Hexagon Composites ASA

OSE:HEX

Earnings Call Analysis

Strong Growth and Strategic Developments Drive Hexagon Composites' Q3 Success

Hexagon Composites achieved impressive Q3 results, with revenues of NOK 1.25 billion, a 9% increase year-over-year, and a record EBITDA of NOK 184 million, reflecting a 15% margin. This success is largely attributed to heightened activity in the Agility truck and mobile pipeline sectors. Additionally, a significant order for the new X15 natural gas engine from UPS positions the company for future growth. Looking ahead, Hexagon expects 2024 revenues of NOK 4.8 billion and an EBITDA of over NOK 560 million, bolstered by rising demand for renewable natural gas solutions.

Strong Performance in Q3

In the third quarter, Hexagon Composites reported impressive financial results with revenues reaching NOK 1.25 billion, marking a 9% increase year-over-year. This growth was coupled with record EBITDA of NOK 184 million, translating to a 15% EBITDA margin, up from 10% a year earlier. This improvement reflects enhanced operational efficiencies and increased activity in both the Agility truck and mobile pipeline businesses.

Agility's Driving Force

Agility, which generated NOK 1.22 billion in revenues (a 10% year-over-year increase), significantly impacted overall performance. The mobile pipeline and truck businesses both witnessed growth, with truck volumes up an extraordinary 37% compared to the prior quarter. Agility's segment alone contributed NOK 203 million in EBITDA, which is an increase of NOK 78 million from the previous year, reflecting a robust 17% EBITDA margin.

Innovations in Natural Gas Trucking

A pivotal change is anticipated with the upcoming launch of the X15 natural gas engine from Cummins, where significant quoting activity is already noted with fleet operators. Companies like UPS have committed to substantial orders, leading the charge toward broader adoption of natural gas. Hexagon has secured the largest X15 order in the industry, providing confidence in future demand. Moreover, customers are increasingly evaluating the ROI of switching to renewable natural gas (RNG), with around 40% of new adopters being completely new to the sustainable fuel landscape.

Market Outlook and Growth Expectations

The management expects the RNG market to expand significantly, having nearly doubled renewable natural gas deliveries from 277 million gasoline gallon equivalents in 2019 to 531 million. Projections show an increase in producing facilities from 108 in 2019 to potentially 1,000 by 2030. This surge supports the growth of Hexagon's diverse offerings, enhancing the market potential for their mobile pipeline and clean fuel solutions.

Strategic Financial Moves

Hexagon successfully completed a NOK 300 million capital raise, bolstering its financial flexibility and ensuring it can capitalize on future opportunities. Post the capital injection, the company maintains a solid leverage ratio of 1.1x, positioning it well for continued growth and investment in innovative technologies.

Guidance for 2024

Looking ahead to 2024, Hexagon has set a revenue target of NOK 4.8 billion and increased its EBITDA guidance to over NOK 560 million, highlighting an expected uptick in margins during the second half of the year. This reflects both confidence in sustained demand and ongoing operational improvements that should enhance profitability.

Operational Efficiencies Paying Off

The strategic focus on manufacturing efficiencies has paid off, with mobile pipeline production increasing by 50%, from 20 to 30 modules per month. These enhancements not only boost output but also reduce costs, further solidifying the company's competitive position in the market.

Addressable Market Expansion

With the introduction of the X15 engine and the shift towards long-haul sleeper cabs, Hexagon's addressable market is set to triple. This diversification into new fuel systems positions the company favorably to capture growth in the heavy-duty trucking segment, where total cost of ownership considerations increasingly favor natural gas solutions.

Anticipating Future Orders

As pilot programs for the X15 engine evolve, the management anticipates a stepwise increase in larger orders over the next 6 to 12 months. This expectation is buoyed by positive feedback from new fleet operators, suggesting a strong likelihood of sustained demand growth.

Conclusion: Positioned for Growth

Overall, Hexagon Composites presents a compelling story of growth underpinned by increased revenues, expanding market opportunities, operational improvements, and a strategic focus on sustainability. Investments in RNG and natural gas solutions position Hexagon to capitalize on the industry's shift towards greener alternatives, ensuring a robust future outlook.

Earnings Call Transcript 2024-Q3

[Karen Romer, executive]

Good morning, and welcome to Hexagon Composites Q3 2024 Presentation. My name is Karen Romer. I'm the SVP of Communications. I'll be your moderator for today. Joining me here in the room is Knut Flakk, the Chairman of our Board; and David Bandele, our CFO. Knut will present today the Q3 highlights and the market update, and then David will join us for the financials and the outlook -- I'm sorry, and then, Knut will sum up the day. Afterwards, there will be a Q&A. And for those of you in the audience, just raise your hand and Emily here will come over with a microphone. And for those of you on the digital audience, there is a field on your screen. Please feel free throughout the broadcast to type in your questions there, and we will take them at the end.

And then I'd just now like to invite Knut to join us on the stage.

[Knut Flakk, executive]

Thank you, Karen, and good morning, everyone. I'm really proud to be here and present the Q3 numbers on behalf of the entire Hexagon Composites team. They've done a tremendous job, and they are definitely delivering on target.

So before we move into the numbers, let's remind ourselves about our mission and our purpose. We're really here to contribute to drive the green shift to replace fossil fuels with cleaner alternatives. And I'm happy to say that so far this year, our solutions have contributed to take away 1 million metric tons of CO2. That equals to close to 240,000 petrol vehicles taken off the road for a full year. So it's quite a substantial contribution that our solutions are making.

Going into the numbers, I'm happy to say that Q3 is a very strong quarter. We have record high EBITDA, and that is driven primarily by the increased volume, but also because of improved operational efficiencies. So we reached NOK 1.25 billion in sales and with a corresponding EBITDA of NOK 184 million, which turns into then 15% EBITDA margin, which we have communicated earlier is our target to be at 15% or above.

If I'm going to take the highlights for the quarter, I'd like to point to 3 things: one is the increased activity in the RNG sector; the second one is our improved operational performance; and the third one is the fact that Hexagon Purus is now fully funded well beyond the point of cash positive returns.

But let's look at the RNG business first. We did receive a major order from a refuse collector company in the U.S. earlier in the quarter. That was roughly USD 18 million. But maybe even more importantly, we're seeing a wave of new orders coming from fleets that's now taking the X15 engine into use. And it's not just the existing customers that we've had in the past, but it's also new adopters. And in fact, close to 40% of these people or these fleets are new adopters of RNG. They never used natural gas, renewable natural gas before. They've been relying on diesel. Now they have an alternative, which makes it possible for them to go greener.

The second one is the solid improvement in operational performance. We see that the increased volume definitely helps us in improving efficiency, but it's also a result of the long-term work that has been done in terms of world-class manufacturing. We're now starting to see the results of that and with increased efficiencies, not just in fuel systems, but also in mobile pipeline. And as an example, last year, we were able to produce roughly 20, 40-foot modules of mobile pipeline per month. This year, that number is up to 30. So it's, in reality, a 50% increase as a result of the increased efficiencies, as well as, of course, more orders coming in.

And last but not least, I'd like to pinpoint the fact that Hexagon Purus, where we are the largest shareholder, have now successfully raised capital, which will bring them well beyond the cash flow breakeven stage. That's a real milestone for the company. We very much believe in Hexagon Purus. It's -- I'd say it this way, nobody probably knows Hexagon Purus better than we do because it was part of our business, and we then let them go on their own in 2020, but we have remained a major shareholder, and we will continue to do so going forward as well.

And there is a lot of synergies on technology, on the market side and so forth. So we will definitely be working closely with them going forward. And I'm very impressed about the rate of growth that they are delivering. This year, you'll probably see another 50% up from last year, which is following the track record that they've had for quite a few years now.

So with that, let me pass it on to David. He will go deeper into the numbers and let you know what the current status is.

[David Bandele, executive]

Thank you very much, Knut. Thank you. Good morning, everybody, also joining us on the webcast. So quarter 3, we will discuss the strong revenues and record EBITDA, Knut touched upon. I'm very pleased with the 15% EBITDA margin, of course. And in the quarter, we had a NOK 300 million capital raise, which should give us additional financial flexibility for opportunities going forward.

So diving into the group results. So the NOK 1.25 billion in revenues, 9% up year-over-year and the NOK 184 million in EBITDA is up NOK 64 million versus the same quarter last year. And those results were achieved due to the high activity in both the Agility truck business and mobile pipeline business together. And when both are working very well, we see a substantial margin increase then from 10% last year to 15% the quarter. And of course, with the capital raise, we were able to close quarter 3 with leverage at a very comfortable 1.1x.

So Agility drove the results. They did NOK 1.22 billion on the top line, up 10% year-over-year. But you see the main story there in the dark blocks of mobile pipeline and the gray of truck. And when we look at year-over-year, the absolute levels have increased in mobile pipeline and so is truck, but truck significantly.

And also, when we look at Q2, so the trailing quarter, it was also up 37% in volumes. So with that activity, Agility were able to deliver NOK 203 million in EBITDA, up NOK 78 million from last year and of course, produced a 17% EBITDA margin.

So those are the results that we can do on today's demand. But of course, tomorrow's demand, we are facing a major inflection point in the natural gas trucking when it comes to the introduction of the X15 natural gas engine, where we see significant quoting activity with fleets, and we'll discuss how those quotes turn into orders.

But to set the scene again, we have Kenworth and Peterbilt. They are PACCAR brands, who have already started serial production on the X15, and they comprise about 28% of the OEM market. Mid-2025, we should have Daimler with the Freightliner brand coming online, and then that will take the market share to 66% and hopefully then other OEMs following after that.

[ Seeing ] that, of course, we've already secured our -- the industry's largest X15 order to date, which is from UPS, and we've already started to deliver to that. So things are going as expected. We have this quoting period. There will be technical validation of the X15 and the orders coming through as expected. When we look at UPS, they are fully invested in natural gas. They have a long history with it and very familiar. And that's what led to them making a very large order of the get-go. And if you see the criteria on the left, these are the typical criteria that fleets need to check the box on in order to proceed with larger orders.

As Knut mentioned, there are many new adopters coming on, which is good news. They've already checked the box on ROI, which is very attractive on the X15. That's why they're in the quoting phase. But of course, they will start with pilot orders because they want to test the fueling strategy for one. Do you rely on the public networks for their routes? Do you build your own private stations, some combination of those.

Then it's the performance. They would like to test these specifically on the routes that they do, those particular fleets, which is important to test the performance. Of course, all the feedback we've got in the initial trials have been very good on the driver side. And drivers are the key opinion leaders in the fleet. So driver acceptance is important, and they have a chance to get experience with the pilots.

Also, it's maintaining these assets. These are working assets at the end of the day. So you want to optimize and maximize their uptime. So seeing how they fit in their maintenance shop and routines is also an experience they gain in the pilot period. And as we've seen before, typically then that leads to larger orders. We expect a step wise increase in orders, perhaps in 6-month cycles that would be typical. So 6 months, 12 months, et cetera.

Ordering patterns can also be driven by the particular fleets buying cycles in the year. We know that for truck business, we typically have revenues Q2 to Q4 and Q1 is usually quite a seasonally low period. So that was Hexagon Agility.

Going on to Hexagon Digital Wave, which when it comes to MAE testing is very complementary to Agility, particularly in the mobile pipeline trailer testing. Hexagon Digital Wave, they celebrated having completed their 750th infield trailer test, so a significant milestone there. In the quarter, they delivered NOK 39 million in revenue, up 11%, and that allowed them to have a breakeven EBITDA margin for Q3.

So how does this all look? In 2024, we hold with the NOK 4.8 billion guidance, but we increased EBITDA guidance to NOK 560 million, and that's coming on the back of our expected increase in margins in the second half. And these are realizing very well in Q3 and hence, the increase in expectation. So Q3, very satisfactory on current levels. But of course, I'd like to welcome Knut back to the stage, so you can discuss a little bit more about how RNG looks like in driving the business for the future.

[Knut Flakk, executive]

Thank you, David. So let's take a look at what is driving the business going forward. RNG has been growing strongly over the last 5 years. If you go back to 2019, renewable natural gas delivered was about 277 million gasoline -- gallon equivalents. But as you can see, that has grown to 531 million last year, and it's even higher this year. So basically, it's almost doubling in this period -- 5-year period. And we also see that the supply of renewable natural gas is increasing strongly.

Again, if you go back to 2019, there was about 108 facilities producing natural gas across North America. In 2024, that number is 433. So almost 4x as much as what you had 5 years back or 5 years, 6 years back. But it's going further, and there is another 162 facilities under construction, which will bring the number up to close to 600.

And if you look at the longer term, the RNG coalition is expecting 1,000 facilities to be operating in 2030. And if you go to 2040, they actually expect 5,000 facilities to be producing renewable natural gas. And I highly recommend you to go into the website of RNG Coalition. There is a lot of information there about how this market is developing, what the prospects are and so forth. But clearly, even though we've had a strong growth in the past, there is substantial more to come going forward.

And why is this important for our business? Well, it actually contributes to drive all our business segments, mobile pipeline, clean solutions or the fuel system business and also our fleet care business, which is a result of the ever-growing fleet of fuel systems and mobile pipeline units out in the market. So indirectly, it's affecting the fleet care business as well.

Why on mobile pipeline? Well, the fact is that many of these new facilities, they are off grid. They are in rural areas, it's the farms and so forth, and they need to have the gas transported from the facility to the nearest connection point on the grid or to a refueling station. So that's where our products come into play, and we can contribute then to take the gas from the production site to the natural gas pipeline network.

And then on the RNG -- sorry, on the fuel system side, it opens up for the fleet operators to actually decarbonize and fast track decarbonizing because this is a solution, which is available today and it has, in many cases, a carbon negative footprint. So it's better than battery electric, it's better than hydrogen because of the negative footprint.

And if you look at the use of fuels in the natural gas vehicle fleet, it was about 79% RNG last year out of the total. So only 21% was actually fossil natural gas. And we see that number increasing. And with the -- as you saw with the growing number of RNG facilities providing renewable natural gas, it's likely that this share will grow even further going forward. But it's the easiest way for the fleets to decarbonize. That's the main thing.

Another factor, which is impacting our market is obviously what we've talked about before, the X15 natural gas engine from Cummins. It's got better fuel economy than the previous 12-liter. It matches diesel head-to-head on power and range, which is important for the fleet operators, and it's a well-tested engine. It's been in the market for years now, started off in Asia 3 years ago actually, and now it's being introduced into the U.S. We see the trucks on the road. We have delivered systems, and we keep following that development very closely. And in fact, it triples our addressable market with the long-haul sleeper cabs now being available for the Hexagon solutions.

And if you look at a long-haul sleeper cab, it's actually a larger fuel system than for a day cabs. The day cabs is what we have been delivering to in the past. Now we are also starting to deliver to the long-haul sleeper cabs, which requires longer range and thereby also more storage system.

So just to summarize, what's driving our markets. The drivers are getting stronger, and we talked about the need to decarbonize and the opportunity that the fleet operators have in that regard. But it's also the total cost of ownership, and we see it especially on the heavy-duty long-haul end because there, you have a lot of mileage per year, which means there is a lot of fuel saving compared to a, let's say, a regional truck, which is -- does not have quite as much mileage throughout the year.

And then the barriers are coming down. The refueling network is well developed. So it matches the needs of the fleet operators. The X15 engine, I've just talked about. And we see that the more people get experience -- getting experience with the natural gas engine, the more the market develops. And this is exactly to the point that David talked about. They're placing pilot orders to be able to tick off the boxes, and we're happy to say that we've had no negative feedback. On the contrary, there's been a lot of positive feedback from the new fleet operators that have now taken the X15 into use. So we strongly believe that they will come back with larger orders going forward.

And if you look further down the road, we sincerely believe that this market will more than -- will increase by more than 10x by 2030. And 2030 is, yes, it's some years down the road, but it's basically 6 years, starting next year. So it means that our business will definitely be poised for growth going forward.

So key takeaways. We do see a strong demand now both for our mobile pipeline units and for the fuel systems. We see the profitability improving partly because of the higher volume in its own right, but also because of the improvements that we made in our manufacturing operations. And we are, quite frankly, in a pole position to capture a significant share of this market growth going forward.

So with that, I think we'll open up for Q&A. I'm sure you have some questions, and hopefully, we have some answers.

[Karen Romer, executive]

Great. Thank you, Knut. So -- sorry, wrong way. So we have a microphone for this audience. So if you have any questions, please raise your hand. And Emily, we have a question in the back. And also, I have questions online I'll take those, as we go along.

[Fabian Jorgensen, analyst]

Fabian Jorgensen from Carnegie. In relation to your guidance for 2024 of more than NOK 560 million in EBITDA, it seems to be low boiling that a bit definitely in terms of margins. It would imply that margins are coming down with higher sales in Q4. Do you see upside to those assumptions?

[David Bandele, executive]

Yes. We put greater than NOK 560 million for a reason.

[Knut Flakk, executive]

I don't know how David managed to calculate that, but you're right.

[Fabian Jorgensen, analyst]

And how should we think then about margins from the current level going into next year now?

[David Bandele, executive]

I think they bode very well. So when we do these types of margins, which we have done previously in a quarter basis, that's fine. And as long as the volumes come along, we don't see any reason why we won't hit the annual -- the next target, which is the annual 15% baseline.

[Fabian Jorgensen, analyst]

But there seems to be upside to that.

[David Bandele, executive]

So we'll return in Q4 with official guidance. But like I say, these types of results on this demand is -- bodes well for the future.

[Fabian Jorgensen, analyst]

And more back to the, let's say, piloting period now. You've received orders from 30 fleet owners, 2, 3 per fleet is my estimate at least. When would you expect these to come back in for us to see larger orders coming through?

[David Bandele, executive]

They can vary, right? It definitely varies between fleets. But I would say, stepwise, we see sort of 6 months -- 6 months to 12 months type of actions, but that's what we expect.

[Fabian Jorgensen, analyst]

And then just finally for me, on the expanded capacity for mobile pipeline, when would you expect -- or how would you expect the ramp-up of this capacity?

[Knut Flakk, executive]

The expected...

[David Bandele, executive]

Ramp-up of the capacity...

[Fabian Jorgensen, analyst]

For mobile pipeline.

[Knut Flakk, executive]

The ramp-up is already done on the mobile pipeline production -- or in the mobile pipeline production facility in the States. So that came on stream in September. So we're ready for larger orders coming in on the mobile pipeline side. We have...

[Fabian Jorgensen, analyst]

So would you expect to fill that capacity in '25?

[David Bandele, executive]

I think we...

[Knut Flakk, executive]

Time will show.

[David Bandele, executive]

Yes. Exactly. But as you can see, we're quite optimistic about the -- both these markets, the mobile pipeline, as well as the fuel systems. So -- but then again, time will tell exactly when we are at full capacity utilization.

[Karen Romer, executive]

Great. Do we have other questions in this room here? Can I go to the digital audience. We have -- let's see, I think maybe this is for you, David. Can you shed some more light on our ambitions in Cryoshelter? Do you plan to continue the Q3 investment level in the business?

[David Bandele, executive]

Good question. So Cryoshelter is a 40% associate company of ours. They develop LNG solutions for Hexagon Composites. In parallel, they also develop liquid hydrogen solutions for Hexagon Purus. It's very much -- well, it's at a start-up stage, and it's actually producing contract at the moment to one of our long-standing customers. So I guess, it's in its early phase. So Q3 was some -- there was a chunk of funding there. But of course, after it starts returning, we would expect Q3 not to be the same funding rate going forward. So yes, hopefully, be a success in the future. We do have options to purchase up to 70% and maybe fully in the future. So we'll be looking at that closely.

[Karen Romer, executive]

Great. And then back to the Q4 versus Q3, should we expect a very different order mix in Q4 versus Q3? The implied Q4 guidance implies either a steep drop in the contribution margin or a substantial uptick in OpEx. On the usual seasonal OpEx uptick, margin should be equal or up.

[David Bandele, executive]

I think that's Fabian's question already answered.

[Karen Romer, executive]

Then we also have -- you state significant quoting activity for fuel systems related to X15, is any of -- is this to any of the fleets that already are piloting X15 or to other new fleets?

[Knut Flakk, executive]

It's mainly other new fleets and maybe there's a couple of people extending, but mainly to the other ones, new.

[Karen Romer, executive]

Okay. Continuing along on the digital audience. Thanks, and congratulate -- this is for you, Knut. Thanks, and congratulations for good performance in Q3. Two questions. How is the search for a new CEO going? And if U.S. lowers tax rate 15% for U.S. basis business -- base businesses in, for example, Agility, how will this flow through to consolidated tax percentage? I look forward to the coming performance updates. Let's take the CEO question first.

[Knut Flakk, executive]

I think we -- I'll do the CEO, and he'll do the...

[Karen Romer, executive]

Yes, there we go.

[Knut Flakk, executive]

Yes. No, I'm very happy to say that we are closing in on a candidate for the new -- the CEO position in Hexagon. It's a very strong candidate in our opinion, and he will most likely join from January 1st, 2025. So it's not far away before the new CEO will be in place. He's got a very strong background in the automotive industry. And yes, it's definitely a strong candidate, and I think also someone, who will work really well with the team that's already in place.

[Karen Romer, executive]

And David?

[David Bandele, executive]

I wanted to skip that one, but -- and I think, yes, I mean, it will be about 5 percentage points better on the group tax percentage calculation. And that's because we do have still some substantial revenues from Agility in Germany as well, which is a higher -- still a higher tax rate jurisdiction. But 5 percentage points would be good.

[Karen Romer, executive]

Okay. We also see we have a question about Purus. So maybe Knut, you participated in the raise of Hexagon Purus, the capital raise for Hexagon Purus. Shortly after the raise, the share price collapsed till now, only the first tranche of the raise is effective. Will the second tranche happen as well? And will you participate given the fall in share price?

[Knut Flakk, executive]

Absolutely. We have committed to contribute our pro rata share of the [ NOK 1 ] billion. So we are putting in NOK 383 million. And that's simply because we believe very strongly in Hexagon Purus in their business model, in the technology and the market they're in. So despite the share price drop, we certainly believe in the future of Hexagon Purus. And if anything, that would be a great opportunity for those, who would like to buy shares at an even lower price.

[Karen Romer, executive]

Okay. All right. Just continue with the digital audience. Knut, we can direct this. What is your take on the new President Trump or soon to be Trump and the impact of your business in the U.S., the impact on your business in the U.S. Do you expect any problems?

[Knut Flakk, executive]

Not really. I mean, we've been through 4 years of Trump in the past, and it didn't really impact our business in a negative way. I think what's important is that we are really in the U.S. We're producing within the borders of the United States. That's where our main market is as well. So we will not be affected by any custom duties or that kind of thing, if that's implemented. So I think overall, we're quite -- how should I say, we're quite relaxed.

But of course, we will follow the President and his decisions very closely because he's shown unpredictability in the past, and that could happen in the future, too. So we'll be on our toes and prepared. But as I said, we are really a U.S. company when it comes to the -- both the mobile pipeline and the renewable gas business. So I don't think he will have a lot of impact. And perhaps we will see some increase in the oil and gas sector, which could actually have a positive impact on our mobile pipeline demand. So time will show.

[Karen Romer, executive]

Great. Any questions here? Okay. Continuing then -- and I'm wondering if this person is actually may potentially confusing this session with Hexagon Purus. But there are questions about how long will our cash last, and when will you get cash flow positive and when will you be profitable. So I think these are taken out of context. So those are meant for the person that sent this to please address that to Hexagon Purus' management.

And then I think...

[Knut Flakk, executive]

Do you want us to answer it then?

[Karen Romer, executive]

Yes.

[Knut Flakk, executive]

I think this guy is going to produce healthy profits. So he'll probably not need more money, but he will -- maybe he will start paying some dividends pretty good. On the Purus side, they are fully funded until they are beyond cash flow breakeven. So it's -- yes, it's a milestone and it's very good.

[Karen Romer, executive]

Great. So I think I've covered the questions from the digital audience. And if we have no further questions here, I'd like to thank everybody and welcome you back to the Q4 when that time comes. And have a great afternoon, morning, day. Thank you.

[Knut Flakk, executive]

Thank you.

[David Bandele, executive]

Thank you.