Hexagon Purus ASA

OSE:HPUR

Earnings Call Transcript 2021-Q4

[Mathias Meidell]

Hi, and welcome to Hexagon Purus Q4 2021 Presentation. My name is Mathias Meidell, and I am Director of Investor Relations in Hexagon Purus. I will be moderating from the studio in Oslo. From the studio, I'm joined by company CEO, Morten Holum; and via Teams from his home office, company CFO, Dilip Warrier. For the agenda for today includes highlights from the quarter, the financials and the outlook. We will end the presentation with a Q&A session. So please feel free to enter your questions via the function on your screen or alternatively, send your questions to [e-mail]. With that, I will pass the word over to you, Morten, who will take us through the highlights of the quarter.

[Morten Holum, President & CEO]

Thank you very much, Mathias, and a good morning to all of you. I'm very pleased to say that we have put another good quarter behind us with high commercial activity level. And as you will have seen from our latest announcement, suitably illustrated by the picture of this beautiful Hino truck, this momentum has continued into 2022. So 3 main messages that cover both the quarter and the full year. First message. We had record revenue in Q4. Revenue was almost 700% higher than the same quarter in 2020. And revenue for the full year was more than 180% higher than the full year 2020. Part of this is due to the acquisition of Wystrach, of course, but we also had significant organic growth, and I'll come back to that shortly. Second message. We have landed several landmark agreements, including the breakthrough contracts on the battery electric side of the business that we announced over the past few weeks. This leads me into the third message. With the acquisition of Wystrach and the strong collection of contracts that we have secured, we now have a solid order backlog for 2022, with line of sight to our longer-term revenue targets. And with this, we have significantly derisked our business plan and our outlook. So let's focus in on revenue. For the quarter, we grew revenue by a factor of 8 from NOK 38 million to NOK 259 million, albeit with a weak comparable. Decomposing that figure, the organic revenue growth was close to 300%. And on top of that, we got the contribution from Wystrach business in November and December, so not even a full quarter, amounting to NOK 142 million. And I also want to highlight that Wystrach had a positive EBITDA margin of 12% for that period. The strong quarter results in a meaningful shift upwards in our LTM revenue curve. For the full year, we recorded revenue of NOK 508 million, which is 182% higher than prior year, including Wystrach. Adjusting for the Wystrach numbers, we achieved an organic revenue growth of 110%. And now to the far right, you see the pro forma revenue number for the full year 2021, the way it would have looked if we had acquired Wystrach from January 1. And that number is NOK 677 million. Breaking down the revenue by application, the vast majority of the revenue growth in the quarter was driven by the Distribution segment, similar to previous quarters. This is an encouraging development, not just because it gives us good business here now, but also because it signals that the green transition is well underway. It's happening. The increase in hydrogen use, particularly for industrial applications drive the need for distribution solutions. And using our distribution modules is the most cost-effective way to transport hydrogen from where it's produced to the point of use. It's not all about distribution, though. We saw growth in other application areas as well. But in the grand scheme of things, the main story of the revenue growth for the quarter really is all about distribution. I want to take a few moments to reiterate the importance of Wystrach to Hexagon Purus. As I also said last quarter, we believe the combination of Wystrach and Hexagon Purus is transformative for us and for the industry. Wystrach is a great company with strong leadership and best-in-class system capabilities, and combining the leading European hydrogen systems company with the leading hydrogen cylinder company has created the undisputed leader for hydrogen systems in Europe. Looking at it from our perspective, it significantly increases the capacity and scale of our business. It deepens the proximity to both new and existing customers, particularly to the industrial gas companies, and it puts us in pole position in the important Hydrogen Distribution segment, which is the first segment to approach commercial scale. And with that, it has already reached the stage where it is generating profit. One additional benefit of the Wystrach combination is that it broadens our product portfolio, giving us exposure to other highly related growth segments like mobile refueling. The mobile refueling unit is highly synergistic with our distribution business, in essence, combining the distribution module with the hydrogen filling dispenser. And with that, you get a fully functional mobile hydrogen refueling station. And that's an important product at this early stage of hydrogen adoption, particularly in the years before a sufficient refueling network is established. And this enables then early adoption for fleet customers with back-to-base operations. We have a couple of recent examples of this. DHL has partnered with Apple to establish a long-haul hydrogen-powered trucking route across the Dutch Belgium border, hauling Apple products. We also just received an order from Polsat who will use our distribution units and mobile refuelers to accelerate hydrogen adoption in Poland. And I shared with you previously, both Deutsche Bahn and Bosch are using our hydrogen refueling units in Germany. So this is yet another example of a product offering that we have just gotten out of the gates, but that is poised for significant growth in the years ahead. So if you take a step back and look at the business we have secured over the past 12 months, it's a strong collection of contracts. We won the supply contract with Nikola, which will be the first company to put a hydrogen truck into serial production already in 2023. We landed an exclusive long-term supply agreement with one of the European transit customers. We wrote a global supply agreement with Air Liquide, one of the largest industrial gas companies in the world, and also made a national exclusivity agreement under that same supply agreement. And we made a long-term agreement with Certarus for the supply of distribution modules in North America. These are important contracts that provide better visibility of the kinds of volumes that we can expect in the next few years, supporting and derisking our business plan. At the same time, we are continuing our development work on projects that will not be major revenue contributors in the short term, but that have significant revenue potential in the long term. One example is the project we just announced where we have partnered with BMW, Bosch and TesTneT. This is a publicly funded project led by BMW to develop the next-generation hydrogen storage system for light-duty vehicles. These kind of projects give us unique insights into the technology development and how leading companies like BMW and Bosch are working on engineering the next-generation hydrogen mobility solutions. And we're, of course, pleased and proud that they have chosen to do this project with us, underscoring our deep expertise in hydro and storage technology. And then over the past weeks, we achieved the breakthrough for our battery systems, 2 landmark contracts with a combined estimated value approaching NOK 20 billion. Both agreements, one with Hino Motors and the other with another long-standing truck OEM, are for the serial supply of battery systems to heavy-duty trucks. We're most often referred to as a hydrogen company. And that is true, we are indeed a leading supplier of hydrogen mobility systems. But we're also on the technological forefront when it comes to battery systems and electric drivetrain integration for heavy-duty trucks. While this may be less known about us, these 2 contracts demonstrate our leadership in this area and position us more broadly as a technology company for zero emission mobility solutions, both battery technologies and hydro and electric technologies. The future of mobility is electric, and it's not an either/or. We believe both technologies have their relative strength and weaknesses. And the best choice will depend on the customer requirements and the duty cycle. Another significance of these agreements is that they put us a bit earlier in play when it comes to larger serial volume. Battery electric technology has come a bit further in its development cycle than fuel cell electric technology. And BEVs will be ready for mass production earlier. The overall momentum for zero emission mobility is super strong. With the high sustainability efforts of the major truck fleets, demand for product is growing rapidly and is much higher than the vehicle industry is able to deliver. This situation is likely to last for many years. Regulations, such as the carb ruling in California, mandates that 9% of all trucks sold in California already in 2024 need to be zero emission. And you won't get there with hydrogen technology alone. The industry is not yet ready for that kind of scale of adoption on hydrogen. But with battery technology, you can get there. And this is precisely why many OEMs have accelerated their plans for battery electric trucks. Hexagon Purus is a leading provider of electric drivetrain integration. So let's dive a little bit deeper into the battery legacy and our vehicle integration capabilities in North America. Today, we perform full electric drivetrain integration of heavy-duty trucks, starting with an empty chassis with 4 wheels and a cab on it, and then building the full electric vehicle. We integrate our own technologies, such as the hydrogen storage system or the battery storage system, and then combine that with third-party components, such as an electric drive axle. And then we write the vehicle level software to get the truck road ready. This skill set is quite rare and super important particularly in the early stages of the transition to electromobility. But I want to spend some time today to give you a better understanding of our battery capabilities. And the first thing to remember is that we are not a start-up company. We are a carve-out from Hexagon Composites and Agility Fuel Solutions. And that means that we carry a long and strong legacy, more than 2 decades worth of integrating alternative fuel systems on to heavy-duty trucks. We know how to integrate large, heavy forms of energy storage onto a truck platform, designing it to optimize the weight distribution, to optimize the use of limited frame rail space and to withstand the extreme duty cycle that these trucks are exposed to. It's that expertise that brought us into the battery and the electric vehicle business in the first place. Back in 2017, as BEV started to take off in the passenger vehicle space, the topic of battery electric solutions kept coming up in our customer dialogues. So we put a small team of engineers on it and developed battery pack in record time using all our knowledge of what's important when designing and mounting heavy energy storage modules onto a truck. Then we got a contract with Daimler, who wanted to build a zero emission demonstration fleet of battery electric trucks to gain experience with the technology. The innovation fleet consisted of around 30 trucks, some Class 8 Freightliner eCascadias, as is pictured here, for which we delivered the battery packs. And then there were some classic Freightliner eM2s for which we did the entire electric drivetrain integration. These trucks were given to Daimler's customers in California for testing in a real life on-the-road situation, and they have now accumulated more than 1 million miles of on-road duty. Besides performing really well, these vehicles have given us valuable data and insights to further improve our battery system offering. And this has put us in a leading position when it comes to battery system design and performance. So today, we have one of the lightest and most energy-dense battery packs in the commercial vehicle industry. And also one of the better looking ones, in my personal opinion, nicely integrated under the cab, as you can see in this picture. It's modular, space efficient and lightweight and protected by strong IP. So we are a broad technology company for zero emission mobility solutions, both hydrogen electric and battery electric. We're best known maybe for our industry-leading hydrogen storage technology, 6 decades worth of experience with carbon fiber pressure vessels, and our significant practical experience with hydrogen systems technology across a wide range of mobility applications. And then we have the leading battery systems technology and vehicle integration capabilities, as I just explained. This puts us in a very good position to capture the opportunities that are driven by the strong momentum for Zero Emission Solutions. And it will grow into a very large market. We did a major market study back in 2020, almost 2 years ago now. And since then, there has been a remarkable shift in the overall momentum for the energy transition and for zero emission mobility. So with all that's happened, we decided to refresh the study, looking at things like updated decarbonization targets, technology developments, OEM vehicle [ road ] maps, et cetera. And not surprisingly, the numbers have grown substantially. The addressable market for hydrogen storage onboard vehicles that we now expect in 2030 is almost 3x higher than the update -- in the updated study increasing from about $7 billion in the old study to $20 billion now. This is driven by higher adoption rates for the heavier vehicle classes, buses and trucks and the higher revenue content per vehicle driven by the larger systems. Even with the increase in adoption rates, they're still quite modest, single digits for cars and trucks, low double digit for buses. And then we've also assessed the addressable market for battery systems and electric drivetrain integration services, giving us a total addressable market of $5 billion already in 2025 and $24 billion in 2030. And the markets are expected to continue growing at higher rates also beyond 2030. So with that update, I will hand the word over to Dilip, who will take us through the financials.

[Dilip Warrier, Chief Financial Officer]

Thank you, Morten. And I just learned my WiFi at home went down, so we're going to test Verizon's 5G network coverage here in Atlanta. We're really thrilled with how the quarter shaped up, not only was it record revenue of NOK 130 million during the quarter organically, but Wystrach also contributed a very strong NOK 142 million to the top line. As indicated in one of the prior slides, much of the revenue growth came from distribution applications. But we really saw it across lots of other applications, heavy-duty, aerospace, rail, transit bus and then also the industrial gas business of Wystrach. Q4 EBITDA loss was NOK 54 million. That was a sequential improvement from Q3 due to higher revenue and also included NOK 17 million of contribution from Wystrach, so about a 12% EBITDA margin over there. On a full year basis, revenue was NOK 508 million with EBITDA losses of NOK 265 million, about in line with our expectations at the beginning of 2021. Next slide. Thank you. Here, you see the breakdown of revenue by segment in the current quarter and the full year of 2021. We've talked about distribution. We've talked about transit bus. Both have contributed roughly 60% to 70% of revenue now quite consistently over the course of the year. The other category, which is kind of a catch-all for a lot of other segments has now become much more significant, with the addition of the industrial gas bundled business from Wystrach. Contribution from the heavy-duty bus -- heavy-duty business is down in '21, but project activity remains high. And we expect this market will drive more meaningful revenue in the coming years as vehicle platforms move to start up production. On to our balance sheet. We ended the quarter with just over NOK 450 million of cash. Working capital levels have increased substantially from prior year-end, driven by higher activity levels, supply chain delays as well as the Wystrach acquisition. All else being equal, pre-Wystrach, our Q4 working capital would have just been about flat with Q3. Next slide. And then on to cash flow. The majority of cash burn then over the year has been to fund ongoing operations of the business. Working capital was about NOK 164 million of that operating cash flow. The investing cash flow includes the NOK 147 million of cash consideration for the Wystrach acquisition. And then a little technicality, but the financing cash flow reflects the paydown of our intercompany debt to Hexagon Composites following the sale of the discontinued CNG LDV business, which was completed on October 1. So we are a clean company in that way now and also debt free from an intercompany perspective. Back to you, Morten.

[Morten Holum, President & CEO]

Okay. Thank you very much, Dilip. The -- as I mentioned earlier in the presentation, the momentum towards zero emission mobility has accelerated substantially during the past 2 years, demonstrated across a wide range of metrics. The number of companies committing to decarbonization targets, the number of OEMs announcing the phaseout of the internal combustion engine, that's gone from 1 to 6. The number of deployed zero emission trucks, hydrogen production, which has increased significantly. And there's been a significant shift in capital flows towards electric vehicle technology, almost every observable metric that you look at, you can see the things are moving rapidly in a direction that's supportive for the energy transition and for zero-emission mobility. And we are ideally placed to benefit from the strong positions that we have built within several subsegments and application areas. Some segments are more or less at commercial scale already. The distribution module is a commercial product where we have a clear leadership position. The momentum is already demonstrated in the current year financials. For transit bus, many hydrogen vehicle platforms are already developed and volumes are now moving from the hundreds to the thousands. And then there are some segments that will come into serial production within the next 2, 3 years. Battery electric trucks will come early. Many OEMs are preparing for serial production in 2024, like the ones we signed agreements with during the past few weeks. And passenger vehicles are already on the road today, and more will come. Although we expect the majority of the passenger cars to be battery electric, we also believe that a certain subsegment will be hydrogen electric. The fuel cell electric trucks will likely be ready for serial production stage near the middle of the decade. Nikola is the first one with planned start of production already in '23. There are some segments that are not likely to be ready at large scale until a bit later. We talk about trains, maritime vessels. These are highly attractive applications that will be significant in size when they scale, but they're not expected to give any meaningful volume until around 2025 and beyond, aside from development work and demonstration sets. So there's a good mix of application areas that are ready today, some that will come soon and some that are a bit further away. And the common denominator is that we have built strong positions and are well placed to succeed in many of them. We've won significant business during the past 18 months in competition with others. We have validated our technology and our competitiveness with customers. The regulatory environment has developed even more favorably than we could have hoped. And with that, we have gotten the confirmations that we need to take the next step forward. And that is to embark on the industrial scale-up phase. We have ongoing or planned capacity expansion initiatives on 3 continents. In North America, we are in process of constructing a new automated manufacturing facility in Kelowna, Canada for battery and hydrogen systems. We're also relocating our specialty cylinder manufacturing facility in Maryland to a new and larger site. In Europe, we're planning to build a new state-of-the-art cylinder manufacturing facility in Kassel, Germany. And we will soon start the construction of a new cylinder manufacturing facility in China together with our joint venture partner. And speaking of China, things are moving ahead. A lot of the planning work is now well behind us. We have assembled a local management team. We have designed the factory and specified all the manufacturing equipment. We are at the end of the site selection study and in process of negotiating an investment agreement with the local authorities. We have initiated dialogues with many potential key customers and are also working on setting up the local supply chain. So there's still some ways to go. But I'm hoping that we will be ready to start construction of our first facility there soon. As we already announced when we went public, we intend to move to the main list of the Oslo Stock Exchange. We had originally planned that to happen in the second half of last year, but we had to postpone it due to the Wystrach acquisition. However, we've now reinitiated the process, and we target to have that completed before the summer. And then on to the outlook. For 2021, we originally targeted revenue growth of at least 50% year-over-year, which we later revised upwards to 90%. We ended up growing organic revenue by 110%, and counting in Wystrach, achieved a revenue growth of 182%. For this current year, we target revenue of NOK 900 million, representing a growth rate of around 75%. We expect to grow in several segments: distribution, transit, heavy-duty battery systems and vehicle integration. And we expect to start our light-duty deliveries in the second half of this year. As we look at our overall contract portfolio and order book, around 80% of the targeted revenue is already covered by the current order book and the backlog. For EBITDA, we expect losses to widen by a factor of 1.5x. This is driven by the continued investments in organization, in product development, and overall capacity expansion. And as such, we don't see this as a loss per se, but rather as necessary capital deployment to prepare the company for larger scale. We also expect a somewhat negative impact from the continued supply chain disturbances that we have experienced in '21, a portion of raw material inflation that we will not be able to compensate in customer pricing. Overall, we're on track to deliver on the revenue target for 2025. With the commercial success and the major contracts that we have added to our portfolio during the past year, we now have line of sight to the NOK 4 billion to NOK 5 billion revenue target. Looking at the overall contract portfolio, we see that 75% to 80% of the 2025 revenue figure is covered by the long-term agreements that we've already announced. And given everything else that we have in the pipeline, we feel comfortable and confident that we will achieve the targeted revenue. Summing it all up. We are in the early stages of a major shift. There is a strong global momentum for zero emission mobility, and we are ideally placed to benefit from it. We have industry-leading technology, and that leadership has been confirmed and validated with customers through the business that we have won. We've executed well, delivered on our targets, and that has put us ahead of our original plan. We will now start the execution of the industrial scale up and prepare the company for much higher volume. And we have tailwinds in a very supportive commercial environment. We have significantly derisked our business plan during the past 12 months. We're confident on delivering on the revenue targets for 2022 and meeting our revenue ambitions for 2025. So that concludes our presentation for today, and we will now open it up for Q&A.

[Mathias Meidell]

Thank you, Morten and Dilip. Let's just jump straight into the first question. Is there any chance of raising money through a placement towards existing partners like Toyota, Daimler or BMW?

[Dilip Warrier, Chief Financial Officer]

I'll take that. So if you look at our financials over the last 12 months in 2021 between the operating cash burn, the working capital, CapEx, et cetera, we're at about NOK 450 million in cash at the end of the year, which is exactly where we expected to be. Yes, we are going to need capital to continue this next phase of investment in the business. Morten has talked about the investments in Kassel, in Kelowna, in Westminster and in China. So I think we are assessing all options when it comes to capital.

[Mathias Meidell]

Thanks, Dilip. I guess the next one will go to you as well. What was the 2021 full year EBITDA margin for Wystrach?

[Dilip Warrier, Chief Financial Officer]

Yes. So we're not really disclosing that. But just to give you a frame of reference, I think historically, they were 8% to 9% EBITDA margin. Their 2021 was probably about 7% to 8% EBITDA margin.

[Mathias Meidell]

Yes. Thanks. Next question. Who are the key competitors in the battery pack business? What kind of margins being targeted? Will this -- and will this require capital investments to add capacity?

[Morten Holum, President & CEO]

Yes. So there are several competitors. Maybe the ones we see as the most likely names is companies like Proterra and Akasol. And so yes, there is competition. And the part of the question related to investments, do you want to take that, Dilip?

[Mathias Meidell]

Margins and investments.

[Morten Holum, President & CEO]

Margins and investments.

[Dilip Warrier, Chief Financial Officer]

Yes, I can -- let me take a stab at that, right? So the battery system business is relatively capital-light. So we are in the middle of constructing a new facility in Kelowna. Between the equipment and the [ 10 ] improvements, we're looking at roughly $18 million to $20 million in CapEx, sorry, USD 18 million to USD 20 million in CapEx over the course of '22, '23. And that should give us the capacity for roughly at least 1,000 battery packs, which is fairly substantial in terms of revenue contribution. So I'd say that it's total CapEx versus annualized revenue over a timeframe is maybe 15% of annualized revenue.

[Mathias Meidell]

Thanks, Dilip. Next question. Congratulations with a fantastic quarter. Could you give us some color on how maximum revenue capacity is in the years towards 2025?

[Morten Holum, President & CEO]

Yes. So I think the way we think about it is that we are moving from a territory of revenue capacity around NOK 1 billion. And then we need to get up to roughly about NOK 4 billion to NOK 5 billion in 2025. And I think with the CapEx plan that we are currently looking at for '22 and '23, that's going to take us up to a -- it's going to add roughly NOK 3.5 billion, I think, so to our overall revenue capacity. And then there are some additional, I think, investments in '24. That's going to take it well above the NOK 5 billion that we have targeted.

[Mathias Meidell]

Thank you, Morten. On a group level, do you have any long-term margin targets?

[Morten Holum, President & CEO]

Yes. So what we have communicated is that our long-term target is double-digit EBITDA margins. And we haven't really been more specific than that.

[Mathias Meidell]

Thank you. Next question then, when should we now expect Hexagon Purus to go EBITDA breakeven?

[Morten Holum, President & CEO]

Yes, it's a question that we get asked continuously, and the answer is always the same. We expect that when we are approaching the kind of operating leverage that we get around the middle of the decade, we will be EBITDA breakeven.

[Mathias Meidell]

Thank you, Morten. And the next question. Thanks for a good update. Can you please bridge the revenue guidance of NOK 900 million in 2022. The quarterly run rate leaving 2021 was NOK 259 million, and the implied revenue for the average quarter in 2022 is NOK 225 million. Why the decline given the solid market growth?

[Dilip Warrier, Chief Financial Officer]

Yes. Let me take that. So there is an implicit seasonality in the business. And it was the pedal to the metal actually in Q4 to hit some customer shipments. So we do expect things to sort of normalize a little bit in Q1 and then build up over the course of 2022.

[Mathias Meidell]

Thanks, Dilip. Next question then. What will the capital expenditure requirements be towards 2025 and more specifically in 2022?

[Dilip Warrier, Chief Financial Officer]

Yes. So the CapEx programs that we've talked about here on one of these slides, they roughly add up to about NOK 700 million over the next 24 months or so. And as Morten said, that should drive annualized revenue capacity in the, call it, NOK 3.5 billion range or so.

[Mathias Meidell]

Thanks. Can you give some more color on cost inflation? What do you expect going forward.

[Dilip Warrier, Chief Financial Officer]

So inflation has been quite widespread. And I don't think there's any particular area that has not seen inflation, including the cost of freight. So it really has been just across the board. I can't think of any one item that tips the scale one way or the other. But we're keeping a close eye -- and then I think there was a question about profitability, et cetera. One thing to just keep in mind is it is quite common in the OEM world where when there is cost inflation, there are mechanisms in place to drive those cost increases through to the customer. It may not always happen in real time and immediately as you would always like it to be, but there are mechanisms and that's very much the case with our business as well.

[Mathias Meidell]

Thanks, Dilip. And then on to the next question then. Can you shed some light into revenue growth potential for Wystrach moving forward as well as margins?

[Morten Holum, President & CEO]

Well, Wystrach has had a pretty good year, particularly the ending to the year, where, as Dilip said, it's really been pedal to the metal. And with all the demand that we have seen and relating back to also our covered revenue backlog for 2022, the Wystrach part of the group is, for all practical purposes, almost sold out. And it's clear that for us in the years ahead to further expand the business in any meaningful way, we will likely need to add capacity also in that side of the business. It's a very capital-efficient capacity to add, but it's something that we are considering once we get past this year.

[Mathias Meidell]

Thanks, Morten. And then I guess we've touched upon this in an earlier question, but we could take it again. You do not seem fully financed for 2022 as it stands now. How and when do you expect to address your financing needs?

[Morten Holum, President & CEO]

Yes, I'm pretty sure that you understand that we cannot be specific on that. As Dilip mentioned earlier, it's no secret that we will need additional capital in order to fund all of our growth expansion plans. But we are assessing all of the opportunities that are out there. And will, of course, announce that when it is done.

[Mathias Meidell]

Thank you, Morten and Dilip. That wraps up the questions we have received from our audience today. On behalf of Hexagon Purus, I would like to thank you for spending time with us this morning, and we look forward to seeing you soon again. Thank you very much from Oslo.

[Morten Holum, President & CEO]

Thanks, everybody.