Hexagon Purus Asa

Hi and welcome to Hexagon Pyrrhus Q2 2024 presentation. We apologize for the slight delay, but we had some technical difficulties at our end, but now we are ready. So my name is Mathias Meidl and I am the IR Director of Hexagon Pyrrhus. I will be moderating from the studio in Oslo and from the studio I'm also joined by Group CEO Morten Holum and Group CFO Samuel Alam. The agenda for today includes, as usual, the highlights from the quarter, a company update, and 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. So with that, I will pass the word over to you, Morten, who will take us through the highlights of the quarter.

Thank you, Mattias, and good morning, everyone. Thanks for joining our webcast this morning. And for you Scandinavians out there, I realize that we're right in the middle of the summer vacation period, so I appreciate you taking the time to follow our webcast this morning. In many ways, this is a business as usual type of quarter where we continue our track record of strong growth and where we continue to improve profitability according to the plan. But in other ways, this is also a special quarter in that we have now reached positive EBITDA for our hydrogen business in Europe and North America. This is an important milestone for us and ahead of plan. So let's look at the highlights for the second quarter. The key highlights are, number one, we continue to deliver strong revenue growth, both on a quarterly and on an LTM basis. Number two, we have reached EBITDA break-even for our hydrogen business in Europe and North America. The HMI segment is now EBITDA positive year to date. We're very happy to have reached this important milestone, which confirms that we are well on track to reach our targets. Number three, we successfully launched the turn truck that we will deliver to the Hino program. This will be an important growth driver for the quarters ahead as that business finally will get into revenue position. And finally, number four, our partnership with Toyota was also made public in Q2, where we will supply our hydrogen systems and our battery systems for their fuel cell electric powertrain kit for heavy duty trucks in North America. This adds to an already strong portfolio of OEM customers for our battery and hydrogen electric trucking portfolio. But first, revenue. We had strong year-over-year revenue growth. Q2 revenue of 528 million NOC is 60% higher than Q2 last year, an all-time high revenue during a single quarter for Hexagon Purus. Looking at last 12 months revenue in the middle chart, we are now at 1.682 billion NOC, 44% higher than last year. This brings comfort to our path towards our full year target. Standing at an LTM revenue of almost 1.7 billion knock halfway into the year, we're confident that we're well on track to reach our 50% revenue growth target for the year. Looking at EBITDA, we see that profitability keeps steadily improving quarter over quarter in line with higher volume and scale. We ended with a group EBITDA margin of minus 18% in Q2. And remember now, this is before we start generating revenue in the battery and vehicle integration segment. We expect to start recognizing some revenue there now in Q3 as the initial pre-production trucks will be delivered to Hino and Daimler. And the HMI segment, our hydrogen business in Europe and North America, is EBITDA positive both for the quarter and year to date. So things are definitely moving in the right direction for us. I'm satisfied that we now start seeing higher volume coming out of the new manufacturing footprint, despite being at an early stage of the overall ramp-up curve. We have been capacity constrained for some time, so I'm happy that we now start seeing the positive impact of higher capacity. But maybe the most comforting aspect of our Q2 performance is the EBITDA development and the fact that we've reached EBITDA breakeven in our HMI segment. And looking ahead, further volume growth at solid gross margins will quickly give us the benefit of higher scale effects and fixed cost absorption. And since we will start generating revenue in the BVI segment now in Q3, we expect profitability to continue improving towards year end. Looking at the revenue composition, we see that hydrogen infrastructure continue to be the most important driver for revenue growth, up 82% from last year. Besides hydrogen distribution modules, which is the largest product area within hydrogen infrastructure, the growth in the quarter is also supported by strong underlying growth for mobile refuelling and stationary storage, albeit from lower levels. It's also great to see that hydrogen mobility now starts to contribute meaningfully as a growth driver, just as we have expected. The growth in Q2 was driven by transit bus and heavy-duty truck. Hydro and mobility will continue to play an important role in driving revenue growth in the second half, driven by increased deliveries to transit bus customers, Solaris, Caetano and Nuflyer and Nikola on the heavy-duty truck side, of course. As I mentioned earlier, revenue in the battery and vehicle integration segment was not meaningful in this quarter. But this is now right around the corner. I'll come back to that shortly. And the revenue decline in other applications was mainly due to lower activity in industrial gas and aerospace. We see these mainly as timing effects and not representative of the underlying activity. Both of these areas are growing fundamentally, but they are also smaller segments and still quite lumpy from quarter to quarter. So, not a lot of revenue in BVI this quarter, but this segment will play a major role as a growth driver in the coming quarters. As I said, we start delivering the first vehicles to Hino and Daimler now in Q3. And these are pre-production test and validation vehicles and demo trucks that we build in our Ontario, California facility. But we can still invoice those. And we will then move the vehicle integration and assembly activities to Dallas once the facility is ready towards the end of Q3, which will then significantly increase our capacity and our ability to grow revenue. So big things to come. The order backlog at the half-year mark stood at 1 billion NOK. Almost 90% of that is for execution in 2024. So that gives solid comfort for our revenue target for the year. The backlog continues to be dominated by hydrogen business. Most of it is hydrogen infrastructure due to long order lead times. But hydrogen mobility has increased its relative share of the backlog. And you can also see that battery electric mobility is almost non-existent in the backlog. So here, the order lead times are much shorter. But we use a strict definition, as you know, of order backlog. They have to be firm orders. And we have not yet received firm purchase orders for the trucks that we plan to deliver now in Q3 and in Q4. But keep in mind that these agreements that we've signed with Hino and Daimler has an estimated combined value of more than $2 billion from now and towards the end of the decade. So the volume is fairly large in our context. For hydrogen infrastructure, we've sold the majority of the distribution module capacity for 24. And for 25, most of the volume is expected to come from existing long-term agreements. And the customer discussions on build slots for 25 is starting now in Q3. And for hydrogen mobility, the dialogues with our transit and truck customers suggest that we can expect further call-offs in 25 under the existing LTAs. And for battery electric mobility, we expect to receive orders for the first test and validation vehicles and the demo trucks within weeks, and further POs for the Q4 volumes to be placed around the end of Q3. So in total, we're comfortable with the order situation. The order stock is a bit lower than last quarter and last year, but we have good line of sight to the expected business for 24. And as for next year, many of the customer discussions for 25 within the longer lead time infrastructure business is happening now in Q3. So we will be a lot wiser a bit further into the second half of the year. We... get a lot of questions around backlog. And it's important to understand the order dynamics in our business to avoid drawing the wrong conclusions. Many equipment providers in the emerging hydrogen space are characterized by fairly long lead times, mostly due to the heavy engineering work involved and the high level of customization. But our business is different. We have more the characteristics of a mobility business, and here the order dynamic is quite different. In the mobility context, You spend a significant amount of time upfront to develop a solution together with the customer. And then once that's done, you deliver a standardized product and you work off of a negotiated long-term agreement with frequent call-offs made relatively short time ahead of delivery. The key thing that makes this possible is standardization. Once the product has already been developed, there is no engineering or customization involved ahead of each customer delivery. If you look at our industrial gas business, it's developing actually much in the same way. So in that business, we are an OEM of distribution modules. And these modules are 90% standardized. And then you customize the interface of that module according to each customer specification. And over the past few years, we have engineered a standard for each of our large customers. So these modules now can be ordered off the shelf and delivered with much shorter lead time because there is no engineering work involved. This is a great benefit for us and a great benefit for our customers, but it also lowers the order book visibility. So then looking at the different dynamics within the company, for hydrogen distribution systems, we typically see purchase orders six to nine months ahead of delivery. Two years ago, most of our customers were at the higher end and even higher than that of that range. And now with standardized solutions for our large customers, it's driving this towards the lower end of the range. For bus and truck, the lead time is a lot shorter. Three to four months for bus and six to ten weeks for truck. Most of these are serial deliveries of already developed products, so call-offs from multi-year agreements or frame agreements. So we have less order visibility on that, but what we do have is close and frequent dialogues with our mobility customers to compensate for lower order visibility. These dialogues give us insight into what their forecasts look like so we can get a good sense of what and when they plan to order. As we now grow our business, the relative order backlog visibility is going to decrease simply because of the nature of the business we're in. The backlog metric becomes a bit less valuable or less predictive, if you will, of future revenue. It's still a valuable metric, but it will mean something different in the future than what it has meant in the past. We expect continued strong demand for 24 and 25, despite this not yet being visible in the current order backlog. But based on current customer dialogues and our portfolio of LTAs, I'm confident with the outlook for the business. The largest business, by the way, that's not yet in the order book and the largest driver of growth for us in 2025 is the BVI business. And they're the deliveries of battery electric and heavy duty trucks to Hino and Daimler programs. Yeah, we need to consider the active market we're in on top of that. We see high commercial activity across most applications, and I expect that we will also be able to land new contracts on top of those in our existing portfolio. And by the way, like I've said many times before during our quarterly presentations, I still worry more about execution than I worry about demand. Looking at the BVI side, in May, we successfully unveiled the TURN RC8 at the ACT Expo show in Las Vegas in partnership with Hino Trucks. The truck is based on a Hino chassis and will be sold exclusively through Hino dealers, but it's branded TURN. We have a short video so you can get a better idea of what it looks like in real life, so let's take a look. This truck is tailored for the North American market and aligns well with the advanced clean truck and the advanced clean fleets regulations in California. The key word is practical electrification. New regulatory requirements are mandating fleets to integrate zero emission vehicles into their operation. And OEMs will in the coming years have to sell an increasing number of zero-emission trucks in order to continue selling diesel trucks. So staying compliant with these new zero-emission mandates is a significant challenge for the industry and for the fleets. Electrification doesn't make sense everywhere, at least not today. So the technology and infrastructure is not in place to enable mass adoption and battery electric technology does not work particularly well when you need to carry heavy loads over long distances. This is where hydrogen makes a lot of more sense. However, there are use cases where battery electric trucks fit well with existing duty cycles and operating patterns, and where the TCO works already today. This would be use cases where routes are shorter, typically within city limits, where you need a powerful yet maneuverable vehicle, and where you're back to base to charge at night. The Tern RCA truck is the industry's smallest Class 8 truck, with the shortest wheelbase, which makes it perfect for things like metro regional food and beverage logistics. The combination of high power, short turning radius and optimal range makes it possible for fleets to integrate this truck into their operation as a direct replacement of a diesel-powered truck. So this truck will hit the sweet spot of a market segment where electrification is practical already today. The Tern truck will be sold exclusively through the Hino dealer network, and the value of a solid dealer network should not be underestimated. It doesn't matter how good your vehicle is, in commercial trucking you will not be successful without a strong network for sales, service and support. And Hino has a world-class dealer network, 240 dealers across the US. And the great thing is that all of them are already trained on high-voltage systems, since Hino's been already selling hybrid trucks in the US for more than 10 years. So these are the dealers that will service the vehicles, since Hino is responsible for aftermarket service and support under our distribution agreement with them. Our initial focus will be California, since this is the most forward-leaning state when it comes to zero emission, with the strongest regulatory requirements and the strongest and most supportive incentives. So we've already had our first dealer event in California where we presented the turn truck to the Hino dealers in the state and the feedback was very positive. Everybody is looking forward to getting their hands on the first demo trucks and we will start delivering the first ones later this year. Last week, we secured funding in Canada of up to 8.5 million Canadian dollars, or around 67 million NOC, from the authorities in British Columbia as part of their CIVIC programme, the Commercial Vehicle Innovation Challenge, to support growth in British Columbia's zero-emission industry. The grant is subject to certain milestone criteria being met, which, by the way, we are confident on meeting, but this is to support costs in our Kelowna facility to further develop our leading battery electric vehicle technology for the turn truck, partly for this year and partly for next year. This is a welcome addition that helps lighten our cost burden in the ramp-up phase for the BVI business unit, so we're obviously super happy about this. Our partnership with Toyota Motor North America to supply our hydrogen storage system and battery systems for their fuel cell kit for heavy duty trucks was made public in May, signaling the transition from the development phase to the commercial production phase. Our collaboration with Toyota goes back to 2017 when they started the first development of the fuel cell electric powertrain kits for Class A trucks. We were part of their proof of concept, their alpha truck for the Port of Los Angeles, when the port decided to start working on technology to reduce harmful emissions in and out of the port. The partnership started with hydrogen storage cylinders, expanded into fuel systems and further into battery storage systems after they became aware of our class leading heavy duty battery system. So the fuel cell kit will be sold to heavy duty OEMs for hydrogen powered Class 8 trucks. Toyota will make the fuel cell and we will supply the hydrogen fuel system and the battery system. And one of the OEMs that have signed up for this kit is Kenworth, as you can see in the picture. And Toyota expects that other OEMs will eventually sign up as well. So they have been granted a zero emission powertrain executive order from CARB for their fuel cell kit. And this certification will help commercial truck OEMs and operators comply with increasing strict emissions regulations in the state of California. We're very happy with the Toyota relationship and to be part of Toyota's hydrogen program in North America. And for us, again, this adds to an already strong portfolio of OEM customers for battery and hydrogen electric trucking. The... In terms of our capacity expansion and investment program, we're almost at the finish line. Dallas is the seventh and final site to become operational as part of this program, and we're now in the process of making the required tenant improvements and moving in equipment. This is mostly vehicle assembly equipment, so in relative terms, it's a much quicker and easier job compared to installing things like a cylinder manufacturing line or a battery module assembly line. We expect the facility to open later in Q3 and be ready to deliver volumes to Hino and Daimler in Q4. With Dallas ready to open soon, our global manufacturing footprint is now more or less complete. There will be some minor follow-on investments in equipment to remove bottlenecks and increase productivity and so forth as we go along, but the heavy lifting in terms of capex will be behind us when we get to the end of this year. Additional larger capacity increases beyond this program is not on the table for now. Our focus for the coming year or two will be to optimize this current footprint and generate profits and cash. However, when the time eventually comes to expand further, we have room within this footprint to grow. So the next wave of capacity increases will be a lot cheaper and faster to execute than the program we are finishing now. On reflection, we took on a significant challenge embarking on this expansion program. We have prepared seven new facilities on three continents more or less simultaneously within an 18-month timeframe. That's quite a challenge, but it has been executed very well. We're not completely done yet, but I cannot emphasize enough how proud I am of the Hexagon Purus team, the team members in our different locations that have made this possible. I'm extremely impressed with the character of the Hexagon Purus organization. And besides being proud and impressed, it makes me confident that this organization has what it takes to succeed over time. One final thing before we turn to the financials. I want to highlight the achievements of Norwegian Hydrogen. They have now finally started production of green hydrogen here in Norway. Their Hellesilt Hydrogen Hub is dedicated to enabling zero emission in the Geiranger World Heritage Fjord, using landlocked hydroelectric power to produce green hydrogen. The plant has now produced its first green molecules and is expected to gradually ramp up its output, ultimately reaching a maximum capacity of 1.3 tons per day. The first deliveries from Hellesult will be made to Veidekke, a leading Norwegian contractor that will use the green hydrogen to decarbonize asphalt production. to Cyan Energy, who will use the hydrogen to generate enough power to enable high capacity electric vehicle charging. to a maritime school vessel that we incidentally provide the onboard hydrogen fuel system for, and finally to Norwegian Hydroden's own subsidiary, Varion, who will now start building the first high-capacity hydrogen refueling network for trucks in Norway, focusing initially on the main transport corridor between Trondheim and Oslo. This is a small but an important first step to enable the establishment of multiple zero emission solutions in Norway. Norwegian Hydrogen is an enabler for the hydrogen economy and thus an enabler of our business. And as you can see, they are using our distribution modules to move their hydrogen. And it's great to see that things are finally starting to move in the right direction. So those were the main points from the second quarter. And with that, I will hand the word over to our CFO, Salman Alam. Salman.

Yes, thank you, Morten. And good morning, everyone. Thanks for tuning in. Revenue-wise, as Morten mentioned, the second quarter of this year was yet another quarter where we delivered record high revenue. Revenue in the quarter came in at 528 million, which is up about 60% year-over-year. Similarly, year-to-date in 2024, we record a revenue of 935 million, which is 63% higher than the same period last year. Both the growth in the quarter and so far in 2024 has mainly been driven by our hydrogen infrastructure and hydrogen mobility business. Total operating expenses ended at 625 million in the second quarter of 2024, up from 419 million in the same quarter last year. Our cost of materials ratio was 62% in the quarter compared to 54% in the same quarter last year and 59% year to date in 2024. This development is generally in line with expectations. Quarterly fluctuations in the materials cost margin is to be expected, driven by product mix and certain special items that fall into that category periodically. Payroll-related expenses were 195 million in the quarter, up from 156 million in the same quarter last year, but decreased significantly year-over-year in relative terms in comparison to revenue. Subtracting total operating expenses from total revenue, earnings before interest, taxes, depreciation, amortization ended at minus 97 million in the second quarter of 2024, which is equal to an EBITDA margin of minus 18%. This is a significant improvement compared to the EBITDA margin we saw in the same quarter last year of minus 27%. Similarly, our year-to-date EBITDA margin is minus 21%, which is up from the minus 35% we saw in the same period last year. This trend is consistent with our expectations of overall improved profitability in 2024, as you recognize more revenue at solid gross margins and you get the scale and operating leverage effect. Moving below the EBITDA line, depreciation ended at 50 million in the quarter compared to 31 million in the same quarter last year. Generally, the increase in depreciation is caused by a higher balance of depreciable assets due to our capacity expansion program. Of the 50 million we had in depreciation, about 34 million relates to depreciation of property, plant, and equipment, as well as amortization of intangibles, and about 16 million relates to right-of-use assets depreciation. The resulting EBIT for the quarter was minus 147 million versus minus 120 million in the same quarter last year. Losses from investments in associates, which reflects our minority shareholdings in CryoShelter and the Systems Joint Venture Company in China, ended at minus 2 million in the quarter and was largely unchanged compared to the same quarter last year. Finance income in the second quarter was 11 million. About 6 million of this came from interest income on bank deposits, and the remaining 5 million is due to foreign exchange fluctuations. Finance costs in the quarter was 86 million, of which 52 million is related to non-cash interest on the two convertible bonds we have outstanding, and another 11 million is related to interest on lease liabilities and other interest-bearing debt. The remainder of that amount relates to foreign exchange fluctuations primarily. At the group level, we are not yet in a taxable position, and tax expense in the quarter was minus 2 million. So loss after tax ended at minus 221 million versus minus 147 million in the same quarter of last year. Moving on to the segments, and just as a reminder, we will start off with the hydrogen mobility and infrastructure segment. This we abbreviate as HMI. This segment is then the business unit that manufactures hydrogen cylinders and hydrogen systems for the storage of hydrogen onboard, either off-road or on-road vehicles, or for infrastructure purposes, such as distribution of hydrogen from the point of production to the point of consumption. It also includes our industrial gas business in Europe and the aerospace business that we have in the US. Looking at the financials for the segment, there are quite a few positive observations to be made. We are now increasingly starting to see that the capacity expansion program that we've put in place over the past couple of years are flowing through to the P&L, especially within the hydrogen infrastructure segment. Revenue in the second quarter for the HMI segment was 526 million, which is 71% higher than the same period last year. The largest revenue component was hydrogen infrastructure solutions, which made up 62% of the revenue in the quarter and showed 82% growth year over year. Hydrogen distribution modules makes up the majority of revenue in this application vertical. And in the quarter, we had product deliveries to blue chip customers like Air Liquide, Linde and Plug Power. The second largest application area in this segment was hydrogen mobility applications, which continued its strong growth momentum from the start of the year. Made up 28% of revenue in the quarter and revenue increased by more than four times compared to the same quarter last year. The drivers of this increase were increased deliveries to our transit bus customers, such as Solaris and Caetano, combined with increasing deliveries to Nikola. The other segment, which consists of our industrial gas and aerospace business, had lower activity compared to last year, mainly due to timing effects. Moving to the year-to-date chart, we see the same trend that we saw in Q2. Total revenue for the segment is up 69% year-to-date compared to the same period last year. And the growth drivers is again the hydrogen infrastructure and the hydrogen mobility segment. Moving to the right-hand side of the page, as Morten already mentioned, we're very pleased to see that the hydrogen storage segment is now actually past the point of EBITDA breakeven and reported 17 million of positive EBITDA in the second quarter, which is equal to an EBITDA margin of 3%. This is in line with our stated ambitions of reaching EBITDA breakeven for hydrogen business during 2024 and adds further confidence to our EBITDA breakeven ambitions for the group as a whole during the course of 2025. The positive contribution in the second quarter also brings the year-to-date EBITDA for the segment into positive territory. Remember that in the second quarter of 2023, we had significant positive one-offs related to our aerospace business, which explains the positive EBITDA in that quarter in isolation. Moving to our battery systems and vehicle integration segment, which we abbreviate as BVI. This is the business unit that does battery systems production and complete vehicle integration of battery electric and fuel cell electric vehicles for the North American market. We also have a complete suite of proprietary key components required for electrification of heavy-duty trucking, and many of those components and that technology is IP protected. The financials for the BVI segment are influenced by the prototype and the ramp-up mode that this business unit is currently in, and that it has been in for a while. The team has spent many years developing a leading battery electric technology offering for commercial vehicles for North America, and we have secured some major commercial agreements with blue-chip customers like Toyota, Ahino, and Daimler. This is a strong testament to the market position that we've built up in this space. And the first trucks to Hino and Daimler are expected to be shipped in the second half of this year. And so right before the point that we start recognizing commercial revenue, which is quite exciting for us. In the second quarter, we had 2 million knock-off revenue, which brings the year-to-date revenue to 21 million. Year-over-year comparisons aren't particularly meaningful given the ramp-up phase that we're in for this business unit, but generally the revenue that we saw in the quarter was in line with our own expectations. Looking at profitability and EBITDA, the numbers we see, both for a quarter and a year today, it is strongly influenced by the phase that the business unit has been through, where we've invested a lot of resources in personnel and product development to get to the point that we are today. As revenues start increasing in the second half of the year, profitability should also improve. The civic funding that we got from the Canadian government that Morten mentioned will also help and will go towards actually lowering our operating expenses and thus increase EBITDA for this segment. The impact of the civic funding to EBITDA in the second half of the year is expected to be up to approximately three million Canadian dollars or 25 million Norwegian kroner. And the remaining up to approximately 5 million Canadian dollars or 40 million Norwegian kroner will be recognized in 2025, given that the full amount of funding is released. Zooming out again to the group level and moving on to our balance sheet, total assets at quarter end was approximately 4.6 billion. On the asset side, the main meaningful change can be seen in property plant equipment connected to our capacity expansion program, as well as an increase in networking capital. The working capital position is a reflection of the rapid growth we've had for several quarters in a row, as well as the ramp phase that BVI is in currently, where we've had to produce certain items to inventory ahead of time before we're ready to ship trucks. This mainly relates to the battery modules that goes into our battery systems. We also saw an increase in other non-current assets in the quarter. This is where our battery cell related prepayments to Panasonic sits and where the 2024 installment of 71 million was made in the second quarter. Our cash position at the end of the second quarter stood at 543 million. Moving on to the equity and liability side of the balance sheet, there's no major changes at the end of the second quarter compared to the first quarter of the year. And our equity ratio stood at 40% at the end of the quarter. Looking at the cash flow statement, which reflects the movements in the balance sheet and P&L, our operating cash flow in the quarter was minus 232 million. Operating losses before tax makes up the bulk of this at minus 224 million, combined with the mentioned increase that we had in working capital, which was 120 million in the quarter. The main item under cash flow from investing, which totaled 180 million in the second quarter, was the 133 million we invested in property, plant, and equipment. This was somewhat lower than expected, but should be caught up in the remainder of the year as we look to complete the capacity expansion program by the end of this year. We also settled the last and final part of the earn-out related to the V-stroke acquisition from 2021, which amounted to 43 million. Finally, net cash flow from financing was minus 10 million in the quarter, and the main items were repayment of lease liabilities and proceeds from a share capital increase that we did in the Chinese joint venture. With that, I'd like to pass it over to Morten to walk us through the outlook.