Hexagon Composites Ord

Good morning, everyone, and welcome to Hexagon Composites' first quarter 2025 results presentation. My name is Berit Katrin Hövik. I'm the Senior Director of Communications at Hexagon, and I'll be moderating today's presentation. I'm joined here in Oslo by our CEO, Philip Schramm and CFO, David Bandella, who will present a company update, financial results and market outlook before we head to the Q&A session. Before we start, I'd like to draw your attention to our disclaimer. And with that, I'll invite Philip.

Thank you so much. Good morning, everyone, and welcome to our Q1 earnings call. Yes, I can tell you the last five months being with Hexagon have been exciting, challenging, and rewarding. Like everyone in the industry, we are facing the impacts of a broader economic uncertainty. However, the US administration and the revision of the zero emission mandate enables us to start facts and move away from ideology. And natural gas, with that said, is just the better alternative fuel solution to replace diesel for heavy duty, long haul, and high energy intensive mobility applications. And simply because natural gas is cheaper, cleaner, and healthier. And this, in many countries, without even subsidies. This differentiates natural gas, but this differentiates also hexagon composites from so many others in this space. With the launch of the new X15 engine from Cummins, With that engine, we can address the entire heavy-duty, long-haul, and high-energy intensive mobility application trucking market, primarily in the U.S., but we also see some movements in other markets. And we are enabling the adoption, and we see that the momentum is growing. Now let's come... quick, and David will do a deep dive into our Q1 results, we have delivered a steady performance, despite all the headwinds. Hexagon achieved 912 million NOC in revenues, with an EBITDA of 44 million, resulting in an EBITDA margin of 5%. The US truck market is down in Q1 versus prior year by 8%. But our fuel system business is up by 64 business year over year. Yes, we had some carryover effects from 24, minor. But what we see is strong, really strong take and revenues coming from refuse. refuse an industry which is for me a poster child for how this integration of natural gas can work and also be and provide an economical and environmental benefit. And I'm sure others will learn from that. In the current macroeconomic uncertainty, yes, mobile pipeline is being impacted the most at the moment. Operators have reduced the capital investment by focusing first on the utilization of the existing equipment before making new investments. In addition, mobile pipeline has experienced the impact of the slower than planned development of new RNG sites. With all the uncertainty around us, we have taken proactively action. We adopted to the new market dynamics. First, we reduced our workforce by 6% without jeopardizing our future growth story. We are now not cutting back. not to deliver in the future because we believe in the market, but we adjusted accordingly. I think that's our responsibility to you, our shareholders, by continuing our growth story at the same moment. We are proactively managing our supply chain. The tariff situation has made things different, I would say. Nevertheless, with a lot of discussions, hard work from our team, we have improved the resilience of our supply chain. And after all these effects, I can say we see just minor impacts from these, yes, almost daily changing news on tariffs on hexagon composites. With all this uncertainty, I would like to use the current market development to use the current environment to strengthen our business. Strengthen our business by internally getting better, but also by expanding within our markets and looking for new markets where we can deploy our product offerings. I'm confident that we can manage this period of uncertainty successfully and come out of this challenging environment stronger and more competitive than before. And with that, I would like to hand over to David, who gives you the details on our financials. Thank you.

Thank you, Philipp. Okay, so quarter one, welcome everybody also joining live. Yes, quarter one is a seasonally slow quarter for truck. So it was positive that in the heavy duty truck side, we were up year over year. We expected the softer mobile pipeline markets. And as you heard from Philip, we're very quick to implement cost savings measures, given some of the headwinds that we see. And of course, we closed the quarter very strongly with a liquidity reserve of $1.1 billion. And again, in this challenging market, steady performance is good. So $912 million in revenue, on a par just about with last year. And again, why is it soft in mobile pipeline? Customers are pausing their CapEx investments. Good to see improvements year over year in fuel systems, and we'll dig into the different core elements. But really pleased that in Refuse, we had our first major order from a single customer that covers all three of our core businesses. So the fuel system, the mobile pipeline, and also aftermarket services. So as we go into agility, on the left, you'll see the breakdown of the revenue, and there's several legs to stand on, as you see. In the left-hand side, you'll see the very strong contribution of mobile pipeline last year and how it's down 35% year over year. So already the sensitive reaction to mobile pipeline we're seeing as expected. Then on the upside, if you go to the next box, it's yellow. Apologies for those who may be color blind. But it's the second box there, and you see heavy duty truck will be as increased 36%. Right at the top box there in purple, you have that 68% increase year over year in refuse. And that follows a 72% increase when we looked at this in Q4. So definitely a boom over there. When we go to EBITDA in agility, so despite even revenues year over year, you can see EBITDA is down 49 million or is down to 49 million with a 6% EBITDA margin versus the 7% same period last year. And there you see the effects of the negative mix with mobile pipeline really drawing the profits down larger and with a larger effect than the increases that we see in fuel systems. And mobile pipeline is a theme because mobile pipeline also contributes to the revenues of digital wave significantly, given that there are five-yearly periodic inspections that are required in the US on mobile pipelines. So sales in that activity depend on historic sales of mobile pipeline. So we came into 2025 knowing they'll be soft. And Q1 was also soft for UE, ultrasonic examinations business, resulting in revenues of $22 million. And at those levels, it did expand our EBITDA loss this quarter to minus $9 million. So long-term, as we go into 26, we will expect that recovery in the MAE business and also very happy to see that we entered the exclusive long-term agreement with our customer Sotoris, and that is the biggest mobile pipeline operator in our North American market. So all goes well for Digital Wave also going forward. So we believe in the long-term profitability of Hexagon, and it's not a distant memory, the back end of 2024, where we delivered a combined 16% EBITDA margin. However, with a significant macro uncertainty that we are experiencing, with the limited visibility that causes, we, like many other capital goods providers, are not able to forecast the rest of the year with confidence. And the results will really depend on our customers' willingness to spend in this climate. And for that reason, we're pausing our guidance for 2025. Effectively, when in such an uncertain climate, our customers, and it's understandable, we're doing the same things, are pausing their purchases of our products. They want to be certain on the future, and it's a very uncertain environment. The one thing we can say is coming out of quarter one on 31st of March, we had a combined backlog and reported revenue of 1.9 billion. So that's a solid base going through the rest of 2025. The area of largest uncertainty is the US mobile pipeline, which we see a weak outlook. And this, again, is due to the general delays in spend. but also additional uncertainty on the oil price development. And of course, oil price development is linked to oil and gas activity, which is key to generating new sales of mobile pipeline. And in this area, in 2024, revenues were 1.6 billion. We know from history, I've lived that history in 2015, the last macro crash following the oil price crash, And also 2020, of course, with COVID. But in both occasions, mobile pipeline recovered pretty quickly. Second area, and this is an impact where we had, sorry, this is a revenue area where in 2024, it was 1.1 billion for us. And this is to do with the freight hauling trucks. So just part of the agility portfolio. And of course, the freight market has been depressed, as we've said, for the last couple of years. So the uncertainty adds to that. Saying that, the whole truck market is down. But again, we see that fleet spend, while they may be pausing it for now, they will start losing more money than they're saving without replacing those new trucks. So we have a lot of confidence in that rebounding. And again, for us in natural gas, we have the X15 engine, which competes head-to-head with diesel successfully. And of course, we have now with Daimler coming online, the new Cascadia platform, 40% of the market share of the heavy-duty truck. And that will be available then to produce new natural gas trucks from the summer months onwards. And then finally, an additional effect, and that is to do with the EU. Last year, we actually had 400 million in revenues selling to Hexagon Puris for their mobile pipeline distribution products. We went into the year expecting that to be lower, but now we anticipate little to no sales in that area, and that's really due to the depressed hydrogen market at the moment. So that's the state of play. What are we doing about it is the key question. Of course, we're not standing still. And we have the financial resilience to navigate what we see in 2025. Number one, when we look at trade and tariffs per se, as you heard from Philip, we don't really see that as a material impact to us. We are in market for market, and that protects us from most of the key issues. So there are only some indirect impacts there. The key impact, again, is that it is delaying demand, pausing, like I say, customers actually spending on our goods. The cost reduction initiatives across the board, not only reduction in headcount, but of course, discretionary spend, et cetera. But as you heard from Philip, it's not at the level that prevents us from gearing up for an upturn. However, if those conditions change, of course, we will also look into further initiatives. Immediately, capex spend will be restricted for the year to 120 to 130 million levels. Inventory should come down with sales. And with the combination of these and the fact that we come in with a strong balance sheet, especially after the sale of Hexagon Regasco last year, which returned 1.2 billion into the company, we are confident then that we are in the financial position to navigate these headwinds. So to discuss how we can recover in the market, maybe, Philip, you can give a few thoughts.

Yes, thank you, David. As we spoke before, 2025 will be a transition year. We spoke about the transition about an engine. Now it's in transition also with economic uncertainty. But I can assure you that we are well positioned to drive this even further. And why it's going in the right direction and that there are market trends, which makes us believe and feel optimistic and confident that our growth story is the right one, I will show you on the next slide. Coming out of ACT Expo, one of the largest truck shows in North America, Natural gas rightfully stepped into the spotlight. And it's not me saying this. It's the others saying it and how they have acted. For example, at keynotes, natural gas took the stage. For example, at major fleet announcement about natural gas applications and adoption. And also, pure the number of natural gas trucks being shown at the show. has been unique. We are perceived with our fuel solution as the alternative to diesel. Natural gas is currently the only alternative to replace the base fuel diesel for heavy duty long haul and high energy intensive mobility applications. And we are right there at Hexagon Composites. So it's for me Not an if, but it's the question of when it's coming back. And as I spoke before about it, the current administration in the United States is actually indirectly benefiting us, benefiting natural gas with the removal of the zero emission mandate. This will lead to an uptake. Uptake being supported now by the deployment of the X15 engine from Cummins, with the adoption of all three major truck OEMs in the United States. With ACT, shortly before end of April, also Freightliner opened their order books for their platform for natural gas power truck coming from Freightliner. And, as you heard before, timing should be on our side. Trucking Truck production in the United States has experienced three consecutive years of downturn. Truck fleets are aging. And at some point, fleets need to replace these trucks. And I'm confident, I'm confident from the discussions I'm having with major fleets in the US, that they will replace their fleets with an alternative solution to diesel, and that is natural gas. For our mobile pipeline business, as David said, we have seen this unfortunately before in 2015, in 2020, and now unfortunately in 2025. We believe that oil and gas activities and RNG projects will recover as soon as the prices will stabilize, uncertainty is gone, and then we will experience the volumes which we have seen before. And when the markets recover, we as hexagon composites are in the pole position to capture the growth. We are the only player in this field where we can provide all the solutions needed to make your natural gas adoption successful. And let me explain you why. With our mobile pipeline offerings, we ensure the availability. With our solution, you can efficiently move gas from any source to any point of use, either being a pipeline injection point or being one of our mobile refueling units. With our integrated fuel systems, we enable new fleets to drive the adoption across multiple different mobility applications. So you can use the gas. And finally, with aftermarket solutions, we are providing service, fleet care, parts, digital wave offerings, and requalifications of lightweight cylinders. So we care about the natural gas experience and try to make it as easy as possible. So in other words, we own the entire ecosystem. And a proof point for that is what David said, is one of the orders which we just announced with a major refuse company who procured our mobile refueling station, is using our fuel systems, and is tapping into the requalification with the digital wave requalification technology, which we have in our portfolio as well. I'm confident that we will manage this challenging transition year 2025 We will seize every opportunity proactively to expand our market position, as I said, within the markets we are operating in, but also within markets where our products could be deployed to. We will capture, and we are prone to capture, the 10x growth projected with the adoption of the new engine in the United States until 2030. And all of this we can do at least to grow by another 40% to our record year of 2024 without any major capital investments. So we are right there. We are in the market and we can deliver it. That said, with our technologies, With our experience, we enable customers to adopt the right fuel for the right application at the right time. Now is the right time for natural gas. And now is the right time for hexagon. And I'm confident in 2025 and to our outlook. With that said, thank you so much for dialing in, listening today here in Oslo. And I would like to open it up for questions. Barry Katrin, please.

We'll start with questions from the audience first before we go to the questions from our online audience. Any questions in the room? Then go. David, could you talk a little bit about what you see for the different agility categories based on your current backlog, then referring to gliding?

I'm not going to give specific comments about backlog. But I can say that in fuel systems, it's important to note that we have several applications there. We have a refuse truck and transit bus, which are, what do you call, critical infrastructure applications. Very resilient then to macro shocks. We saw that in 2015 and 2020. And if you were to take 2024 revenues, I can refer to, that was accounting, including parts and services for 1.5 billion NOx. So it's really the freight truck revenues, which are $1.1 billion. But again, we've got a great product. It's ready to go. So we expect to see that continue to increase. especially when we remove this uncertainty. You mentioned agility, I think. So if I go into mobile pipeline, again, this is the area that's very sensitive with these types of shocks. So that's what we are actively managing. But again, when you do the combination, we have very solid revenues in these situations and areas that are a little bit more prone to uncertainty.

Thank you. Philip, we are now in the middle of Q2. How has the quarter been in terms of X15N sales and how has the reception of the Freightliner in the market been?

What I can share with you is you've seen some of the results which we have already published. We just published on Tuesday an announcement that we captured another milestone in new orders. And I can tell you after ACT, the quoting activity has significantly increased.

Thank you. Another one for you, Philip. Can you comment on developments in Europe?

Developments in Europe? I think Europe is behind the United States. We are facing an ideological belief in Europe, which is not supporting natural gas. And we have reacted to that situation. But we see Europe as an opportunity that if Europe comes back and believes natural gas has the right spot, then we can deliver in this market also for natural gas heavy duty trucks. Currently, we are serving out of Europe a lot of transit buses, and this is how we are utilizing our facilities, especially in Germany.

Thank you. David, you recently completed a share buyback. Given the strong and stable liquidity position, will you announce more buybacks?

I can't comment on that. But principally, the buyback was also to honor obligations for long-term incentive programs.

Another one for you, David. Does CAPEX guidance include investment loans to associated companies? And was this the last loan to CryoShelter?

No, this is machinery and equipment, the CAPEX guidance. Regarding cryo-shelter, actually they're completing a contract, a commercial contract, with a very reputable fleet. So actually in the next few months they should be collecting on that. So we should actually see some positives. Saying that, cryo-shelter is pre, you can say, commercial. I'm sure it will be scaled down accordingly after we finish this contract. But of course, we still use the time then to explore exciting opportunities outside of Europe for CryoShelters LNG storage products.

Philip, what is your current take on Hexagon PURES and your role towards the company?

We are 38% shareholder. and we act as every shareholder with our rights as a shareholder.

David, how does the POST guiding fit with 10x by 2030 communicated outlook?

10X, well, the long-term profitability of Hexagon, we firmly believe in that. So that's the 2030 position. And certainly Cummins is also part of that and also pushing that story. And of course, the short-term position is the current uncertainty due to trade and tariff and macro conditions.

Also another question for you, David. With reference to the comment about backlog and revenues of 1.9 billion as of Q1, revenues were 0.9 billion in the quarter, which suggests 1 billion of backlog. I agree with that math. How does 1 billion of backlog compare with, for example, last year?

Again, we don't give direct comments on backlog.

Philip, another one for you. Is hexagon composites no longer a renewable story, but an alternative to diesel story?

I don't think there's a differentiation. Renewable natural gas The application of renewable natural gas is the only energy source which can enable fleets to have even zero carbon emissions. Because we talk about life cycle emissions. That's the differentiation. Nevertheless, we need to have a product offering which has an economic, environmental, and health benefit. And we fulfill all three of these. And fleets can choose the energy source they want to secure. And renewable natural gas for heavy duty trucking, for example in California, is just by the pure energy mix the source of use. But we are providing the solutions to be applied to enable fleets to be carbon neutral. But it's up to the fleets how they want to deploy and what kind of natural gas they want to use from which source.

Thank you. Moving over to you again, David. Will we see working capital release if or when revenues come down?

We have discontinued guidance, so you have to be careful with the future statements. But I can just say, like we covered, part of the normal initiatives would be to regulate working capital inventories in line with sales.

And another one for you, David. Why did you invest more in CryoShelter during the quarter?

Actually, you can say that's working capital to, as I mentioned, just fund the completion of a commercial contract that the CryoShelter has with a very reputable fleet. So we're hoping that, or not hoping, but they will be collecting the monies on that later in the year.

Thank you. Let's see. Any questions in the room? No? Then that concludes our Q1 presentation. Thank you for joining.

Thank you very much.