Hexagon Composites Ord

Good morning, everyone, and welcome to Hexagon Composites' Q3 presentation. My name is Berit-Katrin Høivik, and I'll be moderating today's presentation. Joining me in the studio today is our CEO, Philip Schramm, and CFO, David Bundela. Today, we'll take you through a company update, financials, and outlook before we wrap up with the Q&A session. And with that, I'll hand the word over to Philip.

Thank you. Good morning everyone and thank you for joining us for our Q3 presentation. Let's start with a high-level summary of the third quarter this year. The macroeconomic uncertainty continues to negatively weigh on our business and our core markets are in a cyclical downturn in combination with an unprecedented macro environment. This has significantly affected our volumes and our profitability this quarter, and our Q3 results are weak, with group revenues which came in with 538 million Norwegian kroner and led to an EBITDA of negative 54 million. August contributed to the majority of our Q3 EBITDA loss. With our banking partners, we decided to initiate an equity race to improve our balance sheet, and we have raised 590 million Norwegian kroner. In September, we launched a group-wide cost savings program targeted at reducing our cost base, improving our EBITDA break-even point, and securing our liquidity. I will come back to the results and details of this program in more detail shortly. In addition, we remain focused on executing the strategic steps that will drive the adoption of natural gas in North America and in Europe. So let's take a closer look at how we are managing the current environment. First, let me give you some content to our current market exposure. On the one hand, our transit, refuse and aftermarket segments represent sectors that operate largely independently of the macroeconomic environment and typically have an uptick in tough times. This is exactly what we are currently experiencing with our refuse business. These segments provide our business with resilient cash flows. At the same time, truck and mobile pipeline are cyclical by nature with higher sensitivity towards the macroeconomic environment. These are also the two segments which represent hexagons, largest growth opportunities. For a deeper look into how these two cyclical growth markets are developing, I will explain some of the factors that are impacting truck and mobile pipeline in North America. These two segments are currently operating in an unprecedented environment affected by a unique combination of external factors. Constantly changing trade and tariff policies have created a wait and see environment. In our discussions with customers, as one example, the announcement and then the quick postponement of tariffs on trucks in September further delayed both spendings and projects. Shifting emissions regulations have had a similar effect. The current US administration has created uncertainty on whether the existing emissions regulations will hold or if other regulations will replace them. This too has caused fleets to sit on the fence. But I do want to be clear, though, that from a regulatory perspective, the removal of the zero emission mandate has supported CNG as the alternative fuel solution to replace the base fuel diesel. The high cost of capital and lower shell activity due to low oil and gas prices are impacting the demand for mobile pipeline. Currently, gas transportation companies have a strong focus on asset utilization in these high capital-intensive markets. For trucks, the freight decline has been now four years. Industry forecasts for the Class A truck market in 2026 have dropped dramatically over the last few months. Fleets are more reluctant in this environment to adapt to new technologies and to incur higher upfront capex costs, despite the positive total cost of ownership that CNG now delivers to heavy-duty fleets thanks to the new game-changing 50-liter engine. If these projections become reality, then we are preparing to navigate this environment. We cannot control the timing of recovery. However, actions that we are now taking will mean that we will be in a more profitable position in the future. So what does this exactly mean? As a company, we are laser focused on reducing our cost base through this down cycle. In connection with the equity race in September, we launched a group-wide cost and cash savings program. It follows cost-saving measures that were already implemented earlier this year. In total, by the end of Q3 2025, we have reduced personal costs by approximately 190 million NOK compared to 2024 on an annualized basis. Approximately 70 million of this reflects structural, analyzed run rate improvements by the end of Q3. As part of the ongoing program, we are delivering on additional measures and expect to see further effects in the coming quarters. We also see similar positive effects from other operating expenses. Beyond personal cost, Our investments are well below 2024 level and will remain that way. In 2026, we will limit capex to a maximum of 80 million NOK for our core businesses. In addition, we have identified significant optimization potential within our inventories. A strategic focus on utilizing our existing assets and raw materials will contribute to a further 150 to 200 million Norwegian kroner reduction in the first half of 2026. Improved payment terms will help us as well. As we have communicated in previous quarters, we remain focused on the core business and will have strict investment discipline. We will continue to review how our current assets can create the best value for you, our shareholders. Despite the current environment, this unprecedented market will rebound. We remain focused on driving the adoption of natural gas vehicles, especially in heavy-duty trucking. While the pace of adoption has been slower than expected, we are proactively doing our part to drive the adoption. In September, we formed a strategic partnership with Cummins and Clean Energy to launch Pioneer, an independent leasing company that is dedicated to mobility applications with alternative fuels. In addition, we launched our own demo truck program in October, enabling fleets across the United States and Canada to test how natural gas powered heavy duty trucks work in their specific and individual environment. For fleets to experience the potential of these trucks in their specific environment is reducing the barrier and it's essential to accelerate adoption. we are already seeing huge interest and confirmation from fleets that they are seeing savings, lower emissions, and the diesel-like performance, which can now go hand in hand without any compromise. In October, we also closed the full acquisition of SCS composites and will now focus on leveraging synergies and consolidating the European market. With a cylinder site in Poland and a valve manufacturing business in Germany, this acquisition further strengthened our position in the European transit bus segment. With that, I will hand over to David, who will walk you through the financials.

Thank you, Philipp. Good morning, everyone. On a group level, Q3 revenues were 538 million NOC with an EBITDA of negative 54 million. That's after booking severance costs of 9 million. The quarter was heavily impacted by the prolonged market uncertainty in North America. Volumes were lower across all segments and especially in mobile pipeline. As Philip has confirmed, to mitigate the effects of these weaker volumes, we initiated a new cost savings program in Q3. We are laser focused on our main priority, which is supporting liquidity through this down cycle. In September, we proactively strengthened our balance sheet by 590 million NOC and negotiated an updated bank agreement. We are already seeing the effects of positive working capital releases, and these efforts will continue to become more visible over the next two quarters. Headcount reductions totaled approximately 20% as at the end of this quarter, compared to 2024 levels. And in light of the market conditions this year, this cost savings program is delivering results with more to come. Now let's look at these results and their drivers in more detail segment by segment. In Q3, our fuel system segment generated 372 million knock-in revenues, weaker than the third quarter of 2024, which was bolstered by deliveries to the large UPS order received in the back end of 2024. The refuse sector has been incredibly strong in 2025 with continued year over year growth in Q3, albeit at slightly lower volumes than last quarter's record performance. Transit delivered steady volumes with deliveries to multiple municipalities, including the large previously announced order to Dallas, Texas. As expected, the refuse and transit sectors continue to deliver a stable base load of demand even amid the current market uncertainty. For the segment as a whole, the EBITDA margin in Q3 came in at negative 4% due to low truck volumes impacted by additional tariffs and further market uncertainties. Now over to mobile pipeline. which remained under pressure with continued impact from broader market uncertainty in the quarter. Lower shale gas activity and falling LCFS and RIN credit prices are resulting in customers halting their capex spending. With new investments being limited in our core energy end markets, including oil and gas and renewable natural gas, Module utilization is being favored by our largest customers who are employing a wait-and-see approach. In North America, this demand halt has resulted in a significant decline in profitability that has impacted group margins. Revenues for the quarter were 93 million NOC with negative margins of 49%. Now, outside of North America, the results delivered remain steady compared to the prior quarter. Now, moving to our aftermarket segment, which is our most resilient segment. Aftermarket delivered steady revenues of 97 million in Q3, on par with the same quarter last year. Our parts and services business delivered solid volumes in the quarter across both FleetCare and Hexagon Digital Wave. Profitability, while stable, came in lower at 8% EBITDA margin due to an unfavorable mix of internal services and one-off charges. As mentioned previously, 2025 has been a known down year for our modal acoustic emissions technology. At these low levels, the unit actually delivered close to EBITDA break-even this quarter, with cylinder inspection and testing activity picking up in 2026 as the five-year requalification cycle reaches their next annual milestone. And to counteract and navigate the headwinds we're experiencing in our cyclical businesses and with continued uncertainty on the timing of demand recovery, We are accelerating our actions on three targeted major themes. The first one, key, preserving liquidity through 2026 and beyond. The second one, lowering the break-even point of our group operations through significant indirect and fixed cost reductions, and then in turn, lowering our reliance on demand recovery. And the third, as you've heard from Philip, increased measures to stimulate the adoption of natural gas transportation in North America, Europe and the rest of the world. As an extension of these actions and to strengthen our balance sheet, announced in September, our refinancing arrangements with the banks have resulted in a suspension of leverage covenant testing up until Q3 2026, at which point the target will be 4.2x on that quarter, based on net interest-bearing debt divided by the last four quarters rolling EBITDA with some allowance for certain one-off adjustments. The steep fall-off in demand that we have experienced in 2025 has significantly reduced our EBITDA levels and made it technically difficult to show normal leverage until EBITDA levels are steadily built up again over time. In light of this development, we secured a covenant holiday to counter that difficulty and the relevance of the test in such situations. As a condition, our banking partners implemented a conditional reduction in debt levels, commitments and availability. A capital raise was a necessary condition to secure this flexibility and was successfully executed in September, again, raising 590 million in Norwegian crowns. Key changes to the financing facility are described in the Q3 report and include a total facility reduction by 200 million NOK down to 2 billion. of which 1.6 billion is fully accessible and 400 million accessibility is dependent on leverage being less than 2x. Also, that 400 million will be reduced to 200 million progressively through 2027. You also see the reduced covenant levels shown and also introduced a minimum liquidity requirement of 200 million. I will also note that M&A investments and financial support will be subject to the lender's consent. These updated terms, alongside the capital raise, have strengthened our balance sheet. While July trading performance was roundabout breakeven levels, August results generated losses with continued weakness in realized mobile pipeline sales versus our probability weighted expectations. With the reduced visibility impacting both core businesses and increasing debt and leverage levels, a maximum capital raise under the authority of the board was executed to ensure that we can best navigate these market headwinds. Hexagon will continue to focus on responsible actions within our control, focused on balance sheet resilience as we face these uncertainties in our markets. Here we illustrate the impact ranges of our additional cashflow and profitability initiatives for the four quarters through to that important milestone of Q3, 2026. These are split between balance sheet and profitability drivers. On the balance sheet side, We expect between 150 to 200 million in working capital reductions as we intentionally reduce our built up carbon fiber, raw materials and other key inventories through negotiated pauses in purchase commitments and of course, the pull through of sales. We can reduce capex in the short term by a further 50 to 80 million from an annualized run rate of around about 130 million. But we should not hold to those levels in 2027. Interest costs can be reduced by 20 to 30 million with benefits from the reduction in our absolute debt levels. Of the 150 million cost saving target disclosed in connection with the cap raise in September, an estimated 70 million of positive run rate effects have already been realized by the end of quarter three. And we expect to realize the remaining 80 million over the coming quarters. We are also actively working on that additional ambition of 50 million knock communicated in September. which would give us a range then of 80 to 130 million NOC over the next four quarters. Total potential cash improvement is as shown and both before any additional cash generation from sales. Again, I'll reiterate, these are before any additional cash generation from sales. In summary, we expect to reduce our interest-bearing debt levels over the next four quarters. While our cost savings initiatives will give a good boost to EBITDA, we will also be dependent on sales and mixed developments in the year ahead. We therefore need to keep laser focused to hit our covenant target at Q3 26, which technically is highly sensitive then to the EBITDA development. Hexagon has a market leading position and a history of profitable growth, and the market will recover over time. We will, of course, keep close and continuous dialogue with our banking partners in this period. And with that, I'll hand it back to Philip to share more on our outlook.

Thank you, David. So let's turn to the outlook. Overall uncertainty continues to provide limited visibility on how quickly the market will rebound. But we are confident that Q4 will come in better than this quarter with several orders being delivered during the fourth quarter of this year. Our cost-saving program will also have a growing positive impact over the next few months and will improve our margins. Beyond Q4, we will continue the delivery of our strategy. Entering 2026, our visibility beyond our current backlog is limited for our cyclical segments. Our aftermarket and public service segments of transit and refuse will continue to provide a baseload of relatively stable cash flows. However, based on our experience and market seasonality, we expect the first quarter of 2026 to be a weaker one. With our cost savings program, we are focused on our cost optimization program. We will deliver efficiency improvements alongside this. This will bear fruit. We have a sound liquidity position, as you have heard. And active cost management will help us as well. And that means, despite the current market softness, our growth ambition remains firmly intact. We see three major drivers for when our markets will rebound. The first driver is the US Class A truck market is at a cyclical low. with an aging fleet, those truck assets will need to be replaced at some point in time. The fact underpins recovery will happen, but the timeline and how quickly they get replaced is largely dependent on the macroeconomic situation and how fast freight rates recover. The second driver of our cyclical rebound is pure economics. Natural gas is the only cost-effective and widely available solution to decarbonize long-haul trucking, and it offers an economic payback over traditional diesel trucks. The third driver lies in the positive signals from fleets. The X15N is changing the game and it is expected to unlock CNG adoption. In talking to fleets and seeing the positive response to our own demo truck program, we are very confident that this technology will scale. The industry ambition remains unchanged at eight to 10% CNG adoption of class A trucks. In addition to these drivers, we are focusing on key strategic priorities. Driving the adoption of natural gas vehicles is one of those strategic priorities. We are also actively working to broaden our geographic and end market exposure with the purpose of smoothing the current cyclicality and growing our business. Our current opportunities represent market entries which require limited capital that again can provide us with additional volumes and broaden our market exposure. So it remains a question of when, not if, this market cycle rebounds. And when it does, we as the market leader for natural gas fuel system With then an improved cost base, we are in the pole position to capture growth more profitably. So to sum it up, our key markets are in a cyclical downturn that is being compounded by overall macroeconomic uncertainty. We are, as Hexagon, doing our utmost to weather the storm and remain focused on driving further cost reduction and cash discipline to secure our liquidity and improve EBITDA breakeven. We remain confident in the long-term growth of Hexagon. That growth story is firmly intact. And we are taking measures to both accelerate the adoption of natural gas and diversifying our geographic, customer, product, and end market outreach. With that, I will hand back to Barry Katrine for the Q&A.

Thank you, Philip. We'll start with the first question as for you, Philip. How have you managed to get in this situation? Shouldn't you have started to cut costs a lot sooner? And what signals are you getting from customers on orders?

Okay, thank you for the question. Since I started, we started to adjust to changing market dynamics. Already in Q1 and Q2, and as I also communicated, we have reduced the cost base. Nevertheless, With the weak result of August, we have taken one of our negative scenarios and initiated more. That was the start point of this major cost reduction program to preserve liquidity, improve our EBITDA level. Due to the fact that we are seeing more and more fleets are being on the fence, the wait and see to respond to these macroeconomic uncertainty and this unprecedented downturn in trucking in the United States. Nevertheless, the uncertainty is in the market. I cannot deny that. But our growth story is intact. CNG is the only alternative now to replace the base fuel diesel for heavy duty trucking in the United States. So the growth story is intact. We are adjusting to the new reality. We are adjusting to a declining outlook. But I'm confident that we will weather the storm and come out of the storm stronger than we entered it.

Thank you. I'll move over to you, David, a question on cash flow. Can you drag us through what the cash flow from investment activities relate to? what is included in the NOC 43 million of CAPEX, the NOC 18 million in loan to cryo-shelter, and the NOC 15 million in other investments.

Sure. So the 15 million was a modest investment into Pioneer, a strategic relationship, in order to boost adoption of natural gas trucks on CryoShelter. And CryoShelter, remember, is a pre-revenue company. They're actually working on a contract, also on a customer of ours. So we supported their ability to do so. And then on CapEx, it's fair to say it's a normal CapEx that we need to do. But also note that we've had quite a few ERP programs actually coming to a conclusion in Q3. So moving to a cloud system, which has been successful globally for the company, and also another ERP project within Digital Wave.

Thank you. And then continue with you, David, questions on SES. There's two questions, so I'll start with the first. Could you please indicate the net interest-bearing debt you took on when you consolidate SES?

SES is a debt-free transaction. Pleased to say.

Thank you. And the second, in round numbers, what will SES contribute to the Q4 numbers for EBITDA?

That's a good question. Obviously, when you do due diligence, we're not yet feet under the table properly. But of course, as announced, it was reporting around about €30 million in top line and around about €2 million in EBITDA. So we'll progress along that basis over the next few quarters.

And then also another one for you, David. Why did payroll increase from the second quarter to the third quarter in 2025? And the second, may we expect other operating costs to stay between 100 and 105 million per quarter for the fourth quarter in 2026?

The other operating costs, as disclosed in the report, that's a fair assumption from the ask of the question. On the other matter, it's just technical. We have our long-term incentive program costs. We had a credit in Q2 and then more of a normal but reduced run rate in Q3. That reflects the financial performance projections. It's just some accounting between Q2 and Q3.

Thank you.

Oh, one other thing. In Q3, we also booked 9 million of severance cost.

And we will continue with questions on working capital, also for you, David. You have more than knock 1 billion tied up in working capital. Why are you expecting so little working capital release? And the second part of the question, are you committed to purchase some raw materials beyond 2026?

Of course, we have stated that we expect at least 200 million. We do also expect market recovery in 2026. But yes, there's good reason to take down working capital as much as we can.

Thank you. and we'll continue questions on mobile pipeline. There's two questions, so there's one for you, David, and one for you, Philip. So first, David, in your investor presentation in relation to the equity race, you show mobile pipeline is not expected to reach 2024 levels before 2028. Why did you expand capacity by 50% last year?

That capacity program was essential also in terms of flexibility of operations. So we have quite a good program of new products coming online, and that gives us increased flexibility. There was also productivity gains, as we mentioned at the time. But at the end of the day, mobile pipeline delivered $40 million in EBITDA in 2024. For a $3 million to $4 million investment, we feel that's the right way to set us up also going forward. And of course, we did come into the year with elevated levels of backlog, which we successfully reduced.

Thank you. And then the second part for you, Philip, on mobile pipeline. You control 50% of the market according to the same slide. Do you not have a dialogue with your largest customers?

We do have a dialogue with every one of our customers. And as we stated, and I said multiple times before, is that customers within the gas transportation industry are highly impacted by the oil and gas prices, first for shelf activities. On the other hand, the RNG side is impacted by lower credits, as we stated also in this presentation today. This is focusing these companies on asset utilization and these discussions we are having but one thing which has changed is now these customers are also truck customers so every customer who has a CNG unit one of our mobile pipeline trailers can haul these trailers with an x15 and engine truck so we're combining this and approaching all of our customers with every of our product offerings this is a change which we haven't had last year and this is what we are moving forward with to offer our customers the entire portfolio of course and these discussions are ongoing in Yes, unprecedented macroeconomic environment where there's a lot of uncertainty, where there's a lot of wait and see. But if... utilizations and some of the uncertainty is going away we see also their momentum from the discussions with our customers that this might change but this is what we are preparing for and as i said we are doing our utmost to weather the storm to improve our cost base secure liquidity because we are prepared we have the capacity to do so and we can scale up And as I said, it's not about the if, it's about the when. And we trust in the market of 8 to 10%, as every other industry player does, of C&G adoption of the entire Class 8 fleet.

Thank you. Move back to you, David. Even with cost cutting of $119 million, the Q3 covenant looks tight, implying revenue run rate must also come up. How do you see that happen with truck volumes weakening further?

Yes, obviously, we mentioned the maximum effect we expect from the cost initiatives of up to 130 million additional for the next four quarters. And the rest, as mentioned there, should come from sales. And that's a fair statement. So if you just repeat that question, sorry.

So even with the cost cutting of 190 million, the Q3 covenant looks tight and playing revenue run rate must also come up. How do you see that happen?

Right. So on terms of the recovery, I think you heard it in the presentation that we believe the assets are close to being replaced on trucks. So we look for a truck recovery far closer than we look for a mobile pipeline recovery. in mobile pipeline there's also split geographies so north america is obviously our biggest but we see promising increases in mobile pipeline in the rest of the world and europe particularly the jordan contract for example so yeah so those are sort of brighter elements of potential recovery

And then for you, David, also on working capital, the working capital reductions, is that relative to 3Q25 level?

Correct. So on the slide, we presented additional cash, P&L and the balance sheet initiatives. Those are all in addition to Q3 run rate.

Then we have a question for you, Philip. Hexagon purists will need more cash or be bought. Will you let anyone buy them? And what is the best case scenario with regards to hexagon purists as you see it?

I think it's an evaluation, and as I stated before, we believe that we have provided Hexagon PUROS with enough liquidity to get through this challenging time. And as with every one of our minority shareholder holdings, we are looking for opportunities to generate and improve shareholder value. So, we evaluate situations closely as opportunities come by, and that's the same also with our shareholding and hexagon peers.

Thank you. And then a question for you, David, on gross margin. Could you please elaborate on why the gross margin improves significantly from the second quarter to the third quarter?

It's a pretty technical answer, but I'm happy to maybe take that more offline. But of course, any improvement is good.

Let's see. And there's a question for you, Philip. Why are you so bullish on truck recovery when the data you're presenting shows further decline in truck orders in 2026?

Because I trust first in our case. Secondly, the numbers speak for itself. It's an unprecedented downturn in Class A truck decline in the United States. The age of the fleets is increasing. So at some point, there will be a turning point that trucks need to be replaced. And that makes me confident that this will change. And it's not me saying this. If you listen to other market players in this area, they are also seeing that there might be a change. But when it is, that's the question. And that's my role as the CEO of Hexagon Composites, to prepare us for this. That's why we have initiated the cost reduction program and the preservation of liquidity. And this is my goal that we are weathering these times and preparing us for the future. Because as I said before, the adoption in other markets for CNG is possible. So I truly believe why should it be different from our main market in the United States where the regulations, as I said before, with the move away from the zero emission mandate is actually putting CNG in the spot to be the alternative to replace the base fuel diesel for heavy duty trucking and heavy long haul and high energy intensive mobility applications.

Thank you. And then a question for you, David, on backlog. Why do you not provide any order backlog information, which would really help outside shareholders close some of the information gap between insiders and outsiders?

I don't think it's relevant in the truck industry with the frame agreements, LTAs, that we have. And it is a long-running question when it comes to mobile pipeline. We've chosen not to do that historically for those reasons.

Thank you. And then one question for you, David, on the cyclicality. Given the immense cyclicality you apparently are exposed to, should you ideally have financial debt at all?

That's a good question to have, but obviously it's always a balance of your capital structure between equity and debt, so I'll leave it there.

Thank you. And I think that we have one final question here for you, Philip, in terms of can you comment on new contracts and the pipeline for Pioneer?

For Pioneer. I cannot comment for our partner. It's an independent company. What we see and what I hear, there is interest and it's the same interest which we see. As I heard, there might be something coming, but I cannot, it's just speculation. And it's up to Pioneer to comment on that.

Thank you. I think that concludes our presentation for today. Thank you for joining.

Thank you very much.