Good morning, and welcome to Hexagon Composites Q3 results presentation. Very happy to have you here. My name is Karen Romer. I'm the SVP of Communications for Hexagon. Joining me here in the auditorium in Oslo will be Jon-Erik Engeset, our CEO, and David Bandele, our CFO, who will be presenting the results to you in a few moments. I just want to point out that if you are from our webcast audience, you are invited to submit questions throughout the presentation. Then the questions will be taken at the end. The same here, there will be a question and answer session for those in studio at the end of the presentation. Without any further ado, I will turn over the stage to Jon-Erik. Thank you.
Thank you, Karen, and good morning, everyone. Q3 was another quarter of strong growth for the Hexagon group, 42% year-over-year. However, it was also a quarter of continued challenges in our supply chain with high costs of production impacting our margins. We see particular growth momentum now in the infrastructure-related business with significant new orders for Mobile Pipeline, for renewable natural gas and hydrogen distribution systems and mobile refueling systems on the Hexagon Purus side. Also our smallest daughter, but very pretty and very smart, Hexagon Digital Wave, continues its strong growth in the quarter. Hexagon remains about driving energy transformation, and year to date, we have enabled the avoidance of 935,000 metric tons of CO2 equivalents.
Financially, if you look at Hexagon, excluding Purus, we had a top line of NOK 1 billion and NOK 80 million, delivering an EBITDA of NOK 68 million. That's up from NOK 848 million revenue last year and NOK 110 million in EBITDA. That shows the impact of the supply chain challenges that I mentioned. Hexagon Purus more than doubled its revenue from NOK 103 million last year to NOK 222 million, with an EBITDA of -NOK 92 million, which is necessary to continue the scale-up of the organization and the ramp-up of the production system to meet the very strong growth expected in the near years. On a consolidated basis, top line of NOK 1,243 million, up from NOK 875 million last year, and an EBITDA consolidated of -NOK 24 million.
As you understand, operating conditions remain challenging, continuing very high costs of raw materials and components and not least energy. On top of that, we experience shortages, delays that create considerable problems to run a smooth and lean operation. However, we are countering this with profitability measures, some of them implemented and take effect already from Q4, and we see the external side of this easing going into 2023. Some external reports indicate that the worst should be behind us when we come into Q2 next year.
That's important because we are going to grow this business, strongly in the years ahead, encouraged by many factors, not least by the very strong governmental support from most important countries and regions in the world, not least from the European Commission and from the U.S. government. In Europe, we together with our friends in the European Biogas Association, we have formed what's called the Biomethane Industrial Partnership with the European Commission. The purpose of that is to establish the link between the REPowerEU program with its biomethane ambitions and the transportation sector. Also, we expect the Commission early next year to propose the new heavy-duty emission regulations, and we are optimistic that that regulation will focus on the well-to-wheel as opposed to the tailpipe emission.
That is very important because that will then favor RNG as the most environmentally friendly alternative fuel, short, medium, and long term. On the U.S. side, the Inflation Reduction Act was signed into law on the August 16th, also very important. It will increase the incentives for RNG development. It will give more predictability and visibility. Not least, it will make RNG equally treated with other alternative fuels like batteries and hydrogen as examples. That will further stimulate the development of RNG. There is already very strong activity in the area, especially in the U.S..
The mid graph here shows the growth of RNG resources over the last few years, and you see that there are a number of new projects under construction or at the planning stage, which will further double the sector in the near term. We see energy majors having entered this space in earnest. For example, the BP transaction acquisition of Archaea Energy recently at the value of $4.1 billion. It's becoming big business in the U.S., and Europe is about to follow suit. That's very important for the transportation sector, obviously, because this energy will be made available not only to the transportation sector, but to the transportation sector as one of the hard-to-abate industrial areas for decarbonization.
Already in the U.S., 64% of natural gas for transportation is renewable, and that has grown substantially over the last few years. We expect that when we get the 2022 numbers, that % will have gone up even further. Another very, very important development for us is the launch of Cummins' 15L engine. The largest engine on the market today is the 12L engine, which is sufficient for medium long haul. When you want to haul, for example, across the Rocky Mountains, that engine is simply not strong enough. That means that it's only 1/3 of the U.S. truck market which has been addressable so far. With the 15L launch, for all practical purposes, the whole heavy-duty truck market is or will become addressable, representing more than 300,000 trucks per year on average.
This engine is the first which is specifically made for natural gas and has superior fuel economy and efficiency. This is a real game changer. That said, we don't expect the whole market to adopt renewable natural gas, but we do expect a significant share up from around 2% today to, in our estimates, 10%-15%. You will see that external analysts and some of our industry peers, they actually assume a higher level. That's why we've included the high case there. But we think it's prudent to assume that the industry will need some years in order to fully get prepared for this transition and to build out the supply chain. The infrastructure is already there. The technology is there, so this is not technology for the future.
This is already a technology used to a major extent by leading transportation firms. This is why we have indicated a doubling of revenue in the next three years in this business. We are very well-positioned to play a core role in this transition to RNG. First, on the Mobile Pipeline side, where we enable the transportation from stranded sources, very often in agricultural areas, removed from the fixed pipeline grids, or as mobile refueling modules where we can supply directly to the fleets, and then systems and technology to the fleets themselves. Excellent growth prospects for Agility in the coming years. Moving to our other businesses, Hexagon Digital Wave, acquired late 2018, had the revenue of $2 million-$3 million.
We have invested in the organization and fully commercialized the technology now, and we are at the early stage of strong growth in this business. It is complementary to the hardware business that we run through Hexagon Agility and Hexagon Purus, enabling the customers to extend the life of the systems, improve safety, but also a lot of information that they currently cannot collect. In sum, this will drive down the total cost of ownership for the fleets. This is a differentiator and a business which will be a core part of our development of our offering in the coming years. Also, for Hexagon Ragasco's growth, smart cylinders is very core. We've talked about the development project. Now this project is ready for field testing, which will happen in 2023.
We expect to launch it commercially latest in 2024. Some good end user features, but more importantly, this will help the distribution companies to make their operations more efficient. That we think will allow us to penetrate markets where we today are only a niche player in a more comprehensive way. Last but not least, Hexagon Purus really on track to deliver on its very ambitious growth plans. Far this year, LTM revenues of NOK 850 million. A strong order book for next year. Good line of sight for the following years.
We are on track to deliver NOK 45 billion in this business in 2025, when we expect to be the year where we turn the corner from EBITDA negativity to starting delivering EBITDA in the whole business. Already in the distribution part of the business, we are now EBITDA+ . With that, I invite David to talk more about the financials and the outlook.
Thank you, Jon Erik. Beautiful, autumnal colors there. Let's go straight into the highlights. Q3 2022, it's very much the same theme as the first half of the year. Very strong top-line performance, while Jon Erik covered the supply chain disruption and input price inflation, continued to weigh on margins, particularly in the Hexagon Agility segment. Leading off with Hexagon Agility, very strong NOK 930 million in revenue for 25% revenue growth overall. In the heavy-duty and medium-duty sector, that's where you have the low margins, and that's due to the fact that price rises due in 2023 are lagging the severe input cost increases.
However, happy to see that there are higher margins now being achieved in Mobile Pipeline as higher prices now start kicking in for the second half of the year. Hexagon Ragasco posted NOK 119 million in revenue for 38% revenue growth, so very good performance there. Of course Ragasco, even since first of April, have managed to contain the material price inflation with higher sales prices to customers very successfully. Still have high energy costs though, particularly here in Norway, and they continue to temporarily weigh down on margins. For Hexagon Digital Wave, as Jon Erik mentioned, fantastic momentum continues.
30 million NOK in revenues for 58% revenue growth, this time driven mostly by the Modal Acoustic Emission Technology Services revenue streams and also with those volumes, a positive EBITDA. For Purus, our publicly listed subsidiary, as Jon Erik covered, doubling revenue with 2022 guidance on track. Our ownership piece, remember, is currently valued at 3.9 billion . On the revenue for Hexagon excluding Purus, that was 1,080 million NOK versus 848 million NOK same period last year. If we look at the EBITDA, you can see that from last year, we delivered 13% margin and this year it's 6%, so 7 percentage points down year over year.
Main factors are, one, we don't have the same productivity through our factories, particularly in the U.S. with these disruptions. Two, there's actually some negative mix year-over-year. We've done higher proportion of medium-duty trucks where we have less content than the heavy-duty. You can read that as less margins. But the big one is the input cost price inflation, which currently is not covered by the sales prices. When you look at that bar to the right, what we've tried to do is keep the mix of sales that we achieved in Q3 2022, but attach the price increases that have been agreed with customers that kick in in 2023.
When we adjust for that, we can see that there is a significant increase in margins of 4 percentage points. Digging further into Agility, we see that 25% revenue growth year-over-year to NOK 930 million. Again, strong medium-duty and heavy-duty truck markets and also Mobile Pipeline. Then the EBITDA, you can see the spread between this year and last year, 5 percentage margin points versus the 13, has also widened as the issues are contained mainly to Agility. That margin pressure, just to dig a little bit deeper into it, is elevated carbon fiber prices.
While some components prices might be leveling off, of course, prices to us are still stable, but carbon fiber has increased and will continue to increase also in Q4. We talked about the industry-wide disruptions and the suboptimal efficiency, but also let's not forget that the light-duty vehicle volumes still are very low and negative year-over-year given the situation with Volkswagen there. When we look at the revenue split, sorry, 40%, so very strong truck. That's the theme for the whole of the year. Happy to see transit bus increase to 17% of share, and also refuse truck healthy and increasing to 13% of the share, whereas Mobile Pipeline continues to be very strong at 22%.
The rest of the 7% is actually mainly cylinder sales to Hexagon Purus. We saw that, marvelous, growth there, particularly in the distribution modules, and Agility currently contract manufactures cylinders for Purus there, and that's the majority of the 7%. What we try to show is that, we have very diversified revenue streams within Hexagon Agility, supporting the critical infrastructure, and also decarbonization targets of municipalities and commercial fleets, or, in North America and Europe. Ragasco, you know, Q3 is seasonally low quarter for volumes. We come off the heavy push out for the summer season in the first half of the year, for barbecue and leisure activities.
We also have manufacturing shutdowns, so a significant manufacturing shutdown in the summer period, but very pleased with the growth there year over year of NOK 119 million versus NOK 86 million in revenues. Ragasco continues to really develop more and more markets. They start as small, but they grow over time. We had additional sales into Middle East and African markets in particular, adding to the volume growth. I think Ragasco are now at over 100 countries sold. Great stuff there. Positive margin development year over year is good to see. Recording a 7% margin versus the 5% same quarter last year. We've got better scale from the volumes, while again the prices offset the material cost increases.
The delta that we're absorbing on energy cost for the quarter, higher energy cost is around about NOK 4 million year-over-year. Ragasco continues to be a very resilient business, with multiple introductory and repeat emerging market orders in addition to their core customer base. For Digital Wave, momentum continues, highest quarter of the year, NOK 30 million versus the 19 same period last year for 58% and profitable revenue growth as we see a slight positive EBITDA margin as well. It's been a healthy, mix of product and business services products in the, ultrasonic, examination. These are machines that large customers use in their factories, usually to test metal-based cylinders.
On the services side, we see this increasingly adoption of inspection and requalification activities, and culminating also just recently Hexagon Digital Wave announced a $2 million order with a long-term key customer in the mobile pipeline applications. As we go into the group, we have covered the left-hand side, the Hexagon excluding Purus results. Purus recorded NOK 222 million in revenues and -NOK 92 in cost of goods and EBITDA. Of course, as Jon-Erik has pointed out, when you screen us at group level, you will see then a slight negative EBITDA with Purus dilution over the composites cash generating businesses.
As we summarize Q3, we have strong demand for Hexagon Agility, seasonally low volumes for Hexagon Ragasco, but with profitable growth, strong momentum for Hexagon Digital Wave, and Purus remains on track for its growth targets. Balance sheet, not a lot happened except currency movements. They've been quite severe quarter-over-quarter, so versus last quarter. Most of that rise in the assets and liabilities are to do with the relative weighting of NOK versus US dollar, so US dollar is appreciated. Otherwise, we closed the group with NOK 700 million in cash on the balance sheet and equity ratio of 46%. When we look at our leverage, this looks at the Hexagon excluding Purus on the bottom.
Recalling Q1, we had a large participation in Purus' capital raise, which temporarily lifted leverage, but we've stabilized that leverage over these quarters. As we end Q3 2022, we have committed financing facilities over NOK 2 billion and available liquidity then of NOK 600 million going into the next quarter. On the full year guidance, there should be no surprises here. We did have a trading update on the October 14th, and what that update covered is first and foremost the reason for it. You can say that profitability forecasting at the moment is extremely challenging because of this disruptive and inflationary environment. Trying to predict how our costs move through the P&L from inventory is very challenging in this environment.
Saying that, we don't see any issues on our revenue, so there was no re-guidance on revenues. However, on the EBITDA, we re-guided to NOK 325 million approximately. Again, it's challenging to give an exact figure, but that's a midpoint of a range of ±5%. Some of the factors that affect getting a more positive result will be those profitability initiatives and how good they can be or what sort of return we can get in Q4. At the same time, we can hope for some easing of these supply chains, but they can also be surprises. We continue to manage that situation very tightly. On that note, I'll give it back to Jon Erik.
Thank you, David. In summary then, healthy demand, very strong growth, continued challenging operating conditions impacting our profitability unfortunately. Strong long-term drivers in the form of government commitments, regulatory support, primarily for us in the US and in Europe, but also in other regions. We remain confident in our 2025 revenue targets of NOK 6 billion for the Hexagon business excluding Purus, and the Purus business at NOK 4 billion-NOK 5 billion as we have communicated in the several previous quarters. With that, I think we are open for some questions.
We have a few questions that come in from the webcast, but is there anybody? Yes, we have one here in the audience. Alina will bring you a microphone.
Hans Erik Jacobsen, Nordea. On the ongoing logistical issues, are you in any way able to offset that in any way? Anything you can do in order to improve the situation, or is it entirely up to your sub-suppliers?
There are always things we can do, and we certainly work on that. Developing new suppliers, of course, that takes a bit of time. I think what has surprised us and I think a lot of other industry players, it's that it's not only the main categories, it's little nuts and bolts components, replacement for machinery, small components in our systems that have been considered marginal. But of course, enough to cause delays in deliveries, et cetera. I think we and most other industry companies will need to rethink the whole supply chain, become less dependent on deliveries from faraway suppliers, potentially buffering more safety inventories, that sort of thing. We are in the midst of all of that. We keep getting new surprises.
As David pointed out, it is a bit unpredictable, unfortunately.
Thank you.
Do we have any other questions here in the audience? I'll take a webcast question. David, do you see any upside potential for 2022?
As I mentioned, I think the key ones we can control, I mean, you can say, are the profitability initiatives. There is upside potential there.
Okay. John Erik, how elastic is the demand for your overall portfolio in a recession scenario?
The scenario which we are potentially facing now is, of course, to a major extent driven by the energy crisis in Europe. That actually will stimulate demand for our solutions. That part, I think, is elastic for us, but in a positive way. On the other hand, with very high energy prices, we should expect the transit bus demand in Europe to suffer. Also we've seen in previous recessions that the overall truck demand is among the markets that indicate a downturn early, and we should also be prepared for that in our business.
Okay. On the Mobile Pipeline front, Jon Erik, you just announced an order for Mobile Pipeline. What do you see as the overall potential for Mobile Pipeline in Europe?
Five-six years ago, we had steady sales of Mobile Pipeline in Europe. We call it the X-STORE. It's the brand of the module that we sell here. In recent years, we've had very, very little sales. Now we have inquiries every day. We have a challenge because we are maxed out capacity-wise. We're now considering various ways of ramping up the systems assembly capacity soon enough in order to service this market. With a bit of time, we will of course solve it. But we're looking for solutions to be able to deliver to our customers also in the short term. We see the same on the hydrogen side. We are sold out for hydrogen distribution modules for the full year of 2023.
That is coming out of the facility that we acquired in Germany, the Wystrach acquisition that we made around a year ago in that part of our business.
Okay. Moving on to Hexagon Purus. Do you plan to reduce your stake in Hexagon Purus? If yes, do you plan to stay above 50% in the long run, or could you go lower?
I think we've been consistent on this particular question since we launched Purus on Euronext Growth in December 2020, that we see our ownership being diluted over time. We want to retain a significant stake in the company, but not necessarily a majority. Obviously, we see some advantages of being able to de-consolidate Purus from the profitable sections of our portfolio, because it's a complicated message to explain that we have these three business areas that are profit making, and then we have Hexagon Purus, which is at an earlier stage of maturity.
We want to do it in the most value-creating way and make sure that Purus is set up for success as we then probably will reduce our relative ownership over time.
Okay. How are we doing on questions in this audience? Okay. I think this is for you, David. Good morning. Measured on nine-month results, your gross margin is 7 percentage points lower in 2022 versus 2021. How big are the price increases you have implemented? For example, will they make the gross margin improve 7 percentage points in the second half 2023?
Yeah, I think trying to explain that it's not just the material cost impacts to margins. We looked at the EBITDA margin effect earlier. Looking at Q3 in isolation, that clearly shows that we can return to reasonable double-digit margins with the price increases. Then, you know, what about the productivity? That's something that we've suffered year-over-year as a secondary effect of these disruptions. We will be looking at getting back to normalized margins as we get through this quite exceptional period.
Okay, looking a little farther ahead, in light of your claims of high growth in 2024, and your revenue target of NOK 5-NOK 6 billion in 2025, what is the associated EBITDA to that revenue target?
We haven't guided on the EBITDA for the five-year picture even from the start. Of course, in this environment, it's difficult enough guiding for EBITDA, as you've seen.
Yeah
just for full year 2022.
The continuation of that.
I will say that, you know, same time we started that guidance, which was January 2021, at the Capital Markets Day, we hold by it. We also said there are three basic financial requirements in Hexagon excluding Purus. One is 15% growth, annualized that will achieve that doubling of revenues. The other one is that we're still holding to chasing 15% EBITDA margin. We're still behind on that, but we closed 2021 at 12%. We expect then with this 15L engine, you will see the volume inflection, particularly from 2024. The third financial item was the steady state 3x leverage, which of course will come easily as profits increase with those volumes.
Okay. Continuing, well, related to that, where do you see the growth coming from? Yeah.
That 15L engine is
Yeah
is a key one. Obviously, you know, today, the automotive business in total is about 60% of our revenues. When you think that the addressable market is gonna triple from that point in time, it kinda gets me happy. Yeah, go on, Jon-Erik.
No, I just want to say, but in addition to that, we also now see much stronger growth potential for distribution and infrastructure-related solutions, as a consequence of the energy situation in Europe and elsewhere in the world. That is on top of the expected growth in the trucking volumes.
Another question I think for you, David. Could you elaborate a little on the positive EBITDA effect from corporate eliminations?
That's technical, so I can take that offline. It's, of course, when the results get worse, the LTIPs are accounted for in central, so there are associated credits against that with the worst performance. But also, Jon-Erik alluded to Mobile Pipeline that generates a royalty back to the center, and of course, sales have been very large there, and of course, more credits in the corporate functions. I can go into more detail later.
We also have a question. Referring to your chart on RNG infrastructure and what you provide there, how much of that infrastructure is common to hydrogen and will be used if and when green hydrogen is available? It has a P.S. Can the 15 Cummins engine also be used for hydrogen combustion engine?
Good questions. To take the last question first, Cummins has actually prepared the same block and essentially the same engine for a hydrogen combustion purpose. It will be interesting to see if that demand will develop. To the first question, in principle, the hydrogen distribution modules are Mobile Pipeline modules for hydrogen. It's the same concept. You stack cylinders, high-pressure cylinders inside a container. You add to that all the piping and the valves and the steering systems, and you have a very, very efficient solution for transportation of gas under pressure from the source to the users. The demand is a little bit different on the two sides.
For RNG, it is from stranded resources to the grid often, while for now, in most areas, there is no grid for hydrogen. On the hydrogen side, it is for now the solution to transport from production, for example, at the windmill farm to the users.
Very good. I do not have any further questions from the web audience. Is there anything in the room? No. I think we have concluded the results presentation for Q3. Thank you very much.
Thank you very much. Thank you.
Thanks.