Welcome everybody to Hexagon Composites Q2 2018 presentation. It's my pleasure to take you through the group highlights. We're going to introduce a section called, business update, and we'll touch on a couple of hot topics for the Q2 period. There'll be a shortened group financials section after that. Jon Erik will come and join us for the outlook and Q&A. We include in this presentation an appendix on some more segment financials, but we won't go through those here today. First of all, highlights from the second quarter. Strong profitability overall for the group. Solid mobile pipelines volumes in the quarter. Also pleasing that we have more customers on board. That's a great indication. Continued strong LPG results. We like to set records in that segment.
This quarter it was a new production record, and that's testament to some of the great investments they've been making there in the last 12 months. Continued very high activity levels within hydrogen and light-duty vehicles. Within hydrogen, we're involved in quite a number of projects, numerous projects there. Within CNG light-duty vehicles, we're definitely preparing for an increase in demand, particularly in the European markets. Agility Fuel Solutions profitability continues its upward trend. Agility, of course, our 50% investment in the heavy-duty, medium-duty sector. Quick business update. In June, we were very pleased to announce a substantial contract for a fuel cell electric vehicle, the new model. Unfortunately, we still cannot mention the OEM by name, so the figure to the right is purely an illustration.
Nonetheless, the combined value of the serial production order is in the area of NOK 1 billion to NOK 1.2 billion, and this very much validates the value proposition that we've been seeing in hydrogen. Very pleasing. The ongoing development will continue through the 2020 timeframe, and the serial order production will kick off after that. Uniquely, we can leverage our global footprint, which includes sites in Nebraska and Ohio, also in Kassel in Germany, and we can also actually rely on resources also in the high pressure section in Raufoss, Norway. I would say key also to landing this contract, is our involvement, you can say our strategic alliance with Mitsui. They certainly have been key in enabling us in this hydrogen area, and also they're a key differentiator versus our competition. Going to move over to the heavy-duty sector.
Of course, this is the market space for Agility Fuel Solutions. One of the key things within especially the U.S. market is the natural gas vehicle adoption. When we look at refuse or waste collection vehicles, the adoption rate of new natural gas vehicles is over 60%. When we look at transit buses, it's 30%-40%. When we're looking at the over-the-road haulage, the Class A trucks, it's still around 2%. Those obstacles, removing those obstacles to adoption is a key area, and we're happy to see lots more happening in the financial solutions world. Take oil major Total, they made an investment in May into Clean Energy Fuels, which is the major downstream retailer of nat gas in the U.S. for 25% of that company, and also critically including a $100 million financing facility, and we'll get back to that.
We see that as strong validation of the natural gas as a transportation fuel in the U.S. Obviously, we feel we will see a lot more of that as oil majors expand their strategy also into low carbon business. Back to the $ 100 million. As Clean Energy announced, basically it is there to match or give price parity for a customer when he is considering buying a diesel truck or a natural gas truck. Today, the natural gas truck comes at a premium, and then the business model is you save fuel and you pay back against that premium. Obviously if the payback rates are attractive, adoption increases. What this aims to do is to basically provide financing to remove that barrier from the start, and customers can save on their fuel costs basically from day one.
We estimate that the funding capability then is equivalent to around about 2,000 trucks, which is a significant demand increase for Agility Fuel Solutions. This will be obviously over some time. What is good for Agility is definitely good for Hexagon as well. Why is that? The value of Agility is still somewhat hidden in our numbers in the balance sheet. It is there, 40% of the balance sheet is Agility Fuel Solutions. Of course, it is not consolidated in our revenue down to operating profit. What we wanted to just be very clear to the graph on the right is that Agility Fuel Solutions in totality is more or less the same size of business as all of Hexagon. A very important investment, and you can do the math. Going over to the financials. We posted revenues of NOK 366.8 million to the left-hand side there.
A slight decrease over the same quarter last year, principally due to lower commercial sales on hydrogen. More or less our activities have been, especially in this quarter, development activities. There has been a reduced top line there. However, on the other side, mobile pipelines has been continuing its upward trend. Very much strong annual year-over-year growth for mobile pipelines continues in quarter two. In the middle of the page, we see our EBITDA. We recorded NOK 73.6 million or a 20% EBITDA margin. That NOK 73.6 includes a couple of impacts. One was a reversal of a long-term provision that was a plus NOK 40 million impact. However, the dilutive impacts of hydrogen as we ramp up that organization, including the lower commercial sales, gave a negative NOK 20 million. In net, underlying impact is plus NOK 20 of the NOK 26 million increase you can see year-over-year.
On the right-hand side, our net profit was also a very good spread, posting NOK 62.6 million, up NOK 48 million from the same quarter last year. Of course, the positive EBITDA trickles down. In addition, below the line, we had very positive currency movements year-over-year, plus NOK 36 million. I think it is very important as we go through this investment modus in hydrogen. We have our established businesses on a slightly different track, and hydrogen, as I say, is in its early growth phase. What we are looking at here is stripping out the hydrogen business, you can see in the middle with revenues of NOK 14 million and a minus NOK 20, and having a look at the rest of Hexagon, also stripping out that plus NOK 40 million impact. What we see there is revenues of NOK 352 million, of EBITDA NOK 53.8 and a 15% EBITDA margin.
The rest of Hexagon are very healthy. Of course, hydrogen business is where we are ramping up for the future. I've discussed quarter 2. To the right-hand side, we see the first half year. I'll just touch on a couple of items there. It's been a strong first half year. You can see revenue is up 64.8% to NOK 783 million. EBITDA NOK 140.1 million versus NOK 82.9 million, same period last year. That takes us down to a profit after tax of NOK 85.7 million versus NOK 22.3 million the same period last year. A very strong first half for Hexagon Composites. On the revenues, you can see LPG is very strong in the quarter. NOK 192 million on the left, that was Q2 2017. That actually remains our record. We're very close to that record level this year as well.
You can see to the right, the impacts of the light blue areas, the hydrogen and light duty vehicles. It's hydrogen that's been lower year-over-year. Mobile pipelines has increased year-over-year, as mentioned earlier. Let's go to Agility Fuel Solutions. Their actual business operating results in US dollars. To the right-hand side, the dark blue bar, they posted $39 million in revenue and an adjusted EBITDA of $3.3 million for a 9% margin. The adjusted EBITDA is mainly adjusting for non-cash stock compensation impacts. Pleasing to see that the increase in revenues and margin is happening all the way through the first half of the year. Jon Erik will comment about the back half of 2018 in the outlook section. Within these numbers still is slow heavy-duty truck volumes.
However, very pleasing that the new Cummins 12-liter near zero engine is now on the market. We've had some sales already and some pickup in quarter 2. Then we will expect that trend to continue later. Still solid refuse truck sales year-over-year, upward trend. On the balance sheet and funding, very much fully funded. In fact, Agility closed on a net debt position of just $1 million. Going over to Hexagon's balance sheet. Much of the change really resulting in a higher net interest-bearing debt. We closed last quarter at quite high cash levels following positive working capital movements, among other things. Obviously, in the quarter, we've paid our dividends. We also executed, completed a share buyback program. Those two effects have increased as the main reason for increasing our net interest-bearing debt to more steady levels of NOK 271 million.
The equity ratio remains at 62%. Still a lot of capacity on our balance sheet for more. On that note, I'll invite Jon Erik over to take the outlook.
Thank you, David. Good morning, everybody. We still feel quite privileged to be working in the sector that we are working in. The macro conditions continue to be very favorable. We have now attractive diesel versus natural gas prices, driving demand both in North America and in Europe. The governmental regulations applicable to our sectors are getting tighter, that is important and positive. Also related to that, continuation and reinforcement of incentive programs in Europe, the U.S., and also now to an increasing extent in East Asia. I think it is now widely acknowledged on political level and industry that hydrogen, biogas, and natural gas are vital for the low-carbon energy mix going forward. Hydrogen. We announced earlier this year that we joined the Hydrogen Council. A lot of prominent members there.
Every month, there is one representative of the member companies having a 60-minute update on their views and visions. This is the representative of Daimler. There is still a lot of speculation and discussion in the press and elsewhere. Is it battery electric? Is it fuel cell electric? The answer is yes, both. There will be a mix, different weighting in different markets, different applications. I think there is a growing consensus that fuel cell and hydrogen will be part of that electrification process. The heavier the vehicles, the more relevant you may say becomes a fuel cell. We see a lot of attention and interest for buses and trucks. Toyota unveils its second iteration of their hydrogen truck. Nikola has reported NOK 11 billion pre-order book for their alternative, and a firm order from Anheuser-Busch in the U.S., the famous beer maker.
Here, closer to home, ASKO is putting their first fuel cell truck on the roads later this year. Why is that? It is because operationally, fuel cell is the most efficient solution when you take into account the fueling time, the range, and that is a function of weight. Another sector which we find very interesting is the maritime segment. We announced earlier this year our first customer for fast ferry application. It was on the West Coast of the U.S. We have several other similar projects under discussion: work boats, fast ferries, and car ferries. Important to notice is that many of these programs, they will come into production and delivery from the early 2020s.
This is not a near-term, large-volume business, but we have now significant confidence and sufficient confidence to state that we will see that strong growth coming a couple of years down the road from now. Short-term, we will see fluctuations in our hydrogen segment. Last year, we had a very good year in distribution, so if you like mobile pipelines for hydrogen. This year, that market has been slower. We see it will pick up again in Q4, we expect a strong first half of 2019. When you refer to David's numbers, that is where we see the temporary downturn compared to 2017. Back to the maritime sector, there is a very strong regulatory push. I'm sure you've all heard of the IMO regulations to be enforced from 2050, but already now, a lot of the operators are starting to prepare for that.
Back to Norway again, the Norwegian parliament recently introduced legislation that will limit or prohibit usage of diesel and oil-driven ships in the fjords, latest by 2026. That is a short time. A lot of development has to happen by then. It is very hard for us to see that battery electric can be the solution. It may be a part of it. In order to achieve that, we are of the opinion that fuel cell technology is absolutely necessary. Moving on to CNG light duty. That continues to grow strongly. We have talked repeatedly about Germany. We now see that movement, if you like, spreading to Belgium. We have a strong market in Italy. Governmental incentives are either prolonged or strengthened. We also have discussions around banning diesel vehicles in a number of cities around Europe.
The Italians are planning to expand their CNG filling station network significantly. We previously discussed the similar plans for Germany. Volkswagen is launching a mono fuel models at the end of this year, so that they have a wide range of models available for the customers. Part of what is driving this is a consequence, if you like, of the Dieselgate. Another consequence of that is very strict rules. There is something called the Worldwide Harmonized Light-Duty Vehicles Test Procedure, and that has been reported in the press that it's causing supply chain challenges for many OEMs. Also Volkswagen informed recently that their deliveries will be affected. We see an impact on our business as well. We saw it now in Q2. We will see a strong effect in Q3.
Without being able to go into details, it has to do with the logistics and the operations of our customers. We will see a temporary disruption to that extreme strong growth curve on the right-hand side. We are very confident that we will get back on the growth trajectory from late, excuse me, from late Q3, early Q4. Our concerns at this stage is more on how we prepare for this strong growth and how we utilize our capacities in order to be able to satisfy demand. It's quite interesting also, the left-hand curve recently announced. You see the reduction in petrol and especially in diesel car sales, this is again Germany. While the CNG alternative has what I think is fair to call an extreme growth.
Unfortunately, we will have a hiccup in Q3, but then the underlying growth is very, very strong in this segment. Mobile pipelines. This is the TITAN 53 recently launched, approved by the U.S. Department of Transportation, the largest tanks on the planet. This is a product especially designed for states in the U.S. where there are limitations on weight, 80,000 pounds weight restrictions. As such, makes our portfolio more complete. We were able to announce yesterday a large order with one of our main customers, XNG, who are expanding their TITAN fleet. We frankly had expected this order a bit earlier. We will see that volume in Q4 and in Q1 2019. Total value, $10 million. Strong activity in the North American market driven by the high oil price. David referred to the oil majors.
We may not be quite back where we left that shale gas market in late 2014, 2015, but we are quickly moving in that direction in North America. A lot of projects ongoing, driven by the attractive spread between natural gas and oil. Also, we are enjoying success with our Modal Acoustic Emissions technology, MAE, for recertification. It is an interesting business in its own right, and it's also a very good value proposition for our customer. They have more predictability in how they can recertify their products every five years, which is a regulatory requirement, in an efficient, non-disruptive way. We expect strong year-over-year growth, but also here we see temporary softness in Q3. Compared to what we guided in the last quarter, we see projects moving from Q3 to Q4 because of delays in getting the final agreements with the customers. LPG.
We expect to reach similar capacity utilization as last year, which is near full utilization. Continued very stable European market. We see now Bangladesh emerging as one of the fastest-growing LPG markets in the world. That is a political decision to move away from natural gas to LPG for domestic use in order to free up the natural gas for industrial applications. We are also continuing our renewed drive to penetrate the U.S. market. We have enjoyed some success in Florida. Still coming from low numbers relative to the extensive potential in that market. We are encouraged, and we are now entering California and Nebraska in a similar way. Agility. We see now that the over-the-road heavy-duty truck market, which has been low for several quarters, will rebound now in the second half of 2018.
Partly because of the favorable spread between natural gas and diesel, but also due to the availability now in the marketplace of the Cummins Westport near zero emissions natural gas engine. When we talk about zero emissions in the U.S., it's NOx and particulates. They're not so concerned about the CO2 part of the emissions. There is pent-up demand for new engines, therefore, we expect a strong quarter. However, we also see that the U.S. overall truck market is at an all-time high. We have some concern that there may be constraints on deliveries of chassis, which then represents a risk that some of the projects may be pushed into 2019. Both the North American and the European transit bus segment is strong this year. In Europe, we think it's driven by the same rationale as on the light-duty side.
Also on the bus side, we see that after a few years with high focus on electric buses, decision-makers are again looking at natural gas and biogas as part of the mix in order to meet their emissions targets. The last but not least, the refuse truck market is enjoying a very good year. This is the familiar curve. In April 2017, the spread between natural gas and diesel was at a mere NOK 0.40 per diesel gallon equivalent. In mid-August now, it was at NOK 1.50, the spread at the pump. Then we know that the large customers, they enjoy significantly better prices than what you can get at the pump. There you have, now in August, almost NOK 1.60. That makes the value proposition of converting to natural gas for large users very significant.
Summing up, we see strong underlying market development in all segments. We see a weak Q3 due to this WLTP effect on the light-duty side, and orders shifting on the mobile side from Q3 to Q4. We then see a strong Q4 altogether. We see a continued significant dilutive EBITDA effect from the hydrogen business. We are now in that phase where we spend a lot of resources preparing for the programs, while income remains modest until things start to. We will see strong growth in 2019, but in particular from 2020. That marks the end of my presentation. If you will join me, David, we are happy to take questions.
Hans-Erik Jacobsen, Nordea. The demand for fuel tanks for CNG, for passenger cars are, as you show in your graph, very strong. Could you give us some guidance on how the growth is for composite tanks compared to steel tanks?
You're quite right. There are two effects driving our market. It is the overall growth, which is particularly strong in Germany. We see growth picking up strongly also in Italy. We know that the Spanish have strong ambitions to make CNG a significant part of their vehicle park. In addition, we see several OEMs moving away, replacing Type 1 steel cylinders with Type 4, lighter, more sustainable alternatives for several of their models. That is also an effect. We have not seen that yet, but I mentioned the Volkswagen mono fuel program. In that process, several models are changed from Type 1 to Type 4.
On hydrogen, you have previously guided on future investments at least up to 2020. Given all the opportunities that continue to arise, do you still think that guidance holds, or will investments be bigger before you can start to reap the benefits after 2020?
No. Maybe you would want to supplement there, David, but I think for the next three years, the guidance is sufficient. We don't see any significant risk of large additional investment requirements. Hopefully, we will take more major orders that will allow us to kick off additional programs, and then could justify more capacity.
Correct. I don't think there is more to add to that.
All right. Thank you.
Hallvard Eie from SEB. Continuing on the CNG LDV side. You said that due to the WLTP effect, you saw some negative effects in Q2 and expecting some stronger effects in Q3. Is it possible to quantify the effect in Q2 and what you're expecting in Q3 as well, before it comes back in Q4?
I would not like to speculate too much on that because we don't have clear I don't think even the OEMs have full visibility, and we get new messages almost day by day. I have to admit it's a bit unclear to us. I think it's fair to assume that we will see a negative impact in Q3, a lower volume than what we've seen in the preceding quarters. We have absolutely no concern about the further pickup and strong growth in that segment.
On the hydrogen side, we saw the first OEM moving from test to serial production with quite a large order. Is it fair to expect that the second OEM contract will also move to serial production? Can you say something about timing such an order as well?
I'm afraid we will not communicate around that until we really have the final confirmations. We are optimistic. We are very optimistic.
Can you say something about the milestones that needs to be met or?
On those additional potential, I am afraid that is to go too much into detail at this stage. We would like to be as transparent as possible, but I think it is market practice among the large OEMs to be extremely restrictive on whatever type of detailed information we can share. That is why we have to be so limited on sharing those details.
All right. Thank you.
Hi, my name is Lil. I just have a follow-up to that one. Maybe a more broader question that is easier to answer than the more specific one. You are seeing the European integrators or majors moving into the cleaner markets in different ways with Eni and different stations and Total with their investments in the U.S. and clean energy. How do you see their American peers attitude and interests in such a move? Are they closing up or just still negligent?
No, certainly not negligent. When you say peers, I assume you mean Hexagon's peers as.
Hexagon
Oh, yeah
the oil major peers in the U.S.
Okay. Would you like to comment on that?
Please.
We are not close enough on those players to really predict what will happen in the short term. What we notice is that all the majors are in the space. A lot of them are invested in the shale field. More and more looking at the downstream integration. We see that, for example, what we call virtual pipeline, so moving gas from one pipeline system to another to take advantage of the price spread is also an area which is attracting now the majors in the field. Our impression is that this is very high on their strategic agenda. That said, we are not that close to those players, so we take most of our information from the media.
I could supplement one bit. We were at the World Gas Conference in D.C. in June. There was obviously a heavy presence there, particularly Chevron and Exxon. Must admit, still very LNG focused, but we showed the TITAN 53 and that was clearly something that got a lot of interest there. Hopefully we will see a little bit more. You're correct, it seems to be more the Europeans even operating in America who are a little bit more on the alternative fuels like Shell and hydrogen.
As well as BP.
Thank you.
Mikkel Nyholt, Carnegie. I was just wondering regarding the NOK 20 million cost in the hydrogen division. It wasn't really clear to me whether that was a one-off in this quarter alone, or whether we should assume this sort of run rate going forward. How long will this ramp-up run for?
I think I'll just refer to prior guidance on the annual level, because as Jon Erik mentioned, it's going to be very lumpy going forward. Annually, we mentioned a figure around about -NOK 39 EBITDA dilution in 2018, similar levels in 2019, and potentially similar levels in 2020. Saying that, it really depends on those milestones on the cost side, and it really depends also on the revenue side. I think that's a good basis. We should have the expectation that this is a dilutive division for some time. Of course, the upside in 2021 and 2022 also cemented by some of that large contract order you saw kicking in.
Thanks.
Are there any more questions from the audience in this room? If not, we will look at the questions from the webcast audience. We have received some questions from the webcast audience. Jens Hofteig has several questions. I will start with the first. Could you please explain what a provision reversal relates to?
Yeah, sure. It goes back to our acquisition of xperion in October 2016. In that booking, you can also refer to detailed notes in our annual accounts. It also included a very high-side case, high-side aggressive case, or earn-out provision, as we call it, whereby if we achieve this high-side case to be beneficial both to Hexagon and also a payment to the sellers of xperion. This period runs out at the end of 2018, it's getting more certain. We can't really go into details, it's a confidential agreement. Part of that related to a new emerging market that was new both for Hexagon at the time and for the seller at the time. Unfortunately, political climate has changed somewhat in 2018 on that specific geography, which makes it less reasonable that that will happen. That prompts a reversal of the provision.
Again, the provision is time allocated to the end of 2018, whereas obviously the xperion business per se will hopefully go on till infinity. It's really a reversal of an earn-out provision in the xperion acquisition.
Thank you. Next question. Could you please explain the types of ramp-up costs in hydrogen and how you expect that to develop going forward?
I think we're talking 2 types of costs, one being investment CapEx related. We will ramp up, in all likelihood, our facility in Heath. Back to the xperion acquisition. When we acquired xperion, we also acquired a newly established site in the U.S. in Ohio. The business there was moved to Agility, and we temporarily wound up the activity there. The site is excellently suited for our needs on the hydrogen side. The plan is to equip that site, and that is the main part of the investment program that we discussed in the two previous quarterly presentations. Then we have the more operating cost related items, which are related to the development projects and programs. Two things. First, those programs, they are costly in their own right, while the income side depends on certain milestones.
There is not a good correlation between the cost and the income generation. Secondly, we are building up the knowhow, engineering capability and capacity in general, mainly to support further opportunities on the hydrogen side, but also related to other areas. We have been a bit thin on resources in order to take on this type of major programs. Demanding customers, we have to make sure that we meet their expectations, and we then choose now to build up that organizational capability and get ready for what we see coming. We think this is very specialized knowhow, very few engineers available with the knowhow, we have to take them in. We have to train them. We assume 18 to 24 months from they start until they can really be put to full utilization.
That is the type of costs that we are incurring these days and will continue to carry in the next couple of years, but will then be paid back when the serial programs kick in.
Thank you. Next question. Revenues in hydrogen light-duty vehicles were down significantly compared to last year. Could you please explain why and how you expect revenues here to develop over the next quarters?
I think I touched on that. It is not in the hydrogen light-duty sector that the revenues go down on the hydrogen side. As discussed, we have had on the CNG light-duty side because of these new regulations, testing regulations. We have that temporary supply chain challenge in the car manufacturing industry. On the CNG and hydrogen in total you see some of that effect. On the hydrogen side, more specifically, it is on the distribution side. Mobile pipelines for hydrogen where we have had a couple of slow quarters. That market in its nature is project based and we do not see anything concerning in having that fluctuation. We expect, we see orders coming in Q4, and we see a healthy market going into 2019 on the hydrogen distribution side.
Thank you. Then we have a couple of questions from Anders Bakke. Have you increased capacity at Ragasco since last year? If not, your guidance of similar utilization in second half 2018 as in second half 2017 implies flat revenues. How will margins develop?
We are in the process of completing an investment program at Ragasco. The program is primarily aimed at improving customer values. We will be more detailed around that when we are ready to launch those product improvements to the market. That program will also add some capacity, two to 300,000 cylinders per year, depending on the mix in any given year. That will only be available from Q1 2019. The capacity in 2018 is the same as we had in 2017. We are close to full capacity utilization. The margin picture so far is very similar. Of course, there's always some dependency on the mix and the length of the series, et cetera. As you will see from the numbers, very healthy performance of the LPG business.
Thank you, Jon Erik. That was all from the webcast audience.
Any more questions from this room before we end the meeting? I thank you very much for sharing this morning with us and have a pleasant rest of the day. Thank you.