Welcome everybody to Hexagon Com's, its quarter two twenty eighteen presentation. It's my pleasure to take you through the group highlights. We're going to introduce a section called business updates, and we'll touch on a couple of hot topics for the quarter two period. There will be a shortened group financials section after that and then Jon Erik will come and join us for the outlook and Q and A. And we include in this presentation an appendix on some more segment financials, but we won't go through those here today.
So first of all, highlights from the second quarter. Strong profitability overall for the group and solid mobile pipelines volumes in the quarter. Also pleasing that we have more customers on board. That's a great indication. And 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 twelve months. Continued very high activity levels then within hydrogen and light duty vehicles. Within hydrogen, we're involved in quite a number of projects, numerous projects there. And 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. And, Agility, of course, our 50% investment in the heavy duty, medium duty sector. So quick business update. In June, we were very pleased to announce, a substantial contract for fuel cell electric vehicle, the new model. Unfortunately, we still cannot mention the OEM by name.
So So the figure to the right is purely an illustration. Nonetheless, the combined value of the serial production order is in the area of NOK1 billion to NOK1.2 billion, and this very much validates the value proposition that we've been seeing in hydrogen, so very pleasing. The ongoing development will continue through the 2020 timeframe and the serial order production will kick off after that. Uniquely, can leverage our global footprint, which includes sites in Nebraska and Ohio, also in Castle in Germany. And we can also actually rely on resources also in the high pressure section in Ralfos, Norway.
But I would say key also to landing this contract is our involvement, you can say our strategic alliance with Mitsui. So 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, is the market space for Agility Fuel Solutions. So 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% to 40%. But when we're looking at the over the road haulage of the Class eight trucks, it's still around 2%.
So 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. So 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 $100,000,000 financing facility and we'll get back to that.
So we see that as strong validation of the natural gas, as a transportation fuel in The U. S. And obviously, we feel we'll see a lot more of that as the oil majors expand their strategy also into low carbon business. So back to the €100,000,000 So, as Clean Energy announced, basically it's there to match, or give price parity for a customer when he's 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.
So obviously, if the payback rates are attractive, adoption increases. So what this aims to do is to, basically provide financing to remove that barrier from the start and so customers can save on their fuel costs, basically from day one. And, 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. But what's 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's there. 40% of the balance sheet is Agility Fuel Solutions. But of course, it's 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. So a very important investment, and you can do the math. Going over to the financials. We posted revenues of 3 and 66,800,000.0 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. So, there's been a reduced top line there. However, on the other side, Mobile Pipelines has been, continuing its upward trend. So, 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 €73,600,000 or a 20% EBITDA margin. And that 73.6 percent includes a couple of impacts. One was a reversal of a long term, provision, that was, plus 40,000,000 impact. However, the dilutive, impacts of Hydrogen as we ramp up that organization, including the lower commercial sales, gave a negative €20,000,000 So in net, underlying impact is plus 20,000,000 of the €26,000,000 increase you can see year over year. On the right hand side, our net profit was also a very good spread posting 62,600,000.0, up 48,000,000, from the same quarter last year.
Of course, the positive EBITDA trickles down. But in addition, below the line, have very positive currency movements year over year, plus 36,000,000. I think it's 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. So what we're looking at here is stripping out the Hydrogen business.
You can see in the middle with revenues of 14,000,000 and minus CHF 20,000,000. And having a look at the rest of, Hexagon, also stripping out that, plus CHF 40,000,000 impact. And what we see there is revenues of CHF $352,000,000, of EBITDA of CHF 53,800,000.0 and a 15%, EBITDA margin. So the rest of Hexagon are very healthy and of course Hydrogen business is where we are ramping up for the future. I've discussed quarter two.
So 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 revenues up JPY 64,800,000.0 to JPY $783,000,000. EBITDA of NOK140.1 million versus NOK82.9 million, same period last year.
And that takes us down to a profit after tax of NOK85.7 million versus NOK22.3 million the same period last year. So, a very strong first half for Hexagon Composites. On the revenues, you can see LPG very strong in the quarter, 192,000,000 on the left that was quarter two 'seventeen. That actually remains our record. So we are very close to that record level, this year as well.
And then 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. And Mobile Pipelines has increased year over year as mentioned earlier. So let's go to Agility Fuel Solutions. So their actual business operating results in U.
S. Dollars. To the right hand side of the dark blue bar, they posted $39,000,000 in revenue and an adjusted EBITDA of $3,300,000 for a 9% margin. The adjusted EBITDA is mainly adjusting for stock non cash stock compensation impacts. Pleasing to see that the increase in revenues and margin are happening all the way through the first half of the year.
And Jan 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. So we've had some sales already and some pickup in quarter two and then we will expect that trend to continue later. Still solid refuse truck sales year over year upward trend.
And on the balance sheet and funding, very much fully funded. In fact, closed Agility closed on net debt position of just $1,000,000 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 amongst other things. And obviously, in the quarter, we paid our dividends. We also executed, completed a share buyback program.
And those two effects have increased, as the main reason for increasing our net interest bearing debt to more steady levels of $271,000,000. The equity ratio remains at 62% and still a lot of capacity on our balance sheet for more. On that note, I'll invite Jan Erik over to take the outlook.
Thank you, David. Good morning, everybody. So, 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 and that is important and positive. And 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 early 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 sixty minutes 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? And the answer is yes both. There will be a mix, different weighting in different markets, different applications. But 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 fuel cell.
And we see a lot of attention and interest for buses and trucks. So Toyota, unveils its second iteration of their, hydrogen truck. Nicolas has reported, US11 billion dollars pre order book for their alternative, and a firm order from Anheuser Busch in The U. S, the famous beer maker. And here, closer to home, Asco is putting their first fuel cell truck on the roads later this year.
And 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 in, on the West Coast Of The States.
And we have several other similar projects, under discussion, workboats, 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, 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 2019. But 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 02/1950, but already now a lot of the operators are starting to prepare for that. And back to Norway again, the Norwegian parliament recently introduced legislation that will limit or prohibit, usage of, diesel and oil driven or ships in the fjords latest by 2026. That is a short time. So 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. But in order to achieve that, we are of the opinion that fuel cell technology is absolutely necessary. Moving on to CNG Light Duty. So, that is, that continues to grow strongly. We have talked repeatedly about Germany, but 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. And 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. And we've previously discussed the similar, plans for Germany.
And Volkswagen is launching our mono fuel models for, 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, this is a consequence, if you like, of the diesel gate. Another consequence of that, is very strict rules. So there is something called the Worldwide Harmonized Light Duty Vehicle Test Protocol. And that has been reported in the press, that it's causing supply chain challenges for many OEMs.
And also, Volkswagen, informed recently that their deliveries will be affected. And 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.
So we will see a temporary disruption to that extreme strong growth curve, on the right hand side. But, we are very confident that we will get back on the growth trajectory, from late excuse me, from late Q3, early Q4. So 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. And it's quite interesting also the left hand curve recently announced. So 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. So unfortunately, we will have a hiccup in Q3, but then the underlying growth is very, very strong in this segment. Mobile Pipelines. So this is the Titan 53 recently launched, approved by the, U.
S. Department of Transportation, the largest tanks, on the planet. So this is a product especially designed for states in The U. S. Where there are limitations on weight, 80,000 weight restrictions and as such makes our portfolio, more complete.
So we were able to announce yesterday a large order with one of our main customers, XMG, who are expanding their Titan fleet. We frankly had expected this order a bit earlier. So we will see that volume in Q4 and in Q1 twenty nineteen. Total value, 10,000,000. 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 twenty fourteen, twenty fifteen, 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 model 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. So 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, so 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, coming from low numbers relative to the extensive potential in that market. But we are encouraged and we are now entering California and Nebraska in a similar way. Agility. So we see now that the, over the road heavy duty truck market, which has been low for several quarters, will rebound now in the 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. And when we talk about zero emissions in The U.
S, it's NOx and particulates. They are not so concerned about the CO2 part of the emissions. There is pent up demand, for new engines, and therefore, we expect a strong quarter. However, we also see that The U. S.
Overall truck market is at an all time high. And we have some concern that there may be constraints on deliveries of chassis, which then represents the 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. So 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.
And last but not least, the refuse truck market is enjoying a very good year. So this is the familiar curve. In April 2017, the spread between natural gas and diesel was at a mere €0.40 per diesel gallon equivalent. In August, mid August now, it was at 1.15, the spread at the pump. And then we know that the large customers, they enjoy significantly better prices than what you can get at the pump.
So there you have, now in August almost €160,000,000 And that makes the value proposition of converting to natural gas for large users very, very significant. So summing up, we see strong underlying market development in all segments. We see a weak Q3, due to this double view LTP effect on the light duty side and orders shifting on the mobile side from Q3 to Q4. But we then see a strong Q4 altogether. We see a continued dilutive significant dilutive EBITDA effect from the Hydrogen business.
So 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 Terkovsson, 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?
Yes. So you're quite right. There are two effects, driving our market. It is the overall growth, which is particularly strong in Germany, but 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.
And in addition, we see several OEMs moving away replacing Type one steel cylinders, with Type four lighter, more sustainable, alternatives for several of their models. So that is also an effect. We have not seen that yet, but I mentioned the Volkswagen Monofuel program. And in that process, several models are changed from Type one to Type four.
Also 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, I think maybe you would want to supplement there David. But I think for the next three years, the guidance is sufficient. So we don't see any significant risk of large additional investment requirements. But 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. You.
Oliver from SEB. Continuing on the CNGLDB 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. So I have to admit it's a bit unclear to us, but 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. But we have absolutely no concern about the further pickup and strong growth in that segment.
And 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? And can you say something about timing at such an order as well?
I'm afraid we will not communicate around that until you we we really have, the final confirmations, but 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'm afraid that's to go too much into detail at this stage. So, it's we would like to be as transparent as possible, but I think it's market practice among the large OEMs to be extremely restrictive, on whatever type of information, detailed information we can share. So that's why we have to be so limited on sharing those details.
All right. Thank you.
Hi, my name is Lael. 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're seeing the European or majors moving into the cleaner markets in different ways with DNI and different stations and Total with their investments in The U. S.
And clean energy. How would you see their American peers' attitude and interest 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 Yes.
Hexagon or The oil major peers in The U.
S. Okay. Do you like to comment on So we are not close enough on those players to really predict what will happen in the short term. But what we notice is that all the majors are in the space. A lot of them are invested in the shale fields.
It's more and more looking at the downstream integration. And we see that, for example, what we call virtual interconnect, 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. So our impression is that there is this is very high on their strategic agenda. But 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 Well Gas Conference in DC in June. There was obviously a heavy presence there, particularly Chevron and Exxon. Must admit, very LNG focused, but, we showed the Titan 53, and that was clearly something that got a lot of interest there. So hopefully, we will see a little bit more.
But 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.
Mikhail Ljolt, Carnegie. I was just wondering regarding the the 20,000,000 cost in the Hydrogen division. 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. So how long will this ramp up run for?
I think I'll just refer to prior guidance on an annual level because as Jon Erik mentioned, it's going to be very lumpy going forward. Annually, we mentioned a figure of around about minus 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 on also on the revenue side. But I think that's a good basis. We should have the expectation that this is a dilutive division for some time.
But of course, the upside in 2021 and 2022 also cemented by some of that big 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 Softwijp has several questions. I will start with the first.
Could you please explain what the provision reversal relates to?
Yes, sure. So it goes back to our acquisition of Experian in October 2016. In that booking, and 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 side case to be beneficial both to Hexagon and also a payment to, the sellers of Experian. This period runs out at the 2018, so it's getting more certain. And part of, we can't really go into details.
It's a confidential agreement. But part of that's related to, a new emerging market that was new both for Hexagon at the time and for, Distella at the time. Unfortunately, political, climate has changed somewhat in 2018 on that specific geography, which makes it less, reasonable that, that will happen. And so that prompts a reversal of the provision. But again, the provision is time allocated to the 2018, whereas obviously the Experian business per se will hopefully go until infinity.
So it's really a reversal of earn out provision in the Experian 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?
So I think we're talking two types of costs, one being investment CapEx related. So we will ramp up in all likelihood our facility in Heath, back to the Experian acquisition. When we acquired Experian, we also acquired a newly established site in The U. S. In Ohio.
We that was the business there was moved to Agility, and we temporarily wound up the activity there. But the site is excellently suited, for our needs on the hydrogen side. So 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. So two things.
First, those programs, they are costly in their own right, while the income side depends on certain milestones. So there is not a good correlation between the costs and the income generation. Secondly, we are building up the, know how, engineering capability and capacity in general, mainly to support further opportunities on the hydrogen side, but also related to other areas. So we have been a bit thin on resources in order to take on this type of major programs. So 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. And we think this is very specialized know how, very few engineers available with the know how, so we have to take them in. We have to train them. We assume eighteen to twenty four months from the start until they can really be put to full utilization. So 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?
So I think I touched on that. It's 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. So on the CNG and hydrogen in total, you see some of that effect. On the hydrogen side more specifically, it's on the distribution side, so mobile pipelines for hydrogen where we have had a couple of slow quarters.
But that market in its nature is project based, and we don't see anything concerning in having that fluctuation. So we expect we see orders coming in Q4, and we see a healthy market going into 2019 on the hydrogen distribution side.
Thank you. And then we have a couple of questions from Anders Packer. Have you increased capacity at Trogasco since last year? If not, your guidance of similar utilization in second half twenty eighteen as in second half twenty seventeen implies flat revenues. How will margins develop?
So 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're ready to launch those product improvements to the market. That program will also add some capacity, 200 to 300,000 cylinders per year depending on the mix in any given year. But that will only be available from Q1 twenty nineteen.
So the capacity in 2018 is the same as we had in 2017, and we are close to utilization. The margin picture so far is very, very similar. So of course, there's always some dependency on the mix and the length of the series, etcetera. But as you will see from the numbers, very, very healthy performance of the LPG business.
Thank you, Henrik. That was all from the webcast audience.
Any more questions from this room before we end the meeting? Then I thank you very much for sharing this morning with you with us, and have a pleasant rest of the day. Thank you.