Good morning, and welcome to the Q3 results presentation for Hexagon. It's lovely to be here in the auditorium in the building where our offices are down on Haakon VII's gate in Oslo. It's so nice to have a live audience here today joining us as well. Hopefully, we'll see more as time goes on. Welcome to all of our webcast participants.
My name is Karen Romer. I'm the SVP Communications for Hexagon. Joining us here today in the auditorium is our CEO, Jon Erik Engeset, and our CFO, David Bandele. Then we'll also be hearing from Eric Bippus, who's our SVP of Global Sales and Marketing. He'll be joining us later.
Today's agenda will include a CEO update, and that's where you will hear from Eric as well as Jon Erik, and then the financials, which will be covered by David. This will all be followed by Q&A. For those of you that are on the webcast, there is a Q&A window available, and it's open during the entire broadcast. Please feel free to just fill it in as you go along with the questions that you have. Of course, we'll be taking questions from the audience here. With that, I think I'll just turn this over to Jon Erik. Thank you.
Thank you, Karen. Good morning, everyone. Thank you for joining us today for this Q3 update. I'm especially pleased to see people in person after so many quarters of only webcasts. The quarter was not without challenges, we are even more pleased to report a strong quarter, so we're really quite pleased with the performance, especially so in Hexagon Agility that continued to have a very strong order intake for RNG fuel systems, but also Hexagon Agility Mobile Pipeline, which had a very strong rebound in the quarter.
What is interesting there, unlike a few years ago when that business was booming last, it was particularly selling into the oil and gas shale segment in North America. While today we see a much more diversified customer mix, which bodes well for the coming quarters and years.
Hexagon Purus more or less doubled its revenue from the same quarter last year. In the quarter, we made an acquisition, or at least we signed and entered into an agreement to acquire Wystrach, a long partner and customer of ours, and then enabling a vertical integration downstream in their business segments.
Year to date, our solutions have enabled the avoidance of 793,000 tons of greenhouse gases. That translates into 172,000 cars off the road for a year. A significant contribution. As mentioned, there have been challenges, and I referred to the industry-wide supply chain disruptions. Still, we had a revenue excluding Purus of NOK 848 million, up from NOK 769 million in the same quarter last year.
That revenue delivered an EBITDA of NOK 110 million, up from NOK 85 million last year, which was also a very strong quarter for us. On the Purus side, 103 million, negative EBITDA as this business is preparing for further growth in the years to come. Coming back to that later on in my presentation. Talking about the supply chain challenges for us, particularly the chassis shortage is a constraint. That's not normally we who supply the chassis, so that's on the customer side. Still, we are unable to deliver and install our systems unless chassis are available to our customers. Also, battery cells continue to be a concern, as well as the semiconductors shortage, especially for our customer, Volkswagen, on the light-duty side. We are focusing obviously on mitigating these effects.
We are building up inventory wherever we can. Of course, we are sitting with our customers and talking about price adjustments. More importantly, maybe long-term, we are focusing on delivering on our world-class manufacturing program to take out productivity gains. Also of course, growth economies of scale in itself is also good for our margins. As we speak, the Global Climate Summit is ongoing in Glasgow, and we continue to see a number of reports, commitments from governments, companies, and others around the world. A quite significant amount of money is being plowed into the green transition. A big chunk of that is going into sectors that are relevant for us, which is why we maintain the outlook of significant growth.
This is an old slide indicating a 4 x increase of our addressable market in the transportation sector, which we still think is valid today. We see now that the number of other participants in the industry space are seeing the same thing. Therefore, I'm happy to introduce Eric Bippus to tell a little bit more what we see in the industry.
Thank you, Jon Erik. As you can see, we're expecting significant growth, 4x growth from now to 2025 across compressed natural gas, EV and hydrogen solutions. In addition to our excitement over this, we're seeing OEMs now launch new technology, specifically focusing on this growth and the market segment that we feel will see the largest growth for compressed natural gas. That is heavy duty trucking and transit in both North America and Europe. Cummins has announced the launch of their 15-liter natural gas engine for heavy duty truck. We're really excited because this opens up 250,000 heavy duty Class 8 trucks in that 1,000 km or more range. It's the most popular in the diesel variants, the most popular engine in North America.
However, now that it's available in natural gas, they've improved engine efficiency, so the already attractive TCO of natural gas or for fleets looking for the extra carbon abatement and reduced emissions of renewable natural gas will have improved operating efficiencies, making the TCO even more beneficial than prior platforms. This is all part of Cummins' effort that by 2030 they can reduce their engine emissions by 30%. Natural gas will play a big part of that. Coming over to Europe now, we see another OEM step up with a new introduction, and that's Scania with their 13-liter natural gas engine for long haul travel operations. These are transit operations, 400+ km miles, that today natural gas, when we look at the offerings, it's primarily intracity routes, relatively shorter range.
This engine allows us to go after the longer range routes where diesel occupies that space with renewable natural gas, biogas solutions. Once again, like Cummins, this is part of Scania's effort to by 2030 they can reduce their emissions of their entire engine platform by 30%, and you can see that they expect significant growth in natural gas, as much as half of that being powered by natural gas. What are we doing at the Hexagon Group to get ready for all of this growth? I'm excited to announce the opening of our commercial hub in Munich, Germany. It's opening this month, the month of November. And really we're replicating some success that we've had in North America in our commercial approach where we have factory installed applications, and it's all around customer intimacy.
We wanna be close to our customers, we wanna be close to our facilities and plants that we can improve lines of logistics and customer support. It will be a one-stop shop for all clean energy solutions that the Hexagon Group offers from EV to hydrogen, hybrid, compressed natural gas, renewable natural gas. We'll have application engineering, program management, commercial support, and after sales support in the market out of the Munich office. It's all part of our strategic agenda to really expand our global footprint. Many of our OEM customers are multinational, and this, the opening of this office just substantiates our growth in these various markets. Now looking at capacity to meet this demand, significant growth of 4x in the market. We're looking at 2x-3x growth in various markets as well. What are we doing in North America?
We've already announced the fact that we're expanding our operations in Salisbury, which is already the number one compressed natural gas systems plant in the market. We're adding cylinder manufacturing so that we can condense the footprint and supply chain and logistics of that market. It's strategically located within North American heavy duty truck OEMs. We're doing the same thing in Kassel, Germany, so that we can supply for the market from the market, both with commercial support but also systems capacity support, cylinder support. As you can see, there's a lot going on within the Hexagon Group. We're excited about the growth projections. We're extremely excited to see the OEMs stepping up with technology, and you can see that we're preparing in both markets to handle that demand. That, back to you, Jan Erik.
Thank you, Eric. Turning then to Hexagon Purus, they had their quarterly presentation on Tuesday, so I've borrowed a few slides from their presentation. The left slide shows the growth year-over-year, and year to date so far 69% up from last year, which means that Hexagon Purus is ahead of its schedule. As mentioned, the announcement of the Wystrach acquisition was an important milestone in the quarter, and we continue to see very strong commercial momentum across that business. Looking at their revenue in the quarter, you will see that the biggest chunk of the growth came from the distribution segment, followed by transit bus. Heavy duty truck was actually down. That's a direct consequence of shortage of battery cells.
The distribution segment is growing very fast, and it is the first segment that comes into the commercial phase, has already entered that phase, and that is why the acquisition of Wystrach is such an important strategic move. Wystrach has been a customer of ours for many, many years. We know them very well. Located in Weeze, Germany, supplied from our facility in Kassel, and European leader in distribution systems. By that acquisition, we nearly double our capacity in building systems, as well of course as integrating vertically through the chain, enabling efficiency uptake. The business of today is approximately the same size as Purus. On the pro forma basis, we expect a combined revenue in Purus north of NOK 600 million after eliminations.
This picture is the same we showed ahead of listing Hexagon Purus on the Euronext Growth Oslo in December of last year, showing an 11x growth projection from 2020 to 2026. If anything, we think this growth is going to be stronger in this period, followed by the real volume growth phase from 2026 onwards. As Hyundai recently said, hydrogen for everyone, everything, and everywhere. This shift is taking place, and we are very pleased to be part of it. In summary, strong underlying growth, adjusted for FX 14% quarter year-over-year, despite severe supply chain challenges.
Strong rebound for the Hexagon Mobile Pipeline segment, and doubling of Hexagon Purus, and with a further doubling when the Wystrach acquisition closes in the near future. With that, over to you, David.
Thank you, Jon Erik. Okay, let's discuss the third quarter 2021 financials from Hexagon, and this is primarily excluding Purus. Highlights are we posted NOK 742 million in revenues in Hexagon Agility and CNG LDV, and we'll see and demonstrate very strong revenues in heavy-duty truck. As Jon Erik alluded to, this is despite the delays to chassis supply. Very strong rebound in Mobile Pipeline, exceptionally strong, I would say, and we'll cover that shortly. Seasonally low volumes in Hexagon Ragasco. Saying that, we had promising introductory orders from leading customers in the Philippines, Greece, and Trinidad and Tobago. Of course, Smart Cylinder concept technology is progressing. On Digital Wave, they had strong growth year-over-year on both technologies, that's ultrasonic and modal acoustic.
Hexagon Purus, as Jon Erik has been through, 96% revenue growth year-over-year is great, and they also boast a very strong order backlog. Our roughly 75% ownership in the investment valued at NOK 5 billion, so that's satisfactory. Note that Purus closed the quarter with NOK 0.7 billion of cash reserves. Digging into the numbers on the left-hand side, you see revenues were NOK 848 versus NOK 769. That's a 10% increase headline rates. When we correct for headwinds, that's a 14% underlying growth. The real big growth driver, as I mentioned, was Mobile Pipeline. It actually increased four times year-over-year.
Very good to see the recovery, especially as it's been quite significantly hit by the pandemic in 2020. Now we see that recovery taking shape. Also, they closed the quarter with a very strong backlog, and not only Mobile Pipeline, but also the automotive business, and that gives us a good feeling for the rest of the year. We go over to EBIT in the middle. We posted NOK 110 million. That's a 13% margin. Again, higher volumes from Mobile Pipeline really helping the margins here. Again, you know, we are facing headwinds from the pandemic-related higher input prices, but we can see that the volume effects have really overridden them. Very good.
When we go over to the right-hand side, we look at EBIT, so earnings before interest and tax, and we see that we recorded NOK 61 million, almost doubling of EBIT year-over-year, and representing 7% operating margin, up 3 percentage points year-over-year. Looking at the Hexagon Agility & CNG LDV segment alone, we see the pattern of growth year-over-year, revenue 742 over 630 last year. 18% headline growth and 23% underlying, after we basically adjust for currency movements. The robust recovery in North America really helping drive that in that segment. But also strong sustainability-driven U.S. truck demand in the quarter. If you look over to the right-hand side, you'll see in purple Mobile Pipeline, 23% share.
This has been riding around about 10%-11% for the other quarters in the year. You can see the extent of the recovery. A U.S. truck is still very much dominating heavy-duty and medium-duty truck with a 41% share. Transit, slightly low at 20% and refuse truck, low at 6%. This is just due to planned call-offs and the pattern of buying. When it comes to the light-duty vehicles segment in green on the right-hand side, it does say 10%. I would say most of that sales though is actually contract manufacturing to Hexagon Purus. You see the enormous distribution numbers in Purus. This sector actually is delivering the cylinders for now.
They also deliver to Mobile Pipeline in the Middle East and Europe, and also some other customers. Okay. Given that there are the semiconductor issues blighting that area, there's still plenty of activity on the site. On Hexagon Ragasco, the drop in revenues year-over-year, so NOK 86 million, seasonally low, I would say slightly lower than that and obviously lower than the same period last year. The big difference was we did have a delay in sales from one of our major Asian customers, so hopefully moving on to Q4. When we look at the EBITDA side, you can see the effect there, NOK 4 million versus the NOK 18 million same period last year. Now, overall market demand remains strong.
We talked about some of those introductory orders, but certainly the lower volume and the slightly higher input prices have obviously affected the margins temporarily in Q3. Digital Wave, 73% top-line growth, that's great. That's both, as I mentioned, in ultrasonic examinations as well as the modal acoustic emission technologies. The reason why we have the same break-even EBITDA year-over-year is that this year we've obviously invested significantly into the OpEx. When we go to leverage, we can look at the orange bars on the far right, so at the top and the bottom.
The top will show that we have a net interest-bearing debt of NOK 0.9 billion, and that translates to the bottom of a very satisfactory leverage of 2.2x for Q3. Let's look at the Hexagon Group financials, some summary financials here. This is where we include Hexagon Purus, of course. On the balance sheet, start with the cash side to the left. You can see a slight reduction in cash in Hexagon, but still very robust at almost NOK 0.3 billion. On Purus side, down to NOK 0.72 billion quarter-over-quarter, so versus Q2. The other standout there is you can see some increase in our receivables. That's due to the increased sales that we're seeing.
We have the same sort of increase on our payables. The real change there is the inventory situation, as Jon Erik mentioned, and we've had a necessary build-up in inventories given the situation we're in, and it allows us to be more ready to deliver to our customers given the challenges. Otherwise, we close with an equity ratio of 56% and a continued strong balance sheet there. In summary for Q3 2021, we always make this point, but if you look to the right-hand side, this is the Hexagon Group numbers. When you screen Hexagon Composites, HEX.OL, you will see NOK 875 million in revenues and NOK 30 million in EBITDA. Of course, that hides the two distinct businesses that we have.
The Hexagon on the left-hand side, which I've covered, cash generating double-digit EBITDA margins, NOK 110 million EBITDA, recorded for the quarter. Of course, Hexagon Purus, almost doubling its sales to NOK 103 million year-over-year. Of course, investing heavily in the organization build-up and hence the negative EBITDA, which then dilutes the group results. For Hexagon, in summary, despite strong headwinds, a strong quarter, demand for heavy-duty U.S. truck remains very high. You saw Erik covering some of the drivers there. Strong recovery in Mobile Pipeline, we see going forward, and Hexagon Ragasco, seasonally low volumes now, but annual demand remains high. 2021 full year guidance. We've obviously just got one quarter left.
Starting with medium and heavy-duty vehicles, we see the sustainability-driven demand is resilient. We do expect a strong quarter four, given our backlog. It will be continued momentum in heavy- and medium-duty truck in North America. Positive developments will continue in the European transit bus. But also we'll see some, hopefully some growth from the North America transit bus, to really deliver for Q4. We do, of course, caution that we are sure that there will be supply chain disruptions causing some delivery delays, but the extent of that, we're not sure. On Mobile Pipeline, we see the trend continue from Q3. Strong demand and delivery is expected to continue, especially the winter season. Virtual pipeline projects in Northeast America.
RNG continues to be a driver. It's a great boost to Mobile Pipeline and diversifying Mobile Pipeline's offerings. But also mobile refueling units, which has been a fairly new product area for us over the last 12 months, that continues to gain momentum.
For Mobile Pipeline, some potential delay to chassis for our products, and that's mainly as a result of some of the challenges in steel supply. On CNG LDV, not much to say really. Jon Erik has covered that well. The situation we expect to continue, and in terms of our major customer, Volkswagen, they have had public statements anticipating that an improvement on the semiconductor issue would be expected around mid-2022.
In the meantime, we'll utilize the production capacity as again for hydrogen mobile pipeline and other businesses. Digital Wave, we see increased sales. We're also seeing increased market applications for our technologies. Looking at modal acoustic emission testing services, these are now being extended to industrial gas customers and also CNG modules.
Good backlog of ultrasonic examination systems, and as I said, the organization is continually primed to deliver on a future pipeline. On Ragasco, we expect a positive uptick to end the year. We have solid demand from our recurring customers in South Asia and Europe. We expect new market-leading customers to make some entry then into Croatia and other parts of the Caribbean.
The Smart Cylinders pilot program, there are, of course, some impacts from the supply chain constraints to key electronic components, so even there causing some delays. However, we're still preparing for launch in 2022.
Since January, we've guided on NOK 3.5 billion for Hexagon, excluding Purus, and resulting in around about expectation of NOK 400 million EBITDA for Hexagon, excluding Purus. We haven't changed that guidance throughout the year. As we end Q3, we say despite supply chain delays, we expect Q4 to be strong. Therefore, we maintain the full year EBITDA guidance. We see some softness on the top line more or less due to the currency headwinds from when we first guided. Our underlying demand is strong.
Again, expectations are to reach the NOK 400 million EBITDA guidance for 2021. One of the big reasons there is that if you start with Hexagon Agility, you can see that they constitute 71% of our year-to-date revenue, so it's important. When that is working very well, we expect the ability to cover for the shortfall in Hexagon CNG LDV, and that's both heavy duty truck and Mobile Pipeline.
On the Hexagon CNG LDV, you can see that that segment represents 9% of year-to-date sales. But the portion that is impacted by the semiconductor issue, that's just 5% of our Hexagon total sales. Again, those revenues have been replaced by, you can say, intercompany revenues with a different margin profile.
On Ragasco then, responsible for 18% of our revenues, but even a higher percentage of our profits. A solid quarter to end the year would be expected for Ragasco. Digital Wave, they will continue to do what they're doing. They're only at 2% of our revenues, so guidance intact there. We reiterate the three big things to look out for in Hexagon. One's occurring now, continuous growth from the RNG uptake as a fast-track alternative fuel to lower the harmful emissions. By 2022, we expect Smart Cylinders on the LPG or Hexagon Ragasco's offering to accelerate adoption versus steel.
As we move to the 2025 area, we're looking for miniaturized technology, MAE technology on board all systems, all cylinders in our industry. That will really be a game changer, enabling continuous health monitoring and connected services. On that note, sponsored by Hexagon, clean air everywhere. Thank you. Jon Erik Engeset.
All right. Thank you. If I could have both of you here, that would be good. Now we'll open up for Q&A. For those who are on the live webcast, please put your questions in the question frame that's in the window you're viewing the broadcast in, or you can also send to ir@hexagongroup.com. Do we have any questions in the room that we would like to take? Okay, we'll give you a chance to think about that. We did receive a few in our webcast window. Okay. Jon Erik, you report that Digital Wave is delivering above expectations. Can you elaborate on how you see it developing?
First of all, we see already strong growth. What is so exciting about Digital Wave is that it is already delivering commercial sales. At the same time, as David touched on, we are working on miniaturizing their MAE technology, which will in turn open a much bigger market and also enable new business models. Early days, but we should expect that business to grow and to become an ever more important part of our product offering, and also differentiating ourselves significantly from the competition.
Thank you. David, you reiterated the NOK 400 million EBITDA guidance, so that means that in the fourth quarter, Hexagon will deliver in the area of NOK 130 million. Is that realistic?
Yeah, we've actually done that before. But it's highly realistic. The demand is very strong, as I mentioned, in U.S. truck. That will continue. With Mobile Pipeline really back online and Ragasco having another strong quarter, we see that as highly realistic. We do caution there are potentially delays of course, but we've seen those delays as well in Q2. Yeah, we're confident on the NOK 400 million.
Great. Thank you. There's another question. How are your component inventories and that way around your confidence to be able to deliver on all orders in? It's like half a question, but,
No, no, I get it. I think Jon Erik touched on the mitigations that we're looking at. Now, obviously, supply side is key, so you do see that increase in inventories, both the price per unit, but also the levels of inventory that we're holding, in order to give us the best probability of being able to deliver on what is very strong demand.
Very good. Jon Erik Engeset, how does natural gas price affect your consumer choice or is affecting consumer choice in regards to natural gas mobility?
We don't see any impact of that today. Of course, also oil is going up, and therefore diesel is going up. I think the decision makers are much more focused on the longer trends. Natural gas has had the remarkable stability over many years. I think most market players expect to return to that state. The current spike in gas prices is not considered to be a long-term stable level. If it is, it is a function also of the oil prices. We don't see a real effect on that, at least not yet.
Okay, continuing on here. What effect do the increased composite prices have on tanks? Do you have sufficient access to raw materials?
We've had to spend a lot of time on securing the material that we need. We are now in a more comfortable situation, we feel, than a few months ago, when there was shortage, but we were able to secure the necessary supplies.
Then of course, it's the other side of that is that the raw material prices have gone up also, again, partly a function of energy prices, and that is a concern. We need to look at other ways of mitigating that, including having discussions with our customers. If this raw material price level is sustained, then of course that has to translate over time in higher prices for our products.
In the meantime, all parties have commitments, and therefore, we need to look at other ways of mitigating those cost increases short term.
Very good. Has increased prices for materials increased the cost of production sites in Germany and the U.S. as well as new factory for Purus in Canada?
It's a good question, and the short answer is yes. Fortunately, we entered into several contracts before these building material price increases, but we will not be completely protected from those increases. That's something we will need to look into. We don't expect dramatic increases in construction costs.
An add-on to that question, how do higher energy costs affect their production?
Our production is not really very energy intensive, so it is more derivative of the energy intensity of the fiber production, which is a significant factor.
Okay. Keep moving along here, same theme. How do increased gas prices affect their customers and their willingness to invest?
I think essentially that is the same question. I answered earlier. We don't see the customers changing their market behavior at this point in time. For now, the environmental driver is the absolutely dominant reason for our customers to go green. We have not seen any signals of change of mind in that respect.
Now over to Purus. The spin off of Purus was a great success, but it ended in transfer of value, and the business ex Purus is valued at close to nothing. There are a number of things you can do about it, such as selling more shares of Purus or perhaps give more precise long-term forecasts for both, so we can better value the two businesses. What is your view?
That is two complex questions in one. What I can say is that we are first and foremost focused on supporting Hexagon Purus to realize its potential. The spin off was a part of that. The continued significant ownership by Hexagon is a part of that. We think that there is tremendous value creation potential for both businesses. We will just need to take the time to make those values visible to the investors. I think quarter by quarter, by demonstrating high order intake and improvement and delivering on our plans, we believe that is the best way of gaining or granting that investor confidence.
Thank you. David, you reported higher than normal inventory build up. Is that something you're concerned about?
I think it's almost the same answer. It's more a concern if you don't in this environment. Back to ensuring that we can, in the best way, deliver on the customer demand, we need to have a higher inventory levels. We expect these to be temporary and, hopefully it reverts.
Very good. A question about Ragasco. Ragasco had a weaker than expected quarter. Can we be optimistic in Q4?
Yes. No, I mean, it was weak in Q3, and then historically, the Q3 has been the low quarter. We did mention that there was one particular order that we expected to fall in Q3, and that was the difference really between Q3 last year. That order should come through in Q4 and otherwise, Ragasco is delivering. We expect the usual good full year for 2021. Strong enough Q4.
Perhaps for you, Jon Erik. Do you see more heavy-duty OEMs switching to CNG offering? In the past, many refused the idea, but it's clear that battery electric has a long way to go.
Definitely. That is our expectation. Long term, we see hydrogen obviously as a very relevant choice. In the foreseeable future and with the strong commitment now by both OEMs, but first and foremost, the big fleets, RNG is the only available option. That is what is driving this market. We see more and more fleets coming to the same conclusion.
Very good. I think the last question I have here right now is for you, Jon Erik. Are there other geographies you see as potential expansion opportunities?
Certainly. There is a global market for us. We are strong, very strong in North America. We have a strong foothold in Europe, but as Erik explained right now, Europe is still our focus area with the establishment of the Munich commercial center of excellence. We are doubling up on our effort to be close to customers and participate in the market growth in Europe. Purus is obviously in China, very high priority. There are other parts of Asia that we also should assume strong growth. South America has been a market for us, especially on the Mobile Pipeline side, and we see also new activity starting to develop there.
Also on the hydrogen side, several of the Central American and South American countries are looking to transform their transportation sector by hydrogen. Opportunities all over the place, but we need to prioritize, and we therefore focus for now on North America, Europe, then more opportunistically, I would say, on other geographical regions for the time being.
Great. Do we have any further questions from the room? I've gotten one additional here at the last minute here. It's noted that you posted Daimler on the one of the slides. Is Daimler going back to offer CNG and LNG? I think they were referring to the map that we had.
In Europe.
On the, and I think that was to show the proximity of the OEMs in the area. That's why it was.
Yeah. Daimler obviously has been a leader on the hydrogen side. I cannot comment on whether they have in their plans to go CNG or LNG.
Very good. Okay. Yes, we have a question in the room, and I'll repeat it.
Yeah. [Non-English content]
We've got a very nice compliment from the room for being invited to actually attend the quarterly presentation in person, and also compliments to the management of the company so far. Good summary of what you said? Yeah. We'll go with that.
If I can just add to the question on Daimler. My answer was, of course, referring to the European market. Daimler is a major player in North America, also on the CNG side, just to avoid any confusion on that.
Yes. Perfect. Okay. Well, I think we'll say thank you to both our webcast audience and to everybody that was able to join us here today, and hope that you have a great day further. Thank you very much.
Thank you.
Thank you.