Hexagon Composites ASA (OTC:HXGCF) Q4 2018 Earnings Conference Call February 13, 2019 2:30 AM ET
David Bandele - CFO
Jon Engeset - CEO
Conference Call Participants
Halvor Nygård - SEB
Welcome everyone to Hexagon Composites Quarter Four and Preliminary Full Year 2018 Earnings Broadcast. As usual, my pleasure to take you through the group highlights. We will also touch on the Agility transaction update. I will go through these summary group financials. Jon Erik who will join me for the outlook, we'll both be available for questions and answers.
And also I'd just like to point out that the appendix to this presentation which is available on our website you'll find more details about the segment financials and also the pro forma financials for 2018, looking at Hexagon and Agility on a combined basis, so please take time to view those at a later time.
So without further ado, highlights for quarter four 2018, top billing goes to our work on Agility Fuel Solutions. We both signed the agreement in quarter four and subsequently completed just after the year end a NOK1 billion acquisition of Agility. This is by far the largest acquisition in Hexagon Composites history and we really look forward to generating value in the years to come. This will then become by far Hexagon's Largest Segment.
Strong quarterly revenue for 2018, so the strongest quarterly revenue actually, driven by Mobile Pipeline. It's actually Mobile Pipelines second highest quarter of all time. So a fantastic quarter there, primarily driven by North America, but also we've increased some of our applications. We have done work or provided our systems for pipeline intervention amongst other things.
Also in the rest of the world in the same quarter we took an order for the U.K. market for NOK65 billion and that will have delivery in 2019.
Strong Agility Fuel Solutions profitability, the heavy duty truck sales cycle has also had a strong quarter four. And we are really pleased to extend our long-term agreement with New Flyer in the US for a total value of NOK640 million. And this is primarily for CNG, compressed natural gas bus systems.
It's hot and getting hot market in hydrogen. We have increased our deliveries to heavy duty applications and also very pleased to receive US Department of Transport permit for actually high pressure hydrogen transportation systems. So here we enable the infrastructure that you will require in order to utilize hydrogen - get hydrogen to the point of application, so also making waves in the US for hydrogen.
I wanted to update on the Agility transaction. Obviously this is a key milestone for Hexagon Composites. The illustrations here look at the effect of 2018 accounts as if. Agility was purchased at the start of the year. So on a combined basis based on 2018 on the left hand side you can see revenues would go up to 2.9 billion, so more or less doubling revenues. And on the right hand side we see EBITDA we would record then around about 364 million. So doubling revenues and double-digit EBITDA margin we really look forward to reporting that in 2019.
So we will move away from equity accounting, as I've shown and will consolidate Agility's results from 2019 onwards. Just to mention, we see some one-offs in quarter one that we'll post. One is again and - a gain on the transaction, net of fees estimated to be around NOK72 million. We would also post a connected deferred tax accrual on that gain of 17 million.
In terms of the accounting, the purchase price allocation, that exercise is ongoing. And of course, the exercise will then determine the split between the depreciable part of the intangibles and the non- depreciable part which is that goodwill. So more to come in quarter one 2019.
So back to the fourth quarter 2018, again, just to emphasize Agility's figures are not in this quarter. We recorded - we're starting with revenues on the left. On the right hand side the orange 426.8 million in revenue. That's an increase of 68 million over same quarter last year or 19% growth and that growth really coming from Mobile Pipelines.
If we move to the center, we recorded EBITDA of 55.2 million for a 13% EBITDA margin. Worth noting that in the 55.2 we did have a remaining and last and final earnout reversal. This has to do with the earnout in the 2016 Experian transaction. So our obligations are fully removed as of this point, at the end of the year.
And just to touch on that again, those obligations stemmed from a very high case for Experian, which included certain emerging market, a new market for both Experian and Hexagon at a time. Unfortunately that new market - unfortunately or fortunately, that new market is not accessible due to political reasons, but maybe that will become accessible in the future. If it does, we don't have any obligations to form a seller [ph] of Experian.
Also in the quarter, we had the hydrogen dilution, so we continue to ramp up the organization. Hydrogen is our game changer of the future at the moment. It requires a lot of investment and that dilutive effect was negative 14 million. So when you add the two up there is a plus 4 million impact in the EBITDA for 2018 quarter four.
Moving over to the right for net profit, we posted a very healthy 27.3 net profit. It's slightly down from last year. And I can explain. Firstly, we did take an asset impairment charge of minus 16 million, funny [ph] enough connected to Experian as well. So when we purchased Experian there were some assets that have remained idle, they will find a use, but we will use them for low value - low volume manufacturer. But as part of our Q4 processes we have written them down to - by minus 16 million.
The Agility joint venture contribution line, you will see an effect of plus 31 million year-over-year. So fantastic results from Agility and you can see them below the line. Financial charges of plus 9 million, mainly positive currency effects and the negatives are tax. We had a normal tax bill in this quarter 2018, but if we recall in quarter four '17 we had the US Tax Reforms from the Trump administration and that actually generated a tax credit, same quarter last year.
This is an important picture because to the right we isolate the impacts of hydrogen. Remember hydrogen has a different profile at the moment. The rest of the business on the right hand side you see posting 13% and healthy EBITDA margins.
So the business operating results of Agility on the ground it's been a fantastic year, as you see there five quarters picture. Right on the far right, Agility posting US$52 million revenue, 7.9 adjusted EBITDA. And for adjusted EBITDA margin of 15%. So very strong and you can see the second half of the year quarter three '18 and quarter four '18 really dominated by the rebound in heavy duty truck sales.
For the year, there's been continued increase in the transit bus volumes, strong refuse truck volumes, as well and good liquidity all around. So for Agility it's been a very good year.
Our balance sheet, again before Agility, we have increased the balance sheet mainly due to certain assets we brought in the Digital Wave acquisition as well and to the right hand side we can see that we've increased our net interest bearing debt from NOK326 million to NOK383 million, again primarily due to the Digital Wave acquisition, still maintaining a very healthy balance sheet 59% equity ratio.
Looking at the cash movements in quarter four '18. We started with NOK125 million balance. Underlying cash flow from operations, excluding working capital movements was plus NOK33 million. The operating working capital changes were positive plus NOK88 million. You'll recall in quarter three we built up a lot of inventory, and we saw that inventory sold by Mobile Pipeline strong quarter four for example.
To the right of that, we actually also invested in Mobile Pipeline assets in a leasing pool. So we have around about minus NOK54 million not worth of assets there and these assets are available for resale or short term leasing at the moment. They are on short term rentals as we speak.
We also spent NOK34 million in normal CapEx and development, NOK64 million was the Digital Wave acquisition, and we have part funded that by drawing on loans of NOK44 million.
So let's just take a view of the full year 2018. Again, this is unaudited and again this is obviously before the Agility transaction which will only kick in in 2019.
On the revenue side, we've increased by 4% to one point - just under NOK1.5 billion and Mobile Pipeline saw a 40% year-over-year growth, so fantastic growth in that segment. However that was cushioned by lower hydrogen revenues and this is lower commercial revenues on the transportation side.
But however more development revenues and obviously transportation products are products for sale as normal, on the development side these are usually two or three so which you have to record certain milestones, so you record the revenue at a slower rate.
Also we had lower light duty volumes for the year. Again, we were impacted by this. Worldwide Harmonized Light Vehicle Testing Procedure, WLTP. Certainly that was - you saw in quarter three that was quite substantial. We had almost no sales to our major customer in Europe and in quarter four we have rebounded but there are still been some effect there.
Moving on to EBITDA in the middle. We recorded NOK234.6 million or a 16% EBITDA margin. Again, two impacts impacting that number, the earnout reversal in total for the year was NOK109 million and the hydrogen dilution impact total for the year was minus NOK55. We also note that in the 2017 figure that also included some positive one-offs of NOK27 million. So very good change year-over-year on the EBITDA side.
When we look to the net profit, we have more than doubled net profit and recorded NOK145.5 million and that includes absorbing that asset impairment charge we talked about of '16. The Agility contribution year-over-year is NOK34 million positive. And we did have very positive foreign exchange impacts, in total the financial charge line is plus 45 and the tax difference, same reasons as I gave in quarter four was minus 43 year-over-year. So very pleased with the bottom line performance there.
Let's look at Agility Fuel solutions full year. I'll start with the charts, top charts. We will see and these are in the US dollar millions. Agility grew revenues by 10% to $174 million and grew adjusted EBITDA by 36% to $20 million for a 12% margin. So really a lot of volume, economies of scale that has been influencing the profitability in Agility.
On the bottom hand - sorry, in the bottom of the bottom chart, we'll show how we take Agility's results as a full reconciliation in the appendix. Basically it means we take the results, take 50% of them turn them into NOK, we get to 31.8 million in profit. But we also have intangible amortization piece. So we have a net performance from Agility of 18.4 million for the year, coming below the line.
So Agility, again, year-over-year growth in a refuse bus and powertrain which is more or less the propane systems. And obviously these strong rebound we mentioned in the second half of the year on heavy duty truck sales, again some of that was influenced by the introduction of the Cummins 12 liter new engine, low NOx engine and that has allowed the demand to come through once again.
Point to note, transit bus systems in terms of Agility, this is their largest business unit and in that large business unit it also grew 20%, that's fantastic and the refuse truck systems also grew 21%. And remember, transit bus and refuse systems very heavily driven by environmental factors over economic factors. Powertrain systems grew by 84%, but of course, this is still in start-up mode, that was only brought in, in the middle of 2017.
So, 2018 has it been one year already. In terms of our financial scorecard, I will start with this, Hexagon strength in the group is that we have this business unit core hydrogen, it's a very exciting growth driver, a game changer for the future. At the moment it's a dilutive business as we grow that. But we can still have the hydrogen business unit, as well as very healthy other business units that allows us to fund the hydrogen.
And when we look at our double-digit EBITDA margins for the non-hydrogen segments, I think this really gives some strength to Hexagon. So absorbing the hydrogen growth and investment for the future has been key. The 40% revenue growth in Mobile Pipelines is the highlight, 36% adjusted EBITDA growth in Agility. So this accretive investment doubling our revenues going forward is something as I said, look very excited to in '19.
We have record production volumes in LPG and 21% EBITDA margin, so not bad. And we've more than doubled our net profit to NOK145 million at all times maintaining a strong balance sheet.
So in 2018 we stood here and we really sharpened our focus on the hydrogen opportunities. Some of the results of that were largest serial production contracts in total NOK1.8 billion in the Hydrogen sector and in 2019 with the Agility acquisition, we look forward to like increasing the value and basically our portfolio of solutions for ultimately cleaner air. And on that lovely topic, I welcome, Jon Erik.
So thank you, David. Good morning, everyone. Going from 50% to 100% of Agility Fuel Solutions, we really completed the mission that we set out in 2016, taking the heavy and medium duty segments from being a product supplier, tank supplier to being a fully integrated systems supplier.
And we feel very good about the timing of that. The transport - a global Zero emission transportation trend is getting stronger quarter-by-quarter. And we consider that as the main driver for this business unit today.
U.S. production of natural gas has gone up by 40% over the last 10 years and that increase will continue in the future years. The infrastructure if not in all areas of the world, at least in many, notably in the US and in Europe is readily available, and the technology is matured. So the adoption rate for heavy and medium duty will be stimulated by availability of resources, economics and the environmental agenda.
So far Agility has delivered more than 60,000 vehicles most in the US, but also plenty in Europe. And the business is spread across four main segments, heavy duty trucks, medium duty school buses, transportation vans, et cetera. Transit buses, the largest segment, and last but not least, refuse trucks where the adoption rate has now assumed 80% in the US.
And we are also across all main technology platforms at this stage. The main one still remains natural gas and bio gas, but we also have system solutions now for hydrogen. And what we have not discussed at length so far, we will revert with more information after Q1. But we actually have solutions for battery electric and hybrid applications. And we also have a business for propane.
As mentioned, the environmental agenda is now the main driver. And looking at Q1 for Agility, we see continued very strong growth in the European transit bus segment. We see a continued strong markets for buses and for refuse trucks in North America. And David mentioned the long-term agreement with New Flyer which has been renewed. And the positive trend regarding the heavy duty transportation trucks will continue from second half of 202018 into 2019. So a very encouraging start of Hexagons full ownership of Agility.
Hydrogen. So I recommend all of you to take a look at the annual KPMG Automotive Executives Survey. It is available on the web. So many interesting piece of information there.
But regarding hydrogen, this is again the confirmation that the leading automotive executive - they assume fuel cell electric vehicles to have an increasing and very important role in the future mix of technologies and power sources for automotive. And then it also confirms what we have stated many times in this room, namely that there will not be one technology winning. There will be a combination of several technologies.
And in addition to Japan and China, now the third major Asian economy South Korea has announced a major shift to hydrogen in their energy supply. The South Korean government has plans to secure more than 80,000 fuel cell electric vehicles by 2022 and 1.8 million by 2030 commitment by the South Korean President. 2000 hydrogen buses by 2022 and more than 300 hydrogen fueling stations in the same timeline. Hyundai, aiming at producing 700,000 fuel cell systems annually, going 10 years into the future.
We have also mentioned the maritime opportunity. And we see now reel projects coming on stream. Obviously this is long lead time development, but there are now four concrete projects in Norway enjoying significant public funding. So with a high likelihood or realization and we expect to see more and more of those coming and also spreading to other areas.
We through our joint venture with Nel and PowerCell, Hyon are actively participating in two of this - these projects at this stage. And we look forward to developing that business further.
CNG light duty vehicles. So as you will remember from the last couple of quarters we had the major hiccup with this so-called WLTP testing procedure for light duty vehicles in the third and fourth quarter of last year. Those issues have now been resolved and it will take a little time before the steep ramp up that we saw in the beginning of last year will resume. But that is definitely what we expect.
And the first quarter of this year we expect it will be similar to the first quarter of 2018. And then we expect the steep increase in this segment in the following quarters. We are very optimistic about the possibility - or the opportunities in this particular segment in 2019.
LPG, good start to this year as well. We have mentioned on several occasions that we have run an investment program. We have extended the factory and drive force [ph] and we have also made major investments in new technology to support and differentiate our product.
We haven't said a lot about exactly what those improvements are. But now the investment program is complete on time and on budget and we expect it to be fully ramped up from Q2. And really what we have focused on with this investment is to reduce the so-called permeation. So one of the very few arguments for a steel cylinder is that the membrane is completely tight and with this new investment we are also reducing the permeation rates for composites, thanks to very, very marginal number approaching zero. So no longer an argument to use steel because of permeation.
Mobile Pipeline, we are - and we continue to be encouraged to see that our product - products find their way to new applications and to new customers. The fundamentals are strong. The backlog for Q1 is very good and we have a new order from our largest customer Certarus.
What is particularly encouraging at this stage is that after two years of drought we see projects coming also in the rest of the world again. So David mentioned we had a delivery to the U.K. and we are optimistic that we will see more deliveries now to the rest of the world for Mobile Pipelines.
All in all we are at this stage optimistic, quite encouraged by what we see. The macro conditions are very favorable. We expect Q1 to be good, mainly driven by Agility and Mobile Pipelines. And we will continue to see a significant dilutive effect from the Hydrogen business. But we are very confident that we are doing the right thing and that we will get payback on when those investments in a few years - took down the road.
So with those comments, David if you will come back on stage and we welcome some questions.
Q - Halvor Nygård
Halvor Nygård from SEB. On the LDV side, we saw or last quarter you showed the dashed line with a steep ramp up of volumes in Germany. However that now seems a bit delayed and you're now saying Q2 will be the quarter of steep ramp up. What gives you now comfort that that is happening in Q3 - Q2 and are these delayed further?
The market resumed in Q4. We will see continued strong growth from Q4 to Q1. But to continue that growth curve that was disrupted, we will need another quarter for the automotive companies to ramp-up their production again. So they have had major disruptions and they just need that time to get back to speed.
All right. And on the adoption rate, you showed quite strong growth within transit business, refuse trucks and so on. But in your forecast what do you expect adoption rate will be within heavy duty. Right now it's maybe 1% to 2%, but what kind of forecast do you have for Agility and the adoption rate?
We don't have an official number on that at this stage. What I can say is that, if you go back to 2014, then people were talking well 20% to 30% adoption by 2025. That is obviously not going to happen. But I think it's fair to say that the current adoption is at a very marginal level. And with the abundance of natural gas we should see a significant increase in adoption in the coming years.
All right. And lastly on the growth path you're now on and that you expect going forward as well across all segments. What do you see as the largest constraints or risks through that growth profile, is it the balance sheet and capital, is it people or is it market opportunities or what is the greatest constraint or risk to achieve that?
You know, our business portfolio is quite diverse, so there are different risks and opportunities in the different segments. I think overall a sharp drop in oil price so it will be a disruption factor if that would happen. And on the other hand the environment momentum we don't think is going to stop in the coming years. So we have a more balanced risk profile in that sense now than we had a few years ago.
And so in terms of our organisational capability I would say the ability to attract the right talent and to integrate [indiscernible] in order to be able to deliver these market opportunities in a very responsible way is the main limiting factor, but we are working hard on that and growing the organization to accommodate those opportunities.
All right. Thank you.
You did not mention anything about the potential competitors I guess, with kind of the growth that you see in some of your markets. There must be some competitors on their way?
Certainly, we have a number of competitors already and we think that especially the hydrogen opportunity is going to attract competition. However, we have had the very painful learning curve over more than 15 years in that segment. And so we are not sure if all those attracted to that opportunity, really understand the demands of the technology. So we think that if we focus on our things, we have a fair chance of staying ahead of the competition.
On the - in the other areas we've seen actually less competition in recent years and we would say that the main competitors are now largely serious competitors focused on profitability and such competitors that we prefer to have, but worthy competitors indeed.
Is there patent protection which is significant in some of these markets?
We have several patents but there are also a lot of things we choose not to patent because the moment you patent you need the documents and then you make it easier for a competitor to work around the patent. So a lot of our IPR is strictly internal. And that is quite important to us.
So I think I've commented on that before. But to make one tank is possible for a competent - composite engineers, to take it from prototype to industrialization, ensuring the consistency of quality, keeping in mind that this is gas under pressure, that's where the challenge is and that is not attributable challenge.
What will you say is the percentage cost to fuel system compared to conventional system?
Again, very complex question because there are so many segments and different answers for each segments and technology. But what I can say is that the fuel system is a very significant component of an alternative fuel vehicle and so we have to work hard and the rest of the industry have to work hard in order to continue to drive that cost down.
And we don't have any questions from the web audience today.
All right. Any more questions there? If not, thank you very much for being with us. Have a good day.