Hexagon Composites ASA (HEX) Earnings Call Transcript & Summary

Good morning, and welcome to webcast by Hexagon about its spin-off of Hexagon Purus. Today, I'm hosting this from our Oslo location together with Morten Holum, who's our President of Hexagon Purus. My name is Karen Romer, SVP Communications. And joining us in the broadcast will also be Jon Erik Engeset, who is our CEO, based in our Ålesund office. Today, we are proud to tell you a bit more about the stock exchange information that went out last evening. And I will now hand over to our CEO in Ålesund, Jon Erik.

Thank you, Karen. Good morning, everybody. So the idea of Hexagon Purus was formed back in 2014. And in 2015, we separated our hydrogen businesses into its own business unit. Then in 2016, we acquired xperion, and Purus was really formed around the operations we have in Kassel, Germany. Then in early 2019, we renamed the entity to Hexagon Purus. And from the beginning of this year, we transferred the hydrogen and battery electric business operations from Agility into Hexagon Purus. And as we announced last week, we are now carving out the CNG light-duty businesses to form a pure-play hydrogen and battery electric zero-emission entity. You can go to the next slide, please. So this makes a lot of sense, both from an industrial and financial perspective. Industrially, it will allow the 2 business areas, gmobility and e-mobility to develop according to their own -- according to their own possibilities and structures. So the gmobility is a fairly mature business, early maturity phase, profitable, and we are in a strong growth and technology development phase. While the e-mobility business is in -- at an earlier stage, it's approaching the inflection point. And a lot of investment is required both in R&D and in capacity expansion. Financially, it will also allow our investors to have a choice between investing in a pure-play e-mobility business or the more profitable cash-generating gmobility business. Hexagon intends to remain a long-term investor in Hexagon Purus. We will maintain a majority stake because it is important to also ensure that we have efficient transfer of know-how and technology and that we can leverage each other's strong positions in the markets. At the same time, it will allow individual strategic agendas and individual investment stories. So as mentioned, Hexagon Purus will be a pure-play e-mobility company, zero emission, while the gmobility business will be focusing on low emission, primarily CNG, LPG, but also renewable natural gas or biogas, which is a very valuable carbon efficient technology. Next slide, please. Taking a look at the Hexagon Purus e-mobility side. So that will be comprised of the core Type 4-cylinder technology as well as the systems, cylinder systems solutions. But also, we have a very important business, which is the powertrain integration business, primarily out of Kelowna in British Columbia, where we are integrating our own solutions with third-party components. And we also have our proprietary software, and we have our own battery packages which go into the deferred heavy-duty and medium-duty vehicles. So if we go to the next page, please. So by doing this, we will leverage our global market leadership position. And we will be able to address global markets for Type 4 technology, which we expect to reach approximately USD 7 billion by 2030. So there are estimates out there that are more optimistic even than this. But we have a very strong confidence that a market of north of USD 7 billion will open up to us in the next 10 years. Also, we will then have the possibility to develop the integrated solutions of electric drivetrain systems. And we do this based on very strong customer relationships. We have, in our customer portfolio, most of the best-known OEM names in the world. We have established footprint in Europe and in North America. And as we have announced earlier, we are entering China, and we are also looking at several other opportunities in the Far East. Next slide, please. So with that introduction, I will hand over to Morten, who is the new or the CEO of Hexagon Purus and will be responsible to lead the steps to take -- to spin the company off and take it into a good future for us all. Morten, please.

Thank you very much, Jon Erik. So Hexagon Purus is a leader in the e-mobility space. And we have already -- we're already a global company with a sizable footprint spread across North America, in Europe and also soon in Asia. And we have a strong global executive team, consisting of some of the most experienced people in this business and in all of Hexagon. And this team has decades worth of experience in all aspects of running this business, whether it is the products and solutions, the customers, the markets or the operations. We've got the knowledge and the competence that we need, and it's a great team. The green shift in a way is driving this market. And the green shift is really gaining momentum. So it's no longer a minor special interest topic. It has gone mainstream, and it has really taken the agenda. And it's driven by strong pressure from customers, consumers, voters and investors that are really forcing politicians and governments to care more about the environment and do more to combat global warming. National governments are responding in the last years. And particularly during the last 12 months, we've seen a significant number of large programs being launched from governments to combat global warming across the world. And hydrogen is gaining popularity in all of this because of its relevance across the entire energy system. It can be used to remove carbon emissions from several sectors that are difficult to decarbonize with batteries. And every sector, of course, of society needs to contribute to solving this climate crisis. Transportation alone is roughly 20% of global greenhouse gas emissions. And those emissions need to come down significantly, if we are going to reach the targets that have been set, the 2-degree target in the Paris agreement. The good news, of course, is that decarbonizing the transportation sector is entirely possible. We have the solution developed today, and they are ready to be deployed at scale already from the middle of this decade. And that need for decarbonization translates into great opportunities for us. The market for hydrogen cylinders alone is estimated to reach $7 billion by 2030. And the largest portion of this growth is going to be for medium and heavy-duty trucks. And the largest markets are going to be China, Europe and North America. But maybe the most interesting part of this is that at 2030, with this kind of market size, we are talking adoption rates that are still in the low to mid-single digits. So there is an even greater opportunity, of course, after 2030. So this is a fantastic opportunity for a market that's going to help the economy, also help the climate crisis. We are and have talked about how we are preparing to enter China, the largest automotive market in the world. And it's also set to become the largest market for hydrogen mobility through the course of this decade. Chinese authorities have targeted significant programs also to get carbon emissions down to clean up local air pollution and to reduce the emissions of harmful global greenhouse gases. They have a target to have 1 million fuel cell electric vehicles on the road by 2030 and a strong network of refueling stations, which is a great opportunity for us. We have announced that we are intending to partner with CIMC ENRIC, one of the large clean energy equipment manufacturers in China. On the systems integration side, in North America, we are serving the major OEMs to develop their battery electric and fuel cell electric vehicle platforms. The market for short series zero-emission, medium and heavy-duty trucks though is still in the very, very early stage, small market, but big potential. There's very high customer interest in the solutions, and we expect the demand to increase significantly over the next 4 or 5 years. In the short term, it's mostly about battery electric vehicles. That's a bit earlier stage development wise. And so today, an estimated 70% of zero-emission vehicles on the road in the U.S. are battery electric. In the long run, though, it's going to be for the heavy-duty market. It's going to be fuel cell electric that will have 90% plus market share. Hydrogen, of course, makes more sense in the heavier vehicle classes where you need both long range and you need to carry heavy payload. So zero-emission mobility, gigantic market opportunity, and we are coming at this market right now as a market leader. We have the leading product competence, being the global leader in Type 4 pressure cylinder technology. This is something where we have decades of experience going all the way back to the space programs in the U.S., in the '60s. But also on the systems side, we've got many years of experience with alternative fuel systems in the medium and heavy-duty truck space. We know how to integrate these systems optimally onto the truck platforms. We have trusted customer relationships with major OEMs, and we have an established operational footprint. We have manufacturing facilities that can produce these solutions on serial scale, both in North America and in Europe. So on the topic of customer relationships, we talked in the Q2 earnings release, we went through some of these examples of things we have done for customers. You see on this page here, a fuel cell electric truck from Toyota. This is the first iteration. We are now, as I'll come to later, working on the fourth. We've done work in the -- in -- with most bus manufacturers in Europe, Caetano, Solaris with New Flyer in the U.S. in the light-duty space, the Daimler GLC F-CELL hydrogen distribution modules, which we -- this one has been delivered for Linde. We are working marine with this zero-emission fast ferry, the first one in the U.S., the first fuel cell electric regional commuter train in Germany, the first hydrogen refueling station in Western Canada. And lastly, we have been working with Daimler on their battery electric truck programs, delivering battery packs and also some of the ancillary supporting systems. So we have successfully delivered zero-emission vehicles across a wide range of both on and off mobility platforms. Then last week, we announced that we have received a EUR 25 million order in Asia. We're nominated to deliver cylinders to a hydrogen-powered SUV for Northeast Asian OEM. Asia is a very interesting geography for us because it's very forward-leaning the countries -- all of the countries there have very ambitious plans for hydrogen. And we are naturally very excited and looking forward to participating in that exciting market growth. Then earlier, this summer, we announced several other contracts that we have won. The fourth iteration of the Toyota fuel cell electric truck, heavy-duty. We also worked on the 3 predecessor versions. We got our first contract to deliver hydrogen distribution modules in the U.S. We received a research grant from the U.S. Department of Energy to study how to get the cost of the composite cylinder down without compromising on the safety. And finally, most exciting, we received our second contract for spacecraft, delivering the high-pressure cylinders to a new spacecraft. Spacecraft is probably the most demanding operating environment you can think of. So the fact that we are chosen for this type of a contract is a testament to our overall capabilities in this space. But we have much more in the pipeline. The market for zero-emission solutions is still very early stage. We see very high customer interest, and there's a strong demand from the market for different solutions. And so we are working to develop those solutions. We have a pipeline of more than 50 active projects running as of today, and they will be more running in the years ahead. We are using our market-leading capabilities to accelerate the development of zero-emission mobility. So I'd like to end with repeating some of the points that Jon Erik mentioned earlier in the presentation. We are launching Hexagon Purus, a unique pure-play e-mobility company. It's a great market opportunity driven by the need to decarbonize and the need to take away emissions from the transportation sector. It's a gigantic market growing out there. And then we have the capabilities that is needed to succeed in this and to retain the market leadership position that we have. It's the deep competence in Type 4 pressure vessels, which is a very key part of making hydrogen mobility happen. We have leading competence on the systems side, whether it's hydrogen systems, battery systems and vehicle integration. We have the strong customer relationships with some of the largest and most important OEMs today. And we have our established operational footprint with capability to push these solutions out at high volumes. In the end, we are positioned for significant growth in this record high interest and activity market with substantial additional expansion potential through the announcement of the partnership with CIMC ENRIC in China. So we're really excited about the future. We are really excited about the acceleration of zero-emission mobility, and we are really excited to be driving the energy transformation. Well, thank you very much.

Thank you, Morten, and thank you, everyone, for joining us for this webcast. We hope we've managed to provide a little more color around the announcement that was sent out last evening. And both David Bandele, our CEO -- our CFO, excuse me, our CFO is -- and I are on standby for those that have additional questions. Media can feel free to contact with me. And of course, those analysts and investors that are meeting or wanting more information can reach out to David. You have your information on the screen. You also find it on our website. And others who wish -- who have questions that were not answered by the presentation can also send us an e-mail to [email protected], and we'll get back to you as soon as we can. Thank you very much. Hope you have a great day.