Earnings call transcript: Hexicon Q4 2024 faces market challenges

Hexicon AB reported its financial results for the fourth quarter of 2024 amid a challenging market environment. The company, which is engaged in the development of floating offshore wind technology, continues to face liquidity challenges with a concerning current ratio of 0.71 and has extended its credit facility with lenders until June. According to InvestingPro data, the company’s total debt stands at $62.67, highlighting the significance of its financial constraints. The earnings call highlighted Hexicon’s strategic focus on core projects and divestment opportunities, despite current market headwinds.

Key Takeaways

• Hexicon is focusing on core projects and divestment strategies to improve liquidity.
• The company completed a significant technology development with its Twinwind foundation.
• Hexicon has withdrawn from the U.S. market and canceled projects in South Korea.
• Market delays in floating offshore wind are impacting project timelines.
• Long-term industry forecasts remain positive, with key markets in Europe, South Korea, and Japan.

Company Performance

Hexicon is navigating a tough market landscape, with its net project portfolio exceeding 8 gigawatts. The company has taken steps to manage its financial structure, including extending its credit facility and optimizing resources. Despite these challenges, Hexicon remains committed to its innovation in floating offshore wind technology, evidenced by its recent completion of the Twinwind foundation technology in collaboration with turbine provider Mignan.

Financial Highlights

• Revenue: Specific figures were not disclosed in the earnings call.
• Earnings per share: Not detailed in the call but forecasted at -0.1333 USD.
• Project Portfolio: Over 8 gigawatts, reflecting a strategic focus on core projects.

Outlook & Guidance

Hexicon’s future guidance indicates a cautious yet optimistic outlook. The company is prioritizing the divestment of the Mummovaram project in South Korea and continuing to mature its project portfolio to preserve value. Despite current deployment delays, Hexicon expects market acceleration in the floating offshore wind sector, driven by ongoing industry electrification.

Executive Commentary

CEO Markus Thore emphasized the company’s strategic focus: "We are in a stage where we clearly were focusing our efforts on core projects." He also noted the necessity of offshore wind for industrial electrification, stating, "As long as that electrification of industry continues to move forward, offshore wind is needed." Thore remains cautiously optimistic, adding, "I see some lights at the end of the tunnel. I see some promising developments here and there."

Risks and Challenges

• Liquidity and debt management remain pressing concerns for Hexicon.
• Political uncertainty in the Korean market poses risks to project stability.
• Market delays in floating offshore wind could affect project timelines and revenue.
• The company’s withdrawal from the U.S. market could limit growth opportunities.
• Dependence on successful divestment and partnership strategies to improve financial health.

The earnings call provided insights into Hexicon’s strategic direction as it navigates current market challenges while positioning itself for future growth in the floating offshore wind industry. With a market capitalization of just $5.63M and a significant -69.03% price decline over the past six months, investors seeking comprehensive analysis can access detailed financial health scores and expert insights through InvestingPro’s extensive research reports.

Full transcript - Hexicon AB (HEXI) Q4 2024:

Conference Moderator: Welcome to the Hexagon q four twenty twenty four report presentation. For the entire time of the presentation, participants will be in listen only mode. If you are listening to the presentation via webcast, you can ask written questions using the form below. Now I will hand the conference over to Speaker CEO, Markus Thor. Please go ahead.

Markus Thore, CEO, Hexagon: Thank

Markus Thore, CEO, Hexagon: you. Good morning, everyone,

Markus Thore, CEO, Hexagon: and thank you all for dialing in and listening. I’m here today to provide an update of our business and the industry that is floating offshore wind. My name is Markus Thore, and I’m the CEO of Hexagon. So let’s get to it. Today, I’ll run through, first, what’s happened within floating offshore wind globally, and there’s actually been quite a lot recently.

I’ll then transition over to a few of

Markus Thore, CEO, Hexagon: our key highlights for the quarter, provide an update of our core projects and end by looking ahead. So to start things off, we are in a time of a rather challenging market. There’s no denial of that. With that said, what’s happened over the last few years

Markus Thore, CEO, Hexagon: is a delay of the deployment of floating offshore wind.

Markus Thore, CEO, Hexagon: So we’re at this transition phase where you

Markus Thore, CEO, Hexagon: can take similarities to oil and gas as an example that went from onshore to shallow water offshore, went deeper and deeper. And at certain point in time, for oil it was the mid ’80s, it went to floating production units.

Markus Thore, CEO, Hexagon: Wind has made a similar journey and are in

Markus Thore, CEO, Hexagon: the transition between fixed bottom wind and floating wind. A few years ago, that transition or that deployment of floating wind, we foresaw at that time that it would really take off. Now it’s taken a

Markus Thore, CEO, Hexagon: few years longer. But what we’re finally seeing over last year is first ever time when there’s a significant volume of auctions

Markus Thore, CEO, Hexagon: that have been closed and awarded to floating projects.

Markus Thore, CEO, Hexagon: So just to give you

Markus Thore, CEO, Hexagon: a few examples, in 2024, ’1 point ’9 gigawatts or 1,900 megawatts was auctioned in OECD countries. This is commercial scale floating wind. That was split up amongst three countries. It was in The UK, France and South Korea.

Markus Thore, CEO, Hexagon: So this is quite important as we’ve tested and demoed floating wind for quite some time. The first ever floating offshore wind turbine was installed in Norway in 02/2009. Now several years later, we’ve actually auctioned out commercial scale floating projects. And it’s been done so in OECD countries, two of them that we are very active and present in. And then I’ll get back to you shortly.

If you look forward, I think what industry experts forecast is that yes, there already is now and there will continue

Markus Thore, CEO, Hexagon: to be a delay in the deployment of offshore wind. We’re now not talking about as we did a few years ago that you would see that commercialization, so commercial scale projects being deployed in 2027, ’20

Markus Thore, CEO, Hexagon: ’20 ’8. So we’re more talking around the 02/1930

Markus Thore, CEO, Hexagon: mark. However, if you look at long term forecasts, those are pretty much unchanged that there will be a significant amount

Markus Thore, CEO, Hexagon: of floating turbines in the future. And a

Markus Thore, CEO, Hexagon: short look, where is this expected to take place? Well, the majority of it is in Europe, which will be followed by Asia. And over in Asia, it’s looking to be an early mover, which is South Korea. Long term big markets is likely to be Japan.

Markus Thore, CEO, Hexagon: And over to some of

Markus Thore, CEO, Hexagon: the significant events last quarter when it comes to Hexagon, and I’ll mention a few. And to start with, over

Markus Thore, CEO, Hexagon: in South Korea, our Mummovaram project entered a so called transmission service agreement with KEPCO, which is for the Swedish audience here is the counterpart of similarity to Sverkerkraftnet here in Sweden.

Markus Thore, CEO, Hexagon: So this is a major milestone for the project. It’s basically the grid connection agreement

Markus Thore, CEO, Hexagon: that allows us to export all of

Markus Thore, CEO, Hexagon: the electricity for the project onto the onshore grid. In Sweden, an also positive development and announcement, which took place in early November, was the government decision to reject 13 projects in the Baltic Sea.

Markus Thore, CEO, Hexagon: 2 of those 13 projects were ours.

Markus Thore, CEO, Hexagon: It was projects one was called Denning and one was called Sirus. So these were projects we have been working on for some time, and we had handed in the application. So it had not been approved yet as was the similar status for the other projects that were denied. I’ll come back to Sweden in a few slides. Back to South Korea.

We, after almost a year of

Markus Thore, CEO, Hexagon: work following

Markus Thore, CEO, Hexagon: the exit of Shell (LON:SHEL) from offshore wind in Korea, We had finalized the transition of Shell’s shares to Hexagon. Now the short part of that was the agreement with Shell, but what took a long time was to get it through authorities. So there’s a fairly strict and rigid change of control process. So when projects of this maturity and size that holds the rights and licenses to operate wind farms offshore changes main ownership, it needs to go through an approval process with the government. So this was concluded in late November, which was extremely satisfactory, which paves the way for the future of that project.

And also for Hexagon, obviously, this is the largest and most mature project that we have in our portfolio, so hence, most valuable. I need to say that at the very end of the quarter, we also extended our current credit facility with a group of lenders, including Wall Street, which is part of the Valenius Group. So we

Markus Thore, CEO, Hexagon: extended that to June year. And what’s happened with the project portfolio over this time? Well, it’s actually gone down in size for two reasons. One is, of course, what happened in Sweden. So the rejection of 13 projects in the Baltic Sea, 2

Markus Thore, CEO, Hexagon: of them were ours, clearly affected our capacity of

Markus Thore, CEO, Hexagon: our portfolio. On top of that, we have decided to cancel one of the more early stage developments we had in Korea for lack of certainty of that project over time. So we

Markus Thore, CEO, Hexagon: are in a stage where

Markus Thore, CEO, Hexagon: we clearly were focusing our efforts on core projects. We clearly see a path for value increase going forward.

Markus Thore, CEO, Hexagon: So the combination of those two led to a decrease in capacity of our portfolio. That’s obviously not the same to say that there’s a decrease in value because the ones that had that are removed from the portfolio from last quarter to this were of early stage. So in total, as of now, Hexagon holds a net portfolio, so Hexagon’s ownership of our project portfolio of just over eight gigawatts. And a short note on our technology as well. So we are, of course, on the in parallel to developing projects, we also hold the IP for a foundation technology that we have named Twinwind.

And

Markus Thore, CEO, Hexagon: what we’ve done over the past six plus months that is now coming to an end is something quite fascinating, which is working closely together with one of the global main offshore wind turbine providers, in our case, Mignan, and conducting a

Markus Thore, CEO, Hexagon: so called integrated load analysis. So this is checking a full model of the complete floating system with moorings, foundation, tower, turbines, everything. And together with the turbine supplier and all their insights into their own technology, we’re running this with a lot of different load cases to see how does the structure behave, how does it withstand extreme forces, etcetera, all simulated

Markus Thore, CEO, Hexagon: as the turbine would operate in a real environment. And in fact, this is something that very few technology providers have done to date. And some

Markus Thore, CEO, Hexagon: of them that have done it have stumbled upon some big challenges.

Markus Thore, CEO, Hexagon: So we don’t have the full results yet, but this is to be concluded during quarter one now this year that is sort of a sets a base of doing anything

Markus Thore, CEO, Hexagon: with the technology going forward. And not that many have done it yet. So this is quite exciting that we’ll be able to have the opportunity to get back to in a later stage.

Markus Thore, CEO, Hexagon: Now on to some of our core markets and what’s happened there. And starting off with Sweden, so

Markus Thore, CEO, Hexagon: I did mention what happened in early November to start with. What has also happened and did happen during the quarter was that the first floating offshore wind farm in Sweden, which was Vattefas project Poseidon, was approved. So this was the first approval by the government for a floating project in Sweden. And this is fairly close to our Marel site on the West Coast. It’s just south of our project.

What we also saw happen just after the quarter, so more recently, was that the Marel site was also approved the Natura 2,000 permit. So this

Markus Thore, CEO, Hexagon: is a permit that was requested by the county for us to apply for, which is when you operate this type of infrastructure in vicinity or on top of a nature preserved area. In our case, we’re not on top of the nature preserved area. We are next to it. Still, it

Markus Thore, CEO, Hexagon: was a strong advice to apply for this, which we did. And that was now very welcome to see it very recently being approved by the county. So this is separate, just to be clear, from the government approval of the site itself that we’re now looking forward to. And in fact, as

Markus Thore, CEO, Hexagon: it seems, we are one of two, I believe, that are in

Markus Thore, CEO, Hexagon: the final permit applications, I should say, that are in the final review by the government. So this is the next milestones we’re looking forward to.

Markus Thore, CEO, Hexagon: Now if you look at the market going forward, there’s there’s a few things that have happened. And my very high level view of Sweden’s market is Sweden is to meet our net zero targets by 02/1945. The only way to

Markus Thore, CEO, Hexagon: do that is if industry continues its electrification plans. So everything from the petrochemical cluster on the West Coast to green

Markus Thore, CEO, Hexagon: steel, etcetera, etcetera.

Markus Thore, CEO, Hexagon: Now as long as that electrification of industry continues to move forward, offshore wind is needed. There is no other way to continue along the time line that is needed for electrification to meet our net zero targets. So as long as that electrification of industry especially is ongoing, offshore wind is needed. And it’s a regional power deficit that we need to tackle in Sweden to allow that electrification to happen. And this is where offshore wind projects come into play and that’s where our project, Marel, comes into play.

On top of that, what we did see is that there was an investigation that was commissioned by the

Markus Thore, CEO, Hexagon: Swedish government on how to plan for future offshore wind in Sweden. That came back proposing that Sweden transition into an auction system. I think this is fundamentally the right way to do it. And I also think that when that is in place, I

Markus Thore, CEO, Hexagon: think there’s every reason to believe that there will be projects in the Baltic Sea going forward as well. However, right now, we are focusing on the project on the West Coast.

Markus Thore, CEO, Hexagon: In Italy, another core market of Hexagon

Markus Thore, CEO, Hexagon: has already, as was the proposal for Sweden to do in the future, it already has an approved regulation for a so called CFD scheme contracts for difference. So how through auctions offshore wind projects are entitled to

Markus Thore, CEO, Hexagon: a fixed revenue per megawatt hour over the lifetime of the project. And this is a market that is, to my knowledge, the only one in Europe at least, where you have a CFD scheme, but you don’t have to pay for your site at inception. So you can through work and applications secure rights to project areas and then later once you’ve met all

Markus Thore, CEO, Hexagon: the prerequisites with certain permits etcetera, you can enter into a CFD auction. We’re still waiting on some details of this CFD, but the principle and the framework is in place. Here we are active with four projects and three prospects. And two of them that are prioritized are now mid through the environmental impact assessment. Over in South Korea, it’s been quite an interesting market to follow recently.

So it’s one of the leading countries in floating offshore wind. So it has a strong political support. It has a subsidy scheme in place, a renewable energy certificate scheme in place that actually favors floating wind. So there’s a multiple, you get more certificates. So basically higher revenue per megawatt hour the further off the coast the projects are and deeper the water is.

And this is the way for this

Markus Thore, CEO, Hexagon: this is a way by the South Korean government to minimize conflicts. So activity offshore, whether that’s fishing, leisure boating, etcetera, that activity drops with distance from shore. So this

Markus Thore, CEO, Hexagon: is a way to incentivize project to be deployed further off the coast. And the first auction, the first part I mentioned in this presentation, so these auctions that have been held now of 1.9 gigawatts globally, One of them for seven fifty megawatts was held in November in South Korea, where Norwegian Equinor was the only floating wind project that won in that auction. And that project is actually one of our neighbors. Now what has also happened that caused us quite a lot of uncertainty is the quite southern end of last year, imposition of martial law in South Korea and subsequent impeachments of the president. So this whole thing has unfortunately created

Markus Thore, CEO, Hexagon: a political chaos and uncertainty that is not really favoring our divestment process that we’ve been clear previously as well that we’re embarking upon. So as it looks now, we expect reelections

Markus Thore, CEO, Hexagon: to occur before the summer. We are still very much prioritizing and progressing with that divestment of this project. This is a late stage big project. It’s not

Markus Thore, CEO, Hexagon: a project for Hexagon to own 100%. So adding new partners into this is a priority for Hexagon. However, the political chaos will mean almost certainly that it will take longer than we planned before that happens.

Markus Thore, CEO, Hexagon: In The U. K, another core market where we have two projects, both our TwinHub demonstrator project as well as a 10% ownership stake in Pentland, North Coast Of Scotland, where CIP is the majority owner. Clearly, and very much remains as a global leader in floating offshore wind. This is where the first project of multiple turbines was installed in 2017. It also holds most of floating turbines in the market today and continues through their CFD scheme with separate budgets, separate pots for floating technology continues to be a driving force within the commercialization of floating wind.

What happens next for us? Well, two things. We’re both looking at how to partner and side share the Twin Hub area as such, so that project, which is a demonstrator

Markus Thore, CEO, Hexagon: project as well as looking forward to this year’s allocation round. So each year, there

Markus Thore, CEO, Hexagon: is an allocation round, so basically an auction that you can enter into bid and secure revenue for projects. And we’re looking forward to see how Pentland

Markus Thore, CEO, Hexagon: can achieve a auction win this year. And in South Africa, last core market that I wanted to mention, which is a bit

Markus Thore, CEO, Hexagon: of the old one here in this path because there’s really no offshore wind in South Korea. But the prerequisites and our view of a market that is clearly in need

Markus Thore, CEO, Hexagon: of offshore wind is there. It’s got a very unstable

Markus Thore, CEO, Hexagon: power situation, very weak grid with a lot of power shortages

Markus Thore, CEO, Hexagon: and very high electricity prices. On top

Markus Thore, CEO, Hexagon: of that, it’s got extremely good winds offshore and deep waters. So this is clearly

Markus Thore, CEO, Hexagon: a very good floating offshore wind market. We’ve tested this. Early stage can develop a market

Markus Thore, CEO, Hexagon: like this on quite low spend. What we’re seeing now, having gone through parts of the environmental impact assessment, is that we’re starting to see both the interest increasing from others as well as well as it becoming clearer how to navigate this market, how to reach milestones such as site control, etcetera. So this is a market that’s gone through clarity and even more clarity along the way of us developing it. I will make the point still though that this is a quite the early stage market still. So there’s a lot of things that can happen, but it’s definitely one that we, in a low spend mode, continue to

Markus Thore, CEO, Hexagon: develop and look at going forward with optimism. Now this was

Markus Thore, CEO, Hexagon: a few bullets that I mentioned last quarter. And just I wanted to follow-up on a few things that we are doing because as I have written in my remarks in the quarterly report that was released this morning, mentioned earlier here as well, it continues to be a challenging market. There’s no denial of that. I certainly see some lights at the end

Markus Thore, CEO, Hexagon: of the tunnel. I see some promising developments here and there. Overall, it’s a very challenging market. Here were a

Markus Thore, CEO, Hexagon: few items, six of them that I mentioned last time that we’re working on. There’s still work to do and it still remains a focus on these six items. Some things we have done that I did want to mention to follow-up, it is looking at cost. We continue to

Markus Thore, CEO, Hexagon: be very aware of cost at these times. Resources have been kept both on the consultants’ parts and elsewhere. We’ll continue to see an effect of that. There’s a lag in some of these cuts that have been made. On top of

Markus Thore, CEO, Hexagon: that, in projects, we have ceased our presence and activity in

Markus Thore, CEO, Hexagon: a few markets and projects, both in The U.

Markus Thore, CEO, Hexagon: S. As a market we do not have a project per se, but we have presence that we don’t have anymore and a specific project that was named Puhang, which was a early stage project in South Korea. So not the same as Mollonbram, it’s

Markus Thore, CEO, Hexagon: a separate early stage project that we decided to terminate and stop developing.

Markus Thore, CEO, Hexagon: So we’ve taken some measures. We’ll continue to be very focused on prioritizing

Markus Thore, CEO, Hexagon: our efforts towards ensuring

Markus Thore, CEO, Hexagon: that we come out in a stable situation on the financial front. To reach that, we need to be very focused on which projects and how we reach divestments of some of the

Markus Thore, CEO, Hexagon: key projects. And that ties into our priorities going forward. Summarize them in rather high level, yes,

Markus Thore, CEO, Hexagon: we are remaining very, very focused on how to secure and improve our company’s financial

Markus Thore, CEO, Hexagon: structure. Again, I’m not excluding or can give any details today of what that means, but clearly, product divestments remains a core part of that. Establishing a new ownership structure for Mumba Varam is key. This is, as I did mention earlier, this is a the, I should say, the combination of size and maturity, it is our most mature and large project, hence, our most valuable project. So to ensure a successful divestment, adding new partners into that is a core work stream.

On top

Markus Thore, CEO, Hexagon: of that, we’re looking at doing the same for other projects as well as continuing to mature projects Because as this market really takes off and increases in its development speed,

Markus Thore, CEO, Hexagon: we need to make sure that projects preserve at minimum their value, preferably drives an increase in value. That’s how we realize bigger earn outs in the future. So with that said, twenty minutes goes fast.

Markus Thore, CEO, Hexagon: I’m a few minutes over time already. I want to thank you all for listening. And now I’ll I’m doing this, through a, webcast here from from the office, so I will be able to read,

Markus Thore, CEO, Hexagon: questions that have come in.

Markus Thore, CEO, Hexagon: So let me do just that. If I’ll just

Markus Thore, CEO, Hexagon: here we are. Okay. I’ll start

Markus Thore, CEO, Hexagon: reading your question and then I’ll answer it myself. So here we go. First one, your liquidity position seems rather poor and with large debts. For how

Markus Thore, CEO, Hexagon: long will you survive with the existing means? And how

Markus Thore, CEO, Hexagon: are you planning to solve the situation? So clearly ties into what I just mentioned, a valid question. Again, we are in a rather challenging moment currently, but I have to say, I really do look forward with optimism. So we’re working at several parallel tracks at the moment. I can’t unfortunately disclose any of them as of now.

Markus Thore, CEO, Hexagon: With that said, the current size of debt for a

Markus Thore, CEO, Hexagon: company like Hexagon is not a long term solution, but it’s given us the ability to preserve and increase significant value of the project portfolio.

Markus Thore, CEO, Hexagon: So if we go back and look at when the development loan facility was put in place almost two years ago, it was done at a time when we had taken the portfolio to a stage where we were

Markus Thore, CEO, Hexagon: ready to partially divest selected projects within it. So we’ve grown the project portfolio to a decent size and diversification.

Markus Thore, CEO, Hexagon: It was at that time, however, clear that the market had changed and divestment would take longer. So to avoid dumping projects, we instead decided to use debt as a way to carry them onwards through further milestones. So and this is

Markus Thore, CEO, Hexagon: a balancing act, one that we continue to need to monitor. So the balance between the one side keeping debt and keeping projects toward higher valuations and on the

Markus Thore, CEO, Hexagon: other side reducing debt and selling earlier at potentially not optimal terms. So this is a very core focus

Markus Thore, CEO, Hexagon: that we continue to monitor extremely closely. Hope that answered the question. So next one here. Given that there are many floating wind foundations out in the market, is there still a demand for more, I. E, is there still time to commercialize your Twinwind technology?

Well, the short answer is yes. So what we’ve seen is the delay in the deployment of new technologies over the last few years. In fact, as of now, there’s still only a handful of different foundation technologies deployed in full scale, and perhaps more importantly, none as

Markus Thore, CEO, Hexagon: of yet in a commercial scale project. To add to that, some of

Markus Thore, CEO, Hexagon: the first movers and the early movers have had issues with their work in this integrated load analysis that I mentioned that we’re doing now with

Markus Thore, CEO, Hexagon: the turbine supplier. So

Markus Thore, CEO, Hexagon: due to increased turbine requirements and that type of work and insight, some of the early movers have really had their issues needing to redesign and go back a few years. So yes, there’s still room and a demand in this space for additional technologies in my opinion. Next (LON:NXT) question here. How will the political situation in Korea affect your ability to find new owners for the Korean project? Well, I did touch on it briefly.

It’s the short answer is it will affect us by it will delay the

Markus Thore, CEO, Hexagon: process as we see it. So two examples with some of the

Markus Thore, CEO, Hexagon: investors we speak to, specifically international ones, the non Korean ones, I’d say, they basically say this is interesting, but we can’t engage. We’ll hang on, not engage until a new government is in place. Others, if you take an example of local, so Korean state owned companies that we’ve also had some dialogue with, they are not even able to make investment decisions whilst this uncertainty is ongoing. They need a government to be able to make investment decisions. So all in all, it affects the time line as we see it.

Good news is that there is this Hari Hari culture in Korea, so we do expect it to be sold rather quickly. And the forecast as of now is that new elections will occur in May. Let’s see if we found something more here. Is there any chance Glenmont can make more of the facility available for the current projects or increase the facility? Short answer is we’re having a so just to be clear as well, Glenmont is the name of the fund manager that we entered into this development loan agreement.

They have changed the name recently to Navient (NASDAQ:NAVI) Infrastructure. What I can say is that we are obviously keeping a very close dialogue with them. We’re extremely close on multiple topics. There’s nothing yet of that agreement, but they are continuing to monitor our situation, continuing to be very supportive, and we’re planning the future together. So I can’t say more than that.

Just of this stage, and there are no nothing in place as of today to be able to do this. But I can’t rule out anything either going forward. With that said, I see time has passed. It’s now half past. Few questions remaining that I won’t able to answer.

We’ll try to provide answers to those in writing. But really want to thank you all for tuning in and listening

Markus Thore, CEO, Hexagon: and look forward to speaking to you soon again. Thank

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