HEXPOL AB (publ) (HPOLB) Earnings Call Transcript

Good day, and welcome to the HEXPOL Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Peter Rosen, CFO. Please go ahead.

Thank you, and welcome, everybody, to the presentation of the results for the fourth quarter of 2022. Presenting today will be Georg Brunstam, our CEO; and myself, as CFO of the company. The agenda for today is to first give you a business update, then go through how we continue to execute our business model, including sustainability, then go through the financials and focus areas for the rest of 2023, and we will finish with the Q&A session. And with that, I hand over to Georg, who will take you through the first parts of the agenda.

Yes. I'm happy to say that we ended 2022 with another strong quarter, in fact, our best quarter 4 ever. And we ended the year, in the year the best year ever for the HEXPOL Group. We also had, in the fourth quarter, a sequential margin improvement, which is good. And we had good sales in all regions and product segments. However, in October and November were strong and December was strong in the last few weeks, we saw some destocking and some effects on extreme weather in the U.S. But all in all, a strong quarter also on sales. We continue to execute well on our strong business model and the price and cost increases were passed on. And as you can see, the margin improved sequentially. And we delivered a record EBIT of [ SEK 811 million adjusted versus SEK 628 million ] that used from last year or the previous year. It's still a bit turbulent. We see continuous turbulence and difficult environment. But however, we have seen that for a while, and we delivered in that environment as well. We saw some good [ slow ] improvements in automotive, but it varies in customers and regions. We saw the same thing as we've seen before and uncertainty, primarily in Building & Construction in Europe. We continue to see global supply issues, and we continue to see some price increases on raw materials and high energy prices. Our M&A journey is continuing, and then there is a strong sustainability focus on that M&A journey. And we closed the McCann acquisition in the quarter, 1st of December. And earlier this year or last year, I should say, we closed the almaak acquisition. So very much in line with our M&A strategy. We are continuing to acquire highly specialized thermoplastic compounders with sustainability footprint. Going forward, we see a continued global challenges and then the high inflation in interest rates, as you all know. We see continued supply chain issues, mainly less on semiconductor, but more on other components. And as had we see some raw material issues for ourselves as well. We see our strong customer focus and geographical proximity as good. And we are as early as before on our toes, and we are flexible and ready to meet the forecasted increase of light vehicle production. If I look at the different segments on next page, Page 5, our business area compounding had very much the same [ comment as ] we have on group. And on Engineered Products, we had a very strong quarter driven by good demand for energy saving products, a very strong EBIT in Engineered Products. We have continued strong focus on our sustainability and our target of 75% reduction of CO2 emissions, we are in good progress to meet that. And we continuously announced and introduced new compounds with bio based and recycled materials. On M&A, we see maybe going forward some more opportunities given the environment. And we have closed 2 acquisitions during 2022. And during 2021, we closed another 2. So good acquisitions, 2 of them in some of that is compounding with sustainability footprints and then one we have acquired in cable footprints and another more consolidating Unica in Spain. If I turn to Page 6, trust you have seen this one before. We have a strong culture in our company, and we do create a material difference for all our customers. We had a good counter in the company, and we have a stable organization and with very competent and experienced people. And that is really good in this challenging environment. On Page 7, you can see the strong -- very strong business model, which we are executing on all the time. And the highlights there is, of course, our pricing power and also our stickiness of products stickiness because it's highly technical products. And another thing is, of course, that we do produce on customer orders, and we do develop customer recipes. If I go to Page [ 8 ] of the next page and show the high level will be active on the carbon footprint reduction. And then there you can see that, that is one of the cornerstones in the high-level objectives. The other one is to further develop our portfolio green products and particularly based on recycled raw materials. On the next page, Page 9, you can see the very strong and good development on our CO2 emissions. We are working focused on this, and we are on track to meet our very ambitious target of 25 -- 75% reduction by 2025. Thank you. [indiscernible] to Peter to --

Thank you, Georg. And if we then turn to Page 10, we look at the sales development during the quarter and see where it comes from. As Georg mentioned, we had a strong growth of 35% compared to the same quarter last year with good sales in all markets in all product areas. And if we look where it comes from, we can see that we delivered 10% organic growth. Acquisitions added another 8%, and that is primarily almaak, McCann, [ too lesser part ] since they were included the 1st of December. And then we had some positive FX effects. In total, we have a 35% increase compared to the same quarter last year. And if we look at the markets, we see that they all show good sales growth around the 35%. And part of the European growth is driven by the acquisition of almaak. But nevertheless, strong growth in all the areas. And if we then turn to Page 12 to look at the financial overview. We can see that for a fourth quarter, we delivered a record adjusted operating profit of [ SEK 811 million ], which is then well above last year. The margin came in at 14.8%, which is below what we did last year, negatively affected by the [ shell ] insurance that we've seen related to raw material shortages and price increases, but also partly the acquisitions [ around ] with a lower margin than the export average. Still the margin shows sequential improvement compared to Q3 this year. Equity asset ratio remains high at 58%, and the return on capital employed is at high 19.2%. And in the quarter, we delivered a very strong operative cash flow of about SEK 1.4 billion, which is almost twice what we did last year, and we will come back to the drivers of this later in the presentation. If I can then ask you to turn to Page 13 and just look at the development in a different fashion. We see this 35% increase to SEK 5.5 billion, while the adjusted operating profit came in at [ SEK 811 million ], an increase of almost 30% compared to same period last year. At the same time, we saw that the operating margin came down some to 14.8%, and this is driven by the price increases we've done through raw material and [indiscernible] for the energy researchers that we passed on to customers, but also the acquisition. And I think it's worth mentioning again, even though we've done so several times before that the lower margin is logical when taking into account the mechanics of our price increases. When we pass on price increases, we mainly pass on the absolute increase and not the relative to the percentage increases, which means that everything else being equal, this will have a mathematical negative impact on the margin but not on the profit in absolute terms, which would also demonstrated this quarter as well as that one during this year. And if we turn to Page 14 and look at the operating profit drivers. We see that the increase mainly comes from the higher sales in the quarter. The higher sales are partly offset by somewhat lower gross margins than higher OpEx. And the OpEx is up compared to last year, driven primarily by negative FX effects, inflation, but also acquisition costs that we had this quarter related to McCann. Compared to the previous quarters this year, the increase is primarily driven by the acquisition cost that we had for McCann here in the fourth quarter. And if I can ask you to turn to Page 15, and look at the compounded sale -- they delivered sales of SEK 5.1 billion in the quarter, which is an increase of 36% compared to Q4 last year. And here, the increase is driven 11% by organic growth and the acquisition of almaak and McCann adds another 8%. We saw sales improve in most customer segments in all product areas. Operating profit came in at SEK 737 million, which is well above last year, where we saw that the higher sales were offset by somewhat lower margin. And if I can ask you to turn to Page 16. I would take a look at Engineered Products, where we see that the sales increased with 18% compared to last year with an overall strong performance across the various product areas within the segment. Operating profit came in at high SEK 74 million, which is 7% above last year, driven by the higher sales, but we also have some positive FX effects in the quarter related to the development in Sri Lanka. And then if I can ask you to pay -- if we turn to Page 17, we can look at the working capital. That saw a big improvement in the fourth quarter, a large part driven by the lower inventory levels. And as mentioned both last year and earlier this year, we took the decision to increase inventory due to supply issues on certain raw materials. And since we now can see more [ steady ] supply of specific [ raw ] materials, not all but most for some. We can also lower the inventory levels for those raw materials. And as we turn our inventory quickly during the year, the effects also come quickly on working capital, which you can see. And when it comes to underlying payment terms from suppliers and to customers, they have not changed, [ they are just saying ] that we've seen for quite a long time. So very positive working capital development, very much in line with what we've said before and the decisions that we have taken to lower the inventory. -- a point to be made at the absolute working capital is up around SEK 350 million related to the acquisitions of almaak and McCann compared to Q4 last year. And if you then turn to Page 18, I look at the cash flow, but we see that as a consequence of the improved working capital, we also see a very strong cash flow in the quarter. We delivered about SEK 1.4 billion inoperative cash flow, which is almost [ twice above with the ] last year in the same quarter. The investment levels is somewhat high in the quarter, and this is driven by CapEx related to recently acquired almaak but also McCann. So a very, very strong cash flow in the quarter. And if I may ask you to turn to Page 19, take a look at the net debt. So we see that it increases so well compared to last year as the net debt-to-EBITDA ratio, which now stands at [ 0.75 ]. However, this is temporarily driven by the dividend, including the extra dividend that we did earlier this year and the acquisitions of almaak and McCann during the year. So all in all, we continue to stand with a very strong financial position here after the fourth quarter. And with that, I hand over to Georg.

Yes. Thanks, Pete. If I just summarize then our best year ever and also a strong end to that with our best quarter 4 ever. And quarter 4 is normally slightly below the other quarters. All in all, a very strong year, and we are very confident going forward that we can handle the current global challenges. We have proven that we have priced power, and we are including the energy costs and other inflation costs as well in that. And I'm sure you have noted the sequential margin improvement in quarter 4 -- we have a strong sustainability focus, as you know, and are ambitious target of 75% reduction of our CO2 emissions. We are strongly pushing ahead to achieve that target, confident we will do it. The M&A agenda is strong. And as we communicated in our strategy, we are acquiring in specialized engineered thermoplastic compounders with a recycling footprint. And finally, we are [indiscernible] we are flexible and ready to meet the forecasted increase in the light vehicle production. If we then turn Page 21 and then to 22. Of course, a priority going forward is to continue to handle health and safety for our employees and to manage the volatility in demand because we do see some uncertainties in 2023. We will also manage the current challenges in supply chain and raw material prices as we have done before. And we will continue to execute on our strong business model and maybe even some more opportunities in M&A, and we will continue to focus on that. And as I said, we are flexible and we are [indiscernible]. Okay. And with that we hand over for Q&A.

[Operator Instructions] And our first question comes from Gustav Osterberg of Carnegie.

My first question is on the gross margin improvement sequentially. I mean can you elaborate a little bit more on what's driving that? Are we seeing less effects from increasing raw material prices year-on-year, I note that the gross margin is flat. Could you elaborate on what's driving that better profitability?

I think you are spot on. I mean, we -- the raw material increases are not so strong as before. And then they are only in some special segments now. So I think you're spot on.

And then just a question there on the comment on that -- the last 2 weeks in the quarter was a little bit weaker, but I also think that usually you tend to see some closures of Christmas, et cetera. So I mean, is this something out of the ordinary? Or how should we read that comment?

It is normally like that. Maybe it was a little bit stronger this year with the weather conditions in America and some inventory adjustments by customers like we did. Many people did inventory reductions at end of the year. But it's a normal pattern, maybe slightly stronger this year.

And then just a follow-up here on -- I mean you see a big working capital release in the quarter and great cash flow from operations. And -- but you still sort of have a somewhat higher working capital than you usually have. I mean how should we think about the working capital levels going forward? Are they -- are there some reasons to expect elevated levels compared to history due to the supply chain situation? Or should we expect sort of normalization towards historical levels.

Both actually -- if we look at -- so as long as we can see that we have the steady supply of raw materials, then we will also lower our inventory levels as we did here in the last quarter of this year. But we need to see a steady supply of raw materials. So we are certain we can deliver to our customers. So as long as we see that, we will lower -- continue to lower inventory levels. If we will reach the optimal historical levels, that is too early to say because it depends very much on the environment around us and uncertainties on the supply chain.

Perfect. And then the final question is on -- I mean, leverage is still quite low despite the 2 acquisitions last year and the extra dividend that we were at somewhere around 0.7%. And I mean, if we have some inventory releases here as well, cash flow looks set to be quite strong. I mean what's the priority here for 2023 then?

We are continuing very, should I say, focused on the strategy we have established, and we are executing on that. And it's including, of course, executing on our strong business model and also an M&A part of it. And maybe there might be more M&A opportunities in the environment going forward where maybe it's difficult to -- more difficult to find buyers and then we are certainly a buyer with our strategy in place.

The next question comes from Douglas Lindahl of DNB Markets.

I wanted to start off actually following up on one of the previous questions there on the December number. You said that the impact from weather and the inventory reductions was a bit more impactful this year than typically. So maybe a better way of understanding the underlying models. If you could maybe give a comment on what you've seen so far in January, if possible. So we get an underlying view of demand environment.

Yes, that's a good question, Douglas, of course. And we do not supply forecast for the coming quarter, we've never done and we are not doing here either. And I guess the best way to describe it is that we saw the ending of December as normal, however, a bit stronger, as I said, on the inventory reductions and the impact of weather conditions. I mean that was some of them quite a normal ending or a little bit stronger.

Okay. So maybe that shouldn't be exaggerated then that comment from your report on the end of December?

No, it is exactly what we are saying.

Yes. Okay. Understood. And coming back to pricing. You mentioned that some prices are still up. But does that -- I mean does that stand for your raw material pricing in total? And so what will be the price impact now for your organic sales heading into this year, assuming that price unchanged from where they stand right now?

Not obviously giving us a number more indicatively.

Yes. No, I understand the question, and I'm sure you understand it's not so easy because it's very short notice with the price increases from our suppliers. But the big increases they are gone. There are some very special materials and there are even some decreases on some materials. So it's a [indiscernible] development going forward.

Okay. But net net, prices are still up in total?

It's difficult to judge if that would be the case. But it's more on specialties, which has lower volumes where the prices are up.

Okay. Understood. And final one on -- we talked about your inventory levels and also the raw material shortage having a negative impact on profitability, while you did seem to see somewhat optimistic on keeping a slightly lower inventory levels. So which means that you are possibly more optimistic on raw materials. So when should that sort of come as a positive on your profitability, would you say?

Okay. I'm not sure -- final.

So basically, what you've been talking about raw material shortage having a negative impact on profitability now. So -- but at the same time, you're saying that you're happy to keep somewhat lower inventory levels because you seem to be seeing a bit more supportive supply for raw materials. So that's sort of point that the profitability issues should linger off at some point. So when would you sort of generally say that, that impact should be felt over the P&L?

I do understand your question now. I think we saw some effects already when we improved our margin as well. I mean the challenges were there, but not as they were before.

Okay. So the challenges are there maybe year-over-year, but not so much sequentially. Is that fair?

Yes. I mean we still have challenges that they are -- that's the reason we took down the inventory as well that we saw that we were able to do -- and then that is, of course, helping also the flow in production.

The next question comes from Karl Bokvist of ABG.

So I guess it falls on me to ask this question. I thought it would be asked before, but 10% organic growth. Any kind of comments you can give on volume versus price here?

Yes, we can. And it's a flattish quarter for us.

Understood. And then just kind of -- you talked about it also now the recall a bit, but the kind of time line on profitability improvements within your acquired businesses. Can you shed some light on where you currently are? And how -- when do you foresee kind of the business plan to be completed, if we call it that?