HEXPOL AB (publ) (HPOLB) Earnings Call Transcript

Welcome to the HEXPOL Q2 presentation. [Operator Instructions] Now I will hand the conference over to the Deputy CEO and CFO, Peter Rosen. Please go ahead.

Thank you, everyone, and thank you for listening into our Q2 presentation. For today, I'll take you through the overall business performance in the quarter, then go into each business area in a little bit more detail. I'll take you through the financials, and then we summarize and wrap up with a Q&A session. But let's start on group level. As you've seen, it's a quarter where we delivered strong organic sales growth. But when we look at the overall picture of the markets where we operate, there is not much change since the beginning of the year. Generally speaking, we still see fairly high levels of uncertainty and a wait-and-see mentality with a lot of customers and in the markets. From a geographical point of view, it's also similar to the beginning of the year with higher uncertainty in North America compared to Europe that is somewhat more stable compared to last year. The uncertainty that we felt in the beginning of the year has, to a certain extent, intensified during the second quarter following on the Middle East situation, not least with the impact on volatile raw material prices, and I will come back to this in a little bit more detail later on. That being said, when we look at our own performance during the quarter, we see improvements in both of our largest business area, Rubber Compounding and Thermoplastic Compounding, while Engineered Products delivers a stable result. Our focus on maintaining and increasing our market share has been successful here in the quarter, and we see volume growth to our largest end customer segments, such as wire and cable, general industry and building and construction. Volume to the automotive end customer segment saw some growth on group level. So all in all, we delivered 8% organic growth, mainly driven by higher volumes. And it's especially positive to see double-digit organic growth of 12% with Thermoplastic Compounding, which is a clear growth area for us. During the quarter, we have also had to deal with increasing raw material prices, which we compensated for through price increases in both Europe and North America. So when we look at the overall Q2 performance, despite some continued negative FX effects, we delivered SEK 5.3 billion in sales, which is up 6% compared to the same period last year and improved adjusted EBIT at SEK 772 million, and consequently also higher adjusted EPS in the quarter. If we then go into the business areas, and we start with Rubber Compounding, on the markets where we operate, total volumes are still at historically low levels affected by the general lower customer demand that we see. We also see the captive volumes being at high levels, although we believe these volumes have peaked. When we look at our own performance in this area, we see that the work regarding protecting and also improving market share has been successful. And we've also been able to retain some captive volumes, not least in North America. And this has resulted in higher volumes for our larger end customer segments, such as general industry, wire and cable, building and construction. Automotive volumes are stable in the quarter for Rubber Compounding. The situation in the Middle East has created imbalances in the supply chain and also volatile raw material prices. This has certainly been a challenge during the last few months but the HEXPOL as an organization has handled these challenges very well and managed both supply and raw materials and implemented price increases when needed. So all in all, we achieved 7% organic growth in the quarter, and this is mainly driven by higher volumes. If we go into and look at Thermoplastic Compounding, delivered a very strong quarter. During the quarter, we see positive ramp-up effects from previously won projects, as well as volumes from new projects being started. And some of these projects are driven by end customers requiring higher levels of recycled content in products that we can deliver, which is positive for us. As with Rubber Compounding, Thermoplastic Compounding has been impacted by the Middle East situation when it comes to availability of raw materials and fluctuating raw material prices. Subsequently, price increases have been implemented also for Thermoplastic Compounding to compensate for higher raw material prices. And as I mentioned before, we delivered high organic growth of 12% in the quarter, and this is also driven by -- mostly driven by higher volumes. And if we then look at Engineered Products, we saw somewhat lower sales in the quarter, and this is primarily related to a couple of specific customers in Sweden. Last year, we saw record level sales and demand has been somewhat lower here in the first half of the year, but we do not see any major market changes in the underlying market, and we still deliver high profitability in the quarter. I will come back to this in more detail later on. If we then go over and look at the financial overview for the quarter, we delivered a sales of SEK 5.3 billion with an adjusted EBIT of just above SEK 770 million with a margin of 14.6%. The reason why we use adjusted EBIT stems from that we report the costs associated with the termination of the previous CEO as nonrecurring items. The cash flow in the quarter is somewhat below EBIT, but still solid at about SEK 680 million. We do see some negative impact from the Middle East situation on inventory levels, and I will come back to this in a little bit more detail later on. Net debt-to-EBITDA ratio at the end of the quarter at 1.17 and below what we had last year in the second quarter. And if we then look at how this compares to Q2 last year, sales are up 6%, partly offset by negative FX effects, and in fixed currency rates, sales are up 9%. And despite about SEK 20 million in negative FX effects, EBIT increased to SEK 772 million. EBIT margin for the quarter at 14.6%, which is down 50 basis points compared to last year, and this is affected by the relative increase in OpEx driven by increased IT investments, but also cost for more people resources needed to support growth going forward. Looking at sales in a little bit more detail for the group. As mentioned, fixed currency sales are up 9%, out of which 8% is organic growth. While the -- while acquisitions, which is Kabkom add another 1% in the quarter. And the organic sales increase is primarily driven by higher volumes. From a geographical perspective, North America showed 3% growth, but in fixed currency, the growth was 7%, while Europe delivered 10% growth or 11% in fixed currency. Asia was in line with last year levels. If we take a look at the development of EBIT. So despite the somewhat the SEK 21 million negative FX effect, adjusted EBIT increased to SEK 772 million. So at fixed rates, the increase was 5% in EBIT. If we then look at the drivers impacting EBIT compared to last year, the main driver is obviously the higher sales while the gross margin was on the same level as last year. And as I mentioned, we see an increase in OpEx, and this is primarily driven by higher IT-related costs and investments in people resources to drive growth. If we then go into a little bit more detail for the 3 business areas, starting with Rubber Compounding, it delivered sales of SEK 3.6 billion in the quarter, up 5% compared to last year or at fixed currency rate, the growth was 8%, of which organic growth was 7%. The high organic growth is driven by the higher volumes and acquiring Kabkom adds 1% in sales in the quarter. The higher volumes are seen both in North America and in Europe. And from an end customer perspective, we see growth with wire and cable, building construction and general industry and automotive sales were stable in the quarter. EBIT is negatively impacted by negative FX effects of SEK 20 million or 3%, but came in at SEK 546 million with a margin of 15.2% in the quarter. We then move over to Thermoplastic, delivered sales of SEK 1.3 billion in the quarter, up 9% compared to last year or at fixed rates, the growth was 12%, all of which is organic growth. Main part of this volume is driven by -- it's volume driven, but there are also some positive price mix effects in here. As with Rubber Compounding, the organic sales development was positively affected by volume, higher volumes to most end customer segments, not least, building construction and general industry but also automotive and medical saw growth. The drivers of the growth are increased volumes on existing business, but also ramp-up of projects that were agreed with customers before this quarter and now start to deliver volumes here in the quarter. Following on the higher sales, we saw a strong improvement in EBIT that increased 40% to SEK 155 million. And at the same time, we saw strong improvement in the EBIT margin would increase 280 basis points to 11.9% in the quarter. And then if we take a look at Engineered Products, we saw sales of SEK 386 million here in the quarter, which is below last year, SEK 402 million. And the decrease is primarily driven by somewhat lower demand from a couple of customers in Sweden. But as I mentioned before, this should be seen in light of record sales in the same period last year. A lower EBIT follow on the lower sales, but still high margins in line with last year above 18%. If we then lead the P&L and look at working capital, it is slightly higher than same period last year. This is driven by higher inventory, and this is what I referred to in the beginning. This is affected by the situation in the Middle East. In some cases, we've increased our inventory levels to ensure that we have access to the material that we need to produce. Also the higher raw material prices impact negatively. Depending on how the situation evolves going forward when it comes to raw material prices, we view this as temporary as we turn our inventory quite quickly during the year. There is no change in the underlying payment terms to customers and/or suppliers. If we then look at the cash flow, we delivered a solid cash flow of below SEK 700 million, where depreciation and investments are balanced while the working capital is, as I mentioned, affected negatively by the inventory in the quarter. And then to finalize the financial view, we closed the quarter with a net debt of SEK 3.8 billion and a net debt-to-EBITDA ratio of 1.17, below last year. And all in all, we continue here at the end of second quarter to stand with a very strong financial position. And then if I can summarize the second quarter. It's a very strong quarter with high organic growth of 8%. The growth we see with both of our largest business areas. In the quarter, we worked intensively to protect and grow our market shares and we have also been able to win some capital volumes that has contributed to this growth. At the same time, it is a quarter impacted by the Middle East, which has resulted in supply challenges and higher raw materials. I think we've handled these challenges very well. We've been able to secure raw materials needed for us and we've implemented price increases when necessary. So all in all, when we summarize the second quarter, we deliver high sales and higher results, which we are quite proud of. And with that, I thank you for listening, and I hand over to Q&A.

[Operator Instructions] The next question comes from Henric Hintze from ABG Sundal Collier.

Peter, this is Henric. Yes. So first, I was just wondering a bit about the sequential price mix improvement you talked about. Is that sort of would you say a durable customer/product mix change? Or is there anything about the sort of raw material price swings driving this?

Henric, when we talk about the sequential price/mix improvement, it's primarily price increases that have been implemented. There is some possible mix, but it's primarily price.

Yes. And I mean, specifically in thermo plastics, where the margin was up quite a bit. How come that deferred from rubber?

Three -- well, two things that are similar and third one, which is a little bit more thermoplastic specific. We've implemented price increases in thermoplastics as well to compensate for the raw material price increases. We have a little bit positive mix effects, but also since we've seen higher volumes, they also cover more of the indirect fixed cost in production. So you also get some leverage when volumes go up.

Okay. And on that, maybe we saw OpEx come up quite a bit here. And you mentioned some things driving that. But would you say this is sort of the new base level? Or is it coming up more from here?

I don't see that we will increase much from this level, but we do have the increase, which is, as I mentioned, is primarily IT and staffing. But the [indiscernible] is not that we will increase from here.

Okay. And just finally, how come automotive volumes are flat in rubber, but up in thermoplastics?

No specific reason more than when we see thermoplastic, they have initiated more new products related to product launches. And those product -- I mean, automotive car models being launched where we've had higher volumes in the thermoplastic and that has had a bigger impact on thermoplastic component than rubber component.

The next question comes from Jakob Marken from SEB.

Peter, just a follow-up on the OpEx part. Can you provide some more detail. Is there any specific segments, geographies, business areas that you are investing in or seeing something special that we -- that the OpEx growth is weighted in?

Yes and no. When we look at the investment in people resources to facilitate growth, we have that across the business, I would say. Then some of those resource may differ from a market or a company or a geography, depending on their needs, but it's primarily salespeople and R&D resources. And when it comes to IT, we see a general uptick where we need to do. And then over time, that will be changed from a geographic point of view. Currently, it's more in the North America and then we will see that coming down and see more investments in other areas.

Okay. That's helpful. And then just a question on the M&A side. It seems like the rhetoric in the report is not similar to Q1. But have you seen any shift in the sort of M&A market or prices are willing to sell or anything on the M&A market that you can update us on?

I would say that the M&A market is quite similar to what we saw in the first quarter. And then we have discussions ongoing that we are intensifying.

The next question comes from Agnieszka Vilela from Nordea.

Peter, maybe starting with pricing. Could you help us and tell us how much did you increase prices year-on-year? Or what the impact was year-on-year in Q2? And given the volatility in the material prices, what should we expect in the coming quarters?

Thank you, Agnieszka. If I take your second question first, the simple answer is we are uncertain. During the second quarter, we saw raw material prices coming up. The forecast is that raw material prices should come down some going forward. But I have to admit, it changes almost daily on the exact development of the raw material prices depending on what happens in the Middle East. But the general forecast, and I can't say when it happens, is that raw material prices should come down. But difficult to answer whether it happens tomorrow or a month from now, it depends on how it develops in the Middle East. Then, if I take your first question regarding how much price increases have been implemented, I would say they are in the mid -- low mid single-digit growth.

Yes. Perfect. But just maybe a follow-up on the kind of outlook for your pricing into Q3, isn't there a lag that means that you already kind of know what you are implementing for Q3? And if so, is this kind of pricing element improving?

I mean when we go to customers with price changes, that is when we know a little bit more how raw material prices will develop. So we cannot and we will not go with daily fluctuations. So we will need to see a little bit more, have a little bit more time to see how raw material prices develop and then we will implement changes. So there is always a certain lag, if you call it that. We will need to see how raw material prices develop before we can go with the price changes.

Understood. And then maybe on volumes for the group, in general, I mean it was the second quarter with volumes growth for you sequentially or consecutive. What momentum do you see so far in Q3? Will this growth even accelerate? And then maybe kind of follow-up to that, you've seen some captive volumes returning to your business. Can you tell us what upside do you see to your sales if these captive volumes return to more normalized level?

Yes. We don't give a forecast or guidance on future performance. So I will shy away from commenting on Q3. When it comes to captive volumes, it's very much a question of if we can get customers to produce for them and deliver both service and quality time at a price, then we should be able to continue or grow capital volumes. But it's still a bit early days. So we will wait and see and come back to it in Q3 when we know how we perform.

And can you tell us how much of a kind of headwind it was for you in the, say, past 3 years on your growth?

Sorry, I didn't hear you.

Yes. If you could tell us how much kind of headwinds the more in-sourcing by customers was for your growth in the past 2, 3 years?

Depends on when you have the starting point, but has been significant, let's put it that away.

Yes. And then the last for me on Thermoplastics. I noticed that you had very strong growth in Europe in these reported numbers, plus 20% year-on-year. Anything out of ordinary driving it? Or it's just the fact that they are performing very well right now?

Performing very well, and it's related to when customer-specific projects are started and start to generate volume as well.

The next question comes from Carl Deijenberg from Carnegie.

Peter, could I ask first, I was maybe a little bit surprised on the statement on Slide 3. I mean I appreciate the comments on the sequential price improvement. But why are not prices higher year-on-year? I think you're stating here that they're on a similar level. Yes, what are the dynamics behind that? I thought it was definitely going to be higher year-on-year as well?