HEXPOL AB (publ) (HPOLB) Earnings Call Transcript

Welcome to the HEXPOL Q3 presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Henrik Elmin; and CFO, Peter Rosen. Please go ahead.

Thank you, and thank you all for listening to this presentation about the Q3 2026 report for HEXPOL. I will start Henrik Elmin CEO, and I'm here with Peter Rosen, CFO. So we will use the slide deck from our web page as guidance for the presentation. But before we start, I would like to say that I'm very excited to be the CEO of HEXPOL since first of August. I'm really looking forward to lead HEXPOL on this exciting growth journey. And after the summary, but before the Q&A, I will also share some short reflections after my first 2 months on the job. So let's go to the agenda slide. We will comment on the overall group results, go through the 3 business areas. Then Peter will go through the financials. And after a summary, we will open up for Q&A. Let's start with an overview. If we look at the right side of this page, we had another strong quarter with 12% organic growth. Very nice to see that all business areas grew versus last year. Currency added 1% and especially the Thermoplastics Compounding business area had a quarter with strong growth. And adjusted EBIT came in on a good level at SEK 723 million 5% above last year. The adjusted relative EBIT margin came in at 13.6%, somewhat lower than last year. And this is actually mainly coming from the Rubber Compounding business area, and I will come back to that. Then also the reason for the adjustment on EBIT is a onetime cost for changes in the management team that was announced at the end of July. If we look at volume and prices, our organic growth is driven by both volume and increased prices. We saw volume growth in Wire and Cable industry, general industrial segment, but also automotive saw some volume increase. If we take the prices on raw materials, they stayed on a high level. And the situation is very -- still very volatile when it comes to raw material pricing. But our teams have handled this again with -- in a very good way. And in general, we can say we have compensated with price increases to customers for the higher raw material prices versus last year. Our average sales price increased sequentially and also versus last year. If we then take the markets on the left here, on average, if you look at the global market, we see a similar level as last quarter. But if we go deeper, the market in North America was a bit more stable, while Europe is more challenging but it differs very much across industry segment. For example, wire and cable industry is growing due to the trends, increased energy demand, electrification and data centers while other industries are on a lower level. The situation for the raw material supply chain remains volatile, but we see no major interruptions in our deliveries. So if we then go to the next slide and we look at Rubber Compounding, our biggest business area, good growth organically, 9%. Adjusted EBIT, SEK 483 million, which is somewhat lower than last year. And in general, we can say that the whole market is still on a relatively low level. When it comes to these captive volumes, as we call it, this is when the customers does the compounding internally, we can say that we still don't see many new investments in captive capacity. So we don't expect that the captive share will increase long term. However, there is still a general overcapacity in the rubber compounding industry. For us, we saw good progress on winning market share in North America. Average sales prices were higher sequentially versus last year. And on the margin side, we have a lower adjusted EBIT margin versus last year. Two main reasons. We are investing in growth and efficiency. Increased OpEx linked to that, but also some specific new lower-margin contracts came in North America. And here, we will focus on improving the profit. 19% organic growth for the Thermoplastic business area, second consecutive quarter with high organic growth. Here, volume is driven by wire and cable, automotive, building and construction, medical, also general industrial. So quite across the board. EBIT came in at SEK 157 million, which is 31% higher than last year. I will also come back to that, but 2 very exciting acquisitions since the last quarterly report. So if we look at Engineered Products, performed very well with organic sales growth of 10%. And good improvements on EBIT for the quarter at SEK 83 million, and this is 30% higher than last year. The Wheels business performed very well, especially in China. The gasket and seals demand is somewhat lower for gaskets for plate heat exchangers right now, but long-term trends support future growth. So if we then go to Slide 7. So we have 2 very exciting acquisitions since last quarter. First, on the left side, we have VIPA, which is the leading thermoplastic compounder for wire and cable industry in Italy. And this fits very well into our thermoplastic compounding area and adds substantial size to the business area with EUR 76 million revenues and also good profitability. Vipa operates in an attractive growing segment, wire and cable, and it's really -- the growth is really driven by electrification and increased energy demand. So Vipa is part of HEXPOL then since October 1. Then we have Symplast leading Turkish specialist compounder, also very strategic to our thermoplastic business area. Symplast specializes on so-called TPE and TPV compounds. And in other words, this means a type of polymer that is a little bit in between thermoplastics and rubber. So it fits really well strategically in our portfolio. And Symplast has the very broad customer base across segments. And here, closing is expected in Q1 2027. So with that, I hand over to Peter for the financials.

Thank you, Henrik. If we then look -- take a quick look at the quarter. As Henrik mentioned, and you've seen we delivered SEK 5.3 billion in the quarter in sales and we have an adjusted EBIT of SEK 723 million, given an EBIT margin of 13.6%. And as Henrik mentioned the adjustment to the EBIT from costs related to changes in the group management that was communicated at the end of July this summer. Cash flow in the quarter is solid at just shy of SEK 700 million, and adjusted earnings per share increased 8% compared to Q3 last year. And the net debt-to-EBITDA ratio stands at just about 1% below last year. So we closed the quarter with a very strong financial position. If we then take a look at the highlights of the quarter. Sales are up 13%, all of it basically driven by organic growth that we see in all the business areas, and we'll come back to this in a little bit more detail. EBIT increased to 5% to SEK 720 million. EBIT margin is down 110 basis points to 13.6%, and this is mainly affected by the relative increase in OpEx and this is impacted by increased investments in IT and digitalization, but also more people resources that we need to support further growth. And if we take a little bit more detail on the sales development, we see that the increased sales of 13% out of that 12% is organic growth, and we have minor effects there are no acquisitions, including in these quarterly numbers. And the organic sales development is driven both by higher volume in the quarter but also higher sales prices. And from a geographical perspective, we also saw growth in all areas. North America is up 15%; Europe, 10%; and Asia grew 16% and Asia is primarily driven by good sales of the Wheels segment for us. And if we then take a look at the EBIT drivers in the quarter, we have the 5% increase in EBIT to SEK 723 million and the driver of the higher EBIT is simply the higher sales, while gross margin is on the same level as other increase compared to Q3 last year. I just want to highlight that the OpEx are on the same level as the second quarter of this year. So it has not increased sequentially. It's just compared to same period last year that we see the increase. And if we then go into the 3 business areas in a little bit more detail. Rubber Compounding, delivered sales of SEK 3.3 billion in the quarter, which is up 10% compared to last year. Out of the 10%, 9% is organic growth, and it's driven by a combination of higher volumes, but also higher sales prices. And in the quarter, the higher volumes were seen in North America, and from an end customer perspective, we saw growth primarily with wire and cable, general industry, while automotive showed basically stable sales and volumes. EBIT in the quarter for this segment came in at SEK 483 million with a margin of 14.5%, and this is where we see that lower results and margin are affected by these more resources that we need to support further growth and efficiency in the business. And if we then move over to Thermoplastic Compounding, delivered sales of SEK 1.6 billion in the quarter, which is up 20% compared to last year. And as for Rubber Compounding, basically, all of this growth is organic growth. And again, it's driven both by higher volumes and higher sales prices that we see across the companies and geographies in the segment. And from an end customer perspective, sales was positively affected by higher volumes to most in the customer segments, not least building construction, so good growth as the general industry, automotive and not least, wire and cable. And the drivers that we see here are increased volumes to existing businesses, but also ramp-up of projects that have been agreed with customers before and they'll start to deliver higher volumes. And following on the higher sales, we also saw a strong improvement in EBIT that increased with 31% to just shy of SEK 160 million. And at the same time, we saw a strong improvement in the margin in itself, which increased 80 basis points to 10.0% for the quarter. And then if we look at Engineered Products, the last of our 3 segments, we saw sales of SEK 397 million in the quarter, which is up a fair amount compared to SEK 353 million last year. And the increase here was driven by high sales of the Wheels products. And as I mentioned, this is especially visible in Asia. A higher EBIT followed on the higher sales with further positive margin effects given a high EBIT margin of about 21% here in the quarter. So very strong performance from this segment in the quarter. And if we then leave the P&L for a moment and look at the working capital, it's slightly higher than the same period last year. And this is driven by higher inventory, and it's affected by the situation in the Middle East. In some cases, we've increased inventory levels to ensure we have access to all the material that we need but also the higher raw material prices impact negatively. Depending on how the situation evolves in the Middle East going forward, we view this as temporary as we turn our inventory quite quickly during a year. And this is basically exactly the same picture that we also had in the second quarter of this year. There are no changes in underlying payment terms. And then taking a look at the operative cash flow, delivered SEK 669 million in the quarter, where depreciation and investments are balanced while we had a small impact from changes in working capital. And this is inventory movements. And then to summarize the financial section here of the presentation. At the end of the quarter, we stand with a net debt of SEK 3.3 billion and a net debt-to-EBITDA ratio of just above 1 in which is below last year. So all in all, from a financial perspective, we continue to stand with a very strong financial position here at end of Q3. And with that being said, I hand over to Henrik to summarize the quarter.

Thank you, Peter. So to summarize a quarter with continued strong growth all business areas and geographies growing. I would highlight 19% organic growth in Thermoplastics, 5% increased EBIT on the adjusted level. And then I would say on the supply chain, we are managing to compensate for the volatile raw material market and not last at the end, 2 strategically important acquisitions. So before we go to the Q&A, since I am new as CEO, I just would like to share a couple of reflections after 2 months on the job. My first priority has been to get out in the market and meet the teams learn about the business, but also to understand the status where are we today. So I have met many of the great text pool teams, but also several customers, suppliers in U.S., Europe and China. And from all these meetings, I have a few reflections to share. One [indiscernible] it's known, of course, that HEXPOL is providing the polymer materials. But actually when you are out there, you see that it's much more than that. We work very closely together with customers to [indiscernible] but how we can help customers run their production machines with higher productivity. So we have many loyal customers where we are really a critical partner excuse me again. And then secondly, to be able to deliver this value, it is very much about people. It's a lot about competence, and we have many very experienced people that collaborate in teams, R&D, production, quality, purchasing, sales working together to find this best solution for customers. Then I have been on the Board of Directors for 3 years before taking on this role. So I'm familiar with the strategy laid out last year. And for me, the strategy remains the same. No major changes on the overall level. We are on the right track, and we need to focus on organic growth as a base, but also, there are lots of opportunities when it comes to M&A. It's a fragmented market. But strategy is only as good as its execution. And execution will be 1 of my focus areas. We have the right setup, the right resources to implement the strategy with speed. I think if we can gain speed, we will grow faster, and we can create more value. So with those short reflections, I think we can hand over for Q&A.

[Operator Instructions] The next question comes from Lara Mohtadi from ABG Sundal Collier.

Just a couple of questions from my end. Firstly, you had slightly higher OpEx year-on-year. You mentioned that it's roughly flat Q-on-Q. But should we sort of see this as the new run rate into 2027. How should we think about this?

Peter here. Yes, I think if you look at Q2 and you look at Q3, we're basically exactly the same OpEx levels. I think going forward, I think it's fair to assume in this range that this is the run rate, at least in the coming quarters.

Okay. Very clear. Also, I know that you don't usually quantify the volume price split, but could you just give some kind of indication in Q, you said the majority was volume.

Yes. We had 12% organic growth for group as a total. We saw both volume and price being in the mid-single digits, maybe a little bit more on the pricing side and a little bit less on the volume side, but in that range.

Okay. -- and also, Henrik, you mentioned some new lower margin contracts in rubber in North America. How large are these roughly share of rubber in North America volumes?

I don't have the exact share. But when it comes to the volume growth in North America, part of that is coming from these new contracts -- and as I mentioned, we are very happy to get that share, and we'll work on improving the margins going forward.

Okay. -- and you also mentioned that Europe is more challenging and rubber volumes fell, if I understand correct. Which segments are weaker is automotive as a part of that?

I think it's a very broad market, I would say, on the automotive side, it's relatively slow, no major change compared to last quarter. The area where we see more growth is linked to electrification and energy or wider and cable-related rubber projects. So it varies very much per industry, but we have a very broad base of different industries in rubber.

The next question comes from Jakob Marken from SEB.

Can you just help us with the split in the 3 segments. Is there anything that sticks out on volume versus price in the 3 segments?

No. No, it doesn't. It's similar development, both when it comes to the volume and pricing and to clarify, there's no additional price increases in the quarter, but it's the full quarter effect of price increases that we did during the second quarter. But the pattern picture is similar between the segments.

Yes. Perfect. And on that note, with the current prices and the raw mat prices -- would you expect a similar price effect in Q4? Or is there anything we should think about there?

I think there are a couple of components. One is depending on what happens with raw materials. So depending on right now, the view is that they will probably continue to be elevated at these current levels. If that changes, then we would also adjust pricing but otherwise pricing should be fairly stable sequentially.

Yes. Perfect. And on that, I mean, a bit big drop here in gross margin quarter-over-quarter. And if we look back, I mean, the last time prices rising, it was a similar pattern. Is there some prices that still lags -- or how do you view that?

No. Actually, there are 2 other explanations to that -- to your question. One is we almost always see a drop in gross margin going from second quarter into third quarter. And it's driven by customers closing down primarily in Europe. So our volumes almost almost come down from second quarter to third quarter, and we've seen that for numerous years and that gives us less cost coverage in production. So that's why we typically see a drop in gross margin. We saw exactly the same pattern last year. Actually exactly the same movement actually on the gross margin as we did this year. The second 1 is when we implement price increases, although it sounds counterintuitive, the gross margin in percentage actually goes down since we pass on the absolute increase in raw materials. So I would say that the gross margin decreased sequentially it's a seasonal pattern and also the mathematical effect of price increases.

Okay. All right. That's very clear. And then on the strong American growth, can you elaborate a bit more on the main drivers, capital volumes new automotive programs that you talked about before or if it's price hikes were -- what's the main driver for the outer growth.

On the rubber side, it is very much linked to both, you can say, share gains, but also what we call taking over captive volumes -- so it's convincing customers about the fact that we can do the job better and more efficiently than they can themselves or the competitive just can do. So nothing other than that. But we are really -- it's really great to see those volumes in a relatively flat market in rubber.

Perfect. And then the last question, I mean, if you can just help us a bit on how the profitability looks in the last acquisition of last you gave the revenue number, of course, but if you can help us with the profitability level.

Yes, both when it comes to Vipa and Symplast, both companies deliver profit margins above HEXPOL average.

Okay. Perfect. I'll get back in line. Thank you for questions. Thank you.

The next question comes from Agnieszka Vilela from Nordea.

I have a few questions. Maybe starting or coming back to the overhead costs. if you could be a bit more specific, we're investing really in your overheads. And also, I think Peter you mentioned that you are increasing the IT and digitalization cost there. Is it a kind of 1 time increase? Or will that cost be recurring?

Difficult to answer the last part. But if we break it down, the increases that we see, we do investments in IT, and that's to drive digitalization that we need but also improve internal efficiency. That goes into various ERP systems and support systems around that. These are onetime costs, yes, the incremental improvement will be onetime exactly where it will be down the line, it's more difficult to say. But I think it is fair to say that IT investments, whatever shape and form it takes, will continue going forward. The second category of the growth in OpEx is people primarily. We see -- we invested both in sales resources to have a better coverage of the customer landscape, but also in more R&D resources to improve our R&D efficiency. So those are basically the 2 or 3 categories, depending on how you view it.