Hexpol AB

STO:HPOL B

Earnings Call Transcript 2021-Q1

[Operator]

Hello, and welcome to HEXPOL AB Q1 Results. [Operator Instructions] Today, I am pleased to present CFO, Peter Rosén. Please go ahead with your meeting.

[Peter Rosén, Deputy CEO & CFO]

Dear all, welcome to this presentation of the results for the first quarter of this year. Presenting today are Georg Brunstam, our CEO; and myself, Peter Rosén, as CFO. The agenda for today is to first give you a business update to go through 2 themes for the day, M&A and sustainability, which will be followed by a financial overview and the focus areas for this year. And as you all know, we will finish off with a Q&A session. And with that being said, I hand over to Georg, who will take you through the first part of the agenda today.

[Georg Brunstam, President & CEO]

Yes. Hello. Good afternoon. I am happy to comment the quarter 1 results we just released. It's a good quarter for us. We are 20% up on EBIT. In fact it's our best quarter ever so far. We have had good sales and volume development in the quarter. We have had it on a structural lower cost base. We see strong recovery in all markets, all regions, all segments, basically. We have had quite a number of supply chain disturbances, both on our own end and also on the customer side. And we are absolutely handling them in a very good way. Don't forget that we are a big player in our segments, which means that we are, for sure, not low down on the priority list on the suppliers. And on the customer side, yes, we have, of course, delivered what we have promised. The demand and the recovery is good and strong in spite of this shortage among our customers. We do see some of them continuing into quarter 2. But we have handled them in a very good way in quarter 2. And then for sure, I mean, we are experienced in handling all these issues. And as I said, a strong player and a big player in our field. So we are handling those issues, although they are there. Good size development in all regions, America and Europe and especially in China, even stronger. We have -- of course, Peter will come back to that, quite big negative FX effects, both on top line and on EBIT. And in fact, we even had an organic sales growth in the quarter. Although our sales price per kilo ton are still quite a bit lower compared to a year ago. We see, however, the raw materials going up in a big way, particularly end of the quarter and now in quarter 2. We have, as you know, who has been following us for long, we have a strong business model, which do take care of the price adjustments. We have price adjustments monthly or the longest of quarterly. And we are -- and we're experienced in handling price changes, it's not the first time we are doing that, and our business model allows us to do that. But that goes for both up and down, as you know. That's why we have a lower sales price in the quarter '20 -- quarter 1 2021 versus quarter 1 2020.Regarding COVID, yes, things are still uncertain and things are still happening. We have from time-to-time local outbreaks, which we have to handle. It could be in a department or it could be in a company. We do handle that. We have been handling it all the time. We have an experienced and decentralized and empowered organization, and that really helps in these days.As I said, the cost savings are in place, and the absolute majority of them are structured. And all of this means, of course, that we delivered the best quarter ever and then, again, with a strong margin, which has been the case for the last 3 quarters. If we then turn page, into Page #5. I have some short comments on the different business areas and M&A. All in all, we updated our strategy some quarters ago, and we recently presented that also at the Capital Markets Day. And we are executing in -- and we're actually executing strongly on that updated strategy. And that one is included a very, very strong and increased customer focus. On the HEXPOL Compounding, we have had good volumes, strong volumes in all regions, good in Europe and good in -- especially good in China, but also quite okay in the Americas. We see the recovery in all segments, but particularly strong in the automotive segment. And automative is strong in all regions in the quarter. And as I said, the EBIT improvement, which is 19% on Compounding, is driven, of course, by good volume and good sales with a lower cost base. I'm quite happy with the performance in HEXPOL Engineered Products, flat sales versus last year, but hugely improved in operating profit. And the margin, quite in line with the group, which hasn't been the case historically.On the M&A side, I think we are executing along the strategy, and we made 2 acquisitions. One is closed and one is signed, waiting for normal regulatory approvals. But they are both completely in line with the M&A strategy. They are in our core areas, and I will come back to that. If I turn page to Page 6. As you know, we have a strong business culture. We updated our purpose recently, and we do actually create material difference in our business. We have an agile and very competent and experienced organization, and that is a good asset in terms of days when we have turmoil, both caused by the COVID, but also turmoil caused by raw materials and supply chain issues. And if we then turn to Page 7, we'll take a first look at how the things you have described has impacted sales. We delivered a total sales in the quarter of SEK 3.8 billion, where we see organic volume and sales growth. But this was offset by fairly strong negative FX effects, amounting to a little bit more than SEK 400 million or 11%. And all of this results in a sales development of negative 9%. But that, as mentioned, includes 1% organic growth and 1% from acquisitions. The negative FX effects that we see are primarily related to the U.S. borders. And looking a bit at the regional development, we saw higher sales in Europe and Asia, while Americas showed lower sales compared to last year, and this is, to a large extent, affected by the negative FX effects versus the dollar. If we then will take a deep dive in our M&A pipeline, if you turn to Page #9, you can see a slide, which is familiar to you. Those of you who attended the Capital Markets Day presentations, and this is a slide from that presentation. And this slide shows the positioning of our product segments, our product portfolio. And you can see the market description on our position and the growth opportunities.And then if we then include the M&A in this strategy, we see good growth opportunities in M&A. And if you turn the page, we showed a deep dive in one of these 6 segments, the Rubber Compounding. And here, you can see clearly that the 2 acquisitions we have done, they fit completely into this strategy. The VICOM acquisition, which is closed, is an acquisition which is directed into a fast-growing segment, the wire and cable, which is driven by the electrification. And the other one, which we have signed but not yet closed, just waiting normally, normal regulatory approvals that is Unica. That is directed into a strengthening of our position in South of Europe. And so 2 acquisitions completely in line with the strategy, and that's for a little bit different reasons between. And on the next page, 11, you can just see a short description of the VICOM, EUR 30 million in the Barcelona area just outside. We know both these companies since long. We have been working together with VICOM since some years. And Unica, which is in the northern region of Spain in Nevada, it's directed very much to the automotive industry, which is based in that area, in the developed area. And it's a slightly bigger company with EUR 40 million turnover in 2020. And both of them, we know very well, and they are nice, well-run companies, although with margins below HEXPOL's group margins. But good acquisitions in line with our strategy that for 2 different reasons. The next theme we are having today is our further increased focus on sustainability, and it is a continuous improvement based on a long history of transport -- transparent and comprehensive reporting. If you turn to next slide then, now you can see that we are increasing our ambitions and our targets. We have been doing this work for a long time and, as I said, being reporting transparently actually since 2007. But we are stepping up. And looking ahead, we have released targets that we will reduce our carbon footprint by 75% to 2025. And on the other side, we also are stepping up our work further to developing green products, products based on bio-based raw materials or recycled raw materials and then also quite a bit of circular materials. We are, since many, many years, committed to this that we are increasing our ambitions in this area.Another topic, if you turn page to #14, it's the EU taxonomy. It's a big talking point these days. And of course, we are involved in this, and we will also be included in the reporting as we are a larger company. There are many uncertainties yet on the definitions. And if you turn to Page 15, you can see that the definitions are not really clear in our segment debt, we know roughly or we think we know roughly, where they will end up. So we have, of course, classified our business according to the already shown sustainability objectives, and we have classified our business according to them. And the result of that preliminary assessment of classification, you can see on Page 16, where you can see when we are adding up our sales in these 6 different segments, they are adding up to 18%. And we think that is -- that figure is going north with where our customers are heading and where we are heading. But I must say, rules and criterias are not really ready yet. But we are on top of this, and we are involved, and this is our preliminary assessment of where we are.Thank you. And if I can then ask you to turn to Page 18, we will start to go through the financial overview. And as mentioned before, we delivered a very strong result and margin in the quarter despite negative FX effects on both sales and profits. And despite more than SEK 400 million negative effects on sales and some SEK 17 million negative FX effects on profit level compared to last year, we delivered an operating profit in the quarter of SEK 704 million with a margin of 18.5%. And this operating profit is the highest we have ever delivered in the quarter. And it also represents a 20% increase compared to last year, which we should keep in mind that last year was seen as a strong quarter, and we increased step up over 20%. And at the same time, we also see a strong equity asset ratio of 62% in the quarter. And taking a somewhat different view on it, if I can ask you to turn to Page 19. Looking at the development compared to the same quarter last year, we see that sales impacted by the FX effects dropped 9% to SEK 3.8 billion while, at the same time, operating profit increased 20% to about SEK 700 million and the margin increases with 30% to 18.5% in this quarter. And if I can ask you to turn page to Page 20, we'll take a look at where the improvement in operating profit comes from. And looking at the drivers, we see that the improvement is equally split between improved gross margin and lower OpEx. And the increased gross margin is the result of strong volume development and lower direct costs, including raw materials compared to last year.The lower OpEx is the result of the cost-saving programs that we launched during the first quarter last year, and which we subsequently stepped up when COVID-19 hit towards -- in the second quarter. And as you may recall, we started to see lower OpEx during the second quarter last year, which then improved further during the third quarter. And we have been on a new, lower and stable cost level since then, and that is also represented during this quarter. And if we turn page, Page 21, and we look at the development during the last 5 quarters. It's quite clear that the continuous volume improvement, combined with a lower cost base, translates into substantially higher levels of both operating profit and margin. In Q1 last year, we delivered operating profit of about SEK 587 million and a margin of 14.1%, which, as I mentioned, was seen as a fairly strong quarter at the time. We were then fully hit by COVID-19 during the second quarter when we saw volumes and sales dropping substantially, but we still delivered a margin of some 8%, partly supported by the OpEx savings. In Q3, when we saw volumes and sales starting to improve and we had lowered our cost base, we delivered profit of SEK 590 million and a margin of just below 18%. And since then, we've delivered 2 record quarters in absolute profits and with margins above 18%. And looking at the 3 last quarters, we have an average margin above 18%, something that we're fairly comfortable with. And going into our 2 business areas, we will see the same picture. So if I can ask you to turn to Page 22, looking at HEXPOL Compounding, we saw sales of SEK 3.5 billion in the quarter, which is 9% below same quarter last year, but this is driven by the negative FX effects. But at the same time, operating profit increased 19% to SEK 658 million, and the margin increased 30% to SEK 18.5 million. The sales volumes increased both versus last year and previous quarter, where we saw increased demand for most customer segments, even though automotive and building construction showed the largest improvements. And this picture is the same in all our regions. And if we then turn page and look at Engineered Products on Page 23, we see that sales were in line with last year at some SEK 260 million. But primarily due to the lower cost, operating profit increased with 40% to SEK 46 million and the margin improved to 17.6% from last year, 12.6%. And as Georg mentioned, Engineered Products is now close to the average of the HEXPOL Group. And leave the P&L and move over to Page 24 to take a look at the working capital, we saw an improvement year-over-year in absolute terms while, in relation to sales, working capital was on the same level as last year. The reason we see an increase versus previous quarter is that we have some inventory buildup and we have higher accounts receivables. The inventory buildup is the conscious decision based on the uncertainty currently regarding availability of raw materials, but also that we see price increases on raw materials. The higher accounts receivables is the effect of high sales during the latter part of the quarter. We do not have any changes in the underlying payment terms with suppliers or customers. And depending on the raw material situation going forward, we expect to see working capital coming down again.And if we then move over to Page 25, looking at the cash flow, we see that the strong EBIT is offset by the temporarily higher working capital, but the level of investment is still below depreciation. And this depreciation also includes a write-down related to the Jonesborough fire in the U.S. And if we then move over and look at our net debt position and financial position on Page 26, we see that the net debt continues to improve, despite the VICOM acquisition during the quarter and the somewhat lower cash flow in the quarter. And the net debt-to-EBITDA ratio strengthens further and now stands at 0.58. So we continue to strengthen in over the strong financial position here during this quarter.And if I then sum up, the quarter, and you just heard our strong financial position. But if I sum up the quarter, it is a quarter with strong sales on a lower cost base, and then that one was giving us the best quarter ever so far. Our strong margin at 18.5% has been there for a couple of quarters, 3 quarters in a row now. And we have had a quarter with good volumes, as I said, and we have had a quarter with supply chain issues for us and for our customers. But we have handled it on our end in a very, very good way, and we see these effects in quarter 2 as well. But we don't see them becoming worse, and we will continue to handle them in the same way as we have done before. We have experienced people, and we have strong positions in the marketplace, which helps. And our people are, as I said, agile, competent and experienced. Yes. All in all, a good quarter based on strong volume recovery and on a structurally lower cost base. If I then go to Page a 29 and just some focus points going forward. And of course, the biggest focus point is, of course, to handle the health and safety of our employees, not at least in these days. We see the strong recovery in many industries. And particularly, of course, with light vehicle production. And we need to strongly continue our strong execution on this. We have to manage the volatility, both in terms of pricing and demand. And for sure, there will be challenges going forward as they were in quarter 1. I don't see them worse. But we handle them, and we also have a business model, which is handling raw material price changes. And we are always continuing to evaluating our manufacturing footprint. And on the M&A side, we are active. We have a good pipeline. But it's, of course, a little bit more tricky to meet the M&A candidates in these days, but we hope that, that will change quickly. We also see not only raw material inflation, we see a general asset inflation and that is also reflected in the requested prices on M&A targets. We also see a further development on our sustainability work, along with our updated strategy. And again, execution of the updated strategy is our key point going forward. And by that, we conclude the presentation in itself and open up for questions.

[Operator]

[Operator Instructions] Our first question is from Viktor Trollsten from DNB.

[Viktor Trollsten, Analyst]

I think take them one-by-one. But firstly, just on raw material prices, that has increased during the quarter. You still maintained gross margin still flat quarter-over-quarter since you have managed to offset that on a sequential basis with price increases. Could you please quantify a sequential raw material headwind in Q1? And also what is your outlook for raw materials in the coming quarters?

[Georg Brunstam, President & CEO]

That is a very good question. I wish I knew because, I mean, that is a continuous moving target right now because we are constant -- we have had constant changes in quarter 1, and they're continuing in quarter 2. And they are different in terms of different raw material categories. So I don't have a specific figure for that. But our business model takes care of that. We have always worked according to our strong business model in terms of pricing. We adjust prices monthly or quarterly at the longest, and we do that up and down. And that's why we have kept our margins, of course. But then it takes a lot of work, and we have a lot of pricing discussions, of course. But we are firm, and our business model supports.

[Viktor Trollsten, Analyst]

Okay. No, that's a clear answer. But just to clarify, it sounds like when I look at synthetic rubber, for example, that was up 2% sequentially in Q1. Going forward, it looks to be still be on that level. So it sounds like you're confident that you should be able to maintain the current gross margin. Is that correct?

[Georg Brunstam, President & CEO]

I mean, we don't give any forecast on gross margin going forward. But -- I mean, we are confident in our business model. We are confident in how we are conducting our pricing.

[Viktor Trollsten, Analyst]

Okay. That's fair enough. And just secondly, another question. I think adjusting for currency -- at least average currency for the quarter, you had organic decline of around 4% in North America in Q1. But you mentioned that volumes have developed positively during the quarter. Could you quantify the sort of run rate level you are at now in April versus Q1 in North America? How much is that up?

[Peter Rosén, Deputy CEO & CFO]

We don't go in and give specific details when it comes to volume. But when we look at -- for a total group, we see organic volume increase in the high single digits, and then that is partly offset by -- compared to last year, still at lower prices. But on a group level, we talked about high single-digit growth.

[Viktor Trollsten, Analyst]

And that is quarter-over-quarter, not year-over-year, just to be clear.

[Peter Rosén, Deputy CEO & CFO]

That is actually year-over-year. Yes, absolutely.

[Viktor Trollsten, Analyst]

Okay. And is it possible to say anything about quarter-over-quarter then? Because I think, yes, Q2 last year was obviously quite low from...

[Peter Rosén, Deputy CEO & CFO]

No, no. Last year was a good quarter for us. Quarter 1 2020 was a strong quarter for us.

[Viktor Trollsten, Analyst]

Yes. But Q2, yes, you're talking about the run rate now in April. Is that...

[Peter Rosén, Deputy CEO & CFO]

Well, we do not comment the run rate in April. But if you -- to answer your question partly, I mean, we had good volume development sequentially as well in Q4 last year. Q1 was above Q1 last year, and it was above the Q4 in terms of volume. And the volume development is stronger in Europe and especially strong in China, Asia, but particularly China. And it's also good in the Americas, but not as good as in the others.

[Viktor Trollsten, Analyst]

Okay. Okay. No, that's good. And just on the geographical split, previously, but it sounds like in North America in the front on the vaccine rollout, are you expecting that development to come up to what you're seeing in Europe and Asia now? Or what are you hearing from your customers now?

[Peter Rosén, Deputy CEO & CFO]

That's also very much of a forecast question. But to answer that question, I mean, we do see though that vaccination is rolled out very quickly. And I can just give you an example. I mean we just spoke to our Chairman, our Americas President, and of course, they are coming out to our factories. And they're getting vaccinated outside the work mills. So that is going very fast. And obviously, that is not a negative thing.

[Operator]

[Operator Instructions] Our next question is from Johan Dahl from Danske Bank.

[Johan Dahl, Analyst]

You seem to indicate sort of high single-digit organic volume growth. And also, it's in some growth to automotive clients. I just -- I think light vehicle production was actually slightly down in your main markets, Europe, U.S. In your view, sort of how do you bridge that difference between your volumes and what the underlying market stuff? Is it just easy comps? Or is something else happening there in your knowledge?

[Peter Rosén, Deputy CEO & CFO]

No, it's very good observation and analysis. I think we have a strong belief that we are putting our positions ahead right now. I mean, we are extremely focused on the customer side. And also, we have absolutely a very good advantage that we are local in our production. I mean the global supply chains, they are not working. And we are globally coordinated, but we are local in our business. And we benefit from that for sure, and I see that continuing.

[Johan Dahl, Analyst]

Okay. On the -- on those issues that you talked about and the supply chain has sort of transportation cost, et cetera, how much did that actually impact your earnings in the quarter, if at all?

[Georg Brunstam, President & CEO]

I think we are -- we have a short-term -- we have short supply chains. We have also very short delivery churns, and we are pretty quick in turning the business and the orders around in our factories. So we are pretty accurate in what we are promising our customers. And we have fulfilled all that, and we haven't missed in spite of a lot of turbulence. I'm not sure that everybody has done that in the marketplace and -- yes. Maybe, theoretically, we could have picked up more. Demand has been good in the quarter, and supply chain has hampered that, but it doesn't hamper what we were planning.

[Johan Dahl, Analyst]

Got you. And just finally on this raw material thing again. I was just looking at your working capital, I heard your comments there maybe half-half was sort of safety stock and half was inflation. But it just seems as if you'll be back here already, maybe in Q2 on higher prices year-over-year. Is that a fair assumption? Or is it entirely incorrect?

[Georg Brunstam, President & CEO]

You're 100% correct that the raw material prices are going up, and we are increasing our sales prices. So yes, that will happen.

[Operator]

[Operator Instructions] And our next question is from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, Analyst]

One question really. I think despite the possible effects of supply chain shortages and so on. Do you think that 2021, where we are now, we'll see a kind of regular year when we look at seasonality in terms of top line margins and cash flow profile and so on?

[Georg Brunstam, President & CEO]

Peter and I, we are looking at each other. That is a different question.

[Peter Rosén, Deputy CEO & CFO]

Do you want to start?

[Georg Brunstam, President & CEO]

It's a good question. I guess, I think there is no -- I mean, our seasonal pattern is anyhow not so big.

[Peter Rosén, Deputy CEO & CFO]

I think I can add to that. When it comes to the things that we can control, we don't see any differences between this year and, let's call it, a normal year, then it should be fairly similar. The uncertainty, of course, relies in what happens in the rest of the world and how that impacts. But when we look at what we can control, we are quite comfortable in managing all that.and shouldn't see big differences during the year.

[Karl Bokvist, Analyst]

Understood. And then just the final one. The production that was in, apologies for giving the name wrong, Jonesborough -- in the Jonesborough factory, has that been fully managed now? I think you commented on, I think, the last quarterly report, but are you producing all of the volumes that you used to have there in your other factories now?

[Georg Brunstam, President & CEO]

Yes. And unfortunately, it's a total loss of the plant. It's very, very sad. The only good thing, we had 1 operator injured and he is much, much better and he is back actually, out of the hospital and then back home. So that yes, we have moved everything we produced to our other facilities. And in all the terrible things, I mean, we've been lucky that it was, of course, happening in a period where we have excess capacity in many other places. And also, we have been lucky that we were maybe not so fast in adjusting our manufacturing footprint. I think you remember that we actually hinted that we will have another plant closure or even plant closures earlier if we go quite some quarters back. But we never did that, and that's actually helped us now. We're transferring the business to other units. And I mean, we have an extensive footprint in Americas where this fire took place, of course.

[Operator]

And we currently have no further audio questions. So I will hand -- we have another question from Douglas Lindahl from Kepler Cheuvreux.

[Douglas Lindahl, Analyst]

Just one from my side. On the VICOM business that you have consolidated now, what can you say in terms of synergy realization? And what are you working with?

[Georg Brunstam, President & CEO]

No, it's an interesting business, and we have integrated it together with our administratively and, management-wise, integrated it with our company -- the other company in Barcelona. On the market side, it's, of course, not integrated as it's directed to different segments, the wire and cable. But organizationally and structurally, it's included it and it's included in our reporting. It's included in our management structure. It's included in the organizational structure. So some synergies on the admin side, maybe less synergies on the customer side. Asset segment, we were very weak before. And this is more of a specialist demand thing.

[Operator]

And we currently have no further audio questions. I will hand over back to the speakers.

[Peter Rosén, Deputy CEO & CFO]

Okay. Thank you very much for listening to our presentation, and also thank you for your questions. And by that, we say thank you and wish you a very good afternoon. Take care.

[Georg Brunstam, President & CEO]

Thanks a lot. Take care. Stay safe.