Hexpol AB

STO:HPOL B

Earnings Call Transcript 2022-Q1

[Operator]

Welcome to the HEXPOL Audiocast with Teleconference Q1 2021. [Operator Instructions] I'm handing over to CFO, Peter Rosen. Please go ahead with your meeting.

[Peter Rosén, executive]

Thank you and welcome to the presentation of the results for the first quarter of this year. Presenting today are Georg Brunstam, our CEO; and myself, Peter Rosen, as CFO. The agenda for today is to first give you a business update, then take you through the almaak acquisition and give you some more flavor on that, and then go through the financials and the focus areas for this year. We will finish with a Q&A session. And with that, I hand over the Georg, who will take you through the first parts of the agenda.

[Georg Brunstam, executive]

Thanks, Peter, and welcome, everybody. I will start on Page 4 in the presentation you can find on the webpage. And we are happy to report actually our best quarter ever so far in spite of a really challenging environment. We are never satisfied that it's quite a decent result given the circumstances. We had record sales, 36% up and a record quarterly result. We have strong sales in all regions and all product segments, and especially good in Americas. We are doing this in spite of lower automotive production. And as you know, from other side of the automotive, the light vehicle automotive production is lower in all markets except China in the quarter, and particularly lower in Europe. But all other segments are strong. And we also see a good proof of local organization and our business model. Our business model remains, and we have said this in many cases and we have proven it over many, many years. We do pass on all cost increases, raw material increases. And you can see this in the report that, that is exactly what we have been doing as well. So, business model strong, business model working, and business model executed in a reasonably good way. We had, in the quarter, substantial global supply issues. We have major price increases on raw material, and we have escalating energy prices. We do handle that, but of course, not these, but we do have. And also, I think it's important to say that the terrible invasion by the Russians in Ukraine is affecting us in Europe that we have no -- HEXPOL has no operations or business in or to Russia, Belarus and Ukraine. In the past, we had maybe some few million euros, and that is stopped since [ law ] in sales into Russia and Belarus and Ukraine. But all in all, no operations, no business and no employees in this tragic region. We also see our M&A agenda being executed again. We closed the almaak acquisition just after the Q1, and the acquisition is fully in line with our presented strategy in M&A and an earlier communicated strategy both in M&A and sustainability, and this fits nicely into the agenda. I will come back to the almaak acquisition a little bit later on. We do see the global challenges with shortages in semiconductor, transport and raw material issues and energy issues. We see that continuing. But as I said, we saw that in the quarter as well, and we handled it. We do have an advantage with our strong customer focus and also closeness to our customers and shorter supply chains, and that is strengthening us. And I must say, we are very flexible, and we are also on our toes to meet the expected increase in light vehicle production, which everybody is forecasting to come. And we are on our toes and we are flexible to handle that. I must also say that in the quarter, our strong American position with 50% or 55% of our business in Americas is actually a good thing for us when in Americas is performing quite good. If I turn to Page 5, you can see the 2 business areas on Compounding, which is the biggest, it's very similar comments to what I mentioned on the Group. And again, Americas performing nicely. We do see all the issues in all regions, however. But in all sectors outside of the automotive is strong. We also had a good quarter in Engineered Products and sales well above last year and the strong EBIT, and especially the HEXPOL Wheels business is performed well. We had a good sustainability agenda as well. And we have continued focus on that and the CO2 reduction by 75% by 2025. We have good progress and we are confident that we can meet the target. And we are also introducing new compounds based on bio-based materials and recycled materials. And also, the whole acquisition of almaak is really driven by sustainability as well. They have more than 78% or close to 80% of the material recylced. So strong focus on M&A and increased activity levels. And as before, if you turn to Page 6, you can see that we have a strong culture delivering. We are decentralized, we are coordinating and we are accountable and we do deliver on sustainable polymer applications. And we are preferred by many customers. If you then turn to Page 7, I can give you a little bit more details on the almaak acquisition, which is really driven by what we have said in the strategy that we want to establish a thermoplastic compounding platform in Europe. We have it in Americas, and now we got it with almaak in Europe as well. And in addition, it's a strong sustainability focus with close to 80% recycled engineered polymer compounds from almaak. It was privately owned by 2 gentlemen who are staying on with a 30% share and are going to continue to run the company as before but with added synergies being part of HEXPOL Group. The main market is in Germany, but 50% is outside of Germany, and the main end user segment is the German premium automotive end users. And as before, it's a same business normally goes through the Tier 1s before reaching the areas. Around EUR75 million in 2021 was turnover and a fairly good profitability in the company. And as I said, the founders are staying and there is a put and call option for the remaining shares. I'm quite happy it's fully in line with creating the European platform on highly advanced engineered polymer thermoplastic compounds in Europe and also with the high degree of recycling content. So I'm very happy it's a nice company and it will bring what we think.

[Peter Rosén, executive]

Very good. And if we then turn to Page 8 and look at the sales development during the quarter, as Georg mentioned, all the challenges that we saw during last year with the semiconductor shortages, local transportation issues and the raw material price increases continued during the quarter. And some of the challenges were actually further accentuated by the tragic war in Ukraine, [ especially its forward ] problems with some automotive customers in Europe with several production stops following the cable shortages at some of the automotive manufacturing Europe [Technical Difficulty] cable harnesses from Ukraine. But despite this, we increased our sales with 36% compared to same quarter last year. And of this increase, 20% came from organic growth, 6% came from the acquisitions that we did last year in Spain. And we also saw positive FX effects of about SEK 360 million, which resulted in the reported sales for the quarter of SEK 5.2 billion. And looking at the regional development, we saw strong sales growth in all regions, Europe partly due to acquisitions. And as Georg mentioned, we're especially satisfied with the performance in the Americas, and then also we saw growth in Asia. And if we then turn to Page 10 to look at the financial overview of the quarter, we delivered an operating profit of SEK 775 million, which is well above the same quarter last year. And it's actually the highest we've ever delivered in the quarter, which becomes even more notable considering all of these challenges that we faced. The margin came in at 15%, and that is negatively affected by the acquisitions that we did last year, [indiscernible] margin levels than other HEXPOL companies and the challenges related to raw material shortages and the pricing business related to that. Equity/asset ratio remains very high above 60% and the return on capital employed is at high 22.4% during the quarter. And if I then ask you to turn to Page 11. We look at the -- a little bit more on the financial highlights. As mentioned, we had the 36% sales growth to SEK 5.2 billion in the quarter and the high operating profit at SEK 775 million. So this is 10% above we did last year. And just a reminder, Q1 last year was also a very strong quarter. We still delivered 10% more than what we did then. At the same time, we saw the operating margin come down to 15%, partly due to the acquisitions that we did, but not least the raw material challenges. And a reminder that as you mentioned, we passed on price increases. And then we primarily passed on the absolute increase in the markets, not the relative order percentage increases. Everything else being equal, this will have a mathematical negative impact on the margin, but not on the profit in absolute terms, as you can see in this quarter. So it's quite logical that the margin comes down due to the price increases, but again, the profit does not as we pass on the cost increases. And if we turn to Page 12 and we look at the drivers behind the operating profits. We see that the increased sales gave a bit more than SEK 300 million, and they were partly offset by the lower gross margin because of the higher raw material prices. OpEx came in higher than last year, driven by negative FX effects, some higher inflation pressure and the acquisitions that came after Q1 last year. And if we then turn to Page 13 to look at the business area segment of HEXPOL Compounding. Compounding delivered sales of SEK 4.8 billion in the quarter, which is an increase also here of 36% compared to Q1 last year. And also here, the increase is driven by 20% organic growth and the acquisitions of VICOM and Unica that we did last year add another 7%. We saw sales improvement in most customer segments and all product areas. And as mentioned, especially [indiscernible] the strong development in the Americas. The operating profit came in at SEK 721 million, well above last year, where higher sales were offset by the lower margin driven by the acquisitions and the raw material price increases. And if we then turn to Page 14 to look at the Engineered Products segments, we saw sales increase with almost 30% to SEK 330 million for the quarter. Overall, very strong development, but especially so for HEXPOL Wheels that performed very well. Operating profit increased with 17% to SEK 54 million and offering very well above last year. But also here, we saw that the higher sales were offset by a lower margin following on the raw material cost increases. And if we then turn to Page 15 to look at the working capital development, we see an increased year-over-year both in absolute and relative terms, and this is driven by an increase of inventory levels. And due to the raw material shortages and [indiscernible] further, we've decided to purchase what we can in order to secure all orders we receive. So -- and this is something we purchased also during last year. But there is also a negative price effect as the value of the raw material goes up due to the price increases of raw materials. Underlying, we don't have any changes in the underlying payment terms with suppliers or customers. So this is purely driven by the decision to increase inventory levels. And then, if we turn to the cash flow on Page 16, we do see a soft cash flow in the quarter, and this comes as a direct consequence of the increase of inventory. If you look at the other factors impacting cash flow, the investment levels continue as one can expect to be below our depreciation levels. And what this all turns into, you can see on Page 17, where net debt remains very low at less than SEK900 million and that the net debt-to-EBITDA ratio continues to stand at a low 0.24. So we continue with a very strong financial position when we close the first quarter of this year.

[Georg Brunstam, executive]

Thanks, Peter. If you turn then to Page 18, I will sum up the quarter. And Peter has just described the strong financial position we have, which is, of course, very good. And as I said, we have the best quarter ever so far, and we are really simply happy with that given the extreme challenging environment. It's also a very strong increase from the quarter 4 results. And I also should say that quarter 1 last year was also a very good quarter. So we are up against a very good quarter and we are very much up against quarter 4 last year. And then, we are seeing that our business model is strong and working. We are passing on, we are executing the price increases we need and we do pass on everything we are getting. And then, it gives, of course, a mathematical effect on gross margin. Then on the EBIT, we do see the increase. We have a strong M&A agenda and we are executing on that. And I'm very happy to have the almaak company on board now since 1st of April. And we see good possibilities of a good M&A pipeline going forward. We are also executing on our sustainability agenda in a strong and good way, and we have good progress on our targets and particularly on the CO2 emission target, which is 75% reduction by 2025. And if you then turn to the last page, which is focus for 2022. And it's, of course, in these not past COVID days, it's there, and it's always a priority to handle the safety and health of our employees. And then we, of course, are on our toes to handle the volatility and demand and the challenges in global supply chains, including supply and pricing. And of course, the M&A activities are crucial and the further developments on our sustainability work is also crucial. And then, going forward, I'm sure you all know that we have a very strong presence in Americas and we see that as an advantage in the quarter and also, I think, going forward. We are also flexible and, of course, we are on our toes, as I said, to meet the increase in demand in light vehicle production and everybody seems to be predicting that light vehicle production will increase. So by that, I think we open for Q&A.

[Peter Rosén, executive]

Absolutely.

[Operator]

[Operator Instructions] And the first question is from Karl Bokvist, ABG.

[Karl Bokvist, analyst]

My first one is, if it would be possible for you, to give a bit of insights into the split between pricing and volumes perhaps at first for the Group. And then, if possible, if there were any particular product segments where you saw very good volume development as well.

[Georg Brunstam, executive]

If we start with, as you know, we don't communicate exact volume -- but if we -- and price effects. But we can say that in the quarter, volumes were flattish. And we saw, as you also can see from the financials, a fairly high price effect from price increases when we look on the Group level. And if we look at the product or the customer segments and product segments, the one customer segment that stems out being more volatile, that's the automotive related to both semiconductor shortages and the cable harnesses challenge that we saw for especially some of the European automotive manufacturers. All other customer segments perform well.

[Karl Bokvist, analyst]

All right.

[Georg Brunstam, executive]

And also, in those years, I would say that volumes are up.

[Karl Bokvist, analyst]

Okay. And then you, of course, mainly have an exposure towards Americas and Europe. But within Americas, we mainly read about COVID lockdowns in Asia and European automotive manufacturers being particularly hit now during the start of this year. But what can you say about your customer base in North America, mainly within automotive?

[Georg Brunstam, executive]

I think -- and I think as we commented as well earlier, we have a good performance in Americas in spite of the light vehicle production being down a bit there as well in the quarter. But we have a good performance there. We are executing well in Americas. And we have had an improvement program for a while in Americas, you know that. And I think we -- it's paying off right now. So, good development in Americas and more tricky in Europe with the light vehicle production. But in all regions, all other segments are good. And I think we have a good position in the market. And I see positively our competitiveness in the marketplace right now.

[Karl Bokvist, analyst]

Understood. My final one, if it is possible for you to give any comments on how you feel that supply constraints and the production rates of customers and so on progress here during April perhaps compared to March?

[Georg Brunstam, executive]

No, I mean, we never got -- we never comment the quarter we are in now. We don't do that. We don't do that, sorry.

[Karl Bokvist, analyst]

No, sorry. That's fully understood. If I may then, the suboptimal recipes, is that something that's mainly affecting overall productivity or something that's also affecting gross margin from a mix point of view?

[Georg Brunstam, executive]

It's actually both. And we do still have that in a big way still. I mean that's not changed. But we handle it, but there are of course effects from it, but we do handle it and we do service our customers, long-term is briefing. Any other questions? I don't think we were that clear

[Peter Rosén, executive]

Operator, are you still there? We don't hear this one.

[Operator]

I'm sorry, I was placed on mute from the system. Mr. Osterberg, Your line is now open.

[Gustav Österberg, analyst]

I have a couple of questions from my side. The first one is, sort of we continue to see a volatile operating environment here. And I was wondering whether you can share some more flavor on how that's impacting sort of the competitive environment. Are you able to take market share in an environment like this or does it sort of -- what are the main effect here? Because we continue to see a very challenging supply chain and raw material price increases for a long time now.

[Georg Brunstam, executive]

It's a very good question. And there are no statistics in our industry. So my comment is based on feelings and the information from the marketplace through our own organization. But that my feeling is strongly that we are very well positioned. We are close to our customers. We are experienced. We are flexible. We are also quite big in this industry, which means that we are absolutely not 3rd or 4th in line. We are 1st in line there every time. And then, we had lots of chemists working in, in collaboration, to change recipes to maneuver and we had 52 manufacturing units close to our customers. So, yes, I think we are in a good position and I'm quite optimistic about our competitiveness. But right now...

[Gustav Österberg, analyst]

Okay. And maybe then, a question for you, Peter. And good to see that the margin is still holding up so well despite all the challenges. Are there any negative impact still from the VICOM and Unica in terms of the negative mix?

[Peter Rosén, executive]

In a sense, yes, because they still run at lower margins than the rest of the HEXPOL companies. So, yes, there is still some negative impact from those 2 acquisitions.

[Gustav Österberg, analyst]

And just a follow-up there. Is that related to sort of the current market environment where it will be sort of more volume leverage or is that an effect on sort of integration or is it still ongoing and the long-term standing that they should sort of normalize over a couple of quarters.

[Peter Rosén, executive]

It's exactly as you say. It's an ongoing integration. It's moving in the right direction. But of course, it takes time to change pricing -- price management structure, which they had in the past. And then, I think, our price management is better and more data driven. So we are implementing that there as well. So, now it's improving that it takes some time. And some of Europe is also coupled with the energy surcharges. But having said all that, moving in the right direction but still, of course, dampening the margin.

[Gustav Österberg, analyst]

And then, just the final question on M&A. Sort of what are you seeing in terms of M&A activity in the market? I mean, it's good to see the acquisition of almaak adding to your product portfolio, but you still sort of have a quite low gearing. What is the current latest sort of read on the M&A environment?

[Georg Brunstam, executive]

No, I mean, I think, Peter and I have said quite a number of quarters as we have a good pipeline and we do intensify our efforts. And I think after opening up a bit more now, it's become easier to get to a transaction as well. So I'm quite -- actually quite optimistic on that. So we have a good pipeline and we are executing on that.

[Operator]

The next question is from Johan Dahl, Danske Bank.

[Johan Dahl, analyst]

You talked about sales exposure in this region, Russia, Belarus, et cetera. But can you just talk about on the sourcing side, if you see any elevated risk there for your ability to supply going forward carbon black or what have you from those regions?

[Georg Brunstam, executive]

Yes, it's a good question. And there are some elements in the polymer industry, and maybe particularly in the rubber industry coming from Russia. It's mainly coming from traders in Europe, stock-keeping traders. So it's not coming directly. But we do see that these traders distribution companies, I should say. They are having problems getting material, mainly carbon black out of Russia. And we have never been a big buyer of that in Americas. We buy actually nothing, we buy a bit in Europe. But we are step-by-step replacing that. But of course, that means that the market is short and then new prices are going up further.

[Johan Dahl, analyst]

Okay. Also on inventories, clearly your sales or produce on safety stock here in the quarter, should we view this is cost-plus model that has worked so well in the past, are you taking more of a position in the market right now, i.e. will that mean sort of slightly added incremental risk?

[Georg Brunstam, executive]

Yes, I see what you mean.

[Peter Rosén, executive]

No, there is no incremental risk. I mean, this is a raw material inventory levels. The raw materials have a very long shelf life. And if raw materials will become abundant, so there wouldn't be a risk and we would see a steady flow. Then we would just go back to normal purchasing patterns and then this inventory move out very quickly.

[Johan Dahl, analyst]

So you're pricing according to your cost of inventory, not according to any sort of market price?

[Peter Rosén, executive]

Sorry to take that again, Johan.

[Johan Dahl, analyst]

I think I understand if you're saying that it's no other risk, that's what I take. But also Sri Lanka, can you say anything there? What's the risk here of potential stops in production, et cetera?

[Georg Brunstam, executive]

It's also a good question. Now it's a small part of our turnover and business. But it's quite a difficult situation in Sri Lanka. Not so much for us. I mean, people are coming to work and they need to work, and they need to be paid and we are paying, of course. And then, we get the electricity and we also have -- bring foreign currency as we export basically everything we produce there out of the country. So, we are in a priority situation in the country, but the country is in a very difficult situation.

[Johan Dahl, analyst]

But production hasn't worked according to plan until now? Can I say that there?

[Georg Brunstam, executive]

Oh, absolutely, and right now as well.

[Operator]

The next question is from [ Xuli Qian, SEB ].

[Unknown Analyst]

Thank you very much for the presentation and for taking my question. I have a few questions and some guidance would be very appreciated. So my first question is input cost has no doubt been a large focus in order to understand your sensitivity to raw material costs. Would it be fair to assume that your raw materials represent around 60% of the cost of goods sold? Or what would you say to that?

[Georg Brunstam, executive]

That's an actual number that we don't comment on, because it's very much related to our business model and our own cost structure and competitive reasons. It's not a number that we disclose [indiscernible] more detail.

[Unknown Analyst]

No, I see. I see. My next question is regarding your transportation costs. And I'm curious about to what extent your local presence. Could you please provide us, for example, with some of your most important route?

[Peter Rosén, executive]

I mean, we are local to our customers and the normal supply for us is an overnight flooring shipments, a trucks shipment overnight from one of our facilities or even during the day from our facilities to the customers. So that's the distance we had in the majority of the business.

[Unknown Analyst]

And my last question is about the tax rate. How can we think about that? Looks to me like you had standard around 24%, a little bit lower during 2021 due to insurance payments. Is there anything that we should be cautious about that ahead?

[Peter Rosén, executive]

No, I think you're right. There were some bigger movements last year that impacted the tax rate. But I think if you look at the going forward, one shouldn't expect any major movements. So I think one can take a look at what we've done in the first quarter.

[Operator]

The next question is from Andres Castanos-Mollor, Berenberg.

[Andres Castanos-Mollor, analyst]

I would like to ask about the construction sector end market. How is it doing?

[Georg Brunstam, executive]

It has been very strong actually in all regions.

[Andres Castanos-Mollor, analyst]

That's great to hear. Also, I would like to hear your thoughts about U.S. and Europe in terms of outlook and of capital allocation. How do you feel about your footprint in those 2 places on what do you expect in terms of performance going forward?

[Georg Brunstam, executive]

I think if -- actually we are quite happy with that footprint we have. And particularly when we see the megatrends that everything is regionalized or even naturalized in terms of supply chains. So we are close to our customers and in all the big regions, and we are strong in the Americas region. It's 55% of our total. And then, that was a good quarter in Americas in quarter 1. So we're not unhappy with the footprint. On the capital allocation, I mean, we do our capital allocation when we need to invest to serve our customers. And then, in terms of M&A, we are keen to acquire in all regions.

[Andres Castanos-Mollor, analyst]

A couple of small clarifications, if I may. On Sri Lanka, I understand the manufacturing plants there mostly serve Engineered Products division, is that right?

[Georg Brunstam, executive]

Yes, I believe.

[Andres Castanos-Mollor, analyst]

And on almaak, you said how much percentage of its raw materials were sourced from recycled sources, sorry?

[Georg Brunstam, executive]

80%. Between 78% to 80%.

[Operator]

So far we have no further questions, I'll hand back to you, gentlemen.

[Georg Brunstam, executive]

Okay. Thank you very much, everybody, for listening in, and thank you for your questions. And we wish you a very good day. Take care. Bye.

[Peter Rosén, executive]

Thanks a lot. Bye from us.