Hexpol AB

STO:HPOL B

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and welcome to the HEXPOL First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Please note today's event is being recorded.

I'd now like to turn the conference over to Peter Rosen, CFO. Please go ahead, sir.

[Peter Rosén, executive]

Thank you, and welcome to the presentation of the first quarter of this year. Presenting today will be apart from myself, Georg Brunstam, our CEO. And the agenda for today is to first give you a business update, go through how we continue to execute the business model, including looking at sustainability and then go through the financials and the focus areas for the rest of the year, and we will finish with a Q&A session.

And with that, I hand over to Georg, who will take you through the first part of the agenda today.

[Georg Brunstam, executive]

Hi, everybody here. Very welcome to our call. If you look at Page 4, I will start to comment on that slide. We delivered another strong quarter, in fact, our best quarter ever. So a very strong start to the year. Good sales in all regions and product segments, and we see improved automotive sales, varying a bit low in some regions and customers, but overall improved sales.

We are continuing to be on top of our business model, and we are executing well. And price management is, as you know, a crucial part of our business model, and we are executing well there, too.

We have a good product and price mix in the quarter. And in fact, it's a record quarter at SEK 946 million compared to SEK 775 million last year. And we see a good improvement on our margin from Q4, actually, a very good improvement on the margin. And I'm happy with that one.

We still see continued uncertainty. We see good improvements in supply chains, both for ourselves and also for our customers. The availability of raw materials is improving for us. Some specialties are still problems. But overall, it's improving. We see good development in Americas. We see some uncertainty in Europe. In fact, high uncertainty in building and construction, particularly in building where we see lower sales overall and that is not a surprise to us. I think it's in many markets and many regions lower sales, but particularly in Europe in the building area.

We see lower raw material prices in quarter 1 versus quarter 4 and on specialized raw materials, it's still increasing, however. But we have a downturn on raw materials in quarter 1. We are continuing our strong, strong sustainability focus, and we connect that to our M&A agenda. And then recycling is a very big part of our strategy. And then today, it's around 18% of our polymer raw materials than they are coming from recycling materials. And that is a very strong, good development. In fact, I think it's some 80% up from last year.

On the sustainability side, we have also [indiscernible] signed and committed our science-based targets letter and then that has been accepted. So we are in that process as well. And the recent acquisition is McCann consolidated from December 1 and they are developing well as planned.

If you then turn to Page #5. I will comment a little bit on the 2 business areas and the comments on the group, they are very similar to the ones on non-compounding and so basically, no further comments on the export component than I had on the total comments, strong good development in Americas, lower volumes in building and construction and supply chain improvements and somewhat lower raw materials in the quarter versus the previous quarter, strong EBIT, improved margin.

Engineered Products had a good quarter and a very strong development in Asia and a strong EBIT and the good performance is continuing also in HEXPOL Engineered Products.

On the M&A side, we are focused, we are following our strategy. We see increased activity levels. However, maybe a little bit more tricky on the valuation for the time being. I can comment that more later, and I guess you have some questions around that.

The acquisitions we have done the last 2 years, they are now completely integrated except for McCann, which is still in process. They are both -- they are all integrated both in organization and in the geographical organization. And they are performing according to the integration plan, which now is closed.

We also had well attended, some of you might have been with us but it was a very well attended venue. Our Capital Markets Day in Amal, Sweden, where we focused on our business model, and we had a deep dive in the biggest part of our business, which is Americas, we actually flew in our President from Americas to Amal and he attended the meeting, and that was a very good meeting in our view. I hope you have felt the same. And we also had a deep dive in our sustainability agenda.

If I then turn page to #6. We -- you can see the culture house of HEXPOL, we had, as you know, a strong culture and then we have a strong execution culture and then -- and we are committed and we are close to customers, and we are working on making our customers sustainable and then we are entrepreneurial, and we are true very competent specialists. So that is our culture house, which I hope you have seen before.

And if you turn page, you will see our strong business model, which we are executing very well. Its core values in the middle and we are acting in a fragmented market with a lot of M&A opportunities, including synergies in them. And we are also on the left side, operating a strong sustainability agenda in it.

And then you can see the 4 parts with global presence where we benefit from shorter supply chains in a big way. We are local. We do coordinate also globally. We are flexible. We are batch-oriented. We are running a stop and start all the time, and we are good at that. And then we have very long and strong customer relations, high stickiness, a lot of testing and approvals needed from customers, but also from end users. And of course, the main thing for us is to develop customer solutions.

So a strong business model. I'm sure you have seen it before. We are executing well on it.

[Peter Rosén, executive]

And then if we turn to Page 8 and look at the sales development for the quarter. We saw growth for the quarter that was total was strong with an increase of 16% compared to the same quarter last year with good sales in all markets and all product areas. That being said, especially in America showed overall continued very good, strong development while -- and also the development for HEXPOL Engineered Products was strong during the quarter, not least in Asia. Sales to the automotive-related customers in total showed improvement, but it still varied from market to market and we see continued high uncertainty in Europe with lower sales to the building -- primarily building construction industry, but also to -- we also see that to some consumer-related end products.

Raw material prices are still higher than last year, but sequentially, we saw lower raw material prices but subsequently we saw lower raw material prices and subsequently also lower sales prices that has been a negative impact on our sales but not on gross profit. And all in all, we delivered sales of SEK 6 billion, which is an increase of 16% compared to the same quarter last year. And out of this increase, 7% came from the acquisitions of almaak and McCann. And then we also saw positive FX effect on top of that.

Organic sales growth was flat in the quarter, compared to the last year's quarter. And all markets and products areas showed good sales around the 16% growth, whether it's in the Americas, Europe or Asia; worth mentioning that part of the European growth is driven by the acquisitions that we did last year.

If we then turn to Page 10 and look at the financial overview for the quarter. As Georg mentioned, we delivered the best quarterly results ever with an EBIT of SEK 946 million which is an increase of 22% compared to last year. The margin came in at 15.8%, which is 80 basis points above last year, positively affected by better product mix and also price changes. And the margin also shows a 100 basis point sequential improvement compared to Q4 of last year.

So overall, we did see -- of our margins. In the quarter, we saw relatively high cost for the financial net but this is, to a large part, affected by negative FX effects, mainly related to Sri Lanka but also to certain amount in Mexico and roughly half of the financial net cost in the quarter is related to FX effects. The rest is just the cost of funding.

The equity asset ratio remains very high at 60% and the return on capital employed is still at a very high 19%. We delivered a good operating cash flow of about SEK 600 million, which is well above what we did same quarter last year where we were around SEK 100 million.

And then if we turn to Page 11 and look at the financial highlights. As mentioned before, we did see an increase of 16% of our sales to SEK 6 billion while the operating profit came in at SEK 946 million and well above what we did last year, which was also a strong quarter. And at the same time, we saw the operating margin increase to 15.8% following on both the mix effect but also price adjustments.

And it's worth mentioning, as we've done several points before that our margin will move with the price adjustments that we do, so when we pass on price increases, like we did in most of the last year, we passed on the absolute increase, not the percentage increase, which means that everything else being equal, this will have a mathematical negative impact on the margin but not on the profit in absolute terms. And vice versa, as we've seen in this quarter, where raw material prices are down and with lower prices, we see an improvement in our gross margin percentage. So please keep that in mind.

And if we then turn to Page 11 -- sorry, Page 12, and we look at the drivers of the operating profit for the quarter, we see that the increase in operating profit is mainly driven by higher sales but also by the higher gross margin that we saw in the quarter. And the higher sales and higher gross margin are partly offset by somewhat higher OpEx in the quarter. And OpEx is up compared to last year, driven by the acquisitions of almaak and McCann, but we also see negative FX effects on this line in the P&L and then there is an increase of the inflation, not with the [ salary ] inflation that in many countries take -- come into effect in the beginning of January of the -- in the new year.

And if we then turn to Page 13, and we look at HEXPOL Compounding business area, we delivered sales of SEK 5.6 billion in the quarter, which is an increase of 16% compared to Q1 last year. The increase is driven by the acquisitions of almaak and McCann that add about 7%, but also positive effects. And as mentioned before, for the group as well, we did see good sales development in all the markets and product areas.

And from an end customer segment perspective, we did see higher sales to automotive while other segments are primarily building and construction saw lower sales. The operating profit came in at SEK 873 million, which is well above last year, positively affected by the higher sales and the higher margin of that sales.

And if I can ask you to turn to Page 14 and we'll take look at Engineered Products. We saw that sales increased with 12% to about SEK 370 million, with overall strong performance in the area, but not least in Asia, where we saw a good development. Operating profit came in at SEK 73 million, and well above last year, driven by the higher sales, but also by the higher margin for the quarter, which was up to 19.6%.

And if we then turn to Page 15 and we take a look at the working capital. We see we do have higher working capital compared to last year in absolute terms, but this is driven by the acquisitions of almaak and McCann that together added SEK 340 million in working capital, so at the same time, working capital in relation to sales improved compared to last year.

Sequentially, compared to Q4 last year, we do see higher working capital, both in absolute terms and in relation to sales, but this is driven by relatively higher sales towards the end of the quarter, therefore driving up accounts receivables. There is no change in underlying payment terms compared to previous quarters and inventory is on the same level as it was in Q4 of last year.

And if we then turn to Page 16, and we take a look at the cash flow. We delivered a good cash flow of around SEK 600 million in the quarter, which is well above last year's SEK 100 million for the same period. The only item standing out here is the higher sales towards the end of the quarter that resulted in higher accounts receivables and therefore, working capital and that temporarily had a negative cash flow impact here in this quarter, but we will, of course, turn into cash flow in the coming quarters.

And then if we turn to Page 17, and we look at the net debt, the net debt stands at SEK 2.5 billion with a net debt-to-EBITDA ratio of 0.6. So all in all, we continue to stand with a very strong financial position, and this is after having done 2 acquisitions last year and also an extra dividend that we paid out last year. So all in all, a very strong financial position at the end of the first quarter of this year.

[Georg Brunstam, executive]

If we then turn to Page 18, I will just sum up the quarter very quickly. And again, we delivered a strong quarter, and then we actually delivered the best quarter ever by far. And we executed our strong business model well. We saw some improvements in the automotive sales, and we saw a good Americas -- good development in Americas, and we saw a not surprising bad development in the building and construction area, particularly in the building area.

We see supply chain improving for us and also for our customers. We have some bottlenecks on some specialty raw materials. We also see in the quarter versus quarter 4, that the raw material prices are going down. We also see that the sustainability focus is strong and then it's actually giving us good effects as well. We now have a recycling content on our polymer raw materials of 18%. And we have McCann being under integration and then the other acquisitions we did in 2022, 2021, we now have fully integrated and taking the synergies out in.

So all in all, a very strong quarter for us. And if you turn to Page 20, you can see the going-forward priorities and of course, the health and safety part is crucial. With the uncertainty prevailing, we have a strong focus on handling volatility, both up and down. And we are good at that.

We are batch manufacturers and we are close to our customers. And the current remaining challenges we need to manage. And the raw material price decrease, we need to handle as well in a clever price management way and we will continue to execute strongly on our business model, including active M&A, supported by a strong balance sheet, and we will have further development in our sustainability [indiscernible].

By that, I think Peter and I open up for questions and answers.

[Operator]

[Operator Instructions] Today's first question comes from Victor Hansen with Nordea.

[Victor Hansen, analyst]

Georg and Peter, a couple of questions from my side. Firstly, I'm wondering if you could tell us more about what products are driving the positive margin mix here in Q1?

[Georg Brunstam, executive]

I think it's an overall matter. It's not driven by any particularly particular products or regions. I think we have a good price management in all regions. Maybe, of course, the volume increase is helping in the automotive, that is not a structural thing, but it's more that is a better volume development in that area.

[Victor Hansen, analyst]

Yes. Understood. And then your SG&A was up quite a bit year-on-year and sequentially. Do you expect to get compensated for this on pricing further ahead?

[Georg Brunstam, executive]

Absolutely. I can comment that we are absolutely taking in the wage inflation and all other cost inflations in our pricing model. Peter, you can comment the figure.

[Peter Rosén, executive]

Yes. If we look at compared to last year, OpEx increase is driven by the 2 acquisitions, negative FX effects and then, as Georg mentioned, the inflation and not least the salary inflation. And if we look at the sequential increase, that is difficult to compare to Q4 because Q4 is a short quarter with a lot of holidays and vacations, which tend to bring down cost. But if you look at -- compared to Q3, which is a more better quarter to compare to, there is an increase of SEK 200 million from that quarter to this quarter, that's driven by the acquisition of McCann and then the primarily the salary inflation that takes comes into effect from first of January in a lot of countries where we are present.

[Georg Brunstam, executive]

We are absolutely not taking on any cost anywhere, rather the contrary. Then, of course, the salary inflation is there, and then we see that basically in every country.

[Victor Hansen, analyst]

Okay. Great. And then I was hoping you could tell us more about your M&A pipeline, perhaps is it similar to last year? Have you seen any changes? And then also on valuation the expectations among sellers, if you could comment something on that?

[Georg Brunstam, executive]

Yes, I can. The -- how should I say, our M&A agenda is unchanged, very focused and we know exactly what we are looking after. And we actually see more assets out there, but we see more difficulties in closing the deals right now due to the fact that valuations has gone down in general, but maybe not [ filtered ] through everywhere. And also we also see some uncertainties in the forecast for the targets.

But all in all, more things to look at, more opportunities, but maybe the other -- the valuations has to come through also in the private sector.

[Victor Hansen, analyst]

Yes, I understand. And a final question here from my side. I'm wondering if you have seen any benefit recently from the oil and gas segment here in the quarter in your backlog.

[Georg Brunstam, executive]

I mean the energy segment is strong for us. It's a good segment for us.

[Operator]

Our next question today comes from Julia Booked with SEB.

[Unknown Analyst]

I would like to start with a few questions on the recycled materials. Do you count those as the specialty materials that you also see increasing prices of and if so, do you also have less availability on those? Or how is the development going here?

[Georg Brunstam, executive]

Georg here. It's an extremely good question. It's one of our difficulties in our day-to-day struggle. And it's not a uniform picture at all, not even in countries or regions. I mean it varies a lot. And then recycled material tends to go up in price. And of course, we price that accordingly. That availability can be good, and it can also be very bad from time to time. So this varies and it takes a lot of focus, it takes a lot of work, and there is not a clear answer to your question, though. It's a question we work on hard every day. But there's more demand for recycled material in general.

[Unknown Analyst]

Understood. And given your relatively high share of recycled material in the polymers, would you say that you are gaining market share from this like that it's a clear path in your strategy or how is it impacting your gain share.

[Georg Brunstam, executive]

No, it's good for us. I mean, it's absolutely a trend and then we have a lot of projects and the requests on it and for sure, that is very positive for us to be successful in those products. And we are but we need to do more.

[Unknown Analyst]

Okay. Perfect. And then some questions on margins and price adjustments. Given your lead times and potential catch-up effect, do you think we can expect those high gross margins also for Q2? Or was this the piece to place?

[Peter Rosén, executive]

Good question, Julia. As you know, we don't give forecast for coming quarters. So we're not -- it will be a little bit difficult to answer that one. And it's also difficult to say whether this is the peak or not because what will happen is, of course, that we will move with the changes in the raw material prices. So if they continue down, then there will be further price adjustments down. And then everything else being equal, the margin percentage will go up, but I think we need to come in a little bit sort of in 3 years to see a more stable price development before we can answer that question.

[Georg Brunstam, executive]

I can add to that, As you know, we have no lag in our system. I mean we are pretty [ instant ], both up and down.

[Unknown Analyst]

Understood. And my last question is about the price and volume split. And also if you can specify the volume from Automotive and Building & Construction as those speak out on the positive and negative side?

[Peter Rosén, executive]

Yes. I mean, we don't report volumes per se. But if we look at from an end customer perspective, when it comes to Automotive, we did see higher sales and for volume. When it comes to Automotive volume, it's high single-digit volume growth in the quarter. And that high single-digit volume growth is offset by lower volumes for Building & Construction, primarily but also to consumer-related end products that are down.

[Unknown Analyst]

Okay. Is it possible to say if you had price increases or decreases at the next -- this quarter?

[Peter Rosén, executive]

We had price decreases this quarter compared to sequentially, we have price decreases, yes.

[Unknown Analyst]

Okay. And on a year-over-year basis?

[Peter Rosén, executive]

On a year-over-year -- so quarter-over-quarter, Q1 last year to Q1 this year, there are still price increases here. They are quite smaller, but still up compared to last year.

[Operator]

[Operator Instructions] Our next question today comes from Karl Bokvist with ABG.

[Karl Bokvist, analyst]

Thank you. Good afternoon, most questions have been answered, but I just wanted to follow up on a comment you made last quarter in terms of inventory adjustments among customers. Do you feel that this has now been, let's say, worked through among them? Or is it still an effect that you are seeing impacting your business?

[Georg Brunstam, executive]

We still see a bit of it but to a lower extent.

[Karl Bokvist, analyst]

Understood. And are there any particular end markets where people are more actively in working down inventory? I mean, a portfolio [indiscernible].

[Georg Brunstam, executive]

More consumer-related segments.

[Karl Bokvist, analyst]

Understood. And then just on -- I understand perhaps the seasonality with the quarter, but is it possible to say anything that you saw any kind of differences in sales activity throughout the quarter or now in early April?

[Georg Brunstam, executive]

No. I mean throughout the quarter, we didn't see any seasonality and changes. However, as Peter said, more working days. For example, in March, took the accounts receivable up, of course, but that is a normal pattern when there is more working days in the month.

[Karl Bokvist, analyst]

Understood. Then just finally, we hear a lot of data points from a lot of industrial companies regarding automotive, but you have also outlined your ambition to kind of, let's say, increase the amount of [indiscernible] in electric vehicles, et cetera. Do you feel that you're actively gaining those contracts on those platforms that are set into the market now for the coming years?

[Georg Brunstam, executive]

Absolutely. We are in that process, and it works well.

[Karl Bokvist, analyst]

Understood. That's all for me. And just to clarify that, sorry for going back on it. But if we say -- if we just think about it, 0% organic growth and just a slight support year-over-year. So just would it be fair to assume that volumes were down somewhat year-over-year?

[Peter Rosén, executive]

Yes, low single-digit volume and offset by a low single-digit price increase compared to last year.

[Operator]

Our next question comes from Andres Castanos-Mollor with Berenberg.

[Andres Castanos-Mollor, analyst]

Most have been asked, but I wanted to ask about the very high margins in [ Engineered ] Products. Is this still related with the FX and the situation in Sri Lanka or is this sustainable? And we will keep seeing high normalized margins here?

[Georg Brunstam, executive]

No, it's not related to the Sri Lanka effect. It's a good volume development is the base, good sales and then good project work and Asia is coming back. We see that here in Engineered Products. And also good demand from products in energy savings and materials handling.

[Andres Castanos-Mollor, analyst]

And then I was also wondering about your strategy ahead while other competitors also start cutting prices potentially aggressively. What would you do about that.

[Georg Brunstam, executive]

If customers are -- if competitors are price aggressive, we sell on our values. We are not price sellers, and then we have superior products in many cases. And then we are value sellers.

[Operator]

And our next question comes from Gustav Österberg with Carnegie.

[Gustav Österberg, analyst]

Just a final follow-up. If you could elaborate a bit on the M&A environment? And how your thoughts are going here? I mean you still despite the acquisitions and some extra payments in 2022, your leverage is down to low levels with the cash generation that you have, it should be possible to continue to be more aggressive on M&A. What's your current thinking in this environment that we have today?

[Georg Brunstam, executive]

Exactly what you're saying. We feel and think that there are more opportunities for us. However, I must say, particularly on the private sellers, it takes a little bit time for them to come down in the expectations of a multiple. I mean, when they have friends who sold last year at multiple x, they want the same this year, but that's not how the market looks like anymore.

So a little bit, how should I say, gap on the multiples right now, but more assets to look at and more opportunities. And then we have a strong balance sheet.

[Operator]

Ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to the management team for any closing remarks.

[Peter Rosén, executive]

Thank you, everybody, for listening in and also posting questions to us. We wish you a very nice Friday afternoon. Thanks from us.

[Georg Brunstam, executive]

Thanks a lot, everybody.

[Operator]

Thank you. This concludes today's conference call, and we thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.