Hexpol AB

STO:HPOL B

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to the HEXPOL Q1 presentation. [Operator Instructions] Now I will hand the conference over to the acting CEO and CFO, Peter Rosen. Please go ahead.

[Peter Rosén, executive]

Thank you. Welcome to the presentation of the first quarter of 2024. I'll first give you a general business update, then go through the financials, summarize the quarter and then, of course, we'll go into a Q&A session after the presentation.

So if I can ask you to turn to Page 4 of the presentation. We delivered a stable first quarter with strong margins. First quarter showed demand and sales demand and sales prices sequentially in line with what we saw during the last 6 months of 2023. We delivered sales of SEK 5.3 billion and EBIT of SEK 905 million and strong margin of 17% in the quarter.

The sales are below first quarter of last year, and this is mainly explained by higher demand in the beginning of last year as well as higher sales prices that were driven by the higher raw material prices that we had at that time. There are also fewer days of sales here in Q1 '24 compared to last year, which has some negative impact in the quarter as such. EBIT is at below Q1 last year, following on the lower sales. But the margin is up from 15.8% last year to 17%, in this quarter, is driven by a better product and price mix that we deliver. And we're looking a little bit more demand on sales during the quarter, we see a very similar picture compared to what we saw during the last 6 months of 2023, with stable development in this quarter across most end customer segments.

Compared to Q1 last year, demand is down for mainly the same end customer segments that we saw during the second half of 2023, where automotive is down some, not much, but building and construction and consumer-related products are down substantially. Sales prices are lower than the first quarter last year driven by lower prices, currently lower prices on raw materials. However, sequentially, sales prices are basically flat in local currency.

During last quarter of 2023, we announced the decision to consolidate our operations in California and close 1 out of 2 factors and move over the volume to the remaining factory since we can service all customers from the remaining site. We took the cost for that move in 2023 since the work started then and it is expected to be completed according to plan by the end of this summer coming up here.

In the same quarter, the acquisition of Star Thermoplastics was announced and the integration is ongoing, and it follows plan as well. The work on sustainability continues with development of products and discussions with our customers. And also in line with our focus on sustainability, we have invested in a delocalization line here in Europe, which is expected to be up and running by the end of 2024. And basically, what we will do is that we will transform cured rubber parts into uncured state again through a mechanical process. And previously, rubber waste has being used mainly as a filler in low-quality applications. But with this process, we can keep it in circulation and reduce the demand for virgin materials also in more advanced compounds.

If I can ask you to turn to Page 5. Looking at M&A, we have a plan that we continue to work on, and we certainly have the financial resources to do more acquisitions. So this is something that will -- where we will maintain a very high focus.

If we then move over to HEXPOL Compounding, as mentioned, demand and sales were sequentially very similar to what we saw during the second half of 2023, and that is the same picture across most end customer segments. But compared to Q1 '23, demand and sales are down somewhat for automotive, but more so for building and construction as well as for consumer-related products. Prices for compounding are sequentially flat in local currency, but they are down compared to Q1 '23. And as you may recall, when it comes to prices, we peaked in Q4 '22, Q1 '23, and then prices started to come down during the second quarter of 2023. So we meet the highest level when it comes to pricing.

Stable supply raw materials, supply chains work well, no disturbances. And overall, for component, we deliver good EBIT and further improve margins for that segment. Engineered Products delivered sales in line with last year. Just keep in mind, last year was a very strong year. So we're very satisfied with these numbers and EBIT basically in line with last year's levels as well.

If I can then ask you to turn to Page 7 to the business model. I know we mentioned it before, but I will continue to do highlight the key aspect of price management in our business model. It is key for us not only when raw material prices move upwards, but also when they decrease, as we saw during the last year. We also look at our cost structure to see if and where we can improve. And one part of that is to continuously review our manufacturing footprint. And that's why we took the decision at the end of last year to consolidate our operations in California from two sites to one site.

And if I can then ask you to turn to Page 8, looking at the sales development. We delivered a sales of SEK 5.3 billion, which is down some 11% compared to the same period last year. Organic sales are down 12% in the quarter, while the acquisition of Star added 1% in sales. And basically, there are no FX effects in the quarter as the SEK is quite stable compared to where we were 1 year ago.

Sales to automotive-related customers in total are down some driven by a little bit lower production of light vehicles in the quarter. Fully on lower demand, sales to build and construction as well as consumer products are down compared to last year. And as I mentioned, the lower sales during the quarter are also affected by fewer days of sales in the first quarter of '24. And this is important because, yes, we don't produce to an order book but to direct confirmed orders, number of days in the period is very important for us. Exist orders are not placed and we do not produce and we do not sell. We do not have an order book that we can produce to.

In this quarter, sales prices are down compared to last year, and this lowers our sales amount but has no impact on the EBIT in absolute terms, everything else being equal. And if we look at the organic sales, the lower sales are basically equally driven by lower volume and lower sales price. So roughly half and half is volume and sales price when it comes to the organic sales developing.

And if I can ask you to turn to Page 10 for the financial overview. We delivered an EBIT of SEK 905 million during the quarter, with a margin of 17%, which is 120 basis points above last year. And that's primarily driven by better product and price mix. And it's also in line with what we did during the second half of 2023. So no change there. Equity asset ratio remains high at 66%, and return on capital is also at high 18.8%.

Cash flow was weak in the quarter. This is normal for us, and it's driven by high accounts receivables at the end of the quarter compared to where we started. It's not driven by any changes in the underlying terms and conditions. But rather that we open up the year with a very low level of accounts receivables. You may remember that Q4 2023, we delivered SEK 1.4 billion in cash flow and one part of that was low accounts receivables. So that's where we start this year. So this is quite normal for us in the first quarter.

if I may ask you to turn to Page 11. I just look at numbers a little bit different. Sales are down 11% to SEK 5.3 billion, and majority of this is organic sales. EBIT is down a little bit, 4% to SEK 905 million at the same -- and at the same time, we see an increase of 8% when it comes to operating margin from 15.8% to 17%.

And if I can ask you to turn to Page 12, looking at the development of the operating profit. We see that the negative impact from lower sales is basically offset by the higher gross margin. And the lower OpEx in the quarter. And the lower OpEx is down compared to last year, driven by very strict cost control.

If I can ask you to turn to Page 13, looking at HEXPOL Compounding. HEXPOL Compounding delivered sales of SEK 4.9 billion in the quarter, which is 12% below first quarter last year. And as mentioned before, the lower sales are driven by lower demand from building, construction and consumer-related products, and also somewhat lower automotive combined with fewer days of sales and lower sales prices here in the first quarter of this year.

Operating profit came in at SEK 837 million with a strong margin improvement moving up 9% to 16.9% in this quarter.

And if I can ask you to turn to Page 14, looking at Engineered Products. Sales for the segment came in line with last year at SEK 373 million. Operating profit at SEK 68 million, which is somewhat below last year, basically in line. And the same thing goes for the margin, which is down a little bit, not driven by anything changes. It's just smaller items affecting this segment in this quarter.

And if I can then ask you to turn to Page 15, looking at the working capital development. We can see that working capital is in line with Q1 '23 numbers. while it's up versus Q4 of last year. And as I mentioned before, this is primarily driven by development of accounts receivables, and it's a normal pattern for us here in the first quarter. There is no change to underlying payment terms when it comes to receivables and payables. Also in the quarter, inventories is basically stable and flat.

And if I can then ask you to turn to Page 16, looking at the cash flow. We delivered a cash flow of SEK 100 million, where EBITDA is offset by the growth in working capital or more precisely the accounts receivables. And that's normally what we see in the first quarter of the year.

And then if I can ask you to turn to Page 17, looking at net debt. Net debt decreased further. And at the end of Q1 stands at SEK 1.5 billion with a net debt-to-EBITDA ratio of low 0.36. So we closed the first quarter with a very strong financial position.

And then on Page 18, just to summarize the quarter. It's a stable beginning of the year with an EBIT of SEK 905 million and then an improved EBIT margin of 17% compared to last year, sequentially stable demand seen across most end customer segments. Compared to Q1 '23, we see lower demand from building and construction and consumer-related products that has negative impact on organic sales development. [indiscernible] also fewer days of sales had a negative impact on sales in this quarter as did the lower sales prices driven by lower raw material prices.

Our work on sustainability continues both in product development, our own footprint. And when looking at the M&A agenda. So all in all, a stable first quarter with good EBIT at SEK 905 million and a high EBIT margin of 17%. And with that, I conclude the presentation in itself, and I hand over to Q&A.

[Operator]

[Operator Instructions] The next question comes from Julia Utbult from SEB.

[Julia Utbult, analyst]

Thank you very much. Julia Utbult with SEB. I have two questions to start with. And the first one is that we saw continued strong EBIT margin in the quarter from positive mix. So could we have more color on whether this was something we could expect to persist or just normal volatility in the quarter?

[Peter Rosén, executive]

To be clear, I don't give any -- or we don't give any guidance on future margins. But if we look at the margin that we have here of 17%. Sequentially, compared to Q3 and Q4 last year, we have a similar product and price mix. So there is no real development or change compared to the second half of last year. There is, however, a positive product mix movement when it comes to comparison to first quarter last year. One is that we see lower raw material prices, and that also has impact on lower sales prices and that also brings up the margin. And also, when it comes to the lower volume, some of the lower volume that we see is with products with lower margin for us.

So sequentially, no change when compared to Q1 last year, somewhat lower volume on lower -- a little bit lower margin products and then the price impact.

[Julia Utbult, analyst]

And then my second question is whether we could have more information on the product line plus the update there. So both the potential costs but also potential productivity impact?

[Peter Rosén, executive]

Sorry, just to understand you that what do you mean with the production line?

[Julia Utbult, analyst]

You mentioned an update of the production line that could facilitate a higher share of non-virgin materials.

[Peter Rosén, executive]

Oh, sorry, you mean the devulcanization line?

[Julia Utbult, analyst]

Yes.

[Peter Rosén, executive]

This is a new line that we took the decision to invest in. It will be based in Lesina Czechoslovakia. And what we will do is we will set up this production line. It will be completed by the end of this year. And what we will do is we will pick up post industrial rubber waste and through mechanical force like sheer and compression and also temperature too will break down that material and take it from cured rubber into uncured state again. And that means that we will be able to use that in new rubber compounds instead of using virgin material. So we haven't had this one before. This is new.

[Julia Utbult, analyst]

And did you also mention the cost of this new line?

[Peter Rosén, executive]

No, we didn't. But it's already been too lowest already in the CapEx.

[Operator]

The next question comes from Douglas Lindahl from DNB Markets.

[Douglas Lindahl, analyst]

A few questions from my side. On the OpEx side, very strong cost control here in the quarter. Is that a fair run rate, would you say throughout the year? Or -- and also, is this a result of the consolidation that you mentioned turning off there?

[Peter Rosén, executive]

It's not related to -- if you refer to consolidation in California, I know it's not related to that. We will start to see positive impact from that consolidation I would say, beginning of next year. It takes us time to move the recipes from one site to another, and that's why the savings will come later, it basically just takes calendar time to do it.

The lower OpEx is the result of very, very strict cost control. Over time, I think it might come up a little bit, but it's too early to say.

[Douglas Lindahl, analyst]

Okay. But it's fair to -- at least it's going to be seemingly operating below last year's levels throughout the year?

[Peter Rosén, executive]

I'm not something like a guy [indiscernible] full year number, but I can just conclude that, I mean, we delivered this quarter and will continue to be strict. But I think over time, it will probably come back up a little bit, yes.

[Douglas Lindahl, analyst]

Okay, fine. Moving on then to M&A. You clearly e that that's on top of your agenda continually. Any sort of commentary around valuation, what sort of targets you're looking at, what your pipeline is? And so we obviously hear that you're highly motivated, but what's going on?

[Peter Rosén, executive]

Yes, we're highly motivated, and we do have a very solid pipeline when it comes to M&A. And we are in a number of discussions, but it just takes time to conclude some of these acquisitions.

[Douglas Lindahl, analyst]

And are we -- I mean do you think that valuation is now aligned with expectations from a sales standpoint? Are you -- is that the...

[Peter Rosén, executive]

Our view is that the valuations are getting closer between buyer and seller.

[Operator]

The next question comes from Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

Just on the demand sort of how you describe demand, Peter, we talked a lot about construction and consumer being weak in the last 12 months. But currently, are you seeing sort of any growth pockets in terms of customer segments that are actually seeing some positive numbers there?

[Peter Rosén, executive]

John, do you mean within building construction or do you mean in general end customer segments?

[Johan Dahl, analyst]

I think in general, across all your segments, you reported flat on automotive, significantly down consumer construction. But I'm just trying to see if there is anything that's showing some underlying growth for you guys?

[Peter Rosén, executive]

If we look at it sequentially and we look at the last -- again, I'm using in the last 6 months of 2023 as a sort of reference point. We see a little bit ups and downs but there are no major movements at the moment. So we don't have the end customer segments that stand out if we look at the last -- the second half of last year. Then of course, the differences are bigger compared to Q1 because that's sort of when we -- after Q1 volumes started to come down or demand started to come down. So no, I would say, no big movements.

[Johan Dahl, analyst]

Got you. And just to hear your view on -- I mean, there's a lot of talk right now about Chinese is taking sort of global share. To what extent is that a topic for you guys that you look at? And how does it impact you? And is it something that you can sort of shed some light on how it may impact you looking forward?

[Peter Rosén, executive]

Yes. It both impacts and it doesn't. It depends very much on where the cars will be produced. If we look at it, in general, as long as we can supply to the Tier 1s that in turn supply to the OEMs that produce the cars, then for us, it doesn't matter whether it's a Chinese manufacturer or German or American manufacturer. So as long as there's access to the Tier 1s that supply to do so OEMs, the origin of the OEM has a limited impact on us. So -- but if Chinese produced cars would only export out of China, and not produced in Mexico or U.S. or Europe, and they take a bigger market share, then that could in the long run impact.

[Johan Dahl, analyst]

Has it been a headwind for you guys so far in your judgment or...

[Peter Rosén, executive]

I wouldn't say so, no.

[Johan Dahl, analyst]

All right. On the raw mats, I think you're fairly clear on the stability you're describing there. At what time do we reach an inflection point there? Are you going from sort of headwind to tailwind on organic growth, if you see my question, is it...

[Peter Rosén, executive]

Yes, you mean compared to last year or...

[Johan Dahl, analyst]

Compared to last year, assuming stable prices from now.

[Peter Rosén, executive]

I mean if we look at 2023, we peaked in Q1 with prices. They started to come down at the end of Q1 last year and also through Q2. And in Q3 and Q4, they were stable. So we peaked in Q1 and they started to come down in second quarter and then they were stable in the second half.

[Operator]

The next question comes from Andres Castanos from Berenberg.

[Operator Instructions] The next question comes from Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

Just a follow up on the test facility for devulcanization. Is that a part of a sort of a bigger project within HEXPOL and our sort of plans in the long term starting to take shape? How you will sort of improve the supply of recycled material and how the sort of the whole business case looks as you migrate towards recycling? I'm just trying to understand the relevance of this small project you're doing now in the Czech Republic.

[Peter Rosén, executive]

Yes, I didn't hear the beginning of the question. But I think the gist of the question is, how does this investment fit into the sustainability work for HEXPOL. And if that is the question, I mean, we've taken the decision -- rubber is the most complex part to recycle materials. It's easier within TP and TPE. And we also have companies that do that, for example almaak. But we've decided to invest in this to see what we can do to get also recycled materials within rubber. And this is a first step, and we need to do -- take this first and then evaluate how it works.

But I mean our ambition is to be able to recycle more of the rubber compounds as well. But we will need to do this first and then assess the effect of it once we're up and running towards the end of this year.

[Johan Dahl, analyst]

Understand. And what sort of time frame are we talking about until you're able to sort of specify how you will commercialize this and sort of the whole business case around it. Is that a 2 years out there?

[Peter Rosén, executive]

No. I mean, the line will be up and running end of the year. And for us, that means that we will be able to generate recycled rubber that we can use in our product and in our compounds. So at the end of the year, we will use those recycled rubber materials.

[Operator]

The next question comes from Andres Castanos from Berenberg.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Peter Rosén, executive]

Thank you, everyone, for listening in and also posting questions. And I wish you a very nice Friday weekend when you get that first. Thank you. Take care.