Hexpol AB

STO:HPOL B

Earnings Call Transcript 2023-Q2

[Operator]

Good morning, and welcome to the HEXPOL Q2 2023 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Peter Rosen, CFO. Please go ahead.

[Peter Rosén, executive]

Thank you, and welcome to the presentation of the second quarter of 2023. 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 to go through how we continue to execute our business model and then go through the financials and summarize the quarter before we open up for Q&A.

And with that being said, I hand over to Georg, who will take you through the first parts of the -- of today's agenda.

[Georg Brunstam, executive]

Yes. Very welcome. If you turn to Page #4 in the presentation, I will make some comments on that. We delivered another strong quarter, in fact, a very strong quarter. It's in line with quarter 1, which was our best quarter ever in terms of EBIT. And it is the best quarter 2 ever for us so far. So a strong quarter in line with quarter 1. We improved, as expected, the margin that we improved it substantially to the 16.5%, which is a strong margin compared to last year's 14.8%. We also improved the margin substantially sequentially from Q1. We are confident in our business model, and we execute it in a good way for -- including price adjustments up and down. We have a good product and price mix in the quarter. And then we have a good Americas development. Strong cash flow generated, and the operating cash flow was more than SEK 1 billion, close to SEK 1.050 billion.

We have a positive development in the Automotive segment, as expected. And also as expected, we have substantially lower demand in most markets from building and construction, mainly from building, but also from construction. Maybe long-term construction will be helped by incentives like IRA in the Americas. But so far, very soft demand also in construction for us.

We had good sales improvements in automotive, but still it varies from brands to brands, markets to markets and models to models. We have lower sales, lower top line driven by, as you know, lower sales prices driven by lower prices on main raw materials.

Some raw materials, we do see still an uptick on, but the main ones are down and they're also sequentially down. The availability of raw material is improving, but on some specialties, there are still major issues. Our sustainability strategy is, as earlier communicated, very strong. We are on target to achieve our decreases on CO2 emissions. And we also have linked our M&A agenda to recycle the compounders. And we have a good progress in projects. We have a high number of projects, particularly to the automotive industry with recycled components. If you then turn page, I will quickly comment the 2 business areas. The comments I just made on HEXPOL Group is very similar on HEXPOL Compounding. And as I said, a good price and product mix and good development in Americas and a strong EBIT developed -- a strong EBIT and a strong EBIT development on EBIT margin.

Then substantially lower demand from building and construction and from producers of consumer products. Good development and improvements in Automotive. On HEXPOL Engineered Products, a good quarter again, but lower than previous quarter that's mainly affected by negative sales -- negative FX effects in Sri Lanka. The M&A activity is high, and we have high focus on it. There are many objects and opportunities, but it's slightly difficult to find agreement on price and forecast levels. But the activity is higher than before, and it's positive. The acquisitions we have done during the last years, they are now integrated, both in our organizations and also geographically. If you turn page to #6. You will see our culture house, and we are strong believers and we are executing well on the culture and the business model and we have a good culture in the company, and we have a stable and experienced people, and that's good in these or should I say these turbulent times.

If you turn page to # 7. You see our business model, which we executed in a very strong way. And importantly, it is the fragmented market which opens for M&A. In all markets, you see the sustainability where we have strong focus and strong targets and also our global presence helps now all the customers to shorten the supply chains, which they all want to do, and we have strong and long-term relations with our customers. It's high stickiness on [indiscernible].

[Peter Rosén, executive]

And if we turn to Page 8 and look at the sales development during the quarter, we delivered sales of about SEK 5.7 billion, which is in line with the same period last year. And organic sales were down 8%, while the acquisition of McCann added 2% in sales. In addition to this, we saw positive FX effects of some SEK 380 million. And as Georg mentioned, sales automotive-related customers in total showed improvement, but it still varies from market to market.

And following on the lower demand, sales to building and construction as well as to consumer-related products are down compared to the same period last year. Our sales process are down compared both to last year and to previous quarter this year following on the lower raw material prices that we've seen. And this lowers our sales amount, but everything else being equal, it has no impact on EBIT in absolute terms, and we'll come back to this one. And if I may ask you to turn to Page 10, and we'll take a look at the financial overview. As Georg mentioned, we delivered the best second quarterly result ever with an EBIT of SEK 945 million, which is an increase of 13% compared to same quarter last year. And this is also in line with the first quarter this year, which was our best quarter ever. At the same time, the margin came in at 16.5%, which is 170 basis points above last year, positively affected by good product and price mix. And as mentioned before, the lower sales prices had a positive impact on the margin. And at the same time, it's -- the margin is up 70 basis points compared to the first quarter this year. So overall, a very strong margin development. Financial net improved some versus the first quarter this year, but it's up versus last year driven by the -- primarily driven by the higher interest rates that we see. Equity/assets ratio remains high at 60% and return on capital employed is also higher, about 19%. And as Georg mentioned, we've delivered a very strong cash flow in the quarter of about SEK 1.050 billion, and that is up more than 60% compared to same period last year where we delivered about SEK 600 million in operative cash flow. And if I then ask you to turn to Page 11 and look at the just a different view. Sales at SEK 5.7 billion, which is more or less in line with the same quarter last year. At the same time, operating profit is up to SEK 945 million, an increase of 13%, and the margin increase is 11% up to 16.5% in total for the quarter. And I think we mention this on a regular basis, but I think it's worth mentioning again that our margin will move with the price adjustments that we do and opposite to what we've seen the last couple of years with increasing raw material prices, we now see somewhat lower prices. And when we pass on the price decreases, we pass on the absolute decreases and this has -- everything else being equal, has a positive mathematical impact on the margin, just to mention that. And if we then look at Page 12, and we look at the drivers of the increase in operating profit, we see the higher gross margin that drives the increase in EBIT for the period. OpEx is up somewhat compared to last year, and that's driven primarily by the acquisition of McCann and negative FX effects, but also some inflation. At the same time, OpEx is in line with first quarter of this year. So there is no change compared to where we started this year.

If we move over and we look at the 2 segments on Page 13 with HEXPOL Compounding. We delivered about SEK 5.4 billion in the quarter, which is in line with same quarter last year. And as mentioned before, we delivered higher sales to automotive segment, which was offset by lower sales to building and construction and consumer products. At the same time, operating profit came in at SEK 883 million, well above last year, positively affected by product and price mix, which also drives the higher operating margin, which is up 15% in the quarter. And then if we look at the Engineered Products on Page 14. Sales are up 3% to about SEK 370 million with overall strong performance, not Eastern Asia. Operating profit strong at SEK 62 million, but low than last year and also -- which is also the case for the margin. And this is fully driven by negative FX effects related to our Sri Lankan operations, where we've seen the Sri Lankan rupee strengthening versus primarily the U.S. dollar.

And then if we change focus and look at the balance sheet on Page 15. Working capital in absolute terms is in line with last year numbers, despite the acquisition of McCann. And sequentially, we do see some improvements. And working capital in relation to sales improved compared to last year. And underlying, there's no change in payment terms. And then if we move over and look at the cash flow for the quarter on Page 16. We delivered a very strong cash flow of about SEK 1.050 billion, which is above -- well above last year's numbers and it's driven by strong EBIT and improvement in working capital.

And then we can move over and look at Page 17 and the financial position, which is very strong. At the end of the quarter, net debt stands at SEK 2.9 billion with a net debt-to-EBITDA ratio of 0.7. So all in all, we continue to stand with a very strong financial position after the second quarter of this year.

And by that, I hand over to Georg.

[Georg Brunstam, executive]

So thanks, Peter. If I -- if we sum up and if I sum up the quarter 2, it's a very strong quarter. It's basically more or less exactly the EBIT we had in the record quarter-on-quarter 1. We have lower top line due to lower sales price due to lower raw material prices. And then we saw that continuing in the quarter 2 versus quarter 1. And we have a very strong margin and a strong margin improvement, 16.5% from -- coming from 14.8% a year ago. Very good cash flow and a very strong balance sheet and a lot of good potential M&A candidates, but a little bit tricky to [indiscernible] on both multiples and forecasts right now. But I guess that's a question on time. Then the sustainability agenda is, as earlier communicated, very strong. We have a strong focus on it, and we are coupling the M&A agenda to recycled compounds and companies who are having that. So by that, I think we open up for questions and answers, please?

[Operator]

[Operator Instructions] Your first question comes from Julia Utbult from SEB.

[Julia Utbult, analyst]

My first question is on the organic growth, which I assume was negative 7%. And I also assume that there was a decline in both volume and price. So I'm curious about which of those were more or if it was more like a 50-50 split?

[Peter Rosén, executive]

If we look -- Julia, it's Peter. If we look at the organic sales development, the 8% that we saw volume compared to last year is down mid-single digits and prices are down low single digits [ of 8%. ]

[Julia Utbult, analyst]

Okay. And on the end market development there, you still see declining in both construction and consumer. Is there any difference from Q1? Is it looked -- does it look worse now or similar to Q1?

[Georg Brunstam, executive]

No, it's a stronger downturn. And we see that particularly in building. But we also see in construction where we do expect something to come back. But I think it takes a little bit longer with the incentives like IRA and so on in Americas to get. So a substantial downturn in both building and construction, more downturn than in quarter 1. And we also see some consumer-related end-user [indiscernible] which are down. However, good improvement in automotive.

[Julia Utbult, analyst]

So would you say that the outlook for the U.S. is a bit worse now? You said in the Q1 report that the U.S. still saw good development. Has this changed?

[Georg Brunstam, executive]

No. I think we have a good development in Americas, both quarter 1 and 2, mainly driven by automotive.

[Julia Utbult, analyst]

Okay. And 1 last question before I go back in line. You had a very good margin development in this quarter. Would you say that it's boosted by the rapidly falling input prices? Or could we expect those levels going forward?

[Georg Brunstam, executive]

We don't give the margin forecast. But having said all that, I mean, we are pretty confident in price management and we also see in the quarter 2 an even more weakening of the raw material prices than we saw in quarter 1.

[Operator]

Your next question comes from Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

Just a few questions, if I may. Just looking at the volume development, if I understood you correctly, possibly sort of down mid-single digits here in the second quarter. If you look at HEXPOL as a group and tilted very much towards a growing light vehicle production. I was just thinking it just seems that the segments outside the light vehicles must -- seems to be down almost by double digits it seems. I'm just thinking is that a fair way to look at it, or are we underestimating inventory reductions in your system? Or is it that you're declining volumes due to price pressure? I'm just trying to understand here how to look at those volumes?

[Peter Rosén, executive]

Yes. Johan, it's Peter here. When it comes to the segments that we mentioned, building, construction and also consumer-related products, it's fair to say that we're talking about double-digit decline.

[Johan Dahl, analyst]

And if you would isolate your look at our general sort of engineering exposure, transportation, food, et cetera, is that also down towards those types of levels, or is it growing, or how...

[Georg Brunstam, executive]

No. It's not. It's not. I mean we see them stable, some slight up and some slight down, but then I mean we see the other segments quite okay. But we see the -- I'm reiterating, we see the building really down, of course, in all markets and consumer close products also down in a big way. Automotive up, Peter says -- we both said, but the other segments are stable, some pretty good and some slight down.

[Johan Dahl, analyst]

Got you. But we certainly see in the numbers that you present today that your pricing model is working well. But would you say that your competitors are starting to get their production in order to get better supplies and start to perhaps be a bit more competitive on price?

[Georg Brunstam, executive]

Yes. I mean, we see them doing that, but we have seen them doing that for a while. So there's no change in the competitive situation in that context.

[Johan Dahl, analyst]

Got you. And just finally a follow-up. Could you just elaborate a bit on the product mix that you talked about in the report driving margins? I mean not the price raw material changes, but the product mix as such. Also, if you could clarify a little bit how those recycled projects with automotive, how that's progressing and how it's accelerating as you seem to indicate in the report.

[Georg Brunstam, executive]

Johan, good questions. The product mix is good in the quarter. And the product mix is driven by good -- how should I say, good price management and also Americas is delivering a better price mix than before. So that's a positive. On the projects in Automotive, we see huge number of projects in the development pipeline. It takes a while, of course, to have a new component in a car, but I mean a huge number of projects with recycled content. So we are very positive on that, but of course, I mean that's not a next quarter project as such.

[Operator]

Your next question comes from Karl Bokvist from ABG.

[Karl Bokvist, analyst]

Yes. Just a follow-up there on Johan's question regarding the mix aspect here. Just for us going forward, should we think about mix in terms of end market categories, or is it more difficult for an external party to have a view on because it relates to the chemicals themselves and the mix between TPE and rubber or within rubber, et cetera?

[Georg Brunstam, executive]

Yes, that's luckily enough, a very complex picture, and that's really good. You can have a very, very good price and product mix in medical in a quarter, but you can also have a bad one. There are always good margin products in every segment. It's not that just one segment is better or worse than another or just one market is better or worse than another. And that's good, of course. It's a more complex situation than that. But of course, we are deliberately moving to a richer segment all the time. And then we did that really good also in quarter 1, but better in quarter 2.

[Karl Bokvist, analyst]

Understood. And then on Automotive, I realize kind of -- well, given your business model and level of lead times and visibility that you do have that perhaps it's difficult to say. But within automotive, you see it's still growing, but what is the latest you hear within automotive regarding production versus sales, et cetera, going into the second half?

[Georg Brunstam, executive]

Yes, that is a good question. And to be honest, we really don't know. We have, of course, feelings and thoughts. But when we read all the external analysts, and there are quite a few following the automotive segment, we see increased production for costs going forward in those reports. But we also see them a little bit lower every time they come that they are always positive when they come.

[Karl Bokvist, analyst]

Understood. My final one is just on something you -- I apologize if you mentioned it, but just regarding inventory adjustments in the entire channel and perhaps mainly among your customers?

[Georg Brunstam, executive]

On the customer side, I can comment. I don't -- I've seen them coming down. So I don't see any overstock situation there anymore. I mean -- and our own inventory is also coming down.

[Operator]

[Operator Instructions] The next question comes from Andres Castanos from Berenberg.

[Andres Castanos-Mollor, analyst]

Yes, actually, on inventories, my question as well. I wanted to understand whether your volumes of inventories are coming down or what we are seeing is a decrease in the costs at which they are booked. Can you comment on that and guidance going forward?

[Peter Rosén, executive]

Yes. When it comes to actual numbers, movements in -- on inventories related to volume development, there can be some price adjustment if the raw materials leave the warehouse and we buy new at lower prices. But I would say, in the short term, i.e., second quarter, it's primarily volume development that has an impact on inventory. Going forward, we don't give forecast on the inventory development, but I mean -- and as we've mentioned several times before, whilst we see that we have a stable delivery of specific raw materials then we will decrease the amount of raw materials for those specifics.

[Andres Castanos-Mollor, analyst]

So this means that you have less trouble with logistics, et cetera, therefore better visibility, therefore you -- we should expect to see lower absolute volumes as well as lower prices. Is that right?

[Peter Rosén, executive]

If supply chains continue to improve, yes, then one can expect more stable supply and then we feel safe to lower inventory levels for those specific raw materials.

[Georg Brunstam, executive]

But, I mean, it's really important to understand that we have no -- basically, no finished goods stock. So...

[Peter Rosén, executive]

It's only raw material.

[Georg Brunstam, executive]

It's all raw material for us.

[Operator]

We have a follow-up from Julia Utbult from SEB.

[Julia Utbult, analyst]

It's a quick question on the share of revenue from recycled materials. The last number we had from you was the CMD, I think, and I wonder if you have an uptake or maybe it will be more on an annual basis?

[Georg Brunstam, executive]

It will be more on an annual basis as it looks like.

[Julia Utbult, analyst]

Okay. And then a question on the integration of McCann. When it was acquired, it had margin below growth. Is it still under development? Do you expect to lift the margin to group level and is this like margin dilutive for HEXPOL where we are right now?

[Georg Brunstam, executive]

I mean, McCann is a very nice company and it's fully integrated now into our organization. And they are delivering the margins we are expecting and basically [indiscernible]

[Operator]

We have a follow-up from Karl Bokvist from ABG.

[Karl Bokvist, analyst]

On the smaller division, Engineered Products, currency, I know it's obviously difficult to have a proper view on. But just the kind of underlying operations, I believe, in the past quarters, you have been quite happy with the performance in engineered even if you kind of try to exclude the currency effect from Sri Lanka. So how should one, let's say, current FX rates, think about the profitability in that division now?

[Peter Rosén, executive]

Yes, you're correct. We are satisfied with the operations of the business in itself. They performed quite well. When we look at -- if you look at Engineered Products, we delivered just about SEK 60 million in the quarter. We delivered SEK 70 million in the same quarter last year. And we do have -- there are negative FX effects included in the second quarter. So I think when one looks at the EBIT and the margin for the total segment, I think somewhere in average of what we've seen over those 2 quarters is a fair view.

[Operator]

I'll now hand back for closing remarks.

[Peter Rosén, executive]

Okay. Thank you very much, everybody, for listening in and posting questions. We thank from our end, and we wish you a good day. Thank you.

[Georg Brunstam, executive]

Thanks a lot. Take care.

[Operator]

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.