Hexpol AB

STO:HPOL B

Earnings Call Analysis

Earnings Call Transcript 2024-Q2

[Operator]

Welcome to the HEXPOL Q2 presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Klas Dahlberg, and CFO, Peter Rosen. Please go ahead.

[Peter Rosén, executive]

Thank you. Welcome, everyone, to the presentation of the second quarter of this year for HEXPOL. Today, both Klas Dahlberg, our new CEO; and myself, Peter Rosen, are present on the call. As Klas has just started at HEXPOL, I will present the Q2 report. But before we start, I hand over to Klas, who would like to say a few words.

[Klas Dahlberg, executive]

Thank you, Peter. Hello, everyone, and thank you all for joining in on the HEXPOL Q2 call. I joined HEXPOL some 2 weeks ago. And prior to that, I was responsible for the business area, NIBE Climate Solutions, which is part of NIBE Industrier AB.

I spent my first weeks here visiting our sites in Europe and in the U.S., meeting with the local management teams and the staff. And I must say it's been a great experience. I'm impressed by the operational excellence at the sites. People are professional and very motivated. And we are working closely with our customers in different segments. So in other words, a solid foundation that we will continue to build on. And as Peter said, I've asked him to walk you through the Q2 presentation. So I give the word back to you, Peter.

[Peter Rosén, executive]

Thanks, Klas. Coming back to the Q2 report, we will follow a common agenda, start with the business update, go through how we continue to work with our business model and then go through the financials and summarize the quarter and then we will finish with a Q&A session. So if I can ask you to turn to Page 4, and we'll start to go through the quarter. Also in the second quarter, we delivered a stable performance with high margins and high profitability. Both demand and the sales prices are sequentially in line. We always saw during the second half of last year, but also during the first quarter of 2024.

In the quarter, we delivered sales of about SEK 5.5 billion and EBIT of SEK 911 million and a strong margin of 16.7%. Also as expected, sales are somewhat below second quarter of last year. And that is explained by -- at that time, we saw somewhat higher demand, but we also saw somewhat higher sales prices driven by the higher raw material prices. At the same time, we strengthened the EBIT margin in this quarter to 16.7%.

When looking at demand and sales during the quarter, we see a very similar picture compared to what we've seen both during the last 6 months of last year but also during the first quarter of 2024 with smaller movements across the various end customer segments that we've catered to.

And compared to the second quarter of last year, overall demand is down some with smaller movements across the end customer segment. The sales prices are lower than what we saw second quarter last year and that is driven by that we now have lower prices on raw materials.

However, at the same time, sequentially, sales prices are basically flat in local currency so very little change compared to first quarter this year. The work on sustainability continues with development of products and also discussions with our customers. And also in line with our focus on sustainability, the investment that we've taken in a devulcanization line Europe is being incremental, and it is expected to be up and running by the end of this year.

Just to mention, previously, rubber waste has been used mainly as a filler in low-quality applications. And with this new process, we can keep it in circulation and reduced demand for our virgin materials in more advanced compounds. If I can then ask you to turn to Page 5. And when looking at M&A, we have a pipeline that we continue to work on.

And as you already know, we certainly have the financial resources to do more acquisitions. We're starting to see sellers and buyers getting closer on agreeing on valuations, which has been a challenge for some time, but it is getting closer.

Looking a little bit more into detail for HEXPOL Compounding. Demand is sequentially very similar to what we saw during the last 3 quarters, and that is across most end customer segments. Compared to Q2 last year, demand and sales are down some with smaller movements across the various end customer segments.

Prices are flat in local currency sequentially, but they are down a little bit compared to Q2 last year. And as you may recall, we peaked with prices in Q4 '22, in Q1 '23. And then after that, they started to come down during the second quarter of last year so that's also why we see a smaller decrease compared to what we saw in the first quarter of this year.

There's stable supply of raw materials and the supply chains generally work very well. And overall, this segment delivered a good EBIT and improved margins compared to same quarter last year. Engineered Products delivered both sales EBIT and margins above last year levels, mainly driven by good performance for the Wheels Products segment.

If I can then ask you to turn to Page 7, looking at the business model, we've mentioned this before. But I still want to highlight key aspects of the price management in the business model. It is really key for us, not only when raw materials move upwards but also when they decrease, as we've seen during the last year.

We also look at our cost structure on a regular basis to see if and where we can improve. And one part of that is to continuously review our manufacturing footprint. And that's also why we, end of last year, took the decision to consolidate our operations in California from 2 sites to 1 site.

And if I can ask you to turn to Page 8 so looking at the sales development in a little bit more detail. We delivered sales of SEK 5.5 billion, which is down 5% compared to same period of last year. And looking at a little bit more detail, we see that organic sales are down 7% in the quarter. While the acquisition of Star at the end of last year, added 1% in sales.

And basically, there are no FX effects in the quarter. And looking at the regions, we saw lower sales both in the Americas and in Europe, while Asia saw a good increase in the quarter. And looking at the lower organic sales, they are driven by somewhat lower volume, which is low single-digit decrease and lower sales prices, which is in the range of low mid-single-digit decrease compared to Q2 last year.

And then if I can ask you to turn to Page 10. Looking at the financial overview, we delivered an EBIT of SEK 911 million. The margin came in at 16.7%, which is 20 basis points above last year with a good product and price mix. And it's also in line with what we have seen in the last few quarters. Equity asset ratio remains high at 61%, as does the return on capital at high almost 19%.

We also delivered a strong operative cash flow in the quarter of SEK 926 million with a good cash conversion. And if I can ask you to turn to Page 11, just looking at the financial highlights. As mentioned, 5% lower sales at SEK 5.5 billion, but with an operating profit of SEK 911 million, which is somewhat low last year. And at the same time, we saw operating margin increased to 16.7% in this quarter.

And I just want to mention, and we've done it before -- mentioned before, but our margin will move with the price adjustments that we do. And all persist of what we've seen in the last couple of years with increasing raw materials, we now see lower prices compared to a year before.

So I just want to highlight that. And then if we move to Page 12, looking at the drivers of the operating profit, we see that the negative impact from somewhat lower sales is basically offset by higher gross margin and lower OpEx compared to last year.

And the lower OpEx is -- compared to last year is driven by general cost control. And if I then can ask you to turn to Page 13, looking at the business segment, HEXPOL Compounding. We delivered SEK 5.1 billion in the quarter, which is 5% below Q2 of last year. And as mentioned earlier, the lower sales are driven by slightly lower demand and sales prices. There are no bigger movements in this quarter. Operating profit of SEK 845 million with a margin improvement positively affected by good product and price mix.

And if I can ask you to turn to Page 14, looking at Engineered Products, sales just below SEK 400 million in the quarter, driven -- which is an increase of 5% compared to last year, driven by good development in the Wheels Products segment. Operating profit just low SEK 70 million, which is above last year, and also the margin increased to 17.1%, and this is driven by a number of smaller items.

But overall, a very good performance for the segment. And if I can ask you to turn to Page 15, looking at working capital, it's basically in line both with the second quarter of last year and also the first quarter of this year with smaller movements across inventory, receivables and payables. And there's no change in the underlying payment terms.

And then if I can ask you to turn to Page 16, looking at the cash flow in the quarter. We delivered a strong cash flow of just below SEK 930 million and better than the EBIT of SEK 911 million with small movements in the working capital. And then if I can ask you to turn to Page 17, looking at the net debt. It stands at SEK 2.9 billion at the end of this quarter with a net debt-to-EBITDA ratio of 0.72.

And just a reminder that this is after payout of dividends in the quarter that included both an ordinary dividend payout as well as the actual dividend payout decided by the shareholders. And all in all, after the quarter, we continue to stand with a very strong financial position.

And then if I can ask you to turn to Page 18, just to summarize the quarter before going into Q&A. It's a very stable second quarter with an EBIT of SEK 911 million and a strong EBIT margin of 16.7%. Sequentially stable demand in across most end customer segments compared to second quarter of last year, as expected, slightly lower demand and lower sales prices driven by the lower raw materials that we see. Our work on sustainability continues both in product development with our own footprint and when looking at the M&A agenda.

And by that, we conclude the presentation of the quarter in itself and hand over to Q&A.

[Operator]

[Operator Instructions] The next question comes from Douglas Lindahl from DNB Markets.

[Douglas Lindahl, analyst]

Klas, welcome, and good to hearing your voice in your introduction and we're looking forward to hearing more from you in the future. But maybe directly my question is more towards Peter. On the demand side here within the quarter, Peter, can you give a bit of color if you've seen any trends entering the quarter and exiting the quarter, talking about the underlying volume development?

[Peter Rosén, executive]

Not really. I mean, we're seeing smaller movements if we look at the various end customer segments, but quite small movements. So I wouldn't say we've seen -- no, no bigger changes.

[Douglas Lindahl, analyst]

Exiting the quarter through higher sort of volume level relative to what you entered? Okay, good. on the pricing, we've had now flat prices for some time quarter-over-quarter. So is it still correct that assuming nothing changes here over the next few months that we'll see flat price impact in Q3?

[Peter Rosén, executive]

I mean we don't give you guidance on pricing or margins going forward. But if we look at -- I mean, we've seen stable raw material prices, I would say, for the last -- basically, the last 4 quarters. We currently see a small -- and I would like to emphasize small upwards pressure on raw material prices. But it is difficult to say if that is something that will continue or will flatten out. We do see some transportation cost increase and that's for containers, but again, it's difficult to extrapolate that going forward. So the way it looks right now, there's a small upwards pressure on prices -- raw material prices, and then we will see I think coming back after the summer where we stand on that.

[Douglas Lindahl, analyst]

Okay. And it is super interesting to hear any sort of updates or your thinking on the M&A environment?

[Peter Rosén, executive]

Yes. I think it will see a change compared to -- if I missed it before, I think it's that we see sellers and buyers getting closer to a common view on valuations. That has been a little bit of a challenge before because the sellers have tended to look at either historical performance or a forecast and not really current performance. And I think that view has changed. So it looks like sellers and buyers are getting closer on valuations. .

[Douglas Lindahl, analyst]

Okay. And geographically, can you mention where you're looking for the most part and within which niches?

[Peter Rosén, executive]

I mean a little bit boring answer is we look everywhere. And we also look at rubber compounding TP and TPE. But as mentioned before, we are really keen on doing more on TP than TPE.

[Operator]

The next question comes from Riya from Bank of America.

[Riya Kotecha, analyst]

This is Riya from Bank of America speaking. I've got a couple of questions, and my first two ones are addressed to Peter. So Peter, are you maybe supposed that you didn't see more of a sequential pickup into the second quarter versus the first quarter, especially, if I remember correctly, the first quarter had a lower number of days that held back the volumes. So if you normalize for the seasonality, then what has underlying demand done sequentially? And is it slightly down?

[Peter Rosén, executive]

Riya, no, I'm not surprised. Our view has all -- the last few quarters been that the first half of 2024 would be very similar to the second half of 2023 from a demand perspective, and we would basically see a sideways movement. So no, I'm not surprised. We've expected both Q1 and Q2 to see a very similar demand from our customers.

When we talk about the number of days, sequentially, it's quite similar. There is one more day in this quarter compared to Q1. So no, the number of days are sequentially very similar. So no, we're not surprised.

[Riya Kotecha, analyst]

Okay. And are you seeing any early customer shutdowns ahead of the summer this year, particularly on the auto side?

[Peter Rosén, executive]

No, not really.

[Riya Kotecha, analyst]

Okay. Fine. That was my question because some of the anecdotes with the automotive suppliers are that they're heading into the summer shutdowns a bit earlier. My next question is to Klas. So welcome. Can you maybe speak a bit about your experience at NIBE and how it might shape strategy at HEXPOL. So specifically, how many acquisitions that you closed over your time at NIBE? What was your approach towards M&A in terms of the targets, the geographies and track record of synergy realization?

[Klas Dahlberg, executive]

Well, hello, Riya. So I cannot really comment on, let's say, how NIBE was conducting their business, but I can say very generally that in a sense, NIBE and HEXPOL has many similarities, similarities in the sense that very decentralized organizations.

And an important part of the growth is actually mergers and acquisitions. But other than that, I think I should not -- I should refrain from any deeper comments.

[Riya Kotecha, analyst]

Yes. I think it's more broadly how you think you'll experience at NIBE can help shape strategy, is an acceleration of M&A something that you see as key for your mandates?

[Klas Dahlberg, executive]

M&A will be -- continue to be an important part of our growth.

[Operator]

The next question comes from Johan Dahl from Danske Bank.

[Johan Dahl, analyst]

Just a few questions. Firstly, on the factory footprint, which you talked a little bit about here in California. I was just wondering, have you come any sort of why so can you provide any sort of color to the potential savings there? I mean this may be a small project in California, but I guess the whole group is running at a fairly low capacity utilization so just get a feel for the potential here within the group?

[Peter Rosén, executive]

Yes. If we take the California reorganization, the plan was, as mentioned before, that they will finish the consolidation after the summer, and that plan is still in place. So we expect to be on time with that project. It will not give any savings this year, but it will -- we will see some savings next year for that consolidation.

Then when it comes to the overall footprint, I mean, it's something that we review. And if we find that there is overcapacity that we don't need, I'm sure we'll come to conclusion to take that decision. But we're not there at the moment. So we've taken California and then we run with the current footprint for the time being.

[Johan Dahl, analyst]

In your view, has it been, what I call it, a easier process or a smoother process something that sort of -- has been a sort of a good example for the group? Or has it been tricky as such?

[Peter Rosén, executive]

It's always tricky because it's not -- the tricky part is not actually to move the production in itself. But when we move the recipes and the compounds, they need to be approved by the customers, which is good and maybe not bad but a challenge because it takes calendar time to get the recipes approved by the customers.

The good thing is it shows how sticky the business is once you have it. But I would say, for us, this consolidation has been a very good project. It has followed plan exactly both from our side and getting the customer approvals. So in that sense, it's a very good project with good learnings, and we're very confident that we can do this kind of consolidations without losing business.

[Johan Dahl, analyst]

Also on the product mix, I mean, it seems as if product mix has been a tailwind to earnings in the group for quite some time. Obviously, we're getting into a situation where comps are getting more tricky -- I mean, higher comps in the comparative period. But are you able to see any sort of trend here in the product mix for the group more from a sequential perspective?

[Peter Rosén, executive]

If we look sequentially, I think we're having a fairly stable profitable product mix. We haven't seen any major changes if we look at the last few quarters. And I don't expect to see that going forward either.

[Johan Dahl, analyst]

So does that imply, Peter, that the year-on-year tailwind to earnings will decline going forward? I mean, given that you have a more stable product mix? Or is there -- is it just poor visibility on this topic?

[Peter Rosén, executive]

I mean, I'm not going to give a forecast on how the mix will look going forward, but everything else being equal. If we have the current product mix, then everything else being equal, then we will see similar margins.

[Operator]

The next question comes from Andres Castanos from Berenberg.

[Andres Castanos-Mollor, analyst]

Two questions, please. One for Klas, please, welcome in. What in your view are the key features that distinguish the 2 specialty targets in doing TP and TPE? And how do you identify those features? The second one, please, for Peter. I wanted to ask -- understand better, right, about the tougher comps that you will be seeing in H2 2023 -- versus H2 2023? I assume those were volumes and maybe for pricing is a different story. And I wanted to ask, in fact, how much of a difference will it make to the year-on-year organic growth numbers that you will be reporting in the second half of 2024 assuming that we'll continue to see a stable sales. So these are my two questions.

[Peter Rosén, executive]

Yes, I can start. If we look at the comparable numbers for last year, I can comment on them, but not what we expect to sell second half of this year. But if we go back and look out 2023 developed, we started with Q1 where we had good demand and we peaked at our sales price -- raw material prices and subsequently, the sales prices.

And then we saw -- during the second quarter of 2023, we saw both demand and sales prices starting to come down. And I would say, since Q3 of last year, demand and sales -- raw material prices and subsequently, sales prices have been quite stable. We've seen fairly small movements when it comes to raw materials and sales prices.

How that will look going forward? It's difficult to say because it depends on how our raw material prices will develop. If raw material prices start to go up at one point in time, we will also increase our sales prices. But it's too early to say if and when that will happen.

But if we look at 2023, we started to come down from high volume -- high demand and high sales prices in Q1, continuing during second quarter and Q3 and Q4 were quite stable.

[Andres Castanos-Mollor, analyst]

Right. That's helpful. Can you remind us how long does it take for you to react to higher raw mats? It's 1 quarter or maybe less to reflect in higher prices?

[Peter Rosén, executive]

Yes, it depends a little bit on the type of customers. The customers without contracts, with no pricing modules built into. I mean when they order, they will be impacted by the cost of raw material prices at that time so that will be immediate. If it's bigger customers where we have contracts and pricing mechanism built in, I would say, generally during a quarter, the prices will be -- new prices will be implemented, both up and down. The second quarter, Andres...

[Operator]

The next question comes from Gustav Berneblad from Nordea.

[Gustav Berneblad, analyst]

It's Gustav Berneblad from Nordea. I think most of my questions regarding demand has already been asked, but I just have one here. And you have previously commented on, for example, consumer-related end markets being weak, but you sort of don't anymore. Would you say that you are seeing an improvement here drastically? And then also if we look into other specific end markets, are you seeing any of them turning more positive now in Q2? It's always interesting given your broad exposure, if you haven't reached there?

[Peter Rosén, executive]

Gustav, the reason why we didn't comment on specific is simply because there were so small movements on them. So when we look in second quarter demand, very small movements compared to the first quarter. So that's the reason. Otherwise, had it been bigger movements, we would have commented on it. When it comes to, if there are any bigger movements in the end customer segments, again, we haven't seen any big movements in the second quarter.

[Operator]

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

[Klas Dahlberg, executive]

Okay. Again, thank you all for your questions and for listening in, of course. But before closing, I would like to thank Peter for managing the group since Georg Brunstam suddenly passed almost a year ago now. And we are devoted to continuing Georg's legacy, and we continue to work hard to develop the HEXPOL Group. And again, thank you all for joining in.

[Peter Rosén, executive]

Thank you, and have a good day and a good summer. Thank you.