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Hexpol AB
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Good afternoon, and welcome to the HEXPOL presentation of the Q3 results. It's Georg Brunstam and myself, Peter Rosén here. We've had some issues with the communication suppliers. So the quarterly report has not been published yet, but it's expected to be resolved within a couple of minutes. [Technical Difficulty]
Welcome to the HEXPOL Audiocast and Teleconference's Q3 2021. [Operator Instructions] Today, I am pleased to present the CEO, Georg Brunstam; and CFO, Peter Rosén. Please begin your meeting.
Thank you. Dear all, welcome to the presentation of the Q3 report for this year. We do apologize for both that you have to wait for the call to start, but also the -- that the report was late. That was not due to anything that we did, but there were some technical issues on the side of the communications partner, which led to the report being late. But it has now been published and the presentation for the quarterly result has also been uploaded. So you should have access to both the report and the presentation.The agenda for today is the same as before. We'll start with a business update, then go through the financials and the focus areas for the year, and then we'll finish with the Q&A session. And with that being said, I hand over to Georg, who will take you through the first part of the agenda of today.
Thanks a lot, Peter. Sorry about the 10-minute late starting and it's not within our control.If I start with the Page 4. Strong sales in a challenging market situation. I actually -- we actually think we had a very good quarter and a good result given the circumstances. I'm sure you're all aware of the circumstances in automotive. They are extremely turbulent and tough and unpredictable right now. And for us, the quarter has been very strong in all segments, except for the automotive, where it's been very turbulent. So I'm actually pretty proud our organization has handled a very, very tricky circumstances in the quarter. So we are delivering quite a strong -- which are not as strong as we would have done if a automotive supply chain has been in the normal mode.And we are, of course, hurt by the frequent start and stop and mainly stop of production of light vehicles in the quarter. And that is, of course, affecting us both from an efficiency point of view and a volume point of view. And we also had in the quarter, continued price increases of raw materials. We also had major global supply issues on our side. And of course, you know that the light vehicle OEMs has major supply chain issues. And I think they are the biggest in the semiconductor sector.We are increasing our sales by 23%, of which 19% is organic sales growth, which is a strong and solid sales increase. And the result is actually extremely good if we take in the extraordinary income from the insurance settlement. But excluding that, we increased our operating profit with 14% to SEK 677 million. We are losing a bit on the gross margin. We're absolutely keeping our costs in the right range. So it's pressure on the gross margin from increased raw materials. We have a business model where we do pass on the increases to our customer, at least by EUR 0.01 x EUR 0.01 or SEK 1 x SEK 1, but that is, of course, mathematically hurting the gross margin percentage.And we also have some major issues on raw materials, which means that we have to change planning, and we have to run sometimes with the second best or third best recipe. And on top of that, we have done too good in acquisitions which in the quarter are not up to pace yet. They have a less efficient price-adjusting model than we have. So that will take some time but not usually long to get the pricing model in place there. Right now, it's affecting our group EBIT in the quarter by 0.6%. So I think we have been at the 17.1% operating margin without dilution. They are, of course, having a lower margin than us to start with that you know that from earlier communication.And of course, as I said, the cost side is continued tight and then we do keep the lower cost base. And if you turn page, we are strongly executing on our updated strategy with the increased customer focus. We see it in both business areas and strong sales in all segments, except for the automotive, where we have disturbances, as I said, over export component side. And on the HEXPOL Engineered side, we actually have very, very strong both sales growth and EBIT growth, good volume growth on top of the lower cost base. Here, of course, we are not expected to be automating segment in any big way, actually, in a very small way.And on the M&A, continued high focus where we see hopefully that we have more opportunities going forward than we have had in the past. But in the past, we've done too good in major acquisitions in our core business area, and we just have to do some integration work on that.And if you turn to Page #6, this is a slide you have seen before. I just want to remind that we have a very strong culture, delivering and in these very turbulent circumstances, that is a huge asset. We have experienced people. We have decentralized -- a decentralized organization and people have been in these difficult planning situations and pricing situations before, maybe not always as severe as today. But people are handling it in a very, very good way. I'm actually confident that we are improving our market positions in a good way in these turbulent times.
And if we then turn to Page 7 and look at the sales development in some more detail, we can see that despite the challenges with the automotive part disposing production during the latter part of the quarter, we delivered strong organic sales growth of 19% compared to last year. The acquisitions of VICOM and Unica added another 6% of sales. So excluding negative FX effects, we saw a growth of 25% compared to last year and it also represents an organic growth compared to the previous quarter this year.The sales growth was then partly offset by negative FX effect of SEK 55 million resulting in the reported sales of SEK 4.1 billion. The negative FX effects were also earlier during the year, primarily related to the U.S. dollar.Looking at the regional development, we saw strong sales growth in all regions, although highest in Europe followed by the Americas and Asia. But we still see that Europe is coming back somewhat faster than the Americas.And if we then turn to Page 9 and look at the financial overview. As Georg mentioned, we delivered an operating profit of SEK 1.1 billion, including the insurance settlement related to the fire that we had in Jonesborough in the U.S. in the beginning of this year. Excluding the onetime items in the quarter, we delivered an adjusted operating profit of SEK 677 million which corresponds to an increase of 14% compared to the year before. The margin came in at 16.5%, negatively affected by the acquisitions that Georg mentioned that are run with a lower margin level than the other export companies. and also the challenges related to raw material shortages and the price increases that we see continue. Our OpEx remained low at some SEK 182 million in the quarter. And the equity/asset ratio remains very strong at 60%.And if we then turn to Page 10 and look at the highlights, we see that, all in all, we saw an increase of sales to SEK 4.1 billion with an increase of 23%, while operating profit increase of 14% to SEK 677 million, while we saw a margin decrease down to 16.5% explained by the acquisitions and the raw material challenges that we've seen during the quarter.A different yield on the similar topic, looking at the drivers on Page 11. Look at the drivers of the increased profit level of 14%. We see the increased sales and the lower OpEx, partly offset by the lower gross margin. And as mentioned, lower gross margin is driven partly by the acquisitions and also the raw material challenges that we've seen during the quarter.And then if we hand over to looking at the 2 segments. Yes. Now I will try to comment the quarter in the 2 business areas. And on export compounding, it's very much, as I've said before, that strong organic sales growth and good sales to all segments, except for the automotive segment and increase in operating profit and some dilution on the margin from the acquisitions and the raw material challenges. But all in all, a strong quarter in the business area component.If you turn to Page 13, a very strong quarter in export Engineered Products with a big sales increase and a huge performance in EBIT. We are getting volume growth on top of a lower cost base that gives a very good leverage. So a very good quarter for Engineered Products.And if we then move over and look on the balance sheet side and the working capital on Page 14. We do see an increase year-over-year, both in absolute terms and relative terms. This is primarily driven by the increase of inventory that we also saw in the previous quarter. And it's due to that the raw material shortages and risk thereof, we've decided to purchase what we can in order to secure all orders that we receive from customers. And once we come back to a more normal raw material situation, this will go to down and come back to historic levels. We don't see any changes in the underlying payment terms when it comes to suppliers or customers. And we do expect to see working capital coming down quickly once the raw material situation comes back to more normal levels.And if we then turn and look at Page 15 and we look at the cash flow, we see that the strong year is offset by temporarily higher working capital, i.e., the inventory level. The level of investment is still below depreciation. And we that we've done for the insurance settlement of SEK 544 million. That was paid in October as planned. So the cash has been received here by HEXPOL after the quarter closed.Then if we move over to Page 16 and look at the net debt situation. It continues to improve despite the lag from the unit acquisitions this year and a somewhat lower cash flow in the quarter. And the net debt to EBITDA also continues to improve, both compared to last year and previous quarter, and now stands at 0.59. So we continue to strengthen an already strong financial position also after this quarter.If I then sum up the quarter. I would like to say once again that it's a good quarter for us, very good sales development and a good result although a little bit hampered on the margin by the raw materials impact mathematically. We are having a pricing and a business model where we do compensate. So there is no change in that. But the quarter is, of course, fantastic with the insurance settlement money and of course, the properties is dramatically good. And then that is, of course, helping a -- or even earlier strong balance sheet. We are seeing a turbulent situation in the quarter from the automotive sales.If we then turn Page [ 2 ] and going forward and focus for 2021. Of course, it's the continued health and safety focus. And we are, for sure, on our toes and we are flexible in the export organization to manage the volatility in demand. And that is especially with a focus on handling the volatility in the light vehicle production and also the services in global supply chains and raw material prices. But we have high flexibility and we have a proven business model to handle that. We also continue to elevate our future manufacturing footprint. And of course, our M&A focus is intact and strong. And now with even further stronger balance sheet, we have even more possibilities.So with that, I think we'll leave it open for Q&A.
[Operator Instructions] Our first question comes from the line of Douglas Lindahl of Kepler Cheuvreux.
Hopefully, you can hear me?
Yes.
I understand it's a difficult market environment for you right now. And it seems as if you are building inventory, is that part of how you're handling the situation right now? That's my first question.
Absolutely correct. I mean we are -- it's coming up to Peter and my desk, of course, and we are supporting the organization in securing whatever we can secure for the future and for coming orders. So we are keen to service customers, and we have a balance sheet to support that. And we think it's temporarily a very good action to take.
And then just on the market situation, how would you say that things have evolved throughout the quarter? Have -- I understand it's been sort of a stop and go. But is there any sort of trend you can extrapolate throughout the quarter?
It's very difficult. I mean it's -- first of all, it's a little bit of a casing quarter in Europe and in July in the North and in August in the South of Europe. And but overall, we see more disturbances and stop and go and stop towards the end of the quarter.
And that's valid in North America as well, age?
Yes, that's valid in North. And that's also, I think it goes in line with the announcement you and we all read about the OEMs stoppages. In the other segments, we don't see that.
The report came out a bit late, but just briefly looking at it, it seems like your cost base is still very impressive levels, I would say. Is there a risk that this is as good as it can get and now with your recent acquisitions? And sort of post-COVID world, cost will increase going forward?
I think we can come back to what we said also in the previous quarter that both Q2 and Q3 will work very, very hard to push the cost down, partly also because we've seen these challenges, and we feel the need to compensate. Going forward, as mentioned before, I think one can expect us to come up a bit because it's difficult to keep that kind of cost pressure in the long run. But again, I think we -- before we mentioned that around or just below SEK 200 million for quarters fully reasonable level. And we don't see any reason to change that picture.
Okay. One other question for me then is -- you already touched upon it, but your recent acquisitions, is it possible to give a bit more comment on how the integration work has been progressing with those? And any sort of size of increased profitability levels for them already? Or any comments on that would be...
The integration work is going as planned, although we acquired the latter one Unica in the middle of the holiday. And of course, August, this is closed in Spain. So that month hasn't been the best for the integration work, of course. But the integration work, I'm not worried about that. I mean we know everybody, we know the product, we know the people. And the synergies are there. They will come. It takes a little bit longer, and it's counteracted by a little bit of a less-efficient pricing model than we have which takes a little bit time to correct or adjust I should say. And of course, the automotive exposure is reasonably high as well with that -- with OEM stoppages affecting them. But the acquisitions are good. There's nothing coming up, which we don't like and didn't know except for a little bit slower pricing adjustment month.
So I guess in this market environment where pricing adjustment has been crucial, they are potentially underperforming relative to where they should be on a normalized basis? Is that...
You are 100% right in that one. And then we are correcting that. But it will take some time.
And our next question comes from the line of Johan Dahl of Danske Bank.
Just a 2 questions. Firstly, on volumes. I was wondering if you could just help me get my arms around the volumes that you're actually achieving in this quarter. It seems as if organic volume growth, if we strip out the raw material inflation, is it high or sort of low single-digit positive, would you say? And I was wondering...
Mid to low. It's mid- to low single digits.
Got you. very interesting. And then I wonder, what's your visibility on these volumes? We had a light vehicle production was down 20%, I think, in the quarter. So it just is fairly substantial. And what, in your judgment, what is the opportunity to actually keep these volumes if you look sort of 1, 2 years out?
I mean We -- I'm not sure I catch your 100%, but please comment if I'm answering wrong. But if I got you right, we are very confident that the volumes are there, and we haven't lost any volumes. I mean, we are gaining volumes in market.
Do you think Georg, it's sticky volumes, this new contract that you -- you seem to be taking share. Do you think you will like...
Yes, I think, yes, absolutely. Absolutely. I'm confident on that.
And to what extent do you think this is volumes -- in-sourced volumes that are returning to the market, i.e., which would impact everyone positively? And to what extent is it your share gains?
No. I think that one is constant. There's no change in those behaviors.
Okay. On the -- you talked a bit about your working capital and inventory buildup. At the same time, you talked about the pressure on margins from having to substitute materials, et cetera. I was wondering if there -- are these -- do you manage to profit from building inventories in this rising raw material cost market which is offset by the sort of complexity and switching supplies, et cetera? I'm basically looking at those 2 gross numbers? Or is it..
100% correct. 100% correct analysis. It's positives and negatives in the same thing. You're correct. You're correct.
But I got you right that the net, you think is negative or...
The net of that, the net is -- it must be positive. I mean, we are getting -- we haven't calculated in that way, but I mean thinking about it. I mean that's the net must be positive. I mean we are getting the orders out and maybe we're getting the product made.
Because the thing that is shown in the financials is, of course, if we were not able to deliver on orders, what would that cost. And one of the main drivers of actually buying a special raw material is to make sure that we can deliver on orders. And that is one of the reasons why we believe we're taking market share in the markets because we can deliver.
No, I was thinking more in a sort of an apples-to-apples scenario on flat volumes sort of if you boosted profitability by your ability to build sort of inventory -- and you also have cost, obviously, for the complexity in switching.
No. If volumes are equal, then it's negative.
Okay. Got you.
I mean we are doing it in order to avoid volume growth. I mean we are business -- we are very business-oriented here. And we have a balance sheet to support it, and it's a short term. And Peter and I, I mean, business people are coming to us with it and it's a 20-second answer, of course. I mean we support the business and we are long term, of course.
[Operator Instructions] And we have a further question from Karl Bokvist of ABG Sundal Collier.
So the first question is on -- we're talking a lot about the automotive side and the issues within that space for many participants. Just to be curious on the other end markets and perhaps if you could give some comments on, let's just say, we are top 4 end markets for you, what you're seeing there? And both in terms of demand, but also if you see encountered similar challenges in those areas?
In all other sectors, good demand and good volume for us. And that's where we are, of course, taking share when we can get raw materials. I mean, there's good demand. Customers are calling off and want volumes from us. So good situation in all the other segments without any exceptions, particularly good in wire and cable actually.
Okay. And is it strictly related to automotive for you when it comes to production disturbances and difficulties in mixing and uneven production rates and everything like that?
I mean from the raw material situation, it's, of course, all over. That's affecting the other segment as well, but the volume drop and the frequent change of planning is from automotive.
Understood. And what's the customer feedback that you hear from your customers and from the OEMs when it comes to price acceptance and the OEMs otherwise regular tendency to adjust prices downward to start of every year? I mean could we see an exception also next year because of the rapid increases in input costs?
I mean, we see and we hear and we feel strong resistance on our pricing increases that doesn't change our pricing model. I mean for us, it's a must. I mean we have our pricing model. We always had it and we are sticking to it. We are firm. We are humble that at the end we are correct. That at the end of day, we offer. That it's, of course, very tricky for the supply chain with these rapid changes.
And just my final one is you mentioned on several locations now how you've been able to gain market share is your belief. Just to also now in recent quarters and especially when it's a bit challenging again. What have you seen in terms of customers going towards or from single sourcing, either choosing you as a single supplier or choosing to have you as a dual source on top of our existing one? Or are you in turn having seeing competition from another participant to dual sources?
Yes. I mean what we see is that -- and that's the reason we believe we have taken share. We see that we -- we are servicing our existing core customers, and we do help with some extra volumes as well. And also, we are occasionally helping some others as well, although the priority is present customers.
We have a follow-up from Johan Dahl of Danske Bank.
Can you just update us on energy prices, how that impacted you in the quarter and where we were at the end of the quarter compared to the beginning of the quarter? And if that's a relevant factor at all for you guys looking into next year?
That's a very, very good question. And then it's a moving target in it but it actually only moves in one direction, of course, is upwards. But I mean, this is -- I mean, we are a global company. We have operations in so many countries, and the situation is different from country to country, and we also have different contracts from country to country. So the impact is there already a bit. But of course, the big energy increases are not everywhere for us and not in every country, and we have contractual situations in some countries. But there's only one direction the energy costs are increasing. But there's no huge impact in the quarter probably.
I guess this affects all suppliers in your industry...
Absolutely.
Do you think difficult to say, of course. But I was just wondering whether that's already up for discussions in your price negotiations?
Absolutely. We are including that in our pricing model for sure, either as a price or an energy surcharge.
Got you. Where do you think you've been most successful in gaining market share? What customer segments do you think primarily?
No, I think it's really the same customer distribution as we have because we've been supporting the present customers in the biggest way we can. And that's where I think we have gained because we have been better in servicing them than the second best supplier.All right. We are coming to the end, I guess?
Yes. Currently, we have no further questions in the queue.
Thanks a lot. Thanks a lot, everybody, and keep in touch.
Thank you very much. By for now.