HEXPOL AB (publ)

Welcome to the HEXPOL Q2 presentation. During the questions and answer session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now I will hand the conference over to the CEO Klaas Dolberg and CFO Peter Rosen. Please go ahead.

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

Thank you, Peter. Hello, everyone, and thank you all for joining in on the Hexpol Q2 call. I joined Hexpool some two weeks ago and prior to that I was responsible for the business area NIBE Climate Solutions, which is part of NIBE Industry or AB. I spent my first weeks here visiting our sites in Europe and in the US, 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.

Thanks, Toss. Coming back to the Q2 report, we will follow a common agenda, start with a 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 four, 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 with what we saw during the second half of last year, but also during the first quarter of 2024. In the quarter, we delivered sales of about 5.5 billion SECs. an EBIT of 911 million SEC and a strong margin of 16.7 percent. Also, as expected, sales are somewhat below second quarter of last year, and that is explained by that at that time we saw somewhat higher demand, but we also saw somewhat higher sales prices driven by then 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 six months of last year, but also during the first quarter of 2024 with smaller movements across the various end customer segments that we catered to. And compared to the second quarter of last year, overall demand is down some, with smaller movements across the end customer segments. 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 de-vulcanization line in Europe is being implemented. And it is expected to be up and running by the end of this year. Just to mention, I mean, 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 reduce demand for virgin materials in more advanced compounds. If I can then ask you to turn to page five. 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 HixPo compounding, Demand is sequentially very similar to what we saw during the last three 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 and 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, the segment delivered a good EBIT and improved margins compared to same quarter last year. Engineer products delivered both sales EBIT and margins above last year levels, mainly driven by good performance for the wheels product segment. If I can then ask you to turn to page seven. 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 two sites to one site. And if I can ask you to turn to page eight, looking at the sales development in a little bit more detail. We delivered sales of 5.5 billion. which is down 5% compared to the same period 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 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 $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've just seen 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 $926 million SEC 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 $5.5 billion, but with an operating profit of $911 million, which is somewhat below last year. And at the same time, we saw operating margin increase to 16.7% in this quarter. And I just want to mention that we've done it before, mentioned it before, but 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 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 a higher gross margin and lower OPEX compared to last year. And the lower OPEX compared to last year is driven by general cost control. And if I then can ask you to turn page 13, looking at the business segment HECS pool compounding, We delivered 5.1 billion SEC in the quarter, which is 5% below Q2 of last year. And as mentioned earlier, the lower sales are driven by slightly lower demand than sales prices. There are no bigger movements in this quarter. Operating profit of 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 $400 million in the quarter, which is an increase of 5% compared to last year, driven by good development in the wheels product segment. Operating profit just below $70 million SEC, which is above last year, and also the margin increase 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 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 930 million SEK, and better than the EBIT of 911, 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 2.9 billion SEK 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 extra 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 911 million SEC and a strong EBIT margin of 16.7%. sequentially stable demand seen 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.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Douglas Lindahl from DNB Markets. Please go ahead.

Hello, Peter and Klaus. Klaus, welcome and good hearing your voice and your introduction. I'm looking forward to hearing more from you in the future, but maybe directing my questions 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?

Not really. I mean, we've seen smaller movements if we look at the various end customer segments, but quite small movements. So I wouldn't say I really see it.

No, no bigger changes. You're not exiting the quarter at a higher sort of volume level relative to what you entered. No, quite stable. 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?

I mean, we don't give 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 four 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 it will flatten out. We do see some transportation cost increase, and that's for containers. But again, it is 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.

Okay. It'd be super interesting to hear any sort of updates where you're thinking on the M&A environment.

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

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

I mean, the 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 and TPE.

Okay, that's all for me. Thank you so much.

Thank you.

The next question comes from Ria from Bank of America. Please go ahead.

Hi, good morning. This is Ria 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 surprised 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?

Hi, Ria. 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 that 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 number of days, sequentially, It's quite similar. There's 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.

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

No, not really.

Okay, fine. Thanks. 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, but thanks for the call on that. My next question is to class. So welcome. Can you maybe speak a bit about your experience at NIBA and how it might shape strategy at Hexpol? So specifically, how many acquisitions did you close over your time at NIBA? What was your approach towards M&A in terms of the targets, the geographies and track record of synergy realization?

Well, hello Ria. 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 have many 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 refrain from any deeper comments.

Yeah, I think it's more broadly how you think your experience at NIBA can help shape strategy. Is an acceleration of M&A something that you see as key to your mandate?

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

Okay, that's helpful. Thank you.

Thank you.

The next question comes from Johan Dahl from Danske Bank. Please go ahead.

Hello there, Klaas and Peter and everyone else. Just a few questions. First on this factory footprint, which you talked a little bit about here in California. I was just wondering, have you become any sort of wiser? 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.

Yeah, if we take the California reorganization, The plan was, as mentioned before, that they will finish the consolidation after this 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 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 a conclusion to take that decision, but we're not there at the moment. We've taken California, and then we run with the current footprint for the time being.

In your view, has it been an easier process or a smoother process, something that has been a good example for the group or has it been tricky as such?

It's always tricky because 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 these kind of consultations without losing business.

Yeah, 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?

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.

Does that imply, Peter, that the year-on-year tailwind to earnings will decline going forward, given that you're having a more stable product mix, or is it just poor visibility on this topic?

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.

Got you. Thank you.

The next question comes from Andres Castanos from Burenberg. Please go ahead.

Hello. Good morning. Two questions, please. One from Klaus. Please welcome in. What, in your view, are the key features that distinguish the two specialty targets in doing TPE and TPE? And how do you identify those features? The second one, please, for Peter. I wanted to understand better about the tougher comps that you'll be seeing in H2 2023 versus H2 2023. I assume those were volumes and... And maybe for pricing, it's 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 continue to see stable sales? So this is your question. Thank you.

Yeah, 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 the second half of this year. But if we go back and look how 2023 developed, we started with Q1 where we had good demand and we peaked at our 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 raw material prices and subsequently sales prices have been quite stable. We have seen fairly small movements when it comes to raw materials and sales prices. How that will look going forward is 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 demand and high sales prices in Q1 continued during the second quarter and Q3 and Q4 were quite stable.

Right, that's helpful. Can you remind us how long does it take for you to react to higher ROMAs? It's one quarter, maybe less?

Yeah, 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 the bigger customers where we have contracts and pricing mechanisms built in, I would say generally during a quarter, new prices will be implemented both up and down. Thank you.

The next question comes from Gustav Bernablad from Nordea. Please go ahead.

Hi, it's Gustav here from Nordea. I think most of my questions regarding demand has already been asked, but I just have one here. You have previously commented on, for example, consumer-related end markets being weak, but sort of don't anymore would you say that you're 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 it's always interesting uh giving you a broad exposure if you have any reads there yeah the reason why we didn't comment on on specific is simply because there were so small movements on them uh so when we looked 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.

Okay, perfect. That's all for me. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. Claes here again. Thank you all for your questions and for listening in, of course. But before closing, I would like to thank Peter, actually, 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. Thank you and have a good day and a good summer.