HEXPOL AB (publ)

Welcome to the HEXPOL Q4 presentation. During the questions and answers 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 Dahlberg, and CFO, Peter Rosen. Please go ahead.

Peter Rosen Thank you, operator, and good afternoon, everyone, and thank you for joining in on the HEXPOL Q4 presentation. This is Claes Dahlberg speaking, and I'm here together with our CFO, Peter Olsen. Hello, Peter. I will start with a business update. I will tell you about our latest acquisition, also Piedmont in the US. And I will also mention the efficiency measures we have taken within rubber compounding Americas. Peter will take you through the financials, and I will summarize the quarter. and our focus areas going forward. After that, we are happy to answer your questions.

If you please turn to page four. Let me start by going through the Q4 performance. We improved sales in Europe in the fourth quarter. The conference call will start shortly. drop out here.

So now we're back. I was talking about the cash flow when the line was broken. So I said the organization keeps close track on the working capital and that's mainly the reason that we have continued to have a strong operating cash flow close to 1.2 billion SEK in the quarter. The board decided on an ordinary dividend to be raised to 4.20 SEK per share. If we move on to demand and sales price, we can see that demand was down versus Q4 last year, mainly affected by lower demand from automotive. Building and construction is still on a low level, but we see another quarter with an increase versus Q4 last year. Sales prices were sequentially stable and we had no big variations when it comes to prices of raw materials. We are firmly committed to sustainability and our focus on that continues. When it comes to our own operations, we are well on our way of reaching our CO2 target reduction of 75% by 2025. And so far we have reached 65%. And that's great work done by our organization. We still see a high interest in recycled products also, resulting in a number of projects, not least from the automotive industry, where we are well positioned. When it comes to operations, if you would please turn to page five, I would like to highlight the sales of our factory in Muscle Shoals, Alabama. The products produced there were not core to our business. They produce so-called curing envelopes for the retread tire industry. We will of course make sure that the transition is smooth for all parties involved. Another step to optimize our production and to be more efficient is the closing of the Kennedale facility in Texas. We moved the production to our other sites in the US, mainly to Burton, Ohio. With these measures, we create higher efficiency in our organization and the payback of closing Kennedale is less than a year. As you can see on the map, we still have a very strong manufacturing footprint in North America for rubber compounding. Not shown in this picture is that we also have three sites in Mexico. If you please turn to page six. Looking into the different business areas, starting with hex pole compounding, which is the majority of our business, we improved sales in Europe. but it was offset, like I said before, by lower sales in North America. Demand was down versus Q4 last year, mainly affected by lower demand from automotive customers. SMP, or Standard & Poor's Global Mobility Report, shows that North American and European automotive production is down some 8% in Q4 this year versus Q4 last year. We saw a slight increase in demand from building and construction, but in a way it's compared to lower volumes last year. The supply chain is stable. Most raw materials see somewhat lower prices year over year, but sequentially stable. If we then move over to Hexpol engineered products, before Christmas I had the opportunity to visit our facilities, Delana US, in Wisconsin producing wheels. I also visited our facilities in Qingdao, China, producing wheels and also gaskets. And it's encouraging to see that sales for engineered products were strong compared to last year. And actually we had a good development across all product areas. And we are proud to announce a new sales record for wheels in 2024. We surpassed 1 billion Swedish crown in turnover. And this is thanks to our dedicated team working with these high quality products. Operating profit and operating margin increased and are now above our average operating margin. Peter will come back to the figures that will show that. Mergers and acquisitions is an important focus area for our growth plans, as you know. We look positively at the M&A environment and we have the financial resources to make more acquisitions. If you please turn to page 7. Piedmont Resin Supply, located in Georgia, is our latest acquisition. We acquired 80% of that company in Q4. And on the picture, you can see the founders, Matt Griffith and Paul Daniel, next to me. They remain on board with 20%. They founded the company in 2013, and they are really true entrepreneurs. And we feel we share the same values and culture. It was consolidated from the 1st of November this year, or in 24, sorry. Piedmont brings valuable competence to the group regarding nylon compounding. Nylon is a very durable material. It's heat resistant, and it's also suitable for replacing metal in, for instance, battery electric vehicles where the manufacturers are chasing weight. It's also used in carpets and furnitures. Piedmont use some 60% recycled material. If you please turn to page 8, coming back to the HexPoll culture. This is a backbone for our organization to deliver value to our customers. If you please turn to page 9, it's time for the financial update and Peter will start with the sales development in Q4. Peter, please go ahead.

Thank you, Klaus. If I can ask you to turn to page 10, looking at the sales development. As Klaus mentioned, we delivered sales of 4.7 billion SEC here in the quarter, which is down 4% versus Q4 last year. Looking into the details, organic sales are down 6% in the quarter, while the acquisition of Star and primarily Piedmont added 2% in sales. There were only minor effects in the quarter affecting sales. If we look into the organic sales, they are mainly driven by somewhat lower volume compared to last year and to a much lesser extent to lower sales prices, so primarily volume. And if we look at it from a geographical perspective, Europe showed sales above same quarter last year, while we saw lower sales in North America. And although customers both in Europe and North America closed down production normally ahead of the winter holidays here in December, this year we saw that especially the U.S. manufacturers and customers closed down production earlier than they normally do in December. So for us, having no order stock, the same December became a short sales month. And as Klaus mentioned before, if you look at it from an end customer perspective, Especially automotive showed soft demand during the quarter, while we again, second quarter in a row, saw building and construction with higher demand and higher sales. If I can ask you to turn to page 11, looking at the financial overview. We delivered and adjusted the EBIT of $631 million, with a margin of 13.4%, which is below what we did the same period last year, and also below what we did in Q3 this year. Main reason for this is lower volume in North America, where we in the short run cannot offset with lower costs, combined with a less profitable mix. Equity asset ratio remains very high at 64%, and also return on capital employed is high at about 17%. We delivered a very strong cash flow of 1.2 billion SEC, to a large extent driven by efficient working capital management. And if I can ask you to turn to page 12, just looking at the development over the quarter, we see that sales came in at the 4.7, down 4%. Wall adjusted operating profit came in at 631 ms and as mentioned before, as below last year, driven by the lower margin at 13.4%. If I can then ask you to turn to page 13, looking at the drivers, the profit drivers, we see that the lower EBIT is driven by the somewhat lower sales. and lower gross margin. And the latter is affected by the lower volume that we had in the quarter and its impact on costs in the short term and a less profitable mix. Again, with main negative impact from our North American business. OPEX are in line with last year levels. If I can ask you to turn to page 14, going into Higgs pole compounding in a little bit more detail. Delivered 4.3 billion SEC in the quarter, which is 5% below Q4 last year. We always see customers closing down ahead of the Christmas holidays, but this year they closed down earlier than they did last year. And as I mentioned before, this was especially visible in North America with some soft demand in November and then December becoming a very short sales month when the customers closed down. Europe showed sales just above last year levels. And from an end customer perspective, the lower demand is primarily seen with the automotive end customers. Operating profit at 566 million SEK with a margin of 13.1. Then, if moving to page 15, looking at engineered products, we delivered sales of 386 million SEC in the quarter, which is well above what we did last year, 357. And within those business areas, all product areas showed good performance. Also visible in the operating profit, that increased 18% to 65 million SEC, with an increase in EBIT margin to 16.8%, so a very, very strong quarter, and for that matter, a year for engineered products. If I can ask you to turn to page 16, looking at working capital, you will see that we continue to manage working capital very efficiently. It stands, despite the acquisition of Piedmont that added about 100 million SEC, working capital stands at the same level as last year, both in absolute terms and as percentage of sales. And as mentioned before in earlier quarters, there's no change in underlying payment terms. And if I can ask you to turn to page 17, look at the cash flow. We delivered a strong operative cash flow of $1.2 billion. with improvements in working capital driving a large part of $650 million a SEC. And then if I can ask you to turn to page 18, seeing how that translates into our net debt, it stands at $2.2 billion a SEC at the end of the quarter and a net debt to EBITDA ratio of 0.59. And just a reminder that this is after the acquisition of Piedmont. um completed here in the in q4 so all in all we continue to stand with a very strong financial position when we close 2024. and with that i hand over to plus to summarize the quarter thank you people since we closed the year 24 if we if i allow myself to look at the full year um

we are close to actually reaching a 60% operating margin. And when we compare with 2023, that was the best year ever for the group when it comes to operating profit. And that year we had 16.6% operating profit margin. In 2024, we had three rather strong quarters, despite some headwinds in the market. Whereas the operating profit margin in this quarter, Q4, was on a level below our standard, as I mentioned before. However, we regard the Q4 result, if you allow the expression, as a bump in the road, mostly related to the month of December in North America. We expect volumes to come back for rubber compounding in North America in January to more normal levels. We continuously work on efficiency, which resulted in the divestment of one production unit and the closing of the Kennedale unit in the US during Q4. Piedmont Resin is a new member of the Hexbolt family, strengthening our position within nylon compounding in the US. We continue to focus on sustainability and we reached 65% CO2 reduction so far. Our cash flow is a proof of a solid business model combined with a strong culture and a decentralized structure. Ordinary dividend is proposed at 4.2 Swedish crowns per share, which is a 5% increase, still allowing us to make the investment for our future growth. As I mentioned in our last call, we continue to investigate further growth opportunities, focusing on M&A, organic growth, and improved efficiency. By that, we conclude the presentation of the quarter and open up for your questions.

Operator?

If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Johan Sundmark from SEB. Please go ahead.

Hello and thank you, Claes and Peter. If we perhaps start with the question with the margin, it's quite a big drop year over year. EBIT is down some 25%. You do mention it a bit, but could you give us some more color on the split explained by price mix or lower volumes in this quarter?

Yeah, there are a couple of drivers. The key is that the The lower volume, especially that came after customers closing down in December, left us with a decision to, we know January is a high volume month for us. So we decided not to take out costs because we need the resources, the people to produce when we come back in January, when volumes go up substantially. So we could not offset the lower volume with cost savings. That would be the normal one. Secondly, when customers closed down in December, the ones still open and ordering, the products asked for were products where we have lower margin. So it was a double hit in the sense of cost remaining when volumes came down and also a negative product mix.

Okay, and then also you mentioned different alternatives to sort of boost organic growth in various end markets. Could you be a bit more specific on what strategies you're looking to address this?

As I said, that I would like to come back to Johan and what our actual actions are there.

That's too early for me to give you that specific input on that.

Alright, and then last final question. The overall market has been quite weak for some time. Do you see any potential signs of recovery out there or any green shoots that you might be able to share your thoughts on?

It depends on what industry you look at. As you know, we have different automotive. One part automotive, as I mentioned, the production has been slow in 24. And we don't see any big changes there, to be honest. But we have other areas like wire and cable is one. area where we are active and there we see possible positive development related to electrification and so on and so forth. So there are areas where we see positive signs let's say.

Okay perfect thank you very much that's all for me. Thank you.

The next question comes from Henrik Hintze from ABG Sundahl Collier. Please go ahead.

Hi, this is Henrik here. First, just to follow up a bit on the question about the margin, I was also wondering, since these early shutdowns seem to affect the U.S. more, is there also a negative geographic mix for the margin here?

Without going into details, we, as most industries, have somewhat higher margins in North American markets than we do in European markets. So there's some... Okay, thank you.

Yeah, yeah, okay. And then also just in your talks with customers, have you heard anything about reasons for the early shutdowns and what that implies for Q1 or H1 demand-wise?

Well, if I may answer that, Henrik. I think if we just look at the reports we are getting, I think we can all read that Somehow, if we look at the automotive industry again, I think some of the producers are struggling with high inventories. And somehow my feeling is the affordability, as it's called, for a passenger car has gone down, let's say. So I think that is impacting where they are standing. Even though some of the statistics show also a slight increase in sales, not in production, but sales of passenger cars.

All right. Thank you. That's all for me.

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

Yes. Hi. It's Gustav here from Nordia. Just to come back to the comment there on the recovery you expect here already in Q1, is that based on the actual figures you've seen here in January so far?

My comment Gustav was that we see the figures in January as you know we, how do you say, That's our expectation for January. I cannot and we will not give a prediction on the full quarter and it's based on volume also.

Yeah okay fair. And then regarding a difference here in between Americans and Europe is there anything specific that sticks out here in terms of demand? Why Europe is a bit stronger so to say?

Yes and no, but in a way similar, I would say. If we look at the overall economy, maybe we feel that the North American is doing a bit better, but when it comes to our customers, we feel it's quite similar pattern in a way.

And then maybe just on the M&A side here can you just comment a bit more on the pipeline and the general M&A sentiment in your type of business currently?

Now currently as we said I mean we see it as if I may call it positive environment and as you know for us it's essential to have a pipeline of possible projects so to say and that is the case so we see positive on mergers and acquisitions or acquisitions I should say.

Okay perfect and then just on the tax one last question here sorry the tax one off here in the quarter is that something we should also expect here in Q1 or was that just for Q4?

No that was Q4 and just to give a little bit more words to if you refer to the cost in tax. That was one of tax costs. It's related to... I'll take that first. We went through our legal structure to see how we could optimize it. And in that process, it became visible that we historically have paid too low state tax in instances when we sell from one state to another. This is sales tax calculated based on sales that becomes due if a company hits certain triggers. And historically, those triggers have been if you have physical presence, like production, warehouse, et cetera. And that has changed over the last few years, that view. And we hit some of those triggers, and just to make sure that we've done right by ourselves and don't have a tax issue going forward, we entered into agreements with those relevant states. So it's a one-time thing, and it's covering Q4. Should have no impact going forward.

Okay, that's very clear. Thank you very much. Thank you.

The next question comes from Douglas Lindahl from D&B Markets. Please go ahead.

Hi, gentlemen. Thanks for taking my questions. I will also add a question on the sort of the gross margin. Peter, I seem to pick up a bit of confidence there that you expect this to bounce back already in Q1. And did I get that right? You're basically assuming it's related to volumes coming back from seasonality pattern. Yeah, that's my first, just a clarification question.

Yeah, and then I should make a clarification as well. I don't give forecasts on future gross margins, to be very clear on that. What I did say was also related to a number of questions on Q4 is the lower volume that we saw primarily in December where we saw volumes coming down very quickly because of customer closures, we can't take our costs, and we don't want to take our costs that quickly because we need to be able to meet the higher volumes that we expect. And as Claus mentioned, that we'll already see in January. Seasonally, if we look at historical patterns, Q1 has always been a much stronger quarter, and we need to have the resources to meet that.

And if we were to look at December isolated and split it up in two parts, first half and second half, will this first half give you a bit more confidence, sort of talking about the run rate there, isolated?

Actually, I think breaking up December into parts is actually too narrow, because if we look at how customers closed, that's more than half of December. I would say this December, you only had a couple of days that were sort of everybody was up and running and then customers started to close down at different dates.

Okay. And then maybe skipping the gross margin discussion, but moving over to OPEX. Do you want to give any sort of guidance or comments on that heading into 2025?

Not more than, if we look at the last two quarters, we've been quite stable. And it's something that we manage closely. So not more than that.

Okay. And on the Tidmont acquisition, did you mention it was Consolidated from 1st of November, I think you said, right? That's correct. And I think you've also, previously you've also said that margins here are basically comparable or in line with Hexpool. So just confirming that they haven't weighed in Q4 margins specifically. And also a follow-up on that is, do you believe you can sort of expand on those margins heading into next year?

That was a lot of questions in one. Sorry. I'll try to answer it. Yes, we have 10 months included since 1st of November. Over a full year, their margin is in line with Hexpool average. If we look only at Q4, they are below Hexpool, so they actually have a negative impact. But that is more related to we bring in and integrate a company that only has two months of sales, where December, also for them, is a very short sales month. So yes, it has a negative impact in Q4 because of the timing of the inclusion, but not if we would have looked at it from a full year perspective. I hope that answered your question, Douglas.

That's clear. But the underlying profitability going forward, do you expect to raise that for Piedmont?

That is definitely the ambition, yes. I don't want to quantify that, I guess. No. That's great.

Okay. Okay. Those are my questions. Thank you.

Thank you. Thank you.

The next question comes from Andres Castanos-Molor from Barenburg. Please go ahead.

Thank you very much. A follow-up on fixed costs, please, because there's lots of moving pieces. There's the closed shores, the acquisitions, potentially extraordinary integration expenses. Yeah, I wanted to follow up on that and see if there was going to be a deviation in the next few quarters versus the last two quarters in terms of OPEX.

If we look at the Q3 this year and Q4, or sorry, last year, 2024, Q3, 2024, and Q4, 2024, we were running OPEX at about 280 million SEC for each of those quarters if we remove the one-time cost that we had here in Q4 related to closing Cannondale, selling Muscle Shoals, et cetera. So the FACL adjusted OPEX they were at 280 million SEC. I'm not going to give a forecast going forward, but also if we look at Q2 2024, we are at the same level. So the last three quarters in 2024, we were roughly at 280 million SEC if we remove one time cost in Q4.

All right, so that part we can assume it continues, but then on top of that should we assume some extraordinaries for integration? You mean for Piedmont? Exactly, integration of the synergies.

No, one shouldn't expect any large integration costs for Piedmont. But of course Piedmont coming into 2025 with a full quarter, of course, zero effects will be added on top of what we have before we acquired payments.

Makes sense. Understood. Thank you. Also wanted to understand a little bit the setup of the geographical footprint in Mexico. Who are they selling to? Is this other manufacturers in Mexico as well? My point is, are these factories subject to risk of tariffs? Because I noticed you're closing your plant in Texas and there is a large hub of automotive there and I wanted to understand this a little bit better.

It's a valid question Andreas. So we have three plants in Mexico and the customers they are actually we are delivering into facilities in Mexico into our customers are in Mexico. So then they are, of course, delivering to OEMs, for instance, exporting into the US.

But our direct customer is also based in Mexico. Does that answer your question?

Thank you. Understood. Very well. Yes, very clear. And then a final one from me. I want to just check that you have received cash already from the MuscleSouls sale or not yet? Is this in this quarter already?

Yeah, it's already in place.

Okay. Thank you. This is it for me.

Thank you very much. Thank you.

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

Good afternoon, everyone. Sorry to dwell on this further, but just trying to understand the margin mix here in the fourth quarter, especially in the U.S. Was that isolated to December when you referred to, Peter, a sharply deteriorating product mix? Was that exclusive? Did it take spot deals to other clients? to compensate for automotive shutdowns? And if so, what sort of effect did that have on volumes taking those bottles in the fourth quarter?

If we look at demand, we started to see somewhat lower demand in November, but the customer closures, they took place in December and it's driven by the customer closures that we saw a negative, primarily that we saw a negative product mix effect. So if we talk about volume, it was partly November, but a large part December. And when we talk about mix, it's primarily December because of the customer closures.

Right, and was it, you know, spot volumes, more sort of bulk volumes you choose opportunistically to take here in the fourth quarter, or is that the wrong way of looking at it?

No, I would say no opportunistic volumes, but customers, so all the businesses, existing customers, and the, let's take automotive as an example, they close down early. And the customers that we still had that were up and running, we delivered on those volumes. And those products were of lower margin for us.

Got you very clear. Would you say that the changes in mix in the U.S. is sort of a bigger impact on profitability compared to the sort of European versus North America issue that you also talked about affected mix negatively?

I would say that the main effect is in the US.

Got you. Final question. Have you come up with anything else or have you found out any new initiatives with regards to factory footprint? I mean, obviously you haven't announced anything, but just in terms of how you see the potential to take out the efficiency here.

Same answers as we give. I mean, we review it on a constant basis to see how the footprint should look like, both in everywhere we are, regardless of if it's North America or Europe. So far, I mean, we took the decision two years, end of 23 to close one in the U.S., We sold one 24 and we closed another one in 24. At the moment that's what we've done and then the only answer I can give is that we continue to look at it and we will adjust when and if needed.

All right, thanks a lot. Thank you.

As a reminder, if you wish to ask a question, please dial pound key 5 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.

All right, then I just would like to say thank you all for participating, for showing interest in Hexpool and looking forward to meet you again for the Q1 report. Thank you very much.