HEXPOL AB (publ)

Welcome to the HexBall Q3 presentation. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. Now I will hand the conference over to the CEO, Klaus Dahlberg, and CFO, Peter Rawson. Please go ahead.

Thank you, operator, and hello to you all, and thank you for joining this call, and welcome to the HexBall Q3 presentation. This is Claes Dahlberg speaking and I'm here together with our CFO, Peter Rosen. If you please turn to page two. I will start with a business update. Peter will take you through the financials and I will summarize the quarter. After that, we are happy to answer your questions. If we then go to page four, please. I will start by going through the Q3 performance. We see that most markets continue to be affected by the geopolitical uncertainty, but it's pleasing to see that the European market continues to be rather stable, while the North American market is still challenging. We had only minor direct impact from tariffs, whereas the indirect impact on end customers affected the overall demand, especially north america it's also pleasing to see that including acquisitions volumes were actually higher than last year and excluding acquisitions they were in line with last year but with an unfavorable mix looking at our main segments we saw that the automotive and customer segment continued to be slow primarily in north america That was partly compensated for by increased demand in building and construction and also in wire and cable. Our most recent acquisition Piedmont in the US and Capcom in Turkey contributed positively to the quarter. Sales prices as well as prices on major raw materials were stable both versus last year but also sequentially. High uncertainty continues, triggered by US tariffs and US trade policy, and that is impacting us indirectly, as mentioned before. In North America, that is the main reason why we could not grow the overall sales and results compared to last year. In the quarter, we delivered sales of close to 4.7 billion SEC, with a negative FX effect of some 300 million SEC. Piedmont and Capcom added some 240 million in sales that was offset by lower organic sales in rubber compounding Americas. Compounding Europe showed rather stable organic sales. We reached an EBIT of 688 million sec and a margin of 14.7%. impacting negatively by fx of some 50 million sec and an unfavorable mix the operative cash flow continued on a good level and we reached 740 million sec in the quarter if you please turn to page five if we look into the different business areas starting with hexpole compounding The overall organic volumes were in line with last year. The lower sales were impacted by negative effects of some 290 million sec, but also by the mix. The automotive end customer segment was down primarily in North America, but that was partly offset by increased demand in building and construction and wiring cables. The price on major raw materials were sequentially stable and also versus last year. And the lower operating margin was affected by an unfavorable mix. Rubber compounding Americas is, as you know, an important part of the HEXPOL group. And we are very happy to welcome Ken Bloom back to HEXPOL as the interim president for Rubber Compounding Americas. Ken has a clear mission to take the next step capturing and growing that business. If we then jump to Hexpol engineered products, if we exclude the negative currency impact of 22 million, we actually had a small increase in sales compared to last year. And also good development across all product areas leading to a stable EBIT. We are firmly committed to sustainability and our focus continues. We are on a good path to deliver on the 75% CO2 reduction target that we set for the end of this year. We're also working on the sustainability strategy and the new targets will be completed during Q1 next year. M&A is, as you know, an important focus area for our growth plans. We have the financial resources to accelerate acquisitions. Short term, the political uncertainty impacts the M&A activity level. There is somewhat a wait and see mentality among some companies. And that is affecting that. And last but not least, on November 4, we will have our capital market day in Stockholm and then we will share more about our growth strategy. If we then turn to page six, it's time for the financial update and Peter will start with the sales development in Q3. Thank you very much.

So if I can ask you to turn to page seven, we'll take a look at the sales development in the quarter. And as you've seen, we delivered sales of 4.7 billion SEC in the quarter, which is down 6% compared to the same quarter last year. And if we look on the drivers, we see that organic sales are down 4% in the quarter. And at the same time, the acquisitions of Piedmont and Capcom added 5% in sales. And as Klaus mentioned, there were large negative effects in the quarter, adding up to 312 million SEC. Coming back to the volumes, overall organic volumes were on the same level as last year, but sales were still down, affected by a less favorable mix. Looking at it from a geographical perspective, Europe showed stable sales in the quarter, while we saw a decrease in North America that also translates into the decrease in group level. From an end customer perspective, automotive showed soft demand, which was partly offset by increased demand primarily from building construction, wiring cable, but also several smaller end customer segments that showed higher sales in the quarter. If I can ask you to turn to page eight, just taking a look at the financial overview and the P&L. We delivered a profit of 688 million SEK. That includes a negative FX impact of just above 50 million SEK. EBIT margin of 14.7%, which is below what we did the same period last year. And the main reason for this is somewhat less profitable mix, but also OPEX in relation to the lower sales that we saw here in the quarter. Strong cash flow in the quarter. With an EBIT of 688, we delivered a cash flow of 740 million SEC in the quarter. If I can then ask you to turn to page nine, taking a somewhat different view of the financial performance here in the quarter. We see that sales came in the 4.7 with an operating profit at 688 milliseconds below last year as mentioned, and an operative margin of 14.7%, which is done below what we did last year. If I can ask you to turn to page 10, looking at the drivers of the operating profit, we see that the lower EBIT is primarily driven by the lower sales, but also impacted by lower gross margin. The lower gross margin is affected by mix. OPEX is somewhat above last year levels, but that is driven by we've added Piedmont and Capcom to the cost base compared to the same period last year. If I then ask you to move over to page 11, starting to look at Hexpool compounding in the quarter, delivered sales of 4.3 billion in the quarter, which is below what we did the same period last year. Negative FX has a sizable impact of almost 300 million a second a quarter. Recently acquired Capcom and Piedmont added about 230 million second sales, while as mentioned before, organic sales were down some. And these lower organic sales are seen in North America, while Europe showed sales on the same level as last year. and as mentioned from an end customer perspective that the lower sales is seen with automotive customers and this was partly offset by higher sales to end customers within building construction wiring cable and also some other smaller segments operating profit came in at 624 million sec with a margin of 14.4 percent for the quarter If I can ask you to turn to the next page, we take a look at engineered products. We're adjusting for negative effects in the quarter. Sales were up 3%, and this is driven by strong performance by the Gaskets products. Operating profit at 64 million with a good EBIT margin of 18.1%, both in line with last year levels. If I can ask you to turn to page 13, taking a look at the working capital, you can see that we continue to manage working capital efficiently. Despite adding Piedmont and Capcom, working capital is on the same level as last year, both in absolute terms and in relation to sales. And as mentioned also in last quarter, there are no changes to underlying payment terms. And if I can then ask you to turn to page 14, taking a look at the cash flow. As mentioned, we delivered a strong cash flow in the quarter, 640 million SEK with smaller movements across the various items, but well above the EBIT that we delivered in the quarter. And then finally, when it comes to the financial part, if I can ask you to turn to page 15, looking at the net debt standing at 3.9 billion SEK and a net debt-to-ebit ratio of 1.14 at the end of the quarter. This is higher than last year, but this is mainly driven by the acquisition of the minority share of ALMAC, as well as the acquisition of Capcom that we've done this year. So all in all, after a third quarter, we continue to stand with a very strong financial position. And with that being said, I hand over to Klaus.

Thank you, Peter. Finally, then, just to summarize the third quarter, Europe showed stable sales compared to last year. Engineered products also showed stable sales with a good profitability. We saw lower demand in North America affected by the high uncertainty related to U.S. trade policy. However, we didn't really see a direct impact from tariffs in the Q3. As mentioned, Ken Bloom is appointed interim president for Rubber Compounding Americas, and we consolidated Capcom as of the 1st of May. And as we've said many times now, wire and cable that they represent is a growing segment for us. We continue to focus on M&A, and we have a strong balance sheet allowing us to act. We continue to focus on sustainability with good progress, both when it comes to our internal targets, but also when it comes to our products. And on the 4th of November, we will have our Capital Markets Day in Stockholm. So by that, we conclude the presentation of the third quarter and we open up for your questions, ladies and gentlemen.

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 Joan Sunmark from SEB. Please go ahead.

Yes, good afternoon, gentlemen, and thank you for taking my questions. Starting with a question on automotive, if I look at the S&P figures on light vehicle production in Q3, it looks like it has improved a bit compared to last year. Yet you mentioned that the decline in automotive seems to be present for you guys in Q3. So do you expect that there is some kind of lagging effect here, or is it rather your particular exposure that's impacting this? If you could shed some light on it, it would be very helpful.

When it comes to automotive, we always look at the production. And as you say, there is, of course, a certain time difference. Those figures compared to our figures. When it comes to the North American market in September, there was, from a sales point of view, an increase and that was due to the fact they had a subsidy of 7,500 euros per vehicle. So that triggered sales in that very month, let's say. But other than that, it's a rather slow market.

Okay, that's good. And I know that you have a fairly short order book, but

you share some color on the current discussions on demand that you have with your customers out there and sort of what they foresee demand wise well as you say we have a very short order book and the trend we have seen is that it becomes even shorter so we get very late orders from many of our customers but yeah The overall situation, like I said, it's a rather uncertain situation. So we don't have good visibility when it comes to the order book.

Okay, fair enough. And on the back of that sort of uncertainty in demand and as the margin trend have been quite negative now for a few quarters, do you see any signs of that shifting or how are your sort of current discussions going to address that and improve the margin profile going forward?

Hi John, Peter here. Just to be clear, we don't give guidance for earnings. That being said, there are a couple of things. One driver of the somewhat lower margin is the mix. And it's no secret that automotive is an important end customer segment for us. so we would prefer to see that automotive production goes up and we get some of those volumes back and which is of course something that we're we are working on the other part is looking at our cost structures and that there are two things one is looking at the manufacturing footprint but in this short run we haven't taken any new decisions on that then when it comes to the more The other cost sides, we're looking both at manning in direct production, bring that down and allocate that according to the volumes coming in and you will see in in q3 that the number of people were actually lower but 60 people less this quarter compared to last quarter q2 this year so we're looking at those costs as well to see what can be done to bring down the cost levels and manage those okay very clear thank you thanks for taking my questions

Thank you.

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

Hi, this is Henrik at ABG. I was wondering if you could give us an update on how you view the M&A landscape at the moment. For example, are potential buyers and sellers closer or further apart on pricing compared to earlier this year?

As I mentioned in my report that What we see right now is some of the companies are also affected by this uncertainty in the market. And because of that, there is a certain wait and see at the moment. So it's not maybe so much about multiples and so on. It's more that if their total result goes down, they are a bit hesitant at the moment to... let's say, to close a deal, if I call it that. So that is what we see. But with that said, we still have quite a pipeline of companies, of prospects, so to say. So that's what we're dealing with at the moment.

All right. Thank you. And continuing on capital allocation, If this wait-and-see attitude persists among sellers, would you consider buybacks or extra dividends if you're unable to find attractive M&A opportunities?

Peter here. Priority number one is to do the M&A, and it's a very high and very clear priority for us. That being said, A while back, the dividend policy was upgraded to be in the range of 40 to 60%. And I think that's where we are right now. Priority number one, M&A. And then we have an increased dividend policy since about two years. So that's what we can say at this point.

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

Thank you.

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

Yes, good afternoon. It's Gustav here from Nordia. I thought maybe just to build on your comment there, Peter, on the cost side. As you said, you haven't really taken out anything recently. Is that more due to you want to wait and see where demand is heading due to the geopolitical uncertainty? Do you feel that you have a quite good balance where you are today and with enough of a capacity to be ready to deliver if demand returns? If you can elaborate a bit more on that.

Yeah, of course. First of all, I think just to point out Q4 last year, we decided to close one site in the US and that project was finalized in second quarter. So I just want to say that to be clear that we've just finished one project to close a production facility. That being said, there's always a trade-off on do we want to close sites in relation to the expected volumes when they come back? Since we are a batch producer and we also don't work with order stocks, we need to have a flexibility when it comes to production capacity. Because when customers come and ask for volumes, we need to have that capacity ready to produce. So we need to strike a balance between the cost and having the capacity to meet volumes when they come back. And I would say that's where we are right now.

Okay, perfect. And then if we move to Europe, I mean, it looks to be quite stable here year over year. Is it possible to give a bit more comments there? Is that stability, is that across all end markets or are you seeing sort of wire and a cable and drawing a heavier part here and being sort of a cushion, if you know what I mean, if you can just elaborate a bit there.

In a sense, it's a similar pattern as we see on the group level, just with smaller movements. So automotive, somewhat softer, and building construction, wiring cable, and some of the other smaller end customer segment being somewhat positive. So in a sense, same pattern, but smaller movements compared to North America.

That's very clear. And there's just one last question there to build on Hendrix here on the M&A side. Would you say that you were more open to close acquisitions in Asia today than you were a couple of years ago within compounding?

So when it comes to Asia, that's too early for us to say. And I think that's also part of, as I mentioned, our capital market. to come back to that subject, what opportunities could be there for Hexpo, let's say. We will come back to that, Gustav.

No, that's fair. That's fair. Thank you very much. Thank you.

The next question comes from Andres Castanas Mahler from Barenburg. Please go ahead.

Hi. Can you please comment on any impact of the Bancrocio First Branch Group, if it has had any impact at the group level at all? I assume it was a client. Is there any receivable at risk here, or will you have any demand, lack of demand, let's say, while the company solves its issues?

We don't normally comment on specific customers, but let's put it this way, Andrés. We don't expect any material impact at all from that customer.

Right, thank you. And also, I was thinking in the changes in the USA, the footprint changes you've been doing there, a few plant closures, also replace the leadership of the business there. What are your priorities or objectives for the region with these changes?

Sorry, Andreas, I didn't hear the beginning of your question. You mentioned changed footprints.

Yes, footprint changes. You have closed a few plants in the USA. You have also replaced your leadership there. What are the objectives for the new interim leadership?

I'll start with the first one when it comes to the manufacturing footprints. For the last few years, we've closed two sites, one in California. The reason for that was that we had two sites in California and we could see that we could service the customers from one site. So that's an efficiency improvement that we closed that down and we could maintain all those customers. The site that we decided to close last year was Cannondale, Texas. Similar reason there, we saw that we could service those customers from other sites. So it was a redundant capacity that we had and that's why we closed Cannondale. So both of those planned closures were, where we said that we could maintain the volumes, but we could service our customers from other existing sites. So that was to improve profitability.

And if I may close here on the regarding leadership in North America, we saw a need for a change to better address the challenges we see and also to capture the opportunities in the North American market. And we think that Ken Bloom is the right person to do that. And he has experience also from Hexpol. He knows the organization. So we are very positive about that change. Thank you. Thank you.

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

Yes, thank you. Good afternoon, everyone. I just wanted to dig a bit deeper on the comments you made in class regarding unchanged organic volumes in the quarter, if I got it correctly. I mean, excluding acquisitions, I guess you referred to unchanged volumes in the group. Does that mark a material improvement compared to what we've seen earlier?

in the year in your view i.e the year-on-year progression on volumes is that sort of significantly better than in q3 compared to previous quarters this year um hi everyone spitter here uh just to be clear again we're not going to give any guidance on on coming quarters when it comes to volume or profitability etc uh that being said if we look look at the volume development um we've seen both in Q1 and Q2, we did discuss that we had lower organic volumes. This quarter, organic volumes are in line with last year, Q3 last year. So in that sense, it's somewhat different compared to the first and second quarter this year. What that will mean... Sorry, go ahead. Go ahead, Johan.

Can you hear me?

Yes. Now I can hear you again.

That's good. You have minus 4% on organic revenue growth, right? And you're saying raw material is flat pretty much and also volumes flat organically. It's a fairly massive shift in the top line if you have the average selling price per ton going down 4%. So what I'm just wanted to pick your brains on is what's your what's your sort of visibility in terms of how this develops going forward is it just the function of sort of small variations us versus europe and auto versus other segments so if there's something else going on here yeah you know are you selling significantly more bulk volumes for example no no products no losing market share in that sense

No, you're right in your first reasoning. If you look at the 4% organic volumes, organic volumes are basically flat compared to last year. If we are very specific, we're talking very, very low single digit volume down percentage. So a very, very small part of the 4%. Then if we look at the other part, it's not sales process, but there's a mix effect and it consists of two parts. One is a geographical shift. We do see lower volume in sales in our North American market and price levels in North America are generally higher. So that has an impact. Then we also see that there is a call it the product makeshift, which is the basically automotive. Automotive, as we've said many times before, is a good end customer segment for us. So it's a combination, smaller combinations of those three items to make up the organic. So it's not a structural shift in that sense. No, it is not.

It's just that it's a fairly big number for those sort of variations. But I totally hear your message there. And on to the topic, what you can do to affect this. Is this just a function of the way markets go or you have any visibility how you sell more advanced compounds, etc.?

You mean for the profitability, Johan? Yes.

Well, I guess both in the end, both top line and profitability. You know, I understand that if US is weaker than US, it's going to impact your organic growth. But I'm just trying to understand how you structurally can sort of approach this issue to sort of possibly improve mix as we go forward.

And yeah, and again, as Peter is saying, I mean, automotive is an important part and that has not been... growing as you know and even shrinking as we can see in the S&P figures and we have found the business as you can see also in our report within building and construction wiring cable is a segment that is also growing and where we have also been able to to capture business so I mean that's That's our day-to-day operation to find new ways, because we can't change the market conditions in that sense. We have to work on the things we can influence, of course.

Understood. Thank you so much.

Thank you.

The next question comes from Carl Dienberg from DNB Carnegie. Please go ahead.

Thank you very much. Good afternoon. I came a little bit late into the course. Apologies if this question was already brought up, but I have to ask again. I mean, when I look at the S&P production figures for the North American market for Q3, I think they indicate roughly plus 3% year-on-year. You're talking about flat volumes but of course it sounds like some of the other segments are sort of offsetting with positive growth relative automotive and I think you know when I look at the production numbers for Q2 as well It seemed like there's been a little bit of a discrepancy on let's say the production numbers relative your reported organic growth if I try to back it out on the automotive side. So yeah, very simple question. Is there a simple answer to this question? Is the OEMs or your customers bringing this more in-house now when production levels are fairly low or is there something else? Thank you.

There are at least two things that separate the official S&P production numbers from the volumes that we look at. One is the timing. There's normally 20-25 day timing difference from production of a car and material that we supply. So there's a timing difference. The other part is, which I think is fairly unique for this business, is that a lot of our customers have their own compounding business. And we do see that when volumes are around in the market, they tend to bring it in-house. So when you see an SAP production number, that doesn't automatically mean that it's transferable or translatable to ours, because we also have customers who sort of shrink the market where we can compete, what we normally call captive conversion or insourcing. And that also has an impact here.

Yeah, understood. And I think that's fairly interesting. If you can talk a little bit more about that. I mean, what kind of, let's say, in-house levels are we at right now relative let's say a pre-COVID scenario or something like that. I mean, just understanding sort of the magnitude which have fallen into this topic. Would it be possible to give a fairly high level view also to that?

Yeah, a high level. It's difficult to measure exactly because we don't have statistics where we see the exact movements in the total market and what goes in and out at customers. But our Our view is that we've probably hit the, let's call it maximum insourcing at this point. When we see volume flowing back in to the market where we can compete, that is difficult to put a timing on. But our view is, our current view is that we'll probably hit maximum insourcing at this point. Yeah.

Very much appreciated.

And maybe just finally on that topic, rounding it off. Obviously, we don't know what 26, 27 is going to look like, but do you have any sense of what kind of production numbers you would have to see in the industry for that, let's say, insourcing to reverse back into your hands? What kind of demand levels? Is it growth of? you know, mid single digits on the production numbers or because I guess that could be a fairly significant swing factor for you if I just looked at the numbers relative to what we've seen in the production numbers here later.

Very good question. I sort of wish we had an exact numbers to say that at this point it will start to flow back. But currently we don't know, and that's also one of the things that brings uncertainty into future orders, as Klaus mentioned in the beginning.

Okay, understood. Thank you very much.

Thank you.

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.

All right. Thank you, operator. And thank you all for participating in this call. And we hope to see you all at our Capital Market Day in Stockholm on the 4th of November. You're all very welcome to join us there. So thank you very much and enjoy the weekend.