HEXPOL AB (publ)

Welcome to the Hexfall Q1 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 good afternoon to you all. Thank you for joining this call and If you please turn to page two. At our Capital Markets Day in November last year, we presented our strategy for Hexbol up to 2030. I will get back to you with a few words about the strategy at the end of this presentation. But one of the clear goals we presented was to grow in thermoplastic compounds. We have singled out that business area and created a separate business area called Thermoplastic Compounding. By that, we now have three business areas related to rubber compounding, thermoplastic compounding, and engineered products like before. As you always see, we have made some changes to our presentation to align with that mindset. I will start with a After my part, Peter will take you through the financials, and then I will make a summary of the presentation. And then we are, of course, happy to answer any of your questions. If you please turn to page three. During the quarter, we have never had a momentum with an offensive approach, despite market headwinds. The general market situation is still challenging and we focus on our customers and defend our market share in a very competitive environment. In-house or so-called captive compounding increase in these market situations. As a result of that, the captive volumes are still on a high level. But what we do believe is that these volumes have peaked by now. In North America, we see continued economic uncertainty, which has a negative impact on the overall customer demand, whereas the European market shows more stability. The situation in the Middle East, of course, impacts our supply chain in all regions. The financial impact in this quarter, though, was limited, but it will be more visible going forward. But I will come back to this later in this presentation. Looking at volume and sales prices, it's very pleasing to see that we have managed to increase our total volume in the in the market protecting our market share has been successful. We have seen higher volumes to customer in many of our main segments like building and construction, wiring cable, industrial as well as automotive. Though the average sales price was lower versus last year. We receive recurring questions about the impact of any potential future higher prices for raw materials. The answer is clear. We will, in line with our business model, compensate for these product costs going forward. In the first quarter, we reached sales of close to 4.8 billion sacks. That was affected negatively by effects of some 526 million seconds. We saw positive effects from higher volumes and acquired Capcom in Turkey. but that was offset by a negative price-mix effect. We will explain more about that later. The EBIT margin came in at 14.7%, with an EBIT of 700 million SEK, with a negative FX effect at some 17.4%. Earnings per share in the first quarter was 1.47 SEK. If you please turn to page 4... I will now walk you through and summarize the quarter in each of the three business areas. First of all, this business area represents 69% of our total sales in the quarter or 3.3 billion. The total volume, market volume for rubber compounding are still on a relatively low level due to lower customer demand. As mentioned, captive volumes are still on a high level but has likely peaked. We have strong customer focus securing our market share and it's pleasing that we have managed to win captive conversion opportunities in North America which is in line with our threat. What this means is that customers choose to outsource all or part of their in-house compounding to Hextech. We see growing volumes to building and construction, wire and cable, industrial as well as automotive and customer segments, both in rural Europe but also in North America. The volume increase has a positive impact on organic sales, but the positive impact is offset by product and pricing. Coming back to the situation in the Middle East, with the closing of the Strait of Hormuz, it is ingrained in our supply chain in all regions, but especially in Europe. If you look at the map of the region, you can see several of our suppliers' facilities are actually in this specific area. itself and on transport. North America is affected to a lesser extent than Europe, and the reason for that is that they source to a large extent domestically, except for some additives that are being imported. As said, for Europe, a large part of oils used in rubber compounds and also base polymers are sourced from the Middle East. And as Hexpo, I believe we have an advantage in our size negotiating with certain suppliers. We also have very skilled chemists who can assist in finding alternative raw materials and suppliers faster than many of our smaller competitors. This has in reality already proven to be a real competitive advantage for us. We follow the development very closely and we take active decisions every day to mitigate the effects. As a result of the higher material prices, increased energy and transport costs, we will increase our prices towards our customers going forward. The financial effect of that is not to be seen in this If we then turn to page five, thermoplastic compounding, there we see that that represents some 23% of our total sales in the quarter, equivalent to 1.1 billion sales. In line with our strategy presented at the Capital Markets Day end of last year, thermoplastic compounding is where we anticipate to grow. We have to bear in mind that already with 4.6 billion SEC turnover in 2025, we're not starting from scratch. We have a good foundation to build from and we have exceptional knowledge in the field that we can now utilize on this growth journey. We talk just as in the overall strategy about both organic and the quiet road. The combination of producers in this area is central to us. The total market for thermoplastic, we should remember, is 10 times the size of rubber and our ambition to move up in the product pyramid. There we find the more advanced products called engineered polymers. Initiatives are ongoing to strengthen the organization in sales, in purchasing, but also in operations. In the quarter, we saw a growing volumes to building and construction, automotive, medical, but also to general consumer segments. The higher volumes had a positive impact on organic sales. If we turn to page six, This business area represents some 8% of our total sales in the quarter, or 313 million. In the quarter, we saw lower demand, primarily in Sweden, for wheels and gaskets. Bearing in mind, though, that the comparison from Q1 last year was on a very high level. engineered products is still on a very healthy level of 70 if you please turn to page seven and now it's time for the for me to hand over to you people for the financial

Thank you, Klaus. If I can ask you to turn to page eight, just looking at the snapshot of the first quarter. We delivered sales of 4.8 billion SEK in the quarter with a need of just about 700 million SEK and given a margin of 14.7%. The operating cash flow, although always relatively weak in the first quarter, came in at 235 million SEK, which is up 25% compared to the same period last year, despite the lower EBITDA we saw in the quarter. And also, and I will come back to this, the net dipter ratio stands at about 0.88, and it's somewhat higher than the same period last year, and this is due to the acquisition of Capco and the acquisition of the minority share of Alamark after the first quarter last year. If I can then ask you to turn to day nine, looking at the financial highlights, and look how this compares to first quarter last year. Sales are down 11%, to the 148 million, all which negative effects make up 10%. organic sales development and the acquisitions that we've done. And I'll come back to this one in a little bit more detail later on. EBIT stands at a drop of 130 million SEC, or 16% compared to the same for last year. And of this decrease, half is related to negative effects in the range of plus 70 million a second. EBIT margin stands at 14.7%, and it's down less than EBIT at the negative 90 bits. And we will come back to the drivers of the future later on. If I can ask you to turn to page 10, we'll take a look at the sales development in the quarter. And we see that the decrease of 11% in sales is driven by negative FX effects of 10%. In addition to this, we see organic sales are down somewhat at 3%, while the acquisition of Capcom adds 2% in sales in the quarter. The organic sales development is positively affected by higher volumes, but this is offset by negative price mix effects. The volumes are on low single digits, while the negative price mix effect is in the mid single digit range. From a geographical perspective, the American business showed 18% lower sales, out of which some 13% are negative effects. While Europe is on the same level as last year, despite some negative effects related to the euro. Asia, although also affected by effects, had a relatively weak quarter. the drivers of EBITS. Of the total decrease of 16% in EBITS, a little bit more than half comes from negative effects, more specifically 74 million SEC or 9%. If we then look at the remaining drivers in the quarter compared to last year, all of the impact comes from the lower sales volume in the quarter. The gross margin in percentage is on the same level as last year and OPEX in absolute terms are also on the same level as last year. Lower sales value is affected by two things. One on the positive side is the higher volumes mentioned and this is offset by negative price mix effect. The negative price mix effect primary comes from volumes produced and sold that have a lower sales value in absolute terms. If I can then ask you to turn to page 12, we'll start to go through the three business areas. We're starting with rubber compounding. in the quarter, down 11% compared to last year. And of this decrease, 10% are negative. Acquired income as 2% in sales, while organic sales are down 3%. Lower organic sales are seen in North America, while Europe showed sales on a similar level as last year. From an end-customer perspective, the higher audience are seen with most end-customer segments, not least the larger segments, wiring cable, building construction, industrial and automotive. EBIT is negatively impacted by negative FX effects of 60 million, or 10%, somewhat lower sales and gross margin, and it came in at a 520 million second margin of 15.8% in the quarter. If we then turn to page 13, we have thermoplastic compounding. As Klaus mentioned, this is now reported separately. We delivered sales of 1.1 billion SEC in the quarter, which is down 10% compared to last year. And out of this decrease, 9% are related to negative currencies. The organic sales development was positively affected by higher volumes to most end-customer segments, not just building construction and general industry, but also building modern medical. The higher volumes were, however, offset by negative price mix effects, resulting in a net negative 1% organic sales development. The lower EBIT is fully explained by negative FX effect of 30 million cents. And the EBIT margin is still the same level as it was last year. If I can then refer to page 14, looking at engineered products. We delivered sales of 362 million second quarter compared to 429 million last year. The decrease is driven by negative FX effects and lower organic sales, making up about half The lower organic sales are primarily seen in Sweden, affected by lower demand. But, as Claus mentioned, the lower demand should be seen in relation to Q1 last year, being a record high quarter, where many customers were delivering on high orders. lower in the lower sales but still very strong margins in line with last year levels if i can ask you to turn to page 15 looking at working capital As always, in the first quarter of the year, working capital is up at a very strong Q4, but we continue to manage working capital efficiently. Capcom adds working capital, but apart from this, there are no major changes to underlying payment terms or payment periods. If I can ask you to confirm, We delivered a solid cash flow of 235 million SEK, where depreciation investments are valid, while as always in the first quarter, working capital is up, affected by the very strong closing of the solidity candle. Although a first quarter is always weak from a cash flow point of view, cash conversion of ETH during the last 12 months remains high at 107%. And if I can ask you to turn to page 17, we have a net debt at the end of the quarter, 2.9 billion SEC and a net dividend ratio of 0.88. This is somewhat higher than what we had last year. And this is mainly driven by the acquisition of the minority share of Alma, as well as the acquisition during the second quarter last year. So all in all, we continue to stand with a very strong financial position here now in the first quarter. And with that, I hand over to Klaus.

Thank you. Thank you, Peter. So, Klaus, would like to recap what we said six months ago at our capital market stage. The strategic priorities are set and the organization is committed to deliver on these three pillars as you We are increasing our sales capacity and we are also increasing the efficiency by engaging the sales force in what we call cross-selling. We have an advantage that we can offer our customers a broad product portfolio in thermoplastics. Our newly inaugurated R&D center in Italy for rubber compounding is another example of us investing in innovative product solutions. We see an increased activity level within M&A and I feel confident about our possibilities and capabilities to continue to grow the business over time. However, the anxious and uncertain world leads to longer and more unpredictable processes. We are engaged in several active discussions, but as you all know, M&A is very much about time. we continuously review our manufacturing footprint so far we have actively chosen to maintain our flexibility and having factories close to our customers since that is a competitive advantage for us if you please turn to page 19 Just to give you a picture of what Hexpol thermoplastic compounding is today. We have 13 different manufacturing sites, six in the US and six in Europe and one in China. We are 800 employees serving with sales of nearly 4.6 billion in 2025. The customer segments are to some extent different to rubber compounding, but automotive is 31%, household is 16%, and medical is 7%. And medical is one area we anticipate to grow in. We also have products for toys, sports and leisure, which is some interest. If you please turn to page 20. I would like to point out that we are aiming at product segments higher up in this product pyramid. We often get the question about profitability of plastics. Moving up in the pyramid, mainly with so-called engineered polymers, we find more advanced products If you please turn to page 21. The new financial targets have been set and we are targeting an average EPS growth of 10%. And that is an important measure going forward. see a softer development short-term due to the overall market situation, but we are totally dedicated to this target for the time. At the AGM this afternoon, our annual general meeting, the board will propose a new long-term incentive for an extended group of key managers within the Hexpol Group, and that is based on our EPS growth for the coming three years. If you please turn to page 22, I will summarize the quarter. So overall, we saw higher volumes, meaning that we were defending our market position. We could see growing volumes in our main segments in most geographies. That has a positive impact on organic sales, but that was as explained during the cold offset by negative price in the captive volumes still on a high level, but we believe they have likely peaked. We have secured our market share and we are winning captive conversion opportunities in North America, which is very positive. The closure of But we handle that efficiently by our best-in-class purchasing, innovation and engineering capabilities. And the financial impact in Q1 has been very limited. And going forward, we still have a clear focus on the 2030 agenda. So by that, we conclude the presentation of the first quarter and we open up for your questions.

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 Henrik Hintz from ABG Sundahl Collier. Please go ahead.

Hi, this is Henrik Hintz at ABG. So I wanted to first ask about the automotive. You stated that volumes grew in the quarter. Was that the first approach? in a while there, and if so, why do you think that the mix effect is still negative here in the quarter, considering you've previously sort of explained the negative mix effect with automotive volumes still being down, and if the mix effect that we still have here is something structural or temporary?

When it comes to the automotive growth, we're speaking about no single deal, but still, if we look at the forecast from S&P for 2026, it seems like the overall production of light vehicles would be pretty stable, let's say. So we don't anticipate big growth in that segment. But still, we have some growth, let's say.

And I can add a little bit to your question regarding mix. What we see in the quarter is a combination of customer mix, as we have different earnings profiles for different customers. So that's an impact. And to also give us an example, some product mix. That product mix can be within the end customer segment, but it can also be between the end customer segments. And we saw that in this quarter.

Okay, but do you think that is a temporary effect?

Yeah, let's put it differently. I don't think it's a structural change. It's depending more on, I would say, primarily which customer takes more or less volumes in the quarter.

Okay, very good. Maybe one more question from me. You mentioned that you've taken some new customers in North America and are taking over their internal compounding operations. Can you give us any indication of how large these new customers are?

Well, as you know, we never speak about volumes, but I must say, just to elaborate a little bit on that, that's great. There is an opportunity when our customers look at renewing their equipment, the whole plant. That's when we have a discussion with them about them outsourcing this. We speak about usually bigger vertical integrated customers. And given the size of some of them, it's... vague, but it's quite interesting volumes for us to get that in-house with us. All right.

Thank you. Thank you.

The next question comes from Agnieszka Plela from Nordia. Please go ahead.

Thank you and hi Klaus and Peter. I have a couple of questions, maybe a follow-up on the captive conversion in the US. Can you tell us something about the profitability profile for that business that you're taking in?

Well, I would say that that volume is not deviating very much from similar volumes in the same, let's say, segments.

Thank you. And then also, Klaus, I think you wrote in the CEO Award about North America improving towards the end of the quarter. Can you tell us what's behind it and also if there is risk for any pre-buy by your customers now, given that we will see some price inflation?

Are you all right that we did see a good finish in the order? Like you say, I mean... It's much too early to speak about the trend there, but it's very positive that that is the case. And given the situation we're in now, it could be, let's say, a pre-buy effect. This we don't know. Bearing in mind, though, when we speak about rubber compounding, this is something you need to put on the shelf. Of course, our customers can produce their products and put that on the shelf.

Fair enough. And then a last one, really. Can you remind us how the input price inflation really impacts your operations? When will you see higher costs? And is there a lag between getting the compensations? And also, do you expect or do you have ambition to get 100% compensation for higher costs?

Thank you for asking. So the increases came very fast, I could say. But we are also very fast in adjusting that. And we have to get compensated to 100%. So that's what we're aiming for. Both starting actually already from last month with the price increases.

If I can add, I would say during the first quarter we didn't see any major movement of the rumour spirit, so that will come second quarter and onwards. And when it comes to timing and effects, as Klaus mentioned, surprise increases have already been an issue. There is always a little bit of a time lag, but when it's these kind of movements we We are quite quick to go with price adjustments. So it will definitely be implemented here during the second quarter.

Thank you. Very helpful. Thank you. The next question comes from Johan Dahl from Danske Bank. Please go ahead.

Yes, good afternoon, everyone. Just two questions. Firstly, I think, Peter, you talked about the mid-single-digit decline price peaks on the rubber compounding side. To what extent is that sort of discretionary decision taken? And to what extent is it just the different customers, different types of products? I'm just curious to know.

Yes, thank you. Peter here. There is a certain element of discretionary pricing to protect or take market share with some customers. But if we talk about the price mix effect in the corner, it's primarily the mix effect. So when we talk about customer mix or product mix, that is absolutely the majority of the impact that we see in the first quarter. And to a much lesser extent, what you would call the discretionary price.

All right. Back to the raw material. When we're hearing significant volatility, obviously, would you say that your You know, how you lined up the procurement here in the second quarter. Are we talking sort of mid-single digits effect on top time for hectares or is it up to double digits?

a class area on that when we see raw material we can see even higher than and it's also I would say a matter of securing availability but it's also making sure we get the material and just one example oils, one third of rubber compound used oil and one refinery in Qatar was actually formed We were supplied by oil, so we had to very fast find an alternative solution. But again, I find there our organization is very much on their coast to find alternatives. So it's price, and it's significant because it's raw material, it's transport, and indirect also energy. So... But I think we manage quite well to compensate for this. I think this is, in a sense, if you understand me, our home ground to handle this with our business.

Yeah, I got you. Just hypothetically, if we talk about sort of double-digit price inflations on your products, when you sort of look at how you plan your production setup, what would you say the elasticity is? your time for that type of price change?

That's extremely hard to answer, Johan. But of course, and just speculating, of course, there is a limit to everything because our customer also needs to, how do you say, compensate. So should this be a on the overall demand. But the customers usually understand, to be honest, the increases. It's very transparent, also, the pricing of the material. So it's usually accepted by our customers.

All right. Thank you very much.

Thank you. As a reminder, if you wish to ask a question, please dial pound key 5 on your telephone keypad. The next question comes from Agnieszka Vilela from Nordia. Please go ahead.

Thank you. I have one follow-up and it's on the merchant acquisitions landscape. So the last acquisition you made, it was one year ago and the impact on your growth is fading now. So can you just tell us what you see right now when you look at the potential targets and if the Middle East crisis changed the outlook for making a potential deal to any direction?

This is Klaus again. So, as you rightly say, our last acquisition was Capcom in Turkey. And, by the way, contributing very positively to the result of the export. as I stated we have a minor activity right now when it comes to M&A and we have very interesting targets also in our pipeline and we have discussions ongoing but you also know that in due time we will of course when we close the deal we will be talking about that and before that has happened we cannot say much more but Our feeling, or not only feeling, it's the fact that we see a higher activity right now. The Middle East conflict has not so far had an impact, but coming back again... then it has an impact, I guess, on the result of the companies we are looking at. And that could influence, you know, the willingness to sell at this point. We haven't seen that.

Thank you.

The next question comes from Matt's list from Kepler Shoebrew. Please go ahead.

Yeah, hi, thank you for taking my question. First, coming back to automotive there, if you just could remind me there how the content you offer is impacted by the situation over to electric vehicles, if there is any substantial difference there, please.

so this is a class again so when it comes to the content in general terms a battery electric vehicle has actually a higher content of both rubber and thermoplastic but so that that's a fact One reason for that is everything that has to do with the battery casing. But it also is the fact that you need much more insulation in the battery. And therefore you need more weatherstrip, more vibration, anti-vibration insulation. parts in a battery electric vehicle usually they use natural rubber so that's that's positive if i may say so for us when it comes to thermoplastic it's often used in the interior of the car so that has no there is no big difference between the combustion engine

And just adding to electrification when it comes to cars and in general society is positive for us because it drives the energy from the wiring cable because the energy needs to be transported from its source to where it will be consumed. So that goes for charging stations, for the automotive, that's all.

Okay, thank you. Is it about the same sort of impact between the three business areas?

No, I would say it's generally speaking a very similar impact. Thank you. rubber and thermoplastic or engineered. Only difference is engineered uses a little bit less of the compound, of course, in rubber and thermoplastic, but the increase is similar, of course, to physical.

But also common in Right now, we feel that in North America, they have more domestically sourced raw materials. So at this point, they are affected less. Okay, great.

Thank you very much. Thank you.

Thank you.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

I just want to thank you all for participating. As I said, we have a clear focus on the 2020 area. That's what we work on going forward.