HEXPOL AB (publ)

Welcome to the HEXPOL Q2 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 Deputy CEO and CFO, Peter Rawson. Please go ahead.

Thank you, everyone, and thank you for listening to our Q2 presentation. For today, I'll take you through the overall business performance. I'll take you through the financials, and then we summarize and wrap up with a Q&A session. But let's start on group level. As you've seen, it's a quarter where we deliver strong organic sales growth. But when we look at the overall picture of the markets where we operate, there is not much change since the beginning of the year. Generally speaking, we still see fairly high levels of uncertainty and a wait-and-see mentality with a lot of customers and in the markets. From a geographical point of view, it's also similar to the beginning of the year with higher uncertainty in North America compared to Europe that is somewhat more stable compared to last year. The uncertainty that we felt in the beginning of the year has, to a certain extent, intensified during the second quarter, following on the Middle East situation, not least with the impact on volatile raw material prices, and I will come back to this in a little bit more detail later on. That being said, when we look at our own performance during the quarter, We see improvements in both of our largest business area, rubber compounding and thermoplastic compounding, while engineered products delivers a stable result. Our focus on maintaining and increasing our market share has been successful here in the quarter, and we see volume growth to our largest end customer segments, such as wiring cable, general industry, and building and construction. Volume to the automotive end customer segment saw some growth on growth level. So, all in all, we deliver 8% organic growth, mainly driven by higher volumes. And it's especially positive to see double-digit organic growth of 12% with thermoplastic compounding, which is a clear growth area for us. During the quarter, we have also had to deal with increasing raw material prices, which we compensated for through price increases in both Europe and North America. So when we look at the overall Q2 performance, despite some continuing negative FX effects, we delivered 5.3 billion second sales, which is up 6% compared to the same period last year, and improved adjusted EBIT at 772 million SEC. and consequently also higher adjusted EPS in the quarter. If we then go into the business areas and we start with rubber compounding, on the markets where we operate, total volumes are still at historically low levels affected by the generally lower customer demand that we see. We also see the captive volumes being at higher levels, although we believe these volumes have peaked. When we look at our own performance in this area, we see that the work regarding protecting and also improving market share has been successful. And we've also been able to retain some captive volumes, not least in North America. And this has resulted in higher volumes for our larger end customer segments, such as general industry, wiring cable, building and construction. Automotive volumes are stable in the quarter for rubber components. The situation in the Middle East has created imbalances in the supply chain and also volatile raw material prices. This has certainly been a challenge during the last few months, but the HEXPOL organization has handled these challenges very well and managed both supply of raw materials and implemented price increases when needed. So all in all, we achieved 7% organic growth in the quarter, and this is mainly driven by higher volumes. If we go into and look at thermoplastic compounding, deliver a very strong quarter. During the quarter, we see positive ramp-up effects from previously won projects, as well as volumes from new projects being started. and some of these projects are driven by end customers requiring higher levels of recycled content in products that we can deliver, which is positive for us. As with rubber compounding, thermoplastic compounding has been impacted by the Middle East situation when it comes to availability of raw materials and fluctuating raw material prices. Subsequently, price increases have been implemented also for thermoplastic compounding to compensate for a higher raw material prices. And as I mentioned before, we deliver high organic growth of 12% in the quarter, and this is also mostly driven by higher volumes. And if we then looked at engineered products, we saw somewhat lower sales in the quarter, and this is primarily related to a couple of specific customers in Sweden. Last year, we saw record-level sales, and demand has been somewhat lower here in the first half of the year, but we do not see any major market changes in the underlying market. And we still deliver high profitability in the quarter. I will come back to this in more detail later on. If we then go over and look at the financial overview for the quarter, we deliver the sales of 5.3 billion. with an adjusted EBIT of just above 770 million SEK with a margin of 14.6%. The reason why we use adjusted EBIT stems from that we report the cost associated with the termination of the previous CEO as non-recurring items. The cash flow in the quarter is somewhat below EBIT, but still solid at about 680 million SEK. We do see some negative impact from the Middle East situation on inventory levels, and I will come back to this in a little bit more detail later on. Net debt to EBITDA ratio at the end of the quarter at 1.17 and below what we had last year in the second quarter. And if we then look at how this compares to Q2 last year, sales are up 6%. PARTLY OFFSET BY NEGATIVE FX EFFECTS. AND IN FIXED CURRENCY RATES, SALES ARE UP 9%. AND DESPITE ABOUT 20 MILLION SEC IN NEGATIVE FX EFFECTS, EBIT INCREASED TO 772 MILLION SEC. EBIT MARGIN FOR THE QUARTER AT 14.6, WHICH IS DOWN 50 BASIS POINTS COMPARED TO LAST YEAR. AND THIS IS AFFECTED BY THE RELATIVE INCREASE IN OPEX driven by increased IT investments, but also cost for more people resources needed to support growth going forward. Looking at sales in a little bit more detail for the group, as mentioned, fixed currency sales are 9%, out of which 8% is organic growth, while acquisitions, which is Capcom, add another 1% in the quarter. and the organic sales increase is primarily driven by higher volumes. From a geographical perspective, North America showed 3% growth, but in fixed currency, the growth was 7%, while Europe delivered 10% growth or 11% in fixed currency. Asia was in line with last year levels. If we take a look at the development of EBIT, so despite the 21 million SEC in negative FX effect, adjusted EBIT increased to 772 million SEC. So at fixed rates, the increase was 5% in EBIT. If we then look at the drivers impacting EBIT compared to last year, the main driver is obviously higher sales, while the gross margin was on the same level as last year. And as I mentioned, we see an increase in OPEX, and this is primarily driven by higher IT-related costs and investments in people resources to drive growth. If we then go into a little bit more detail for the three business areas, starting with rubber compounding, It delivered sales of 3.6 billion a second a quarter, up 5% compared to last year. Over a fixed currency rate, the growth was 8%, of which organic growth was 7%. The high organic growth is driven by the higher volumes, and acquired compcom adds 1% in sales in the quarter. The higher volumes are seen both in North America and in Europe. and from an end customer perspective, we see growth with wiring cable, building construction, and general industry, and automotive sales were stable in the quarter. EVIT is negatively impacted by negative FX effects of 20 million or 3%, but came in at 546 million SEC with a margin of 15.2% in the quarter. We then move over to thermoplastic, delivered at a scale of 1.3 billion sec in the quarter, up 9% compared to last year. Or at sixth grade, the growth was 12%, all of which is organic growth. The main part of this volume is driven by, it's volume driven, but there are also some positive price mix effects in here. As with rubber compounding, The organic sales development was positively affected by volumes, higher volumes to most end customer segments, not least building, construction, and general industry, but also automotive and medical, so growth. The drivers of the growth are increased volumes on existing business, but also ramp up of projects that were agreed with customers before this quarter and now start to deliver volumes here in the quarter. Following on the higher sales, we saw strong improvement in EBIT that increased 40% to 155 million. And at the same time, we saw strong improvement in the EBIT margin with increased 280 basis points to 11.9% in the quarter. And then, if we take a look at engineered products, we saw sales of 386 million SEC here in the quarter. which is below last year, 402 million. And the decrease is primarily driven by somewhat lower demand from a couple of customers in Sweden. But as I mentioned before, this should be seen in light of record sales in the same period last year. A lower EBIT followed on the lower sales, but still high margins in line with last year, above 18%. If we then leave the P&L and look at working capital, it is slightly higher than same period last year. This is driven by higher inventory, and this is what I referred to in the beginning. This is affected by the situation in the Middle East. In some cases, we've increased our inventory levels to ensure that we have access to the material that we need to produce. The higher raw material prices impact negatively. Depending on how this situation evolves going forward when it comes to raw material prices, we view this as temporary as we turn our inventory quite quickly during a year. There is no change in any underlying payment terms to customers and or suppliers. If we then look at the cash flow, we delivered a solid cash flow of below 700 million SEK, where depreciation investments are balanced, while the working capital is, as I mentioned, affected negatively by the inventory in the quarter. And then, to finalize the financial view, we closed the quarter with a net at that 3.8, And then, if I can summarize the second quarter, it's a very strong quarter with high organic growth of 8%. The growth We see with both of our largest business areas. In the quarter, we worked intensely to protect and grow our market shares, and we've also been able to win some captive volumes that have contributed to this growth. At the same time, it is a quarter impacted by the Middle East, which has resulted in supply challenges and higher raw materials. I think we've handled these challenges very well. We've been able to secure raw materials needed for us, and we've implemented price increases when necessary. So all in all, when we summarize the second quarter, we deliver high sales and higher results, which we are quite proud of. And with that, I thank you for listening, and I 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 Henrik Hintz from ABG Sundal Collier. Please go ahead.

Hi, Peter. This is Henrik. Yeah, so first I was just wondering a bit about the sequential price mix improvement you talked about. Is that sort of, would you say, a durable customer product mix change, or is there anything about the sort of raw material price swings driving this?

Hi, Henrik. When we talk about the sequential price mix improvement, it's primarily price increases that have been implemented. There is some positive mix, but it's primarily price.

Yes, and I mean specifically in thermoplastics where the margin was up quite a bit. How come that differed from rubber?

Well, two things that are similar and third one which is a little bit more thermoplastic specific. We've implemented price increases in thermoplastics as well to compensate for the raw material price increases. We have a little bit positive mix effects, but also since we've seen higher volumes, they also cover more of the indirect cost in production. so you also get some leverage when volumes go up.

Okay. And on that, maybe we saw OPEX come up quite a bit here. You mentioned some things driving that, but would you say this is sort of the new base level, or is it coming up more from here?

I don't see that we will increase much from this level, but we do have the increase, which is, as I mentioned, primarily IT and staffing, but we will increase from here.

Okay. Okay. And just finally, how come automotive volumes are flat in rubber but up in thermoplastics?

No specific reason more than when we see thermoplastics, they have initiated more new products related to product launches and those automotive car models being launched. where we've had higher volumes in the thermoplastic and that has had a bigger impact on thermoplastic compounding than rubber compounding. Okay.

Very good. Thank you.

The next question comes from Jacob Markin from SEB. Please go ahead.

Hello Peter, and thank you for taking my question. Some of them were already answered, but just to follow up on the OPEX part, can you provide some more detail, you know, is there any specific segments, geographies, business areas that you are, you know, investing in or seeing something special that we, you know, that the OPEX group is related to?

Yes and no. When we look at investment in people resources to facilitate growth, we have that across the business, I would say. Then some of those resources may differ from market or company or geography depending on their needs, but it's primarily salespeople and R&D resources. And when it comes to IT, we see a general uptake where we need to do, and then over time that will be, change from a geographic point of view. Currently, it's more in the North America, and then we will see that coming down and see more investments in other areas.

Okay, thank you. That's helpful. And then just a question on the M&A side. It seems like, you know, the report is similar to Q1, but have you seen any shift in the sort of M&A market or prices are willing to sell or anything on the M&A market that you can update us on?

I would say that the M&A market is quite similar to what we saw in the first quarter. And then we have discussions ongoing that we are intensifying.

Okay, perfect. Of course, we'll get back in line.

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

Hi, Peter, and thanks for taking my questions. Maybe starting with pricing, could you help us and tell us how much did you increase prices year-on-year or what the impact was year-on-year in Q2? And given the volatility in the material prices, what should we expect in the coming quarters?

Thank you, Agnes. If I take your second question first, the simple answer is we are uncertain. During the second quarter, we saw raw material prices coming up. The forecast is that raw material prices should come down some going forward, but I have to admit It changes almost daily on the exact development of the raw material prices, depending on what happens in the Middle East. But the general forecast, and I can't say when it happens, is that raw material prices should come down. But it's difficult to answer whether it happens tomorrow or a month from now. It depends on how it develops in the Middle East. Then if I take your first question regarding how much price increases have been implemented, I would say they are in the low-mid single-digit growth.

Yeah. Perfect. Thank you. But just maybe follow up on the kind of outlook for your pricing into Q3. Isn't there a lag that means that you already kind of know what you are implementing for Q3? And if so, is this kind of pricing element improving?

I mean, when we go to customers with price changes, that is when we know a little bit more how raw material prices will develop. So we cannot and we will not go with daily fluctuations. So we will need to see a little bit more, have a little bit more time to see how raw material prices develop, and then we will implement changes. So there is always a certain lag, if you call it that. But we will need to see how raw materials prices develop before we can go with price changes.

Yeah, understood. And then maybe on volumes for the group in general, I mean, it was the second quarter with volumes growth for you sequentially or consecutive. What momentum do you see so far in Q3? Will this growth even accelerate? And then maybe kind of follow up to that, you've seen some captive volumes returning to your business. Can you tell us what upside do you see to your sales if these captive volumes

We don't give forecasts or guidance on future performance, so I will shy away from commenting on Q3. When it comes to captive volumes, it's very much a question of if we can get customers to produce for them and deliver both service and quality time at a price. then we should be able to continue or grow captive volumes. But it's still a bit early days, so we'll wait and see and come back to it in Q3 when we know how we perform.

And can you tell us how much of a kind of headwind it was for you in the, say, past three years? Sorry, I didn't hear the... Yeah, if you could tell us how much kind of headwind the more insourcing by customers was for your growth in the past two or three years?

Depends on when you have the starting point, but it's been significant, let's put it that way.

Yeah. And then the last for me on thermoplastics, I noticed that you had very strong growth in Europe, and it was reported that The next question comes from Carl Dienberg from Carnegie. Please go ahead.

Hi, Peter. Could I ask first, I was maybe a little bit surprised on the statement on slide three. I mean, I appreciate the comments on the sequential price improvement, but why are not prices higher year on year? I think you're stating here that they're on a similar level. Yeah. What are the dynamics behind that? I thought it was, you know, definitely going to be higher year on year as well.

Now, if we go back one year, at the end of first quarter last year, we started to see raw material prices and subsequently sales prices going down as well. In second quarter of last year, that's where we had a fairly big impact on lower sales prices. And those sales prices we had for the rest of last year as well. When we see where we stand today and we see the price increases that have been implemented, we basically come back to where we were a year ago. There is some mixed effect in it as well, but when we look at prices, that's what we've seen.

Okay, okay. And could I ask also, I mean, I guess the volume development that you're talking about is quite surprisingly positive here. And when I read the wording, I mean, the markets that you're sourcing that is performing well, like wiring cables and so forth, I think you had a similar communication the last couple of quarters. So if anything, you know, specifically driving this change here in Q2, you know, do you see any competition, you know, suffering more from the situation in the Middle East, or you know, is it just the general uptick in those overall end markets?

I think it's a combination of a couple of things. When we look at general industry and buying cable in the segments where we have products, we've seen increased demand, but we've It's our view that we've also been able to take market share in some of these segments with existing customers. Also been able to add a little bit to that. So we've seen increase in those segments.

Okay. And those market share gains, is that due to your... I would say depending a little bit where we look, but I think even more customer focus has given some of this volume, and we also know that in some cases,

We have some of this volume is because also some competitors have difficulty managing raw materials and deliveries and supplies.

And in the scenario where, you know, let's say prices would come down again or let's say normalize, would you believe that these market share gains are structural or would it even out again then?

I don't see direct correlation with the prices and market shares, but if raw material prices go down, then we will need to adjust pricing to customers. So that would change with raw material prices. The volumes that we have and the market share is something that, of course, we will work very focused on maintaining or, if possible, improve.

Okay. Okay, very well. And then maybe just finally also, I know that you're not guiding on, you know, price contribution, but if you take the sort of run right now, first couple of weeks here in Q3, what would be, you know, price contribution would be on a year-on-year basis, you know, without giving any forecast what the remainder of Q4 is going to be, but what kind of, you know, year-on-year run rate that we're talking about here?

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

Yes, good afternoon, everyone. Just on that growth you recorded in thermoplastics, Peter, you talked about sort of new projects, new customer orders there. I was just wondering, is that sort of an incremental add to your sort of recurring business in the coming 12-month period, or would you say rather that there's a fair bit of volatility in those projects, sort of how it falls out? each and every quarter, or is it more of recurring net additions to the thermostatics operations?

I would say the projects themselves are recurring in the sense that if we take a new car or a project with a production of a car, if we get approved and awarded for that project, then we should be able to see volumes throughout that project. So that project in itself should be fairly stable. Then, of course, it depends very much on do we have other projects that run out or end, or can we add new projects that will add incremental volume on top? So I think to answer your question, Johan, no, the projects themselves should deliver the volumes that they do currently, but then it's up to us, of course, to add new projects and ensure that all the ones are replaced by better projects.

All right. All right. And just finally, if you could just reiterate that if we talk about the sort of how price mix has impacted your profitability year over year, you know, it's been quite negative in the past here. You talked about weak U.S., weak automotive, et cetera. Now, you know, perhaps you don't really see that negative shift there. Perhaps a bit on the opposite. Clearly, you highlight thermoplastics as being a positive driver for product mix. But is there anything else? I mean, you're still sort of more bullish on Europe versus North America, and also seems fairly flat this year over year. And any color you can add to that mix change?

Yeah, take these ones first. Automotive is fairly flat if we look at it from a total perspective, and then we have little growth from a plastic side. But automotive as a total industry is fairly flat here in the quarter, and we expect it also for the full year. But we do see growth in some of the other areas, such as wiring cable and also general industry, we see some improvement. If we talk here from an end customer perspective, from a geographical perspective, we still think that the U.S. is more uncertain than Europe. There is still the question of affordability and that impact on demand, not least on automotive. But it has also some other impact in other industries. While Europe, which has its challenges as well, is still more stable than North America when it comes from general demand.

All right. Thanks. Thanks, Bob. Thanks.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Matt List from Kepler Shoebrew. Please go ahead.

Yeah, hi, thank you. Well, coming back to organic sales there, and I guess you mentioned that you have increased inventory somewhat to secure deliveries and so on. Do you see a similar pattern among customers there, and maybe also if they try to avoid price increases? Have you seen any impact of that in your organic sales improvement?

To a certain extent. I think in the beginning of the quarter, if we go back to April and partly May, we did see some customers where we think they ordered a little bit more than they normally do. But our products, don't lend themselves to pre-bind that much since, for example, rubber probably has a shelf life of three, four weeks, and it needs to be turned into components. So even though we did see a little bit of it in the beginning of the quarter, when we look at the quarter as a total, we don't think that there is much effect of pre-bind.

Okay, great. And secondly, on thermoplastic there, well, you mentioned this market share gains you have succeeded in and on the back of customer projects. Could you say something about the second half there, if you see similar trends benefiting you?

Sorry, in this second half of?

Yeah, this year or maybe... longer term also, but if you have sort of a good position in customer-related products, it sort of boosted you in the first half here or in the second quarter.

Yeah, I mean, our view is that we have a good position, but regarding volumes that will materialize the second half of the year, I will pass on that because then I will get to guidance, and we don't do that. So, currently, we're delivering on the projects that we have. We feel comfortable with the share that we have, and then we will just need to continue to work on this focus going forward.

And finally, just on rubber compounding there, I mean, you mentioned that increased overhead costs affected your margin negatively. Could you shed one?

Yeah, as I mentioned, we've invested in more people resources, not least on the sales side, also on the R&D side where we've made some changes and centralized some R&D, for example, here in Europe. And then we invest more in IT, both to replace existing systems, but also invest in more efficient systems going forward. So it's a combination of those things.

Great. And finally, I mean, you mentioned you have a pretty good financial position now. The M&A opportunities, could you say something about those? I know you are in the changeover process there of management, also CEO. Do that affect your sort of how to make acquisitions?

If I take your last question first, no, that will not impact. Not more than we are very focused on actually on delivering M&A so that there will be no pause or let up in our, in us doing M&A because of this. So we continue to work as focused on this and even more so than we've done before. We're really keen on doing this.

Okay, thanks. Thanks a lot.

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

I have a follow-up on thermoplastics and profitability for that division with expansion of almost 3 percentage points in the quarter. I note, though, that comparisons, I think, were a bit easier, given that Q2 last year was down on margins. But still, like, Could you tell us, like, should we expect a similar kind of improvement in profitability in the coming quarters if volumes, you know, hold up or improve if you see this positive mix effect still? What to expect in the coming quarters?

Difficult to say, but I think the current profitability level where we are now makes sense. That's where we can be in the short term. Then of course we have said that the strategic direction of the growth of thermoplastic is to move up in what we call the product pyramid. But that move where we move into more profitable segments is something that we will need M&A to drive, to be a large driver of. So we need to do more M&A in thermoplastic in order to move it up further in the product pyramid.

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

Thank you, everyone, for listening for our Q2 report. Thank you, and I wish you a very nice week. Take care.