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.