HEXPOL AB (publ) (HPOLB) Earnings Call Transcript & Summary

Hello, and welcome to HEXPOL AB Telecom Q4 2021. [Operator Instructions] I will now hand over to HEXPOL. [indiscernible], please begin.

Hi. Good afternoon, and welcome to the presentation of the fourth quarter of 2021. Presenting today is Georg Brunstam, our CEO; and myself, Peter Rosén, CFO. The agenda for today is to first give you a business update then go through the financials and the focus areas for next year. And as normal, we will finish off with a Q&A session. And with that, I hand over to Georg, who will take you through the first part of the agenda.

I will follow up the slides, which are on the website. So I'm starting with the 1 having strong sales in a challenging environment. But I would like to start to say some worse about the full year before I go into the quarter. 2021 is a very, very strong year for HEXPOL group. We have record sales, and we have record profit. It's the best year ever for us so far. And we passed a little bit of SEK 16 billion in sales, 19% up. And adjusted profit is 26% up and earnings per share is 67% up. And we're also above the 2019 in all aspects. And 2019 was, as you know, a strong year. And we are above that. So all in all, I think we are reasonably pleased with 2021. You can always do better. And it's achieved in a challenging environment. And that environment we had in Q4 as well. We believe that Q4 was reasonably good for us given the circumstances. And we have strong sales in all regions. Light vehicle production was down. I think it was down 13% globally, and that affected us, of course, in our markets. But the other sectors were strong. And we had also a weak end of the quarter as expected. We saw our customers closing down a bit early for Christmas and New Year. But having said that, I think they did that in order to be back in 2022. So we are not that concerned about the weak end any of the quarter that it was as expected for us. But however, the environment is challenging, and it's continuing to be because of the global supply issues and price increases and also problems with availability on raw materials. We do see some improvements on, how should I say, mainstream raw materials, but on specialties, the situation is less bad as before. And then, of course, that is affecting the totality. We also see that the automotive industry is continuing to struggle with the semiconductor shortages. However, we also see them handling it in many ways, one way is that they, of course, take away options, including semiconductors. So they are, of course, adapting. We also had a strong cash flow and in local currency. We had a strong inventory reduction, and we wanted to have that. We do see higher M&A activity now when it's of course, opening up a bit and then it was closing down a bit again, but we do hope that the increased M&A activity, when you can meet people will take place. We are restructuring our U.K. business with plant in South of England being proposed to move its production to a main factory in the Midlands. And we are proposing -- the Board is proposing a regular debt to dividend 30% up and an extra dividend of SEK 3 extra per share. We are confident that our M&A agenda will be supported by the balance sheet, which is very, very strong. And then we don't see any contradiction in this. The balance sheet is strong to -- and our cash flow, in particular, is very strong to support the M&A agenda that we have. We do see the challenges we have continuing. But I must say we have been handling them in a very, very good way, quarter 3 and quarter 4, and when the challenges has been very strong. And I'm very pleased how the organization is handling it. We have a good culture. We have experienced people, and they are very good in handling the situation. But of course, I mean, the recipe changes and the constant planning changes are affecting -- together with higher raw materials are affecting the gross margin a bit. But, for sure, we are flexible. We've always been, and we are extremely ready to meet the expected increase in light vehicle production, which everybody is predicting that plays in 2022. If you turn page, I'm just repeating myself on the record year of 2021. I will not dwell on that anymore. I'm coming into the strong execution on the updated strategy and increased focus on the next slide. And as I said, strong sales in all regions and product areas and in most customer segments, except for the light vehicle production, which was not bad, but of course, not as good as it could be. Good EBIT considering the challenges we have. And if I look at Engineered Products, we have a very strong and a good quarter again, and particularly export wheels was performing well and particularly in Asia and a good EBIT in Engineered Products. And of course, we have a continued focus on sustainability. We have our overall target of 75% CO2 emission to be reduced by the 75% by 2025. We are introducing new compounds based on bio-based materials and recycling materials. And we are also introducing certifications from ISCC, and we also got some good rating from [indiscernible]. And as I said, on the M&A high focus and increased activity level. And during 2021, we closed 2 good acquisitions within our core business and 1 supporting the electrification in a big way. On the next slide, you can see the culture house, which we have had before, I'm not going to be through it, but I can just say that it's working. Our business model is strong. The culture is working and is strong, and it's actually a very, very strong asset in these challenging times. And if we then turn to Page 7, looking at the sales development, as Peter mentioned, the challenges that we've seen during the year with semiconductor shortages and the global transportation issues and raw material changes, they continued during this quarter. And they were especially visible with automotive customers with several production stocks, and they also -- some customers also extended their holiday closures again, driven by the component shortages that they face. But despite this, we increased our sales with 20% compared to the same quarter last year. And out of this increase 12% came from organic growth and 6% came from the 2 acquisitions that we completed during the year. We also had some positive smaller positive FX effects in this quarter of about SEK 60 million, and all of this resulted in the reported sales of SEK 4.1 billion. And look at the regional development, we saw strong sales growth in all regions, although highest in Europe, partly due to the acquisitions, but then followed by growth both in the Americas and the Asia areas. And if we then turn to Page 9 and look at the financial overview. We delivered an adjusted operating profit of about SEK 630 million in the quarter, which is on the same level as the year before. The margin came in at 15.4% and was negatively affected by the acquisitions this year. They both currently run at lower margin levels than the other HEXPOL companies do, and also the challenges related to raw material shortages and the price increases that we've seen. OpEx remained low at some SEK 194 million excluding the onetime costs that we had in the quarter. And the equity asset ratio improved further actually in the quarter to 65%. And I think it's important to take a look at the full year as well. And as you mentioned, this is the best year HEXPOL has ever delivered with sales about SEK 16 billion and an adjusted operating profit of SEK 2.7 billion. And that gives an earnings per share of just about SEK 6 per share, excluding the 1 time items, and SEK 6.85 including the onetime items. And this also means that, for the full year, we deliver return on capital employed of almost 23%, which is very high and well above what we did last year. So taking into account all the challenges we faced during the year, we are very pleased with the performance for the full year. And then if we turn to Page 10 and just take a look at the highlights. Looking at the development compared to the same quarter last year, we see that sales increased with 20% to SEK 4.1 billion and the adjusted operating profit came in at SEK [ 628 ] million which is on the same level as last year. And here, we see that the higher sales were offset by the lower operating margin. And then we can see that in [ further ] to look at the next page on Page 11. And when we look at the drivers of the profit, we see that the increased sales were offset by the lower gross margin. OpEx is on the same level as last year, and this is despite that we've done 2 acquisitions during this year. And again, the lower gross margin is partly driven by the acquisitions that run with lower margins and partly by the higher raw material prices and shortages that we've seen. And if I can ask you to turn to Page 12, where we look at HEXPOL Compounding. The segment delivered sales of SEK 3.8 billion in the quarter, which is an increase of 20% compared to the same period last year. And the increase is driven by 12% organic growth and the acquisitions of VICOM and Unica added another 7%. And as we all mentioned, we saw sales improvements in most of our customer segments and in all product areas. And operating profit came in at SEK [ 586 million ], which is just above last year. And again, the higher sales were offset by the lower margin. And if I then can ask you to turn to Page 13, we're looking at HEXPOL Engineered Products, where sales increased 21% compared to last year, with overall strong performance, but especially so for HEXPOL Wheels that had a very good year. And also here, we see that profit came in on the same level as last year, where operating margin came down a bit compared to last year following on the raw material costs that we faced during the quarter. And then, if I ask you to turn to Page 14 and the working capital. We did see an increase year-over-year, both in absolute and related terms. And this is primarily driven by an increase of the inventory levels. And as we've seen in the previous quarters, this is due to raw material shortages and risks that will continue. So we decided to purchase what we could in order to secure all orders that we receive from our customers. At the same time, we see an improvement compared to the previous quarter this year, primarily driven by lower accounts receivables, but also, in local currency, we see lower inventory levels compared to the previous quarters. We don't have any changes in the underlying payment terms with suppliers or customers. We've been able to keep them on the same level throughout the years. If I can then ask you to turn to Page 15 and the cash flow. I mean, we see a very, very strong cash flow in the quarter. This was expected not least because of the insurance payment that we received according to plan during the quarter. But also excluding this payment, we delivered a strong cash flow where we saw the improvement in working capital. So for the last quarter, we delivered SEK 1.3 billion in operating cash. And if I then ask you to turn to Page 16 on the net debt. We see that, that continues to improve following on the strong cash flow and the net debt to EBITDA ratio now stands at 0.25 for the end of the year. So we continue to strengthen an overt strong financial position with this last quarter. And with that, I hand over to, Gerog.

Thank you. On the next slide, I will sum up what we were starting with. Again, we are very pleased to deliver the best year ever so far for the HEXPOL group and very strong sales and also adjusted operating profit up 36%. And of course, the earnings per share up even more. And also, we are reasonably happy with a good ending of the year with a challenging quarter 4, but we think we handle it in a very good way and we are experienced and we do address the challenges in a good way. But they are, of course, affecting our costs and certainly the cost for changing recipes and planning is costing some money for us. We have a good M&A pipeline, and we see increased activity. And we are sure that we can handle that with our very strong balance sheet. And then the regular dividend plus the extra dividend is not changing that. And then going forward, I can just say that we are ready to be flexible to handle the expected outcome in the light vehicle production. We are eagerly waiting for it to happen. So that's good. And then we focus on the next slide for 2022 is, of course, to handle the COVID things, which are a little bit tricky right now. I mean accounting rules around the world and Sweden, they are quite difficult to handle, particularly the accounting rules, as I said. And of course, we are focused to handle the volatility, which we have proven to be good at. And then we will, of course, continue to focus on our sustainability job and the active M&A work. And with that, I think we leave it open for questions and answers.

[Operator Instructions] Our first question comes from Gustav Österberg with Carnegie.

A few questions from me on demand and pricing. Firstly, your organic sales growth here year-on-year is up 12% despite sort of clear strength in the supply chain. Could you give us some more color on the extent of the impact from these constraints on volumes, i.e., sort of where could you have been given current end customer demand, if we had a more normal supply environment?

That's a very difficult question. I do understand it, but it's very difficult to answer. I mean, where would we have been if that's basically what you are asking. I mean, we would have been better, yes. But how much, I cannot say that because, I mean, it's a combination, of course, that the [indiscernible] are postponed. And we -- it's really a difficult question to us. I cannot really give you an exact answer on that more than, yes, of course, we would have been better if the challenges wouldn't have been there. That is we have fulfilled all the orders we are promising.

All right. And if you sort of -- if you look at the sequential development during Q4, I mean, if we adjust for the shutdowns that occurred over Christmas, are you seeing any sequential improvement or change from Q3 in Q4?

I think that's a good analysis. Yes. I mean, December is, of course, more effective than any of the previous months, including Q3. And so that's rarely common from [indiscernible].

Okay. I guess a quick final 1 for you, Peter, on the acquisitions. I mean would it be possible for you to quantify the effect of the margins from the 2 acquisitions you made during 2021? And then perhaps also sort of you've historically been very quick in driving higher profitability in the acquired businesses. Is there any reason to expect any deviation from a normal sort of timetable here? Or how should we think going forward?

No. That's also a good question. I mean we can answer that 1 a little bit better. We are confident in our M&A model, and we will improve those companies for sure. And one of them went into the raw material situation with [ notice past ] price adjusting model as we are used to. So it takes some time for us to adjust that, but we will do that and we are doing it. So we will improve those 2 companies' margins for sure.

Yes. And when it comes to the question of the impact, we stated ordered in the Q3 report, that the negative impact was around 0.6% on the margin and the impact is similar in this quarter.

Our next question comes from Johan Dahl with Danske Bank.

A couple of quick questions. Firstly, on organic volumes for the quarter, would you say it was a decline of low, mid or high single digits? Just any sort of guidance that would be great.

It's a decline of -- if I take the organic one, I guess that's what you're asking for?

Exactly.

It's a mid-single-digit.

Mid-single digit. Also, when you're summing up here 2021, I mean it seems as if volumes to general industry has performed really strongly while sort of vehicle demand has been poor. Has that had any significant or relevant effect on your product mix, i.e., from a profitability perspective, which we perhaps should think about going into 2022?

No, not really. We wouldn't say that the mix changes has a big impact on the margin as such for us.

Okay. And also on -- I'm just trying to interpret what you're saying regarding raw materials here that you're seeing some normalization on sort of mainstream products. What exactly does that mean? Do you anticipate that cost or sort of extra added cost for supply chain problems, are you seeing that sort of being less of a problem going forward? Is that how we should read it?

It's a fair comment of your. We see a little bit of relief on the main volume raw materials, I should say. But that doesn't really help, of course, with a supply ability because if we are lacking one, it's still 1 lacking. But, then you are right. I mean the changes in the recipe might be a little bit less.

Our next question comes from Andres Castanos with Berenberg.

I have a quick question about the U.K. restructuring. Is it fully expensed now? And how much savings do you expect to get in the long-term from this?

Yes, we have accrued for expected expenses in this quarter. So that should be covered. And then when it comes to savings.

No, it's a very short payoff of that one.

Yes.

It's very good for us. And we haven't quantified the year that is not many years.

No.

It's a quick payback.

A second one, if I may. I noticed that Europe outgrow the other geographies. I wonder if this is effect of an even recovery across geographies. So if we have something to do with the product mix?

Could you take that question again, please?

Yes. So I see Europe has grown more strongly than the other geographies, particularly America. And I wonder if that is the effect of just an even recovery across the different regions or if it's because the different product mix you [indiscernible]?

The main reason why we say you're growing faster in the reported sales numbers primarily because of the acquisitions that we've done in Spain. So that's the main reason why you grown faster compared to last year. That being said, I mean, over the -- during last year, we've seen somewhat different speed of recovery between the geographies. Asia was first back then followed by Europe and Americas trailing somewhat.

But having said that, the light vehicle production in Europe went down more than in America in quarter 4. So it's a little bit of a mixed bag, but the main reasons are, of course, the acquisitions taking Europe.

Our next question comes from Douglas Lindahl with DNB.

A quick question. You mentioned that you're looking more and more into bio-based and recycled materials, which is also something you touched upon on your CMD. I was curious here, these potentially are helping you to some degree in the short-term given the issues you see within traditional raw materials and also as capacity expanded for these more alternative raw materials, is there still sort of a structural shortage here for bio-based and recycled appear?

It's a fair comment. We do see an increased interest on these materials, and we do see a somewhat increased sales. But the shortages doesn't drive this. It's driven by more than the consumer sentiments, by the OEMs. So no effect from that. And the situation on constraints of these raw materials is still there.

And you're not seeing that changing any time soon either from?

We do. We do see investments in these areas, but it takes, of course, some time to get on stream. But I think that the biggest issue is, of course, the consumer demand, which is not 100% there yet.

Okay.

But we are ready for it.

[Operator Instructions] Our next question comes from Karl Bokvist with ABG Sundal Collier.

My first question is just on the kind of OpEx level that you have in the business, you've been quite explicit on it before. I was just curious on, if we are now starting to see a bit of general inflation also impacting you with kind of [ 220 ] in SG&A? That's my first one.

Okay. I can take that one. As we've said during this year, if we look at quarterly OpEx levels, around SEK 200 million is one can expect. And we are quite comfortable on that level. Then of course, we do see some inflation discussions and pressures coming into 2022 in the Americas and Europe. So we'll wait and see a little bit, see what the impact is and where all those discussions end up. But there is some inflation pressure coming through in 2022.

Understood. And my next question is just on the situation you're having now with increasing energy costs and increasing raw material prices. Do you feel that, in the near-term, you're still -- maybe you still maybe have a bit of a catching up to do? Or do you feel that you're -- when -- or put it differently, when do you feel that you might have reached a balance between price increases and cost inflation?

Well, I mean, on the raw material side, if our pricing model and business model is strong, we do best so more. The lag is not big, the lag is short. The energy surcharges is more difficult. The surcharges we are getting from suppliers and also the extra energy cost because they are different from countries to countries and even regions to regions. So they are more difficult for us. We are going to pass them, and we are passing them, but then the pace varies different in different regions and markets. But on the raw material side, we are passing it and, our business model is strong there.

Understood. And we've talked about automotive. But on the other side, do you see any end market that you feel -- where you feel demand has improved during the quarter?

We had a very strong quarter in Building and Construction, for example, very good.

There are no further questions at this time. I hand back to our speakers.

Okay. Thank you very much for listening in, and thank you for your questions. We wish you a very nice afternoon and weekend when you [indiscernible]. Thank you.

Take care. Thanks a lot.