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

Welcome to the HEXPOL Q4 presentation. [Operator Instructions] Now I will hand the conference over to the acting CEO and CFO, Peter Rosen. Please go ahead.

Thank you very much, and welcome, everybody, to the presentation of the last quarter of 2023. As usual I will first give you a business update and then go through how we continue to execute the business model, go through the financials, summarize the quarter and then we will finish with the Q&A session at the end. So if I can ask you to turn to Page 4. When we look at the -- just the business in the quarter, we delivered a strong quarter with an adjusted EBIT of just below SEK 840 million, which is about 3% above what we did same quarter last year. The adjusted EBIT margin continues to improve, and we delivered 17.2% margin, which is up 20 basis points compared to last quarter, Q3 this year, and it's up 240 basis points compared to Q4 last year. The drivers of the higher margin is the execution of the business model, where price management and cost control is key combined with a good product and price mix. Following on the good EBIT and improvements in working capital, we also delivered a record strong cash flow in the quarter of SEK 1.4 billion. When looking at the demand and sales during the quarter, we see a very similar picture to what we saw during the third quarter with improved demand and sales of Automotive & Customer segment, while the demand from Building and Construction was down substantially. And we also see the same when it comes to consumer-related products and to a lesser degree to general industry. Sales prices are lower than last year, driven by lower prices on raw material. However, sequentially, sales prices are basically flat in local currency, and I'll come back to this one a little bit later. During the quarter, we announced the decision to consolidate our operations in California, where we closed one out of two factories and moved over the volume to the remaining factory. We can service all customers from that remaining site. And we took the cost for the move this quarter since the work has started, while the total move is planned to be completed by end of next summer. During the quarter, we also announced the acquisition of Star Thermoplastics in the U.S., and the integration is ongoing with that acquisition. Financially speaking, it's not a big acquisition, but strategically, it's important for us because it gives a foothold on the TPE market in the U.S. where we haven't been present before. So strategically, it's important for us. The work in sustainability continues with development of products and discussions with the customers and what they need. Also, we are well on our way to reach our target of a reduction in CO2 with 75% by 2025. So far, we reduced the CO2 emissions with 57%. So we are well on our way to reach that target, and we're very comfortable with that target. If I can then ask you to turn to Page 5. When looking at the M&A strategy, we have a pipeline that we continue to work on. And as you can see, we also have the financial resources to do more acquisitions. And just formally as mentioned, Star Thermoplastics is consolidated as of 1st of November 2023. And if we then go into the two business segments, for Compounding, the Automotive & Customer segment shows improvements, but there's still varied development across our markets, similar to what we saw in last quarter. Also, as we saw during the third quarter this year, we continue to see very low demand for Building and Construction as well as from consumer-related end customers. And this lower demand offsets the automotive demand. On a positive note, there is stable supply of raw materials and the supply chain works well, which is also one of the reasons why we've been able to lower the inventory levels in the quarter. During the quarter, we continued to see raw material prices come down compared to the same quarter last year. And as I said before, at the same time, prices are sequentially flat in local currency. And overall, we delivered a good EBIT and further improved margins for this business area. Engineered Products delivered sales above last year and a strong EBIT. The EBIT is down some compared to last year, but this is fully driven by negative FX effects in Sri Lanka. Last year, we had positive FX effects in the same area. And as you probably have seen, driven by the very strong financial position and the cash flow we generate, we've decided to change the dividend policy for HEXPOL. Up until now, the policy has been to pay dividends in the range of 25% to 50% of the result after tax. Now we moved it up to 40% to 60%. And the reason is simply we have such a strong financial position that we can both implement our M&A strategy and increase the policy at the same time. Also, if one looks at the last 10 years, we've basically paid out on average about 50% of result after tax. So we've always been at the top of the possible range. And as you probably have seen as well, this year, there is a proposal of a SEK 4 per share regular dividend and then an order -- additional dividend of another SEK 2, so total proposed dividend of SEK 6 per share. If I can then ask you to actually skip Page 6, and we go directly to Page 7 and the business model. And we mentioned this several times before, but I'm going to continue to highlight a couple of key aspects of the business model, not least the price management, which is key for us, not only when raw material prices move upwards, but also when they decrease, as they do now. And for us, it's extremely important to be agile when managing these price movements of raw materials and towards customers. And also what something that's been discussed before, we also look at our cost structure to see if we can improve. And one part of that is to continuously review our manufacturing footprint. And this time, we took the decision to consolidate our operations in California from two sites to one. We can service all these existing customers from this one remaining site. The project has started, is ongoing, and we expect to complete it by the end of next summer. And the reason why it takes calendar time is simply that it takes time to move production, not least since compounds need to be verified and approved by the customers. So it takes some calendar time to do the actual move. And then if I can ask you to turn to Page 8, looking at the sales development in the quarter. We delivered sales of SEK 4.9 billion, which is down some 11% versus the same period last year. Organic sales were down 14%, while the acquisition of McCann and Star added about 2% in sales. In addition to this, we saw a small, very small positive FX effects of about SEK 30 million. As I mentioned, sales to automotive-related customers in total showed improvement, but it still varies from market-to-market. And we see lower demand related to Building and Construction as well as consumer-related products. Our sales prices are also down compared to last year. This lowers our sales amount, but has no impact on EBIT in absolute terms, everything else being equal. And looking at the organic sales, the lower sales are basically equally driven by lower volume and lower sales prices compared to Q4 last year. Compared to Q3 this year, we see a similar drop in sales, but that is driven by a stronger Swedish currency that we see here during Q4 and fewer days of sales. Prices are, as I mentioned before, flat in local currency. And I think it's important to keep in mind since we do not produce to an order book, but to direct orders, number of days in the period is very important for us. If orders are not placed, we do not produce and we do not sell. And this normally happens in Q4 as many customers closed down for 1 or 2 weeks during Christmas. It doesn't have a big impact year-over-year comparisons, but it does have an impact when comparing to Q3. Then if I can ask you to turn to Page 10, and I'll take a financial -- look at the financial overview. As mentioned, we delivered good adjusted EBIT of about SEK 840 million which is up about 3% compared to last year. Margin came in at 17.2%, which is 240 basis points above last year, positively affected by good product mix and price mix. And it's about 20 basis points above third quarter this year. Equity asset ratio remains high at 65%, and the return on capital employed is also high at 19%. We saw a somewhat higher tax rate this year, driven by higher profits in countries with higher tax rates, and there were also some smaller one-time items that impacted during the year. And as mentioned, we delivered a record strong cash flow in the quarter of SEK 1.4 billion. If I can then ask you to turn to Page 11, coming back to a couple of messages. But looking at the development compared to the same quarter last year, we see that sales came in at SEK 4.9 billion with an operating profit of about SEK 840 million, which is above last year. And we also saw operating margin increased to 17.2% following on the positive mix effects, but also the price adjustments. And if I can then ask you to turn to Page 12. Looking at the profit drivers for the quarter, we see that the increase in operating profit is mainly driven by the higher gross margin. OpEx is down somewhat compared to last year, driven by general cost control. And then if I can ask you to turn to Page 13, looking at HEXPOL Compounding. We delivered sales of SEK 4.5 billion in the quarter, which is about 12% below Q4 last year. And as mentioned before, the lower sales are driven by lower demand from Building and Construction and consumer-related products, combined with lower sales prices. However, operating profit came in at about [ SEK 780 million ] above last year with a strong margin improvements. And if I can then ask you to turn to Page 14, looking at Engineered Products. Sales came in above last year, driven by -- mainly by positive developments for the Wheels segment. And operating profit came in at SEK 55 million, which is below last year and the margin is also down compared to last year. However, this decrease is fully driven by negative FX effects in Sri Lanka, not to the operations underlying the business. And if I can then ask you to turn to Page 15, looking at the working capital. It's well below last year in absolute terms despite the acquisitions of McCann and Star that added about SEK 80 million in working capital. Also, sequentially, we see strong improvements. Working capital in relation to sales improved both compared to last year and also sequentially and stand just below 6% when we closed the year. There is no change in the underlying payment terms compared to before. And then if I can ask you to turn to Page 16, looking at the cash flow. We delivered a very strong cash flow in the quarter of SEK 1.4 billion, and it's driven -- in addition to the EBIT, it's driven by the lower working capital of almost SEK 700 million in the quarter. And this, of course, translates over to what we see on Page 17, the net debt that continues to decrease. And at the end of the year, it stands at SEK 1.6 billion with a net debt/EBITDA ratio of 0.38, and this is despite the acquisition of Star that was done during the quarter. So all in all, we continue to stand with a very strong financial position at the end of the year. And then if I can ask you to turn to Page 18 and just to summarize the quarter. It's a good quarter from an EBIT perspective with about SEK 840 million in profits and a margin that improved both sequentially, but also 240 basis points compared to the same period last year. Very strong cash flow in the quarter with SEK 1.4 billion. And looking it from a demand and sales price point of view, lower demand from end customer segments, primarily with building construction and consumer-related products that had negative impact on our organic sales, also lower sales prices driven by the lower raw material prices impacted sales [ not ] negatively, but not the EBIT. This is very similar to what we saw in Q3 this year. The difference compared to Q3 is, in Q4, we saw a stronger Swedish currency and fewer sales days, both that have a negative impact on sales value. The work on sustainability continues both in product development, but also on our own footprint and when looking at the M&A agenda going forward, where sustainability recycling is a key part for us. And by that, I conclude the presentation in itself, and I hand over to Q&A.

[Operator Instructions] The next question comes from Riya Kotecha from Bank of America.

I've got a couple, please, and I'll take them one by one. My first one is on the cost cutting and plans to consolidate the California plant. Can you give us an idea of the run rate savings that this might achieve by the end of next year? And what part of the SEK 83 million one-off costs are related to this? And any higher working capital needs you might need of having just one plant now to service customers who are presumably more geographically spread out?

I'll start with the last one first. We don't see a need to increase working capital related to this, we think that it will be quite similar. When it came -- comes to the SEK 83 million, that's all of it is related to the consolidation in California. So everything is related to that part. And then if you -- if I understand your question correctly, the first one regarding run rates, we don't expect to see any profit improvements next year. They will come towards the end of 2025.

Any quantification or ideas of what sort of SEK million figure that might be?

You mean customer segments?

The savings from the California plant?

I didn't understand. You mean the categorization of the savings?

Yes, the run-rate impacts of consolidating two plants into one.

Yes. The savings will come across the P&L. First of all, looking at the -- we will increase the production utilization. And so we will see lower cost in production. There will be also some savings on the administrative side, but most of it will be on the production side.

Okay. My second question is just about capital allocation. Can you give me some more context and timing around raising the dividend policy payout to 40% to 60%? Should we infer that as a sign of confidence in the cash flow generation potential of the business model or more signal of capital allocation priority between returns and M&A? And just some context around the timing, why now?

Yes. First priority is the M&A strategy. That's key for us, and that's priority #1. But since we can do both, if we look at the M&A possibilities and we look at the financial position, where we are today and where we've been in the last few years. We think we -- or we know we can do both of it. So priority number one is M&A. We still have potential to do both. And therefore, it's suggesting to increase the dividend. And also, when we look at the -- as I mentioned, I think, the last 10 years, we've been around 50%. So we've always been at the top of the range where we -- what the previous policy said. So we can do both, priority number one is M&A.

That's helpful. My third question is on M&A. And looking at the past couple of acquisitions that you've done over '22 to '23, they've all been in thermoplastics. And as you said, with Star, you've now entered the U.S. thermoplastics market for the first time. Has this been a deliberate and intentional strategy to grow into this area a bit more versus historical M&A that's been in the rubber area and therefore, an indication of what future M&A might look like or more just a reflections of the assets that have been up for sale?

I mean the way we look at M&A and the whole strategy is we want to do M&A, and we're willing to do M&A in all product areas, including rubber compounding, TP and TPE and high performance. That being said, I mean, for a number of years, we've done many acquisitions within rubber compounding. There are still some that we -- there are still acquisitions that we want to do. But we also want to grow both TP, TPE and high performance. And if those companies that we're interested in come into play to being acquired, then we will do that. And when we look at the TP and TPE side, we've seen more acquisition targets being available that we are interested in. And therefore, we've done TP and TPE acquisitions last year and this year. The year before that with two rubber compounders. But it is the strategy to grow in TP and TPE as well, absolutely.

Okay. That's clear. And just a last question if I may? With the appointment of the new CEO, can you please give us some background behind the appointment and what perhaps the Board has seen as fitting over the right characteristics for Mr. Dahlberg to take on this position?

That's a question for the Board. They said that they are looking for a profile than he fits, and he has the background to match that profile. So that's basically what I can say.

The next question comes from Julia Utbult from SEB.

Julia Utbult, SEB. You mentioned that the construction and consumer end markets remained weak in the quarter, while automotive improves and that there are regional differences. Could you give us some more color there on what you see among the different regions, please?

Yes. I mean, for us, when we talk about regions, is primarily what we call the Americas, the U.S. market and Europe. Asia and China were quite small. So when we look at automotive, it's primarily U.S. and Europe we talk about. And what we've seen both during the year and also when we look at the official forecast is that the volumes have changed a little bit over the year. Sometimes, this is more positive in Europe and less so in the U.S. and then it changes. But lately, we've seen better -- higher volumes in the U.S. and less so in Europe.

Okay. And could you also comment the demand situation in the industrial end markets?

Fairly stable across most markets. So we haven't seen big changes. They are quite stable.

Okay. Perfect. And then a question on the EBIT margin. You mentioned that you saw an improvement there, which was driven both by better product and price mix. So can you give us some more flavor on what kind of mix and price you're seeing?

Yes. It differs a little bit depending -- but if we look at -- compared to Q4 last year, we've seen, and as we've talked about this earlier this year also, we've seen better product and price mix compared to where we were 1 year ago that's driven up margins -- supportive margin growth here during the year. I think one thing to keep in mind is Q4 last year was probably the peak of price increases, which means that since then, we've seen prices come down quarter-by-quarter. So when we sit here in Q4 this year, this is the quarter where we have the biggest difference on sales price. And as you know, when we lower sales prices, but keep volumes, we have a positive margin improvements, mathematically speaking.

Yes. I understand. And also, if you could say something more about the specific product mix. Like are there any specific end markets that are performing better? Or what are we looking for ahead here in terms of better product mix?

It's not so much product mix related to end customer segments, but products within each customer end segment. So for us, it's actually -- the end customer segment isn't really the determining factor on the margin, except for perhaps medical, but the products that we are able to sell into each end customer segment. So we focus on the more high-end compounds, and we've been able to sell those into the various end customer segments.

Perfect. And a final one there, you said that a weaker organic growth there was driven both by weaker volumes and price. So is it 50-50 split there? Or could you give some more guidance, please?

Yes. When it comes to Q4 last year, the organic -- the lower organic sales is driven roughly half by volume and price.

The next question comes from Johan Dahl from Danske Bank.

Just a question on this factory consolidation project. Are there -- is this something that has moved up on the agenda in HEXPOL to sort of look over factory footprint? How many other projects similar to the one you're doing now is potentially ongoing? And can you give any sort of indication of current capacity utilization across your polymer compounding system?

I mentioned it before. I mean, we constantly review the manufacturing footprint to see if this where we want to be and it's always a trade-off at looking at our own production utilization and can we meet customer demand if it goes up quickly? So it's something we review constantly. And then we came to the conclusion that in California, it made sense to close down 1 out of 2 sites because we're confident that we can still supply all the customers and the volumes they need, both in the short term and the long term. It's not something that quickly came up. It's something that's always being reviewed. But here, we came to the conclusion that it was time to take this decision and close one of the two sites. That -- I mean the same answer goes for the rest of the manufacturing footprint. It's something that we review. We don't have any specific projects ongoing. It's something that is discussed and looked at, but there is nothing concrete specific right now on the table. And then when it comes to utilization, it's not something that we publish. So that one will -- I'm not going to be able to answer, but we have capacity to meet increased demands.

All right. On the -- if you look on this weak segments you talked about construction, consumer -- just if we're -- if you're saying that automotive grow and you've got the weak spots in consumer and construction, it seemed to be a fairly significant volatility or significant movement in those particular segments. Do you have any visibility or hope of what they're thinking ahead of 2024 now? I mean we're seeing possibly destocking in consumer being approaching an end, you got all these government initiatives in construction. Are you seeing anything there?

I mean you're correct. I mean we do see a downturn -- a significant downturn in demand from housing and consumer-related products. When this turns and goes -- start to see increased demand, I'm not sure. When we look at all the signals that we can see from outside HEXPOL, we still haven't seen a turn. The information and the numbers we see related to housing, new building are still very weak. We don't see architects suddenly saying that they're starting growing new houses. So we don't really see any signals yet that it will turn. And the same goes for consumer-related products. We haven't seen it yet. Exactly when it will turn, we're not sure of.

Got you. A final question just on price competition. You're saying that supply chain is clearly seeing and you produce stellar results, obviously, but then again, volumes are weak. Are you sort of turning down any volumes due to competitors becoming more sort of price competitive?

I mean, we go in and compete for every volume that we can that's out there. And in some cases, we do have especially smaller competitors that lower prices much to get that volume. We -- I mean we're a market leader. We're not going to drive pricing down. So it happens that we turn volume down. And in some cases, we compete for those volumes as well. So it's a mix.

The next question comes from Andres Castanos-Mollor from Berenberg.

Congratulations on the results. I wanted to ask about the plans for CapEx going forward, particularly after your investment in TPE in the U.S.A. I wanted to understand if you expect to invest more and grow organically?

When it comes to CapEx, if we exclude doing acquisitions and what might come from that. But if we look at where we stand today in the business we have today, one can expect normal CapEx levels. There is -- there isn't an area where we are underinvested when it comes to production capacity. We continuously do CapEx that we need to maintain efficient production efficiency. So one can expect to see normal CapEx levels when it comes to production capacity.

That's great. Another one, please, on the level of inventories. Of course, they will come down in krona terms when the cost of the basket right overall comes down. But I also wanted to ask about the volumes, the level of inventories in terms of volumes. What we have right now is a stable, sustainable level going forward?

If we look at our inventory levels, I mean, they are stable as they are. I mean, we brought it down a little bit here in -- or some in Q4. The ambition is to continue to decrease where we can. But that is done by article-by-article to say, okay, do we have a stable supply? If we do have that, then we'll bring the volume down as well, regardless of the price component. And the ambition is to continue to lower.

[Operator Instructions] The next question comes from Gustav Berneblad from Nordea.

It's Gustav here from Nordea. Just one or two quick ones here. Maybe in terms of the geographical point of view here, given the 13% decrease in sales in North America, just -- are you seeing an intensified weakness here? Or is it just tough comps and lower prices? Or what can you say there?

Yes. We don't see a changed picture. The U.S. is still a market where we see, which is basically more positive than Europe. So no, there's no change in view on that.

That's great. And then just a final one here. On the net financials, is this sort of a good proxy for the run rate interest expenses? Or are there any one-offs in there?

No, it's a good -- good levels, maybe the wrong word, it could have been a lot cheaper. But it's -- the only one-offs we do have are some FX effects, but they are normal not a big part of the financial net. Apart from that, it's the interest rates and interest income.

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

Thank you very much, everyone, for calling in. I wish you a very nice Friday afternoon and a weekend when you get that far. Take care. Bye.