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

Welcome to the HEXPOL Q1 2025 Presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Klas Dahlberg; and CFO, Peter Rosen. Please go ahead.

Thank you, operator, and good afternoon, everyone, and thank you for joining in on the HEXPOL Q1 presentation. I'm Klas Dahlberg, and I'm here together with our CFO, Peter Rosen. If you please turn to Page 2. I will start with a business update, tell you a little bit about our latest acquisition, Kabkom in Turkey and also the organizational changes we have done during the quarter. And then touch upon the U.S. trade policy, how that affects us. Peter will take you through the financials, and I will then summarize the quarter and focus areas going forward. After that, we are happy to answer your questions, of course. And if you please turn to Page 4. Let me start by going through the Q1 performance. We did have a good start of the year despite the uncertainty in the world. We're happy to report that we did see the effects of the expected increase in demand after the seasonally weak Q4 last year. We had overall stable sales in Europe and in the U.S. in the first quarter. Asia showed a good improvement driven by Engineered Products. The somewhat lower EBIT margin was mainly driven by product mix. In the quarter, we delivered sales of close to SEK 5.4 billion and an adjusted EBIT of SEK 839 million with a margin of 15.6%. The organization continues to keep close track on the working capital. As always, in the first quarter, the cash flow is on the lower side, but the SEK 188 million that we achieved is still higher than last year. Moving over to demand and sales prices. Organic demand was slightly down versus Q1 last year, mainly affected by lower demand from automotive, but that was largely offset by growth in building and construction, general industry and also in wire and cable. Positive impact also of Piedmont that we consolidated from November last year. Sales prices were sequentially stable with no big variations in price for major raw materials. But there is, of course, an uncertainty going forward by U.S. trade policy and changing tariffs. If you please turn to Page 5. Looking at the different business areas, starting with HEXPOL Compounding, which is the majority of our business. Sales was in line with last year. Organic demand was slightly down versus Q1, but also mentioned -- as we mentioned before, it was largely offset by growth in other areas. And I mentioned those, building and construction and so on. The supply chain is sequentially stable and also versus last year. If we look at Engineered Products, we are happy to report a 15% increase of sales compared to last year and a good development across the product areas. I would like to highlight wheels that had a good first quarter. They have made a differentiation into new segments like defense industry, conveyor systems for airports and so on, and they were quite successful in that. We are firmly committed to sustainability and our focus continues, both for our own operation, but also for our products. We still see a high interest in recycled products, resulting in a high number of projects, not least from the automotive industry, where we are well positioned. M&A is an important focus area for our growth plans. We look positively still on the environment and what's important is that we have the financial resources to make the acquisitions. The acquisition of Kabkom was approved by the Turkish authorities last week, and we are planning to close the deal next week on April 30 in Izmir, where they have their facility. We acquired the remaining minority share of almaak in Germany in April and the management remains on board, which, of course, is important to us. If you please turn to Page 6. Just a few words about Kabkom. Kabkom is the market leader in Turkey for wire and cable compounds and especially for so-called HFFR compounds, which is a compound that is, let's say, fire resistant. You don't get toxic smoke and so on. And that is a regulation that has been put in public buildings to use that compound for wires and cables. And they have been quite successful in that area. And we see electrification is driving this segment in general. So we are -- we see a positive growth going forward. If you please turn to Page 7. We have made some organizational changes to drive growth. We are building a stronger thermoplastic and TPE business by putting them into one product area. These compounds are produced in a similar way. We can also leverage on our customer relations, our application knowledge and geographical reach. High-Performance Compounds will be integrated into rubber compounding because they are also closely related. If you look at Page 8, if you turn to Page 8. This picture illustrates the changes that we have done, giving us 4 product areas: rubber compounding with a geographical split, TP,TPE compounding, gasket and seals and wheels. And coming back to our growth plans or strategic overview, we are planning to invite you all to a Capital Markets Day on November 4 in Stockholm. There we will be more precise about the plans, and you will be able to meet our management team also. Then if we move over to Page 9, U.S. trade policy, I guess, is something on everyone's agenda at the moment. And actually, in the first quarter, we did not see any material impact of the trade policies. And we see minimal impact of the U.S. tariffs in Europe overall because we're not exporting from Europe to the U.S. Going forward, we do expect a direct impact on HEXPOL in the U.S., primarily driven by prices on raw materials. Active work is ongoing to mitigate the effects of that by finding alternative suppliers, negotiating purchase prices, and we plan for necessary price increases. And all that is in line with our business model. We also expect to see a negative indirect impact on demand in North America, but that is, of course, impossible to quantify today, but we believe it will have some effect given higher prices. If you please turn to Page 10. This is the heart of our operation, our business model and that I think is worth mentioning when we meet like this that, that is really the backbone to -- for our operations. If we turn to Page 11, it's time for the financial update, and Peter will start with the sales development in Q1.

Thank you, Klas. So if I can ask you to turn to Page 12, looking at the sales development here in the first quarter. As Klas mentioned, we delivered sales of SEK 5.4 billion, which is up about 1% compared to the same period last year. And if we break down the sales development, we see organic sales are down 3% in the quarter, while the acquisition of Piedmont added 3% in sales. And for the quarter as a total, we only saw minor FX effects. The lower organic sales are mainly driven by somewhat lower volume. Sales prices are stable both versus Q1 last year, but also sequential compared to Q4 last year. And from a geographical perspective, both Europe and North America showed stable sales, while we saw the increase that Klas mentioned in Asia, driven by the performance by Engineered Products. And if we look at it from an end customer perspective, we did see slower or softer demand within the Automotive segment that, to a large extent, was offset by increased demand and sales related to building construction, general industry and the wire and cable end customer segments. If I can ask you to turn to Page 13, just looking at the financial overview for the quarter. An EBIT of about SEK 840 million with an EBIT margin of 15.6%, which is below what we did the same period last year. Main reason for the lower margin is the somewhat less profitable product mix and also somewhat higher OpEx in the quarter. Equity asset ratio remains very high at above 60% and return on capital employed is also high at about 17%. As Klas mentioned, a cash flow of just below SEK 200 million, which is higher than what we did last year at SEK 112 million. And just a reminder that this is the normal cash flow development that we normally see. It's always soft in the first quarter and will then pick up during the rest of the year and normally close quite strong at the end of the year and for the full year. If I can ask you to turn to Page 14, looking at the financial performance from a somewhat different perspective. We see sales at SEK 5.4 billion, in line with last year, while the operating profit is down 7% to about SEK 840 million, which is below last year, and this is driven by the lower margin at 15.6% compared to 17% that we did same period last year. If I can ask you to turn to Page 15, we look at the operating profit and the various profit drivers. We can see that the lower EBIT compared to last year is driven by the somewhat lower gross margin and the lower gross margin is affected by the product mix, as I mentioned before. OpEx are above last year, and that is driven primarily by acquired Piedmont that has been added, various smaller items such as the general salary increases, but also costs for some strategic products that we've run here during the quarter. If I can ask you to turn to Page 16, we'll take a look at HEXPOL Compounding, where we saw sales of SEK 5 billion in the quarter, which is in line with the same period last year. I should mention that this includes acquired Piedmont. Excluding Piedmont, we saw a small drop in sales primarily related to the U.S. market. As I mentioned before, from an end customer perspective, the lower demand and sales is seen with the automotive end customers, and that was, to a large extent, offset by higher sales to building and construction, general industry and the wire and cable end customer segments. Operating profit at about SEK 760 million with a margin of 15.4% here in the quarter. If I can ask you to turn to Page 17, looking at Engineered Products, very strong quarter at about SEK 430 million in sales, which is an increase of 15% compared to same period last year. And within the business area, we saw that all product areas showed good performance. Operating profit at about SEK 80 million, also 15% above last year, with a stable EBIT margin at high 18.2%. So a very strong quarter for Engineered Products. If I can ask you to turn to Page 18, looking at working capital. We continue to manage it very efficiently, I would say. Despite adding Piedmont with about SEK 100 million in working capital, we see that the group working capital is below the same period last year, both in absolute terms and in relation to sales. And as [indiscernible] often mentioned, there is no change in the underlying payment terms. And if I can ask you to turn to Page 19, looking at the cash flow in the quarter. As mentioned, we delivered a cash flow of SEK 188 million, where the growth in working capital offsets the EBIT in the quarter. And this is a normal pattern for us here in the first quarter. And then finally, talking about finance, I'll ask you to turn to Page 20, looking at the net debt here at the end of the first quarter. We have a net debt of SEK 2.3 billion, a net debt-to-EBITDA ratio of 0.63. And just a reminder that this is, of course, after the acquisition that we did in Q4 of last year. So that has some impact. But all in all, we continue to stand with a very strong financial position here at the end of Q1 of 2025. And with that being said, I hand over to Klas for some summary remarks.

Thank you very much, Peter. So summarizing the first quarter, we are looking at -- we feel we had a good start of the year, which is important for the coming quarters also. We came back after a somewhat weaker Q4 last year. No material impact from tariffs so far, and we are geared to handle the direct impact of imported raw materials to the U.S. Kabkom, as I mentioned, is a new member of the HEXPOL family, strengthened our position within wire and cable that we see as a growing segment in general. We are changing parts of the organization to drive profitable growth, and we are forming one product group for TP and TPE, where we see good growth potential. We continue to focus on sustainability with good progress. We continue to investigate further growth opportunities that I mentioned before, and we focus on M&A, but also organic growth and as always, improved efficiency also in our facilities. So by that, we conclude the presentation of the quarter, and we open up for your questions.

[Operator Instructions] The next question comes from Joen Sundmark from SEB.

So first question on profitability. Margins continue to be down a bit compared to last year's levels. Yet you mentioned negative mix affecting. So my question would be whether we should extrapolate similar mix going forward? Or if you think this is more of a temporary -- is more temporary effect?

We don't give guidance on future performance when it comes to margins. So I just want to be clear on that. That being said, it's a little bit difficult to give more information on that because it will be affected by where the U.S. trade policy goes and how that will impact demand primarily on the North American market. So it's difficult to give a forward-looking view on this.

And if you would talk about sort of the mix that you -- it's now, is it sort of the recycled products that are having a negative impact? Or is it rather a geographical mix that's affecting profitability.

No, I wouldn't -- it's not related to products with recycled content. This is related to where demand is and where we can produce those products to those customers asking for it. So what we've seen here in the first quarter in relation to last year is that there has been a shift in the products being asked by customers. But it's not related to -- anything related to recycled products.

Okay. Very clear. And then you mentioned you're looking to find alternative suppliers for raw materials. Do you expect that will have any gross margin effect? Or how do you look at that?

Again difficult to answer because it -- there are a couple of items related to this, and it's, one is finding alternate suppliers. It's also about negotiating prices with those suppliers, but also with the existing suppliers. And then, of course, the third item here is how do we manage whatever price impact that has versus our customers. And as Klas mentioned, one very key part of our business model is to work with prices actively versus our customers. And last time, let's take COVID where we have very big movements in prices, we managed to protect our margins very well. So our view is taking all those 3 items together, is that we feel as comfortable as one can do in these days in managing and then it will not have a major impact on our margins.

Okay. Makes sense. Then as a final question, if you could talk a bit on the trend throughout the quarter. You mentioned some of the lost volumes in Q4 worsen in Q1. I guess that's mainly impacted January. So maybe if you could share a bit on what you saw in February and March in terms of demand?

A couple of things. The increase in demand from Q4 into Q1 was important to see because as we discussed in Q4, the lower demand was also impacted heavily by customers closing down extended period due to Christmas and lower demand. So for us, it was important to see that demand coming back in January. That is normally the pattern that we see. But this year, we needed to see a bigger increase because they closed down so early in Q4, and we did see that increase. Then during the quarter, demand has been fairly stable. So we haven't seen any major movements between the 3 months during the quarter. So fairly stable during the quarter.

Okay. Very clear.

The next question comes from Henric Hintze from ABG Sundal Collier.

This is Henric at ABG. So first, I was just wondering if you could maybe explain in a bit more detail what drove you to make these organizational changes and what you aim to achieve with them?

I will do that, Henric. So with those 2 segments, we call it TP thermoplastics and TPE is thermoplastic elastomers, they were actually split between 2 business units, you could say, for product areas. And that was because we started somewhere to acquire companies in those areas and now, we see we have come to, if I may call it, the critical volume where we could actually start to grow this more significantly. And by putting them together, I think we reach a more, if I may call it a critical mass, and they are closely related also. It's the same type of production process and so on and so forth. So by doing that, I feel we have a much stronger setup to build on, let's say, going forward.

All right. And the other change you mentioned?

The other change was roughly it was a High-Performance Compounds and the history of that was we acquired a company in Italy called Mesgo and at that time, we choose to keep that as a separate unit, but that production and the setup is also very linked to rubber compounding. So that is also a natural step to integrate that into rubber compounding actually.

All right. And secondly from me, can you say anything about what your customers in the U.S. have been saying with regard to how tariffs will affect demand for their products? Do you get any input from customers on that kind of thing?

To be honest, not really. I mean, as we said that so far, we haven't seen much of an impact, but our standing is more -- how will it affect the demand, let's say, for our customers' customer further down the value chain. But we haven't heard any specifics from any customer.

Yes. Okay. And then finally from me. I think you wrote in the report that you view the environment for acquisitions is positive. I was just wondering, if you noticed any change here during the past few months with increased uncertainty and such?

Yes, I think the key word here, Henric, is the uncertainty. As we would imagine most companies that need to take investment decisions on CapEx, they probably take a pause, sit on the sidelines a bit. And we see similar when it comes to M&A. But for the moment, if it's more quiet, but long-term, we still view this as positive. Deals will be needed to be made going forward, but at the moment, it's -- I think a lot of people are sitting still and waiting.

The next question comes from Andres Castanos from Berenberg.

For a number of quarters now, you have been discussing a stronger construction demand. And I wanted to have a sense of where do you think we are versus what could be a midpoint of the cycle?

Good question, very difficult to answer. When we talk about building and construction, this is the third quarter, as you mentioned, that we've seen increases from -- and there are 2 things to keep in mind. One is that we come from a relatively low level. The second one is that when we look at the increase in that segment, it's primarily driven by infrastructure. So it's not driven by new construction of housing, but it's infrastructure projects that drive the increase. When housing will come back, difficult to say.

That's very helpful. I wanted to ask also what is your -- yes, this percentage of sales of the total that represent cables, this will be pro forma with Kabkom. How much would it be of the total group sales? Will you get to double figures?

So wire and cable, most likely, yes.

Question comes from Johan Dahl from Danske Bank.

Just a few questions. First, on this reorganization. I was just wondering if you could provide LTM sales for this newly created business area. And also, if there is any sort of incremental CapEx going into this new venture to boost growth?

So as you know, we report on business area level, let's say. So it's within compounding. But -- and when it comes to your question to CapEx, I would say, given the fact that we are reviewing our strategy in general now, very generally said, I mean we are willing to invest in the growth in these areas, but we couldn't mention the figure on that, Johan.

Got you, Klas. I was just thinking, I mean, the [ TP ] and the high performance is becoming 1 of 4. I appreciate this reported on the other regions. But just to get a sense for the relative size there, if you can provide any details or maybe not.

Not really. I mean size-wise, maybe I could say like this that size-wise, the market for TP, especially and we always speak about the advance. So we are not into packaging materials and so on. But that market is much, much larger actually than the rubber market. So that's why we see a growth potential also. But I couldn't -- sorry mention the...

Fair enough. What do you make -- I was just looking through the annual report and noted, I think there was a slightly lower share of sales of recycle. What do you make of that in 2024 versus '23?

I think -- and correctly that it's light slightly lower, but I would point out it's slightly lower. And I would say, we are still at around 18%, if I remember right, on recycled material. And that depends also, I guess, on the product mix where we sell which type of products. But in general, that is something we see actually growing all in all, let's say, that demand from the customers.

Got you. Just finally on the oil price, I mean, it's come down quite significantly lately. Do you seeing any ripple effects of that in your -- in your procurement supplier discussions, et cetera? Basically, what I'm after is if you sort of think about deflation in your P&L going forward from that lower oil price?

At the moment, no. But I think also it's too short time if we look at when oil prices have come down and what impact that will have on our raw material prices. First, it needs to affect our suppliers and then will trickle down the value chain if we will see changes. But at the moment, we estimate that raw material prices will remain basically stable. And the [indiscernible] here is the U.S. tariffs, how that will impact raw material prices. But if we look at it from a source economy. So to say, we estimate that raw material prices, at least for the moment, remain stable.

The next question comes from Adrian Elmlund from Nordea.

Adrian Elmlund here from Nordea. Just one quick question for me here regarding automotive. Could you comment on how much automotive was down in any meaningful way in the quarter to give us some more flavors behind the numbers.

Not when it comes to our specific numbers, but if we look at the production levels in the first quarter in Europe and in the U.S., we see close to double-digit down or a high single-digit decrease in production, and that normally translates quite well into our numbers as well.

Question comes from Douglas Lindahl from DNB Markets.

I wanted to come back to the U.S. and the tariffs. I appreciate it's a difficult topic to address. But I was just curious to hear how you think that HEXPOL is positioned relative to your main U.S. competitors? Would you believe that there would be some sort of shift in market share, if you were to start changing pricing around due to these tariffs? Or you feel like you're in a better shape than your competitors in the U.S. Yes, comments on that, please.

Yes. Douglas, Klas here. So I don't think that the tariffs we believe, will be, if I may call it, say, equal to everyone. So they will also be hit by the tariffs, our competitors. And of course, we try, as I said, to negotiate with suppliers and so on and maybe also in some cases, find the second way of supply. But at the end of the day, I guess, we all have to pass this on as a price increase, like we do in all types of increased raw material prices. But no change between us and our competition. I don't -- I think we're quite well positioned to be honest.

Yes. Just trying to get a sense of if you will be more impacted or less impacted relative to your competitors. And if your clients then would choose another player relative to you?

It's a million-dollar question. But again, given the volumes we have, I mean, we are a market leader in the U.S., and I can see that we should be well positioned in this case.

If anything, probably on the plus side versus everyone else.

Yes, it's a difficult question. So I appreciate your answers, Klas and Peter.

The next question comes from Carl Deijenberg from Carnegie.

So a couple of questions from my side. Firstly, coming back on the discussions around pricing, maybe referring to one of the previous ones. Just rephrasing it maybe a little bit. I mean given that you're operating in, at least some of your areas fairly, let's say, transparent pricing environment. Have you seen any given the commentary you're giving around the U.S. here going forward, have you seen any price adjustment upwards from your peers in the U.S. already? And if so, roughly how much? Or is that still too early to call?

I would say, Carl, that's still too early to say we haven't seen that.

Okay. Okay. And then I wanted to ask also a little bit on pre-buys. Yes, tariffs were obviously implemented in a very quick manner. But have you seen any pattern or pre-buys in any of the end markets on the back of this or has not been any unusual on that side?

Basically, the answer is no. We haven't seen any major pre-buys. Maybe there are some but not of any significant volume that we see changes the picture, no.

And as you know also, since it's -- you can put a rubber compound on the shelf, it has to be used, so to say. So not really.

Yes. Yes. Yes, sure. And then finally, I wanted to ask also, I mean you made a couple of, let's say, production relocations you've done that continuously in the past and going forward, again, the situation. Is that anything that you're planning here going into -- to '25 on the back of the backdrop and what we have on that tariff side now? Or is that still also maybe early to call?

I mean, we constantly review the manufacturing footprint, and that's also why we've closed 3 sites here for the last 2 years. That being said, I mean, we continue to look at the manufacturing footprint. And if the economy changes and demand changes much, yes, then we have that review and then we will act on it. But at this moment, no.

Okay. Okay.

Question comes from Andres Castanos from Berenberg.

An additional one, please. Do you think you can maintain working capital below 10% of sales sustainably. Back in the day, you used to be there, but for a few years, you've been above 10%. Do you -- what do you think is achievable here?

Andres. I'm not going to -- we're not going to give a forecast on it, but I think there are a couple of things that have changed if we go back, for example, 6, 7, 8 years. One is that it was much more rubber at that time and that runs with a little bit lower inventory levels than for example, high performance or the TP companies because they need more raw materials on stock. So that's one thing. The second one is after COVID when all the global supply chains broke down, we took the decision to increase inventory to make sure that at any given time, we would have the inventory. It has come down since then, but if we still run with a little bit more inventory than we used to do historically. And again, the world is very, very uncertain. Different reasons than COVID, but still extremely high uncertainty. Whether we will come down. We will certainly work at trimming the working capital, but it is difficult or impossible to say that is -- it will be below a specific number. But rest assured that working capital management is very high up on the agenda for us.

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

All right. Thank you so much, operator, and thank you all for your questions. Also thank you for participating in this call. We wish you all the best and see you next quarter. Thank you.