Thank you. Welcome to the presentation of our results for the Q2 of 2021. Presenting today are Joerg Brunnestam, our CEO and myself, Peter Rosen, CFO. The agenda for today is to first give you a business update, then to go through the financials in more detail and also the focus areas for this year, we will finish with a Q and A session. And with that, I hand over to Jyr, who will take you through the first part of the agenda.
Thank you, Peter. We are happy to announce and present a good quarter. In it's a very good quarter given the challenges we are facing in distribution and supply chain. We have strong organic sales, actually 70%, with, of course, low comparables from Q2 last year. We have growth in all regions despite quite a lot of global supply chain disturbances.
We have continued with a lower cost base we established, and this has given us the best quarterly result ever so far. We see the supply chain issues and semiconductor shortages, especially affecting our Tier 1 customers where they see the OEMs are affecting. We see it in a different pattern or maybe no pattern at all, it is it varies a lot from Tier 1s and OEMs globally, both different OEMs and in different countries. So we see it affecting actually in all markets. We have handled our own issues, and we also handled the flexibility issues and the cost issues connected to the flexibility which we are having to prove every day in a good way.
We have an experienced and a very competent team who are very good, I must say, in handling all these flexibilities because you can imagine, there's a lot of the new planning and different planning and changed planning in order to service the customers with these disturbances. But all in all, we have managed that in a very good way. We have handled it in a very good way, and I think we have handled it in a better way than most other people in the industry in our industry, I should say. We feel that we have been able to gain some traction with many customers here. We had a strong sales growth, and this is hit by negative FX effects by more than SEK 400,000,000 and at fixed the FX rate, we will be at SEK 4,400,000,000.
The COVID situation is still there, although it's manageable everywhere and then we are open bed. We have some local outbreaks from time to time, but we do handle them. We do have a decentralized organization that really helps and works in this circumstances. And of course, vaccination is increasing everywhere, and it helps to stabilize. We are tough and tight on our cost control in order to keep the savings we've done in our cost savings programs, and then that has been the case in the quarter as well.
And as I said, this was the best quarterly result ever so far. And we actually had a profit of SEK 728,000,000 versus SEK 209,000,000 last year. And the margin is kept on the high above 18.2% levels, and we have been over the 18% now for a number of quarters in a row. We feel that the organization is executing on the updated strategy, which we made some time ago, and we presented at the Capital Markets Day recently, and that is including an increased customer focus. We see that in both business areas, both in export compounding and in export engineered products.
And we see a recovery and we see strong sales in all regions. We see automotive at a decent good level in all regions, but of course, disturbances from semiconductor shortages. We hear from the OEMs that the sales is good and that the inventory is at a low level. So the EBIT improvement is driven by good sales at a lower cost base. And that is also the case in HexPol Engineer Products, where we had a very good quarter with increased sales and increased operating profit.
The M and A focus is strong. We have, during the quarter, integrated the Viacom business, which we recently acquired, it's a very good complement to us in the wire and cable compounding. The wiring cable compounding business is driven by the electrification. So that is a good acquisition for us and integration goes well. We have also recently got the final approval from the authorities on the Unica acquisition, which is a leading rubber compounder in the South of Europe with 1 plant in Spain.
And we just started the integration, and we see very positive signs with the people on board. We I have shown this picture on Page 6 before. I just want to reiterate that we do have a very strong country in the export group. We are decentralized, but we are coordinated wherever it makes sense and then where we save money. We have experienced, we have agile and we have very competent people in our organization, and that really helps now in the turbulent supply chain days.
And we have a new refreshed purpose, which is that we do create a material difference in all aspects.
If we then turn to Page 7 and look at the sales development in the quarter. As Joerg mentioned, we delivered a very high organic sales growth of 70% compared to last year. The acquisition of Biocom in the Q1 added another 4% of sales compared to last year. So excluding the negative FX effects that we saw, we saw a growth of 74% compared to last year in this quarter. And the organic growth is of course affected by the low comparables in last year, but nevertheless it's a very strong growth and it also represents organic growth compared to the previous quarter this year.
The sales growth was are offset then by the fairly strong negative FX effects of some SEK 405 1,000,000, resulting in reported sales of an even DKK4 1,000,000,000 here in the quarter. Looking at the regional development, we saw strong sales growth in all regions, although highest in Europe, followed by the Americas and then Asia. And we do see that Europe is coming back somewhat faster than the Americas. Asia may look somewhat slower than the other regions, but keep in mind that they were hit by COVID-nineteen already in the Q1 of last year, so their comparables are somewhat different, but overall a very strong sales growth in all areas. And if we then move over and look at Page 9 and look at the financial overview, we delivered a very strong result in margin in the quarter despite negative effects on both sales and profits.
On profit, we saw some SEK 60,000,000 second negative FX effects. But all in all, we still delivered an operating profit of SEK728 1,000,000 and a margin of 18.2%. And the operating profit is yet again the highest that we have ever delivered in the quarter, and it also an increase of almost 2 50% compared to last year. And looking at the equity asset ratio, it also remained strong in the quarter at 60%. If we then move over to the next page, to Page 10 and look a little bit more on the developments.
We see that we see a sales growth of 58% compared to last year and that includes some SEK 400,000,000 in negative FX effects. At the same time, the operating profit increases with 2 50 percent to SEK728 1,000,000. And the margin improves with 120% to 18.2% compared to same period last year. And if we then move over to the next page and look a little bit at what drives the improvement in profit. We see drivers of the improvement across the board with increased sales, improved gross margin and lower OpEx.
And the increased gross margin is the result of strong volume development and relatively lower direct costs in production. The lower OpEx is the result of the cost saving programs that we launched during the Q1 last year and which were subsequently stepped up when COVID-nineteen hit. We started to see the lower OpEx during Q2 last year, which then improved further during Q3 last year and we've seen we've been on a new and lower and stable cost level since then, even actually improving itself this quarter. If we then move over and look at the development of profit and margin over time. And we look during the development on the last 6 quarters, it's quite clear that the continuous volume development improvement combined with the lower cost base translates into substantially higher levels of operating profit and margin.
For example, in Q1 last year, we delivered an operating profit of almost SEK600 1,000,000 at a margin of 14.1%, which was seen as a fairly strong quarter. We were definitely hit by COVID-nineteen during the Q2 last year, where we saw volumes and sales dropping substantially. We still delivered a margin of some 8%, partly supported by the OpEx savings that we started to see during that quarter. Since then, we've delivered 4 record quarters in absolute profits and with margins around and above 18%. And this is despite the challenges we still face when it comes to COVID-nineteen and the fairly new challenges that we've seen regarding raw materials and global supply chain interruptions.
Yes. I then make some small comments. If we turn Page to number 13 on the business areas, I would make some comments on export compounding. It's, of course, a very strong quarter with organic sales growth of 74% versus last year and then a very strong profit improvement to SEK 679 €1,000,000 versus €178,000,000 Q2 last year, and the margin is 18.2 percent, a strong margin again and very much higher than the 7.8% corresponding quarter in 2020. The highest sales is driven by improvements in all customer segments, and we see especially strong performance in TPE and also in the relatively newly acquired Mesco, where we now see a lot of benefits from the integration into the Hexpo Group, very strong quarter in those units.
In the segments, we see strong recovery in all segments, but especially in quarter 2, the general industry is improving and there is more of a mixed picture in automotive versus the previous quarter. If I then turn page into Engineered Products on Page 14, a very good quarter for Engineered Products. Sales well above last year. Last year wasn't so bad hurt by the pandemic has been compounding, a big improvement in operating profit and a margin at 17.6%. We see overall strong performance in Hexport Wheels, and the wheels business is driven by the hugely increased e commerce business, where a lot of our products are going in.
Okay, and if we then move over and look at the balance sheet and our working capital on Page 15. Did see a small increase year over year in absolute terms, while in relation to sales, working capital was on the same level as last year. The reason that we see for us relatively high working capital levels, although on same level as previous quarter, is that we have some inventory buildup and higher accounts receivables. The inventory buildup is a conscious decision on our part, and that is based on the uncertainty currently regarding availability of raw materials. So we simply acquire it when we can.
The higher capital receivable is the effect of high sales during the latter part of the quarter. So we do not have any changes in the underlying payment terms with suppliers or customers, and we do expect to see working capital coming down when normality exists around us. And if we then move over and look at the cash flow on Page 16. The strong EBIT is partly offset by the temporarily higher working capital that I mentioned, but also very strong is that the level of investments continue to the below depreciation. So even though we have the growth in the working capital, we still have an operating cash flow of strong $600,000,000 in the quarter.
And looking on Page 17, we can take a look at and see how that affects our financial position. The net debt stands at NOK 1,900,000,000 at the end of the quarter. And the net debt to EBITDA ratio improved somewhat compared to end of last year. And this is despite that we have acquired VICOM, and it's also despite the dividend payouts. So we continue to strengthen an already strong position.
And also making just a short note, when it comes to our funding, in June, we launched a commercial paper program to make our funding more efficient for us. It has, of course, no impact on our total funding or on our banking relationships, which remain exactly the same as before. However, it is a complement for it, and it's been very, very well received by investors, helping us to keep the cost of our funding lower than before. And per the end of June, we had some SEK700 1,000,000 outstanding in commercial papers with a duration between 2% to 4% sorry, 2 to 4 months.
Okay. If I then sum up the quarter, which was a good quarter, as I said. In fact, it was a very good quarter given the challenges and the disturbances in the supply chain, which we handled in a very, very good way. I'm very happy with how the organization is handling that. But that gave, of course, the best quarterly result ever.
We had strong organic sales increase of 70% on the structural lower cost base, and we delivered a margin again above the 18%, in fact 18.2%. And the COVID situation is not gone, but it's under control and it's more stable than before. So all in all, a good quarter and, in fact, a very good quarter that with some disturbances. And if I look forward and if you look at Page 20, we are still focusing on the same items as before, and we do believe that there could be good rebound in light vehicle production. And if that happens, we are on our toes to execute on that.
And we are very cautious in the health and safety of our employees, and we are on our toes to manage the volatility, which could be there. We will continue to have challenges in global supply chains and in raw material prices, which we have been handling so far in a good way, but there will be continued challenges in that. We will continue to look at our print, and we will be very active in the M and A as we have been recently with 2 recent acquisitions. And of course, we will run and execute our strong business model efficiently. And the increased stepped up sustainability work will continue.
Okay. And by that, we end our presentation of the Q2 and hand over to Q and A.
Please press 1 on your telephone keypad now. Our first question comes from the line of Douglas Lindahl of Kepler Cheuvreux. Please go ahead. Your line is now open.
Hello. Good afternoon, Joe and Peter. I wanted to start off by focusing on your cost control here, which was impressively strong in the quarter. What sort of can you exemplify what sort of SG and A issues you've handled and which specific costs you've taken out? And I guess you mentioned there in the report that these are mostly sustainable or structural.
But is it fair to assume now that if Volumes come back, we should see some sort of rebalance of SG and A towards H2. Those are my first questions.
Okay, if we look at the type of savings that we've done, I would say that there are no specific one time savings. The savings are more or less across the board and they should be seen as an expression for us having a very tight cost control. So we do work I mean, last year, we launched a number of saving cost saving programs, including people leaving the company and some other actions as well. And we haven't they were completed last year. So this is more an expression of us working very hard with all the details on all cost aspects.
When it comes to and they are structural in that sense. When it comes to eventual cost increases. When we return to a more normal situation, it's very likely that some costs will come back. For example, if we are able to travel, some of those costs will come back, but they will certainly not come back to previous levels. So they will still be below what we've seen historically.
Okay. That is very clear. And I guess, underlying, do you see room to further improve on cost? I know I've asked you this before and you said sort of no, but now that you've proven that that's Possible. Do you see further room for?
No. I would say again that low cost this quarter, we worked very hard to get here, I would say that no, there are I mean, we will continue to work with the tight cost control, but to see substantial additional savings below.
And on the supply chain issues that you mentioned Which has affected your growth profile somewhat. Is it possible to quantify by how much that has impacted your organic growth in the quarter or give sort of indications.
Yes. No, I'm sorry, I thought that I can't do that because I mean, we have fulfilled what we have taken on. But how much more could we have taken on, how much more from other suppliers could we have taken on if we weren't having our own disturbances? And how much more could the Tier 1s have been ordering if they haven't had the OEMs semiconductor shortage. I really don't know.
I cannot put a figure on that. I can only say that if the supply chain disturbances for us and also for BOEMs wouldn't have been there. We would have definitely supplied more.
Okay. Yes, fair enough. I understand it. It's a difficult question to answer.
It is. It is.
See how you responded to that. And finally a bit of a housekeeping question, I guess, but G and A is coming down now to SEK78,000,000. What should we expect going forward to sustainable levels Throughout the year.
I'm sorry, I didn't hear your question.
Yes. A bit of a housekeeping question on depreciation and amortization which has come down quite a lot in recent time. Is it possible to give some sort of guidance on what we should expect there going forward?
I think the levels that you've seen lately in the last couple of quarters are that's a reasonable level for us.
So Q2 is a bit on the low side
then.
Okay. That's it for me. Thanks.
Thank you. Our next question comes from the line of Gustav Osterberg of Carnegie. Please go ahead. Your line is now open.
Good afternoon, Jorgen, Peter. I'd like
to ask a quick question to get some more color on demand, please. You mentioned numbers are strong. The supply situation is tough but manageable, and it appears that vaccination rates are going in the right direction. Is it time to drop the comment that Uncertainty still remains high? Or what's keeping you from removing that?
Is it related to supply situation? Or could you elaborate a bit on that, please?
Yes, I can. And I think both you and I can go back to the comments from all OEMs in automotive, I mean, they are still talking about semiconductor shortage and stopping weeks and stopping days. And then how that will happen, how that will come in play and then affect, I don't know. So that's where we have a big uncertainty.
All right. So if I read you correctly, then I mean the underlying recovery in demand is Still there. It's more the time and the short term issues and where uncertainty is high then.
I think that's a good interpretation.
All right. Thank you very much. Thank you. Our next question comes from the line of Johan Dahl of Danske Bank. Please go ahead.
Your line is now open. Yes. Hi there. Thank you. You talked here about having your ability to supply and strength and customer relationships, etcetera, could you just talk about how sticky that potential new business is.
Is it more of a spot character? Or is that something that you think could Sort of have a more long term impact for export?
It's a very good question, Johan. And we have been very clear in our both tactic and strategy in this. I mean, I think we are a big player in our industry, certainly in the rubber compound industry. And if we are having good not good or if we're having less bad accessibility to things. Then we try to use that, of course, by servicing all our major customers, normal customers, which have, of course, a very, very high stickiness.
That's our business model. But of course, if we got some chances to supply some other customers as well. We have been very tactical and tried to find long term customers who could be sticky for us as well.
Okay. You talk On your sort of management agenda, you talked about the valuation of the manufacturing footprint. What is exactly sort of what are you what do you need to fix there in your view? Just some sort of major headlines on that.
I think we went out with the closure of 1 more American plant quite some time ago. And that is not off the agenda yet, but it's still that is less likely now given the improved demand and also the fire we had in Jonesboro, but we are still evaluating is that that is less on top of the agenda than it was prior to the recovery of demand and prior to the Johanstburg Factory Fire.
Okay. Let's try to talk about raw materials. I think that raw materials prices were higher this quarter compared to last year. But was it double digits? Was it sort of mid single digits?
Could you just give us a Ballpark number
there. Yes. It's single digit and it's low mid.
Okay, great.
Thanks. Thanks, Johan.
Thank you. Our next question comes from the line of Karl Buchtqvist of ABG. Please go ahead. Your line is now open.
Thank you. Good afternoon, Jiori and Pieter. First one, how one should given where we are now and I think there are some players out there throughout the value chain talking about how the automotive demand could sequentially come down at least in the Q3 due to the bottleneck issues and supply chain constraints. I realize you have a quite sort of you don't really have a too long visibility. But given where we are today, what are your thoughts about sort of a continued sequential improvement on your end or if you feel that the automotive end market might have been sort of at a Level that could come down a bit during the
Q3. That's a very good question, and it's a question we think about and we analyze and we look at every day basically because it's extremely important for us. But if I hear from our Tier 1s and if I hear from the OEMs what they are saying is that the sales of cars is good. It's actually the ability to deliver which is bad. And also, for example, in Americas, where they produce to inventory, the inventories are very low, extremely low.
And if you give to a car dealer there, I mean, the dealerships are empty of cars. So that tells me that if the semiconductor problems are not getting worse, then there should be a good demand for parts to production of automotive cars. So that's what we hear. And then the but as I said in my outlook and comments, we are an hotels.
And just a follow-up there. When you say that inventory levels are low, are we talking about Car inventories or the inventory levels of your customers?
No, car inventories.
All right. So I was just
thinking And our customers, they are delivering just in time like we are.
Okay. So you haven't seen any sort of inventory dynamic among your customers? No, I
don't see that. No, I don't see that.
And then I guess, we during the Q1, you stressed that your ability to deliver meant that you had so far no issues in terms of raising prices given that customers have prioritized availability over any possible price discussions. I was just curious to hear what your thoughts are as we towards the end of this quarter and as we head into the second half of the year when raw material prices will The way they seem now at least, the even more sort of impactful year over year?
That is still the case, what I said, but it's, of course, a very, very tough discussion. I mean, somebody must swallow the cost increases somewhere. So I think it's we have still the same situation, and that has always been the case in our business model as well. We passed the cost increases.
All right. And then I seem to recall that previously you've been talking about sort of structural cost level to think about would be somewhere around NOK 200,000,000 and now it's below NOK 190,000,000. Is there any particular seasonality in here as well as vacation or anything that means that the future quarters we might still think about the level closer to SEK 200,000,000 rather than sub SEK 200,000,000.
As I mentioned before, I mean, we've taken out the structural cost savings and they are there. The low cost here in the quarter is the result of both the structural savings and very, very tight cost control. I think if one looks ahead, we've said around 200. If it's somewhere around there or just below, I think it's a reasonable view on our cost base.
Understood. Thanks, Rob.
Thank you.
Thank you. Our next question comes from the line of Victor Trasten of DNB. Please go ahead. Your line is now open.
Thank you, operator, and hello, Gjeran and Peter.
Hi, Victor. I'm a bit curious about the sequential trend. You mentioned there about organic growth also on a quarter quarter basis. Could you please split how much of that sequential organic growth was volumes and how much of that was price, please?
Yes, we can roughly it depends a little bit on the mix as well, of course. But roughly, I think, at fixed FX, we had 6% organic growth quarter 2 versus quarter 1, and I would say it's half half, maybe slightly more than half on Enterprise.
Okay. That's Council, just looking on the volume trend then, has that, I call it, been accelerated during the quarter or where are we on run rate now versus beginning of Q2? Do you still see trend of accelerating volumes?
No, I think there's no pattern in Q2 on the demand more then the holiday days in quarter 2, but they are not there every year. So no change demand pattern in the quarter than the normal holiday seasonality with Easter and so on.
Okay. And on the topic, Just looking historically, the seasonal pattern in the business is not that obvious. But Just thinking now into Q3, is there any potential even where inventory levels and demand is that our Q3 could be even stronger despite holidays or something.
Q3 is a little bit more of a holiday quarter, but our seasonality variations are not so big. But of course, I mean, August is a European holiday and U. S. Is maybe less of that. But we have not any huge seasonality changes in our business.
Okay. No, that's clear. Just also could you remind us a bit about the lag effect you might have in price increases versus raw materials, how does that work? And I guess what I'm looking for is whether some of the effects from the current price increases is still ahead of us, so to speak.
I think our pricing to customers is normally monthly or quarterly. And the same goes basically for the suppliers. But of course, given the extreme situation, there has been quite some variation on that because it hasn't been possible to get hold of things from time to time. And then of course, the price adjustments can vary as well.
No, okay. I say I guess what I'm after is looking at your gross margin that was down basically 100 bps quarter over quarter. Just thinking about that trending to the second half, Should we expect given where raw materials are heading on spot, should the gross margin then continue to decline a bit? Or how should we think about that?
As Jorg mentioned, I mean, it depends very much on development of raw material prices and how we can push that over move that over to our customers. On gross margin, there might be somewhat more pressure on the percentage, but as we've stated all along, in absolute terms, we estimate to be able to pass on any changes in raw materials to customers.
And that's a bit what I'm after. In that absolute term, has you been able to do that During Q2, or is that sort of a lag effect given that some pricing is on quarterly basis?
I think in general, we've been able to pass that on euro for euro, so to say, only or dollar cent per dollar cent and on the raw material. But of course, there could be some lagging. But basically, we balance with the purchasing lagging with with the sales lagging.
Okay. That's clear. And just one final for me, if I may. On the M and L agenda, we have talked a bit about previously about sort of a difficult environment of actually closing acquisitions given the restriction travel and so forth. Could you just comment a bit on your pipeline and also how that environment is improving or just improving into the second half?
Well, that is improving, of course. I mean, it's improving because you can actually see and meet people, and it's also improving that I think the market sentiment is a little bit better, and you're not forced to sell on 2020 figures anymore. And so I'm positive on that sentiment except for the the price levels and multiples are going up.
No, that's a clear answer. Sounds good. Thank you very much. I'll step back in line. Thank you.
Thank
you. Thank you very much.
No further questions, I'll hand back to speakers for any further remarks.
Okay. Thank you very much for listening into our presentation of this quarter. We wish you a very nice weekend when you get there. Thanks a lot. Take care.