Good day and welcome to the HEXPOL Q3 2022 Earnings Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Peter Rosén. Please go ahead.
Welcome to this presentation of the result for the third quarter of 2022. Presenting today will be Georg Brunstam, the CEO, and myself, Peter Rosén as CFO. The agenda for today is to first give you a business update, then go through how we continue to execute our business model, not least when it comes to sustainability, then go through the financials and the focus areas for the rest of the year. We will finish off with Q&A session. With that being said, I hand over to Georg, who will take you through the first part of the agenda.
Yes. Hi, Georg here. I will start on page four. I'm glad, I'm happy to say that we delivered again a very good result, actually our best quarter ever. We executed very well on our strong business model and on our strategy, including M&A and sustainability. We had a record sales and a record result in the quarter. Sales was 44% up, and we had strong sales in all regions and all product segments, especially so in Americas. As you know, Americas is close to 60% of our business. We had continued, as I said, very good execution on our strong business model, where price increases are key and we pass on the cost increases and the raw material increases to our customers.
We have done that, and we have continued to do it. Hence, we recorded a record EBIT of SEK 838 million, quite substantially up from last year. It's a continued turbulent and to some extent difficult environment, but we are delivering in that environment since long. Global automotive sales has varied, but we have seen improvements in our automotive sales towards the end of the quarter, especially in the Americas. We have seen uncertainties at the end of the quarter within the building sector in Europe, which is of course not the biggest sector we have, and Europe is absolutely not the biggest region. We have seen continued global supply issues and still continued price increases on raw material.
Of course, as you all know, escalating energy prices. Our M&A journey continues and our focus is strong. Almaak, which was acquired lately, is delivering in line with our expectations. It really supports our sustainability agenda as it is a highly engineered compounder based on recycled raw materials. Going forward, we do see global challenges with high inflation and high interest rates. We also have a tight labor market in most of our markets, and we see these things continuing. Our strong EBIT as before, we have been handling them in a good way, actually delivering the best quarters ever in that environment. Our strong customer focus and our geographical proximity to customers, that really strengthens this.
We are, as I said before, close to 60% with our sales in Americas. We are, as before, flexible, and we are on our toes, and we are ready to meet the forecasted increases in light vehicle production. If you then turn to page five, I will make some small comments on the two business areas and on the HEXPOL Compounding, which is our biggest by far business area. We had strong sales in all regions and product areas and in particular in Americas. Some improvements in automotive sales at the end of a quarter. As I said, some European uncertainties end of quarter within building and construction. We had strong EBIT in the HEXPOL Compounding, and we are handling all the challenges which are prevailing.
We also have a management change in Americas, completely in line with what was planned with Ken Bloom. He has announced that he should retire some time. He has been doing a great job for us, and he has announced his retirement. We have therefore appointed Tracy Garrison, the second guy in charge, second man in command in Americas. He has been 16 years with HEXPOL and a huge number of years in management positions, and the last couple of years in chief operating officer in HEXPOL Compounding Americas. A very experienced, well-known person for us, and Tracy Garrison has the perfect background to take over from Ken. We would like to thank Ken.
He has done a great job for us, and he will stay on as a senior advisor until at least end of quarter one. HEXPOL Engineered Products, a very good quarter, particularly performing well in HEXPOL Wheels. A strong EBIT and a strong growth and a good margin was achieved. We have continued focus on our sustainability and our sustainability target of over 75% reduction of CO2 emissions. We see good by 2025, we see good progress in that. We also see good progress in developing new green products, bio-based or even more recycled-based products. We were also selected as a partner in the Polestar 0 project, which was announced with a big press release just recently.
On M&A, high activity levels, we see good activity in the market. If you then turn over to page six, I just want to comment on that slide that our culture is strong and it's a strong culture delivering with a purpose that we create a material difference. We are, as you know, decentralized, but very strongly coordinated in all our activities. If you turn to page seven, then you will see the business model, which is a very strong business model, with the core values in the middle. We are benefiting, of course, from the shorter supply chains, which is a strong trend where we have a strong global presence with a global footprint. The sustainability is a big part of our business model.
Last but not least, we have a business model where we do pass on raw material and cost increases, and you can see that on the numbers. If you then turn to next page, just a recap on our sustainability strategy, that is to, as I said, reduce the carbon footprint in our own energy use, and then to develop green products to our customers. The further development, if you take next slide, you can see the Polestar 0 project I just mentioned. It's a great product, and we are chosen as a partner for that. Then also along the strategy in sustainability, we have acquired a highly engineered TPE compounder in Germany with recycled material as a base. We are very happy with that company.
It's performing according to plans, and it's giving us a much stronger sustainability profile.
If we then turn to page 10 to look a little bit on sales development for the quarter, we can just see that the challenges that we saw during the first six months of the year, with component shortages, the transportation issues, and raw material price increases, continued also during this quarter. Despite all this, we increased our sales with 44% compared to the same quarter last year. Out of this increase, about 20% came from organic growth, 6% came from acquisitions, and in addition to this, we had positive FX effects, especially related to the U.S. dollar of some $700 million. In total, that gave reported sales of just below SEK 6 billion in the quarter.
When we look at the markets and product areas, they all show good sales.
Especially America showed good growth, the highest growth that we had with 48%, followed by Europe with 41% increase, and Asia with 28% growth compared to the same period last year. Part of the European growth is driven by the acquisition of Almaak that we did earlier this year. If we then turn to page 12 to look at the more specific financials, as Georg mentioned, we delivered a record operating profit of SEK 838 million in the quarter, which is just above what we did previous quarter. That was also a record quarter, and is well above what we did last year in the same period.
The margin came in at 14.2%, which was negatively affected by the acquisition this year, which is currently running at lower margin levels than the other HEXPOL companies. The challenges related to raw material shortages and the price increases that we push through to our customers. Looking at the balance sheet, we see that the equity asset ratio remains high at just below 60%, and the return on capital employed is high at just below 19% for the quarter. If we then move to page 13, we see that the development compared to the same quarter last year, we see that sales increased with 44% to SEK 6 billion.
At the same time, we saw the profit coming in at SEK 838, which is an increase of 24% compared to the same period last year. At the same time, we saw the margin, operating margin coming down to 14.2%. As I mentioned before, that's partly related to the acquisition this year with lower margin, but especially the effects from the price increases that we've been doing for raw material and lately also energy surcharges. The lower margin is logical when taking into account the mechanics of our price increases.
We pass on absolute price increases to our customers, not the relative increases, which means that everything else being equal, this will have a mathematical negative impact on the margin, but not on the profit in absolute terms, which is also demonstrated by the high absolute profit in this and also the last quarter. If we then turn to page 14 and look at the drivers of the profit, we see that the increased sales added substantially to the bottom line, but they were partly offset by the lower gross margin and also partly by higher OPEX. The higher OPEX is in line with previous quarter while the increase versus last year is affected by acquisitions, inflation, and not least the negative FX effects on this line in the P&L.
If we then move over to page 15 and look at our business segments, we'll start with HEXPOL Compounding. They delivered sales of SEK 5.6 billion second quarter, which is an increase of 45% to same quarter last year. This increase is driven, about 25% is organic growth, and another 7% is acquired growth, which is Almaak in this quarter. We did see the sales improvements in most customer segments and in all product areas, especially positive was the strong development in the Americas. Operating profit came in at SEK 765 million, which is well above last year, where higher sales were offset by the lower margin, driven by the acquisition and the raw material challenges.
If we then move over to page 16 and take a look at Engineered Products, the sales increased with 30% to SEK 367 million compared to last year at SEK 282 million. Here we saw overall strong performance in the various product areas, but especially so for HEXPOL Wheels that performed very well. Operating profit also showed a very good growth with 24% increase compared to last year, ending up at SEK 73 million, driven by higher sales, partly offset by somewhat lower operating margin that ended still at high 19.9% for the quarter. If we then move over to page 17 and take a look at the working capital, we did see an increase year-over-year, both in absolute and relative terms.
As mentioned in the previous quarters this year, this is driven by an increase of inventory mainly. It's a conscious decision that due to raw material shortages and risk of even more, we decided earlier this year to purchase what we can in order to secure all orders that we receive, which we've done throughout the year. In addition to this, we have the recently acquired Almaak included, which adds another SEK 250 million in working capital compared to the same period last year. If we then move over and look at the cash flow for the period, it's a quarter with a solid good cash flow in the quarter, delivering about S EK 700 million in operating cash flow.
The investment level is somewhat higher in the quarter, and this is driven partly by acquired Almaak, where we see some more investments and the specific acquisition of a production building in the U.S. Apart from that, very good solid cash flow. That leaves us with turning to page 19 and looking at the net debt. Net debt increases some, compared to end of last year, as does net debt to EBITDA ratio, which now stands at 0.8. This growth increase is temporarily driven by the extra dividend that we did this year, and also the acquisition of Almaak in the second quarter.
All in all, when we close this quarter, it's a record quarter from an EBIT point of view, and it's a very strong financial position that will help us fund the M&A strategy that we have for the company. By that, I hand over to Georg.
Yeah, I just want to sum up what I really started with, and that is that we delivered a very good quarter again, actually the best quarter so far. We executed very well on our pricing and strategy and on our business model and the long-term strategy, including M&A and sustainability. Strong sales growth and a strong EBIT growth in the quarter, driven particularly by our biggest region, which is Americas, with close to 60% of our business. We saw some improved automotive business at the end of the quarter, especially in Americas. We had a good start of the acquired company, Almaak, which is really based on recycled raw materials, and it's driving our sustainability profile in a big way. We are very happy with that acquisition.
If I then turn to the focus going forward on page 22, I can just say that we will continue to handle the health and safety of our employees, and we will be on our toes to manage volatility and demand, and we will be on our toes and flexible and ready to meet the forecasted increase in light vehicle production. We will continue to execute well on our strong business model, including pricing power. I guess that was all from us delivering the best quarter so far.
We open up for Q&A.
Thank you. We will now begin the question-and-answer session. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. The first question comes from Douglas Lindahl with DNB Markets. Please go ahead.
Hello, Georg and Peter. Congratulations to a solid report. A few questions from my side. Georg, you mentioned that the Americas, especially automotive, improving towards the end of the quarter. My question is, did that already result in positive volumes in Q3, or will that come in Q4? Also, if you could add a bit of color to the comment on the weakening building construction market in Europe. I guess that shouldn't really come as a surprise. Start with those.
Yes. We saw that already in Q3 with the automotive uptick in Americas. Yes. On the comment on building and construction in Europe, we saw uncertainties among our customers at the end of a quarter with somewhat hesitant order intake. We are a little bit uncertain if that's the destocking demand. It's also a winter season coming up. We saw some uncertainties.
Okay. Thanks. My second question is on the organic growth. If you're able to break that out, pricing and volume, I guess, the 20%.
Yeah. As you know, we don't report volumes per se. A good try.
That's why I'm asking the question.
Just to give some flavor anyway, Douglas.
Yeah. Yeah.
When we look at volume growth, we do see some volume growth, and it's in the single digits area.
That's right.
Yeah.
Peter, I guess then my final question for you, or you have to answer if you can as well. You've seen some challenges throughout the year. I guess the shape and form of these challenges have varied, but at least in my sort of thinking that some of them have been quite similar. As we start to approach the end of this year and move into next year, how are you thinking about these challenges on raw mats, transportation. Yeah. Some of all of those basically going forward, how are you thinking about this.
I mean, it's really difficult to answer that question. I mean, during the quarter, we have seen, like in previous two, three quarters, the escalating raw material prices, transport issues, availability issues, and so on. Having said that, during this quarter, the availability problem is still there, but maybe less.
Mm-hmm.
Slightly less than before when it was really dramatic. It's still there, but maybe less. We still see price increases on raw material, but also less. On the other hand
Mm.
The energy prices are more.
Mm.
Than before. Again, I mean, our pricing model has to take care of this.
You talk also about sort of changing behavior from your customer side, meaning you can't really optimize manufacturing. Is it possible to give some sort of comment on that?
You mean the recipe side?
Yeah, yeah.
Yeah. I mean, that is also still a problem in some areas, but of course, it's not becoming worse. It's the right direction on. It's not gone.
Okay. Okay. Thank you so much.
Our next question comes from Gustav Österberg with Carnegie Investment Bank. Please go ahead.
Thank you, operator, and good afternoon to you and Peter. A few questions from my side, please. Firstly, on the positive comment in the automotive segment in the U.S., which, as you mentioned, is obviously an important segment for you. Could you provide some more detail on what's driving that? Are there any indications from large OEMs on production increases, or are there supply chain availability considerations on your side that is driving that more positive outlook?
Yes, we can comment that, it's from a customer side. It's not from our side. We've been very good in spite of all problems and challenges. We've been good in delivering. It's coming from the customer side. However, it's varying quite a lot between our customer base and what customer base they have. It's not a uniform picture, but we see improvements in the quarter, particularly in America.
Perfect. Thank you. Just to follow up on a thing we've been talking about from time to time historically with sort of the nearshoring trends or your customers wanting to have more local production facilities in the U.S. and in Europe. Have you been seeing any developments on that front recently that you think is important to mention?
No and yes, same trend as before, getting stronger in our feeling. For sure, it's much more regionalized than ever, and everybody's avoiding long supply chains.
Perfect. Thank you very much. That was all questions from my side.
Thank you, Gustav.
Our next question comes from Johan Dahl from Danske Bank. Please go ahead.
Yeah, thanks. Good afternoon. Just on the organic volume growth. You know, we talked about the organic volume growth. Can you say, was it better than the previous quarter, or in line, or was it worse in terms of organic volume growth case?
Fairly similar to what we saw in Q2.
All right, great. How much is recycled rubber now when you look after the inclusion of Almaak in the group?
Yeah. It's getting bigger and bigger. I mean, last year it was 10% of our raw material consumption. Of course, it's increasing quite a lot with the Almaak acquisition, which is maybe around 85%-95% recycled material in that. So quite a big increase of that. In addition to that we have 10% natural rubber. I mean, the non-fossil content is getting less.
Yeah. Right.
It's improving.
Yep.
Sorry. The non-fossil is improving, I should say. Sorry.
Okay. Yeah. Just on your pricing, your ability to price for cost increase. I mean, when you talk more broadly to various industries, it just seems that you know, the ability to price for some sort of general wage inflation or energy cost inflation seems a bit trickier when you look across several industries. I don't know, would you ascribe to the idea that it's more difficult for you guys to raise prices due to energy, et cetera, compared to when it was raw mat induced?
Well, none of them are easy. It has been extremely tricky to increase the raw material cost increases, and then it will be extremely tricky to increase the general cost increases too. We have always done that and we are doing it.
Gotcha. Can you say anything, Georg, about this, the turnaround of this companies that you acquired running at lower margins compared to the HEXPOL average? What's your plan there and outlook, if you can say anything about that?
Yeah. I mean, that is progressing quite according to plan. Maybe it took a little bit longer at the beginning because, I mean, the pricing, or should I say, the pricing models those companies had wasn't really adapted for that quick raw material increase. It took us some time to get our arms around that. That is getting better and better, so moving absolutely in the right direction, but still at a lower margin than the group.
Is there a negative margin mix as U.S. grows significantly faster than the European operations at the moment? Do you get the question there?
No, no. There's no negative margin mix with U.S. America's growing faster.
Okay. Is it positive or is it equal?
It's fairly equal.
Okay. Just final question. That's on, I mean, we've talked about construction, automotive. Can you say anything about general industry, which is a big customer group of yours?
Stable during the quarter.
Okay. Thanks.
Thank you, Johan.
Our next question comes from Andres Castanos-Mollor with Berenberg. Please go ahead.
Hello, good afternoon. Congratulations on the strong print. One question from me is about the raw material costs. Are you seeing any improvement yet, or do you expect to see it in the next quarter?
That's a good question. We haven't really seen any improvements in the quarter, rather the opposite. We still have substantial increases in some areas, maybe more specialties than the big ones. Going forward, it's very difficult to judge. My crystal ball is not better than anyone else.
Mm-hmm.
We try to maneuver us when we know.
Okay. The next one on labor inflation, do you expect to see significant labor inflation in 2023?
Yes, we do. We will compensate for that in our pricing models.
Understood. Final question, please. On CapEx outlook for Q4, should we expect to see an irregular trend, like an extra, like, spending on projects that need to be completed by the end of the year or something in line with what we have been seeing in this year so far?
Generally one can expect us to come back to, let's call it, somewhat lower levels than what we saw in Q4. The only but in that answer is that it depends a little bit on the completion of some of the CapEx projects that we're currently running. If we look forward another quarter, just to give it a little bit more time, then one can expect us to come back to the lower CapEx levels.
Got it. That's useful. Thank you.
Our next question comes from Karl Bokvist with ABG. Please go ahead.
Thank you, and good afternoon. Just a follow-up on something you mentioned there, Georg. You've been very, you know, quick to adjust for raw material input cost changes, but now you also flagged that you also take energy surcharges into account in your pricing model. Just, you know, do you see a similar kind of fast price adjustment on energy surcharges as with the kind of very widely acceptable raw material adjustments in your contracts?
Yeah. How should I say? The overall answer is yes, but underlying is of course tricky and more difficult as it varies. I mean, just take Europe, how many countries are there and how many different strategies or they're choosing in spite of what European Union are saying and so and then what contractual situation do you have and your competitors have? The overall answer to the question is still yes, we will absolutely adjust for that like we do for any cost increases, including raw materials and wages and others. It's absolutely a lot of work and not so easy.
Understood. Speaking of a crystal ball, I think historically you or this past kind of 12-18 months at least you believed you were able to gain market share because of having volumes available, for example. One question for me is just on insourcing and/or outsourcing among your customers. Have you-
Mm.
-seen or heard anything about this, trend, in the past month or year?
I mean, if you look at the insourcing situation, I mean, we're talking about rubber compounding only of course in that segment for us. If I look at the long trends, it's always been an outsourcing there. Of course from time to time there's an insourcing, from time to time there is a big outsourcing, but the net has always been an outsourcing.
Okay, understood. Just on, we talked about this the last quarter, but you haven't seen any kind of indications from your customer about destocking. I mean, it seems like every company in every part of the value chain is now flagging that they will try to reduce inventory going into the end of the year. What do you hear from your customers?
Yeah, we hear that. We hear exactly what you're describing. On the other hand, I must say that you know that we supply just-in-time products, basically all of it. On the rubber side, it has actually limited shelf life as well. Our customers are also just-in-time to the OEMs. I think in our part of the supply chain, it's not so much. We also hear it from the OEMs, but we don't know the full picture there.
My final one is just on the margin impact of the acquired units. Forgive me if you mentioned this and I didn't hear it, but would it be possible for you to give some kind of rough impact from these units?
The one unit that we have impact from this year compared to last year is Almaak. We haven't specified yet the impact of that. It makes up a part of the decrease of margin compared to last year. The bigger part is the raw material and energy price increases that we're pulling through.
Okay.
I must say the acquisitions we did last year, they are also below the group average still, although improving.
This dilutive margin impact, so to say, that's visible also on the EBITDA level?
Yeah.
I imagine. Yeah. Perfect. Okay. That's all for me. Thank you.
Our next question comes from Julia Utbult with SEB. Please go ahead.
Hello. Thank you. Julia with SEB. My first question is if you could help me to bridge the EBIT in the quarter a little bit further, because recently we saw declining raw material prices and the acquisition costs seems to be in line with previous quarter. I guess that should mean, like, the margin should be in line then, except for the energy prices coming up. Is there anything else that you see that is depressing the margin in Q3 compared to Q2?
If we look at the margin decrease that we see compared to the previous quarter, in the second quarter, we had 14.8% margin in Q2. We have 14.2% this quarter. The primary driver of the lower margin is that we've continued to push through price increases to our customers on raw materials and energy surcharges. That, compared to the second quarter, that's the key driver.
Except for the energy prices, it's also a price adjustment lag, if I understood correctly?
That is very difficult to specify, but what we see, what we do know is that the increases that we put through on raw materials and energy has increased compared to the second quarter, and that drives. It has no impact on the EBIT in absolute terms, but it drives the mathematical negative impact on the margin.
Yes. A slightly more positive cost price balance for Q4 might be expected then if raw material prices come down further and you get through your price adjustments?
We didn't see any pricing down in the quarter. We saw an opposite. We saw still increased prices in quarter three.
Okay, thank you. The next question is on the financial expenses. It seems that it has more than doubled in this quarter, year-over-year. Could you say something about what this is related to?
The changes that we see on financial net are driven by two things. One is the funding cost, of course, and then in this case also, the FX effects that we have in some areas.
Yeah.
Okay. Could you give us some more details on the FX effects? If I understood correctly, you have approximately the same cost and revenue exposure to, for example, Americas. Is there a difference anywhere?
I think we can take that on a separate call, but it depends on the currency movements that we see, for example, Sri Lanka, we see Turkey, China, et cetera. It's a mix of effects.
Okay, thank you. One question on the M&A and the cost of integration. Would you say that the integration cost would vary depending on what you acquire? For example, if you acquire a company within rubber or within thermoplastics, would it be different investment costs and integration costs related to this?
I mean, we don't see any substantial integration costs. We see synergies in all our acquisitions, and if we make a rubber compounding synergy, the cost synergies are better, normally. In other areas, we might see better cross-selling synergies. Basically cost of integration is not there. I mean, we have synergy in our acquisition.
Okay, thank you very much, Georg and Peter, and I will go back in line.
Thank you.
Thank you.
This concludes the question and answer session. I would like to turn the conference back over to Peter Rosén for any closing remarks.
Okay. Thank you very much, everybody, for listening in and posing questions to us. We wish you a very nice weekend when you get there. Thank you.
Thanks a lot. Take care.
The conference has now concluded. Thank you for attending today's presentation. You may now.