Welcome to the HEXPOL Q1 presentation. During the questions-and-answer session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now I will hand the conference over to the CEO, Klas Dahlberg, and CFO, Peter Rosén. Please go ahead.
Thank you, operator, good afternoon to you all. Thank you for joining this call, a warm welcome to the HEXPOL Q1 presentation. If you please turn to page two. At our Capital Markets Day in November last year, we presented our strategy for HEXPOL up to 2030. I will get back with a few words about the strategy at the end of this presentation, but one of the clear goals we presented was to grow in thermoplastic compounding. We have singled out that business area and created a separate business area called thermoplastic compounding. By that, we now have three business areas. It's Rubber Compounding, Thermoplastic Compounding, and Engineered Products like before. As you will see, we have made some changes to our presentation to align with that new setup.
I will start with the group performance and then move over to talk about the performance of each business area. After my part, Peter will take you through the financials, then I will make a summary of the presentation. Then we are, of course, happy to answer any of your questions. If you please turn to page three. During the quarter, we have kept up the momentum with an offensive approach despite market headwinds. The general market situation is still challenging, and we focus on our customers and defend our market share in a very competitive environment. In-house or so-called captive compounding, as we used to call it tends to increase in these market situations. As a result of that, the captive volumes are still on a high level. What we do believe is that these volumes have peaked by now.
In North America, we see continued economic uncertainty, which has a negative impact on the overall customer demand, whereas the European market shows more stability. The situation in the Middle East, of course, impact our supply chain in all regions. The financial impact in this quarter, though, was limited, but it will be more visible going forward. I will come back to this later in this presentation. Looking at volume and sales prices, it's very pleasing to see that we have managed to increase our total volume in the first quarter. This is a clear proof that our strategy to keep our position in the market, protecting our market share, has been successful.
We have seen higher volumes to customer in many of our main segments, like building and construction, wire and cable, industrial, as well as automotive, though the average sales price was lower versus last year. We receive reoccurring questions about the impact of any potential future higher prices for raw materials. The answer is clear: We will, in line with our business model, compensate for increased product cost going forward. In the first quarter, we reached sales of close to SEK 4.8 billion. That was affected negatively by effects of some SEK 526 million. We saw positive effects from higher volumes and acquired Kabkom in Turkey, but that was offset by negative price mix effect. We will explain more about that later.
The EBIT margin came in at 14.7%, with an EBIT of SEK 700 million, with a negative FX effect of some SEK 74 million. Earnings per share in the first quarter was SEK 1.47. If you please turn to page four. I will now walk you through and summarize the quarter in each of the three business areas, starting with Rubber Compounding. First of all, this business area represents 69% of our total sales in the quarter, or SEK 3.3 billion. The total volume, market volume for Rubber Compounding are still on a relatively low level due to lower customer demand. As mentioned, captive volumes are still on a high level but has likely peaked.
We have strong customer focus securing our market share, and it's pleasing that we have managed to win captive conversion opportunities in North America, which is in line with our strategy. What this means is that customers choose to outsource all or part of their in-house compounding to HEXPOL. We see growing volumes to building and construction, wire and cable, industrial, as well as automotive end customer segments, both in Europe but also in North America. The volume increase has a positive impact on organic sales, but the positive impact is offset by product and price mix.
Coming back to the situation in the Middle East, with the closing of the Strait of Hormuz, it's impacting our supply chain in all regions, but especially in Europe. If you look at the map of the region, you can see several of our suppliers' facilities are actually in this specific area. This means that we see the impact both on the production itself and on transport. North America is affected to a lesser extent than Europe, and the reason for that is that they source to a large extent domestically, and except for some additives that are being imported from Asia. As said, for Europe, a large part of oils used in rubber compounds and also base polymers are sourced from the Middle East.
As HEXPOL, I believe we have an advantage in our size negotiating with certain suppliers. We also have very skilled chemists who can assist in finding alternative raw materials and suppliers faster than many of our smaller competitors. This has, in reality, already proven to be a clear competitive advantage for us. We follow the development very closely, and we take active decisions every day to mitigate the effects. As a result of the higher material prices, increased energy and transport costs, we will increase our prices towards our customers going forward. The financial effect of that is not to be seen in this quarter, however. If we turn to page five, Thermoplastic Compounding, there we see that represents some 23% of our total sales or in the quarter, equivalent to SEK 1.1 billion .
In line with our strategy presented at the Capital Markets Day end of last year, Thermoplastic Compounding is where we anticipate to grow. We have to bear in mind that already with SEK 4.6 billion turnover in 2025, we're not starting from scratch. We have a good foundation to build from, and we have exceptional knowledge in the field that we can now utilize on this growth journey. We talk, just, as in the overall strategy, about both organic and acquired growth in this field. The combination and focus within this area is central to us. The total market for thermoplastics, we should remember, is 10 times the size of rubber and our ambition to move up in the product pyramid. There we find the more advanced products called engineered polymers with higher profitability.
Initiatives are ongoing to strengthen the organization in sales, in purchasing, but also in operations. In the quarter, we saw a growing volumes to building and construction, automotive, medical, but also to general industry and customer segments. The higher volumes had a positive impact on organic sales. If we turn to page six, Engineered Products, this business area represents some 8% of our total sales in the quarter, or SEK 362 million. In the quarter, we saw lower demand, primarily in Sweden, for wheels and gaskets. Bearing in mind, though, that the comparison from Q1 last year was on a very high level. I also wanted to highlight that margins in Engineered Products is still on a very healthy level of 17.7%. If you please turn to page seven.
Now it's time for me to hand over to you, Peter, for the financial overview. Please go ahead.
Thank you, Klas. If I can ask you to turn to page eight, just looking at the snapshot of the first quarter. We delivered sales of SEK 4.8 billion in the quarter with an EBIT of just above SEK 700 million and giving a margin of 14.7%. The operating cash flow, although always relatively weak in the first quarter, came in at SEK 235 million, which is up 25% compared to the same period last year, despite the lower EBIT that we saw in the quarter.
I will come back to this, the net debt-to-EBITDA ratio stands at about 0.88, and it's somewhat higher than the same period last year, and this is due to the acquisition of Kabkom and the acquisition of the minority share of almaak, after first quarter last year. I can then ask you to turn to page nine, looking at the financial highlights, and look how this compares to first quarter last year. Sales are down 11% to the SEK 4.8 million, of which negative FX effects make up 10%. The other part is the net effect of organic sales development and the acquisitions that we've done. I'll come back to this one in a little bit more detail later on.
EBIT stands at, drops SEK 130 million or 16% compared to same quarter last year. Of this decrease, half is relative to negative FX effects in the range of +SEK 70 million. EBIT margin stands at 14.7%, and it's down less than EBIT, at a negative 90 basis points. We will come back to the drivers of the EBIT decrease here later on. If I can ask you to turn to page 10, we'll take a look at the sales development in the quarter, and we see that the decrease of 11% in sales is driven by negative FX effects of 10%. In addition to this, we see organic sales are down somewhat at 3%, while the acquisition of Kabkom adds 2% in sales in the quarter.
The organic sales development is positively affected by higher volumes, but this is offset by negative price and mix effects. The volumes are up low single digits, while the negative price mix effect is in the mid-single digit range. From a geographical perspective, the American business showed 18% lower sales, out of which some 13% are negative FX effects, while Europe is on the same level as last year, despite some negative FX effects related to the Euro. Asia, although also affected by FX, had a relatively weak quarter in the first quarter of the year. If I can ask you to turn to page 11, we'll look at the drivers of EBIT. Of the total decrease of 16% in EBIT, a little bit more than half comes from negative effects, more specifically SEK 74 million or 9%.
If we look at the remaining drivers impact the EBIT in the quarter compared to last year, all of the impact comes from the lower sales value that we saw in the quarter. The gross margin in percentage is on the same level as last year, and OpEx in absolute terms are also on the same level as last year. The lower sales value is affected by two things. One, on the positive side is the higher volumes mentioned, and this is offset by negative price mix effects. The negative price mix effects primarily comes from volumes produced and sold that have a lower sales value in absolute terms. If I can ask you to turn to page 12, we'll start to go through the three business areas. We're starting with Rubber Compounding.
Rubber Compounding delivered sales of SEK 3.3 billion in the quarter, down 11% compared to last year. Of this decrease, 10% are negative FX effects. Acquired Kabkom adds 2% in sales, while organic sales are down 3%. The lower organic sales are seen in North America, while Europe showed sales on similar level as last year. From an end customer perspective, the higher volumes are seen with most end customer segments, not least the largest segments, wiring cable, building construction, industrial and automotive. EBIT is negatively impacted by negative FX effects of SEK 60 million, or 10%, somewhat lower sales and gross margin, it came in at SEK 520 million with a margin of 15.8% in the quarter. If we turn to page 13, looking at Thermoplastic Compounding, as Klas mentioned, this is now reported separately.
We delivered sales of SEK 1.1 billion in the quarter, which is down 10% compared to last year. Out of this decrease, 9% are related to negative currency effects. The organic sales development was positively affected by our higher volumes to most end customer segment, not least building construction and general industry, also to automotive and medical. The higher volumes were, however, offset by negative price mix effects, resulting in a net negative 1% organic sales developments. The lower EBIT is fully explained by negative FX effect of SEK 30 million, the EBIT margin is on the same level as we saw last year. If I can then ask you to turn to page 14, looking at engineered products. We delivered sales of SEK 362 million in the quarter compared to SEK 429 million last year.
The decrease is driven by negative FX effects and lower organic sales, making up about half each of the decrease. The lower organic sales are primarily seen in Sweden, affected by lower demand. As Klas mentioned, the lower demand should be seen in relation to Q1 last year being a record high quarter where many customers were delivering on high order stocks. A lower EBIT followed on the lower sales, Still very strong margins in line with last year levels. If I can ask you to turn to page 15, looking at working capital. As always, in the first quarter of the year, working capital is up after very strong Q4, We continue to manage working capital efficiently.
Kabkom adds working capital. Apart from this, there are no major changes to underlying payment terms or inventory buildup. If I can ask you to turn to page 16, looking at the cash flow for the quarter. We delivered a solid cash flow of SEK 235 million, where depreciation investments are balanced, while as always in the first quarter, working capital is up, affected by the very strong closing that we saw during end of 2025. Although our first quarter is always weak from a cash flow point of view, cash conversion of EBIT during the last 12 months remains high at 107%. If I can ask you to turn to page 17, looking at net debt. We have a net debt at the end of the quarter, SEK 2.9 billion, and a net debt to EBITDA ratio of 0.88.
This is somewhat higher than what we had last year, and this is mainly driven by the acquisition of the minority share of almaak, as well as the acquisition of Kabkom during second quarter last year. All in all, we continue to stand with a very strong financial position here after first quarter. With that, I hand over to Klas. Thank you.
Thank you, Peter. Before summarizing, ladies and gentlemen, I would like to recap what we said six months ago at our Capital Markets Day. The strategic priorities are set, and the organization is committed to deliver on these three pillars, as you can see in these pictures. In this picture, sorry. We are increasing our sales capacity, and we are also increasing the efficiency by engaging the sales force in what we call cross-selling. We have an advantage that we can offer our customers a broad product portfolio in thermoplastics. Our newly inaugurated R&D center in Italy for Rubber Compounding is another example of us investing in innovative product solutions. We see an increased activity level within M&A, and I feel confident about our possibilities and capabilities to continue to grow the business in this area over time.
The anxious and uncertain world leads to longer and more unpredictable processes. We are engaged in several active discussions, but as you all know, M&A is very much about timing. We continuously review our manufacturing footprint. We have actively chosen to maintain our flexibility and having factories close to our customers since that is a competitive advantage for us. Turn to page 19. Just to give you a picture of what HEXPOL Thermoplastic Compounding is today, we have 13 different manufacturing sites, six in the U.S. and six in Europe, and one in China. We are 800 employees serving some 2,400 customers with sales of nearly SEK 4.6 billion in 2025.
The customer segments are to some extent different to Rubber Compounding, but automotive is 31%, household is 16%, and medical is 7%, and medical is one area we anticipate to grow in. We also have products for toys, sport, and leisure, which is some 8%. If you please turn to page 20. I would like to point out that we are aiming at product segments higher up in this product pyramid. We often get the question about profitability in thermoplastics. Moving up in the pyramid, mainly with so-called engineered polymers, we find more advanced products with a higher profitability. If you please turn to page 21. The new financial targets have been set, and we are targeting an average EPS growth of 10%, and that is an important measure going forward.
We were clear at the Capital Markets Day about that we will see a softer development short term due to the overall market situation, but we are totally dedicated to this target over time. At the AGM this afternoon, our Annual General Meeting, the board will propose a new long-term incentive program for an extended group of key managers within the HEXPOL Group, and that is based on our EPS growth the coming three years. If you please turn to page 22, I will summarize the quarter. Overall, we saw higher volumes and meaning that we were defending our market position. We could see growing volumes in our main segments in most geographies. That has a positive impact on organic sales, but that was, as explained, during the call, offset by negative price and mix effects.
Captive volumes still on a high level, but we believe they have likely peaked. We have secured our market share, and we are winning captive conversion opportunities in North America, which is very positive. The closure of the Strait of Hormuz creates imbalance in the supply chain. We handle that efficiently by our best-in-class purchasing, innovation, and engineering capabilities. The financial impact in Q1 has been very limited. Going forward, we still have a clear focus on the 2030 agenda. By that, we conclude the presentation of the first quarter, and we open up for your questions.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad.
The next question comes from Henric Hintze from ABG Sundal Collier. Please go ahead.
Hi, this is Henric Hintze at ABG. I wanted to first ask about automotive. You stated that volumes grew in the quarter. Was that the first quarter of growth in a while there? If so, why do you think that the mix effect was still negative here in the quarter, considering you've previously sort of explained the negative mix effect with automotive volumes still being down? Is the mix effect that we still have here something structural or temporary?
Hello, Henric. When it comes to the automotive growth, we're speaking about low single-digit, but still, if we look at the forecast from S&P for 2026, it seems like the overall production of light vehicles would be pretty stable, let's say. We don't anticipate a big growth in that segment. Still, we had some growth, as said, yeah.
Henric, Peter here. I can add a little bit to your question regarding mix. What we see in the quarter is a combination of customer mix, as we have different earnings profiles for different customers, so that's an impact. Also to a lesser extent, some product mix. That product mix can be within a end customer segment, but it can also be between the end customer segments, and we saw that in this quarter.
Okay. Do you think that is a temporary effect then, this mix effect?
Yeah. Let's put it different. I don't think it's a structural change. It's depending more on, I would say, primarily which customers take more or less volumes in the quarter.
Okay. Very good. Maybe one more question from me. You mentioned that you've taken some new customers in North America and are taking over their internal compounding operations. Can you give us any indication on how large these new customers are?
Well, it's, as you know, we never speak about volumes, but I must say, just to elaborate a little bit on that's, there is an opportunity when our customers look at renewing their equipment or maybe even the whole plant, that's when we have a discussion with them about them outsourcing this. We speak about usually bigger vertically integrated customers. Given the size of some of them, it's, even though it's very vague, but it's quite interesting volumes for us to get that in-house with us.
All right. Thank you.
Thank you.
The next question comes from Agnieszka Vilela from Nordea. Please go ahead.
Thank you, and hi, Klas and Peter. Yeah, I have a couple of questions, maybe a follow-up on the captive conversion in the U.S. Can you tell us something about the profitability profile for that business that you're taking in?
Well, it's, I would say that that volume is not deviating very much from similar volumes in the same, let's say, segments.
Perfect. Thank you. Klas, I think you wrote in the CEO word about North America improving towards the end of the quarter. Can you tell us what's behind it and also if there is risk for any pre-buy by your customers now, given that we will see some price inflation?
No, you're right that we did see a good finishing of the quarter, but like you say, I mean, it's much too early to speak about the trend there, but it's very positive that that is the case. Given the situation we're in now, it could be, let's say, a pre-buy effect. This we don't know. Bearing in mind, though, when we speak about Rubber Compounding, this is something you need to. You can't put that on the shelf. Of course, our customers can produce.
Yeah
their products and put that on the shelf, but.
Yeah
yeah.
Fair enough. Last one, really. Can you remind us how the input price inflation really impacts your operations? When will you see higher costs? Is there a lag between getting the compensations? Also, do you expect or do you have ambition to get 100% compensation for higher costs?
Yeah, thank you for asking. The increases came very fast, I could say. We are also very fast in adjusting that. We have to get compensated to 100%, so that's what we're aiming for. Both starting actually already from last month with the price increases.
If I can add, I would say during first quarter we didn't see any major movements on the raw materials, so that will come second quarter and onwards. When it comes to timing and effects, as Klas mentioned, some price increases have already been issued. There is always a little bit of a time lag, but when it's these kind of movements, we are quite quick to go with price adjustments. It will definitely be implemented here during second quarter.
Yeah.
Thank you. Very helpful.
Thank you.
The next question comes from Johan Dahl from Danske Bank. Please go ahead.
Yes. Good afternoon, everyone. Just two questions. Firstly on the... I think, Peter Rosén, you talked about the mid-single digit decline price mix on the Rubber Compounding side. To what extent is that sort of discretionary decisions taken in HEXPOL to sort of defend market share, which you talk about in the reports you've done successfully? To what extent is it just this, you know, different customers, different types of products? Just curious to see that dynamic.
Yeah
in the first quarter.
Yes. Thank you, Johan. Peter here. There is a certain element of discretionary pricing to protect or take market share with some customers. If we talk about the price mix effect here in the quarter, it's primarily the mix effect. We talk about customer mix or product mix. That is absolutely the majority of the impact that we see in the first quarter, and to a much lesser extent what you would call discretionary pricing.
All right. Back to the raw materials. Just to sort of. We're hearing, you know, significant volatility obviously. Would you say that your visibility when it comes to, you know, how you've lined up the procurement here in the second quarter, are we talking sort of mid-single digits effect on top line for HEXPOL, or is it even up to double digits? What can you say there?
Klas here, Johan. When we see raw material, we can see even higher than mid-single digit for sure. It's also, I would say, a matter of securing availability also for us. It's not. It's a price matter, but it's also making sure we get the material. Just one example, oils. One third of a rubber compound, we use oil. One refinery in Qatar was actually bombed in the beginning of the war, where we were supplied by oil. We had to very fast find an alternative solution. Again, I find there our organization is very much on their toes to find alternatives.
It's price, and it's significant because it's raw material, it's transport, and indirect also energy. I think we manage quite well to compensate for this. I think this is, in a sense, if you understand me, our home ground to handle this with our business model.
Yeah, gotcha. Just hypothetically, if we talk about sort of double digit price inflations on your products, when you sort of look at how you plan your production setup, what would you say the elasticity is among your clients for that type of a price change?
That's extremely hard to answer, Johan. Of course, just speculating now, of course, there is a limit to everything because our customer also needs to, how do you say, compensate. The, if this should be very long-term, it will have an impact, I guess, on the overall demand. The customers usually understands, to be honest, the increases. It's very transparent also, the pricing of raw materials, so it's usually accepted by our customers.
All right. Thank you very much.
Thank you.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Agnieszka Vilela from Nordea. Please go ahead.
Thank you. I have one follow-up, and this is on the merger and acquisitions landscape. The last acquisition you made, it was one year ago, and the impact on your growth is fading now. Can you just tell us what you see right now when you look at the potential targets? And if the Middle East crisis changed the outlook for making a potential deal to any direction? Thanks.
All right. This is Klas again. As you rightly say, our last acquisition was Kabkom in Turkey, and by the way, contributing a very positive to the overall result of HEXPOL. As I stated, we have a much higher activity right now when it comes to M&A, we have very interesting targets also in our pipeline, we have discussions ongoing. You also know that, in due time, we will of course, when we close a deal, we will inform about that. Before that has happened, we cannot say much more. Our feeling, or not only feeling, it's a fact that we see a higher activity right now.
The Middle East conflict has not so far had an impact, coming back again, should this be long-term, then it has an impact, I guess, on the result of the companies we are looking at, and that could influence, you know, the willingness to sell at this point. We haven't seen that yet.
Yeah. Thank you.
Thanks.
The next question comes from Mats Liss from Kepler Cheuvreux. Please go ahead.
Yeah. Hi, thank you for taking my question. First, coming back to automotive there, if you just could, well, remind me there how the content you offer, well, is impacted by the changeover to electric vehicle cars, if there is any substantial difference there, please?
This is Klas again. Hello. When it comes to the content, in general terms, a battery electric vehicle has actually a higher content of both rubber and thermoplastic. That's a fact, and one reason for that is everything that has to do with the battery casing. It also is a fact that you need much more insulation in a battery electric vehicle, therefore you need more weather strip, more vibration, what you say? Anti-vibration parts in a battery electric vehicle. Usually they use natural rubber for that's positive, if I may say so, for us. When it comes to thermoplastics, it's often used in the interior of the car, that has no.
There is no big difference between a combustion engine and a battery electric vehicle.
Just adding to electrification when it comes to cars and in general society is positive for us because it drives, the end customer segment wiring cable because the energy needs to be transported from its source to where it will be consumed. That goes for charging stations for the automotive as well.
Yeah.
Okay. Thank you. Also about the raw material impact, Is it about the same sort of impact between the three business areas or if not?
Yeah
if there's any of them affected more?
No, Peter, I would say it's generally speaking, very similar impact, regardless whether it's rubber, thermoplastic or engineered. Only difference is engineered uses a little bit less of the compound, of course, than rubber and thermoplastic, but the increase is similar across the three segments.
Also from a geographical point of view that, right now, we feel that in North America, they have more domestically sourced, the raw materials. They, at this point, they are affected to a lesser extent, I would say.
Okay. Great. Thank you very much.
Thank you. Thank you.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
I just want to thank you all for participating. As I said, we have a clear focus on the 2030 agenda, and that's what we work on going forward. Also thank you, of course, for your questions, and I wish you all the best. Thank you.