And welcome to the HEXBOL presentation of the Q3 results. It's Bjorn Pham and myself, Pete Rosen here. We've had some issues with the communication suppliers. So the quarterly report has not been published yet, But it's expected to be so within a couple of minutes. So we will hold this call or take this call as planned, But we will wait until we can see that the report has been published and is available to everybody else.
So we don't make any Formal mistakes in this. So if I can just ask you to hold on, we expect this to be done within some 10 minutes, and then we will come back. Thanks.
Welcome to the Hexapol Audiocaster Teleconference Q3 2021. Throughout the call, all participants will be in listen only mode, and afterwards, there'll be a question and answer session. Today, I am pleased to present CEO, Jorg Bransdolme and CFO, Peter Rosen. Please begin your meeting.
Thank you. Dear old, welcome to the presentation of the Q3 report for this year. We do apologize for both that you had to wait for the call to start, but also the that the report was late. That was not due to anything that we did, but there were some technical issues on the side of the communications partner, which led to the report being late. It has now been published, and the presentation for The quarterly result has also been uploaded, so you should have access to both the report and the presentation.
The agenda for today is the same as before. We'll start with a business update, then go through the financials and the focus areas for the year, and then we'll finish with the Q and A session. And with that being said, I hand over to Jir, who will take you through the first part of the agenda
Thanks a lot, Peter. Sorry about 10 minutes late Starting, it's not within our control. If I start with the Page 4, strong sales in a challenging market situation. I actually or we actually think we had a very good quarter and a good result Given the circumstances, I'm sure you are all aware of the circumstances in automotive. They are extremely turbulent and tough and unpredictable right now.
For us, the quarter has been very strong in all segments except for the automotive, where it's been very turbulent. So I am actually Pretty proud how our organization has handled the very, very tricky circumstances in the quarter. So We are delivering quite a strong result, not as strong as we would have done if the automotive Supply chain has been in the normal mode. We are, of course, hurt by the frequent start and stop and mainly stop of production of light vehicles in the quarter. And then that is, of course, affecting us both from an efficiency point of view and the volume point of view.
And we also had in the quarter Continued price increases on raw materials. We also had major global supply issues on our side. And of course, you know that the light vehicle OEMs has major supply chain issues, And I think they are the biggest in the semiconductor sector. We are increasing our sales by 23%, of which 90% is organic sales growth, which is a strong and solid sales increase. And the result is actually extremely good if we take in the extraordinary income from the insurance settlement.
Excluding that, we increased our operating profit with 14% to SEK677. We are losing a bit on the gross margin. We're absolutely keeping our costs in the right range. So it's pressure on the gross margin from increased raw materials. We have a business model where we do pass on the increases to our customer, at least eurocent by eurocent or SEK by SEK, but that is, of course, mathematically hurting the gross margin percentage.
And we also have some major issues on raw materials, which means that we have to change planning, and we have to run sometimes with a 2nd best or 3rd best recipe. And on top of that, we have done 2 good acquisitions, which in the quarter are not up to pace yet. They have a less efficient price adjusting model than We have so that will take some time, but not usually long to get the pricing model in place there. Right now, it's affecting our group EBIT in the quarter by 8.6%. So I think we have been at the 17.1% operating margin without that dilution.
They are, of course, having a lower margin And then us to start with that you know that from earlier communication. And of course, as I said, the cost side is continued tight, and we do keep the lower cost base. If you turn page, We are strongly executing on our updated strategy with the increased customer focus. We see it in both business areas and then strong sales in all segments except for the automotive where we have disturbances, as I said, on the HEXPO Compounding side. And on the HEXPO Engineered side, we actually have very, very strong both sales growth and EBIT growth.
Good volume growth on top of a lower cost base. Here, of course, we are not exposed to the automotive segment in any big way, actually in a very small way. And on the M and A, continued high focus And we see, hopefully, that we have more opportunities going forward than we have had in the past. But in the past, we've done 2 good and major acquisitions in our core business area, And then we just have to do some integration work on that. And if you turn Page 6, this is a Slide you have seen before.
I just want to remind that we have a very strong culture delivering. And in these Very turbulent circumstances, that is a huge asset. We have experienced people. We have decentralized a decentralized organization, And people have been in these difficult planning situations and pricing situations before, maybe not always as severe as today. But people are handling it in a very, very good way.
I'm actually Confident that we are improving our market positions in a good way in these turbulent times.
And if we then turn to Page 7 and look at the sales development in some more detail, we can see that despite the challenges Automotive, part of the closing and production grew during the latter part of the quarter. We delivered strong organic Sales growth of 19% compared to last year. The acquisitions of ICON and UNICA added another 6% of sales. So excluding negative FX effects, we saw growth of 25% compared to last year, and it also represents and organic growth compared to the previous quarter this year. The sales growth was then partially offset by negative FX effect of SEK 55,000,000, resulting in the reported sales of SEK 4.1 billion.
The negative FX effects were as also earlier during the year primarily related to the U. S. Dollar. Looking at the regional development, we saw strong sales growth in all regions, although highest in Europe, followed by the Americas and Asia. And we still see that Europe is coming back somewhat faster than the Americas.
And if we then turn to Page 9 and look at the financial overview, as Dior mentioned, we delivered an operating profit It's about SEK1.1 billion, including the insurance settlement related to the fire that we had in Jonesboro in the U. S. In the beginning of this year. Excluding the onetime items in the quarter, we delivered an adjusted operating profit of SEK677,000,000, which corresponds to an increase of 14% compared to the year before. The margin came in at 16.5%, negatively affected by the acquisitions that Dior mentioned They turned around with a lower margin level than the other export companies and also the challenges related to raw material and the price increases we see continue.
Our OpEx remained low at some SEK182 1,000,000 in the quarter, And the equity asset ratio remains very strong at 60%. And if we then turn to Page 10, I look at the highlights. We see that all in all, we saw an increase of sales to SEK4.1 billion, an increase of 103%, while the operating Profit increased 14% to $677,000,000 while we saw a margin decrease down to 16.5 explained by the acquisitions and the raw material challenges that we've seen during the quarter. A different view on the similar topic, looking at the drivers on Page 11, Look at the drivers of the increased profit level of 14%. We see the increased sales and the lower OpEx, partly offset by the lower gross margin.
And as mentioned, lower gross margin is driven partly by the acquisitions and also the warmest year of challenges that we've seen during the quarter. And then if we hand over to looking at the 2 segments, Thomas.
Yes, well, I will try to comment the quarter in the two business areas. And on export compounding, it's very much, as I said before, that Strong organic sales growth and good sales to all segments except for the Ultimo 2 segment and increase in operating profit and Some dilution on the margin from the acquisitions and the raw material challenges. But all in all, a strong Quarter in the Business Area component. If you turn to Page 13, A very strong quarter in Hexpol Engineering Products with big sales increase and a huge Performance in EBIT. We are getting volume growth on top of a lowered cost base.
That gives a very good leverage. So very good quarter for Engineered Products.
And if we then move over, look on the balance sheet side and the working capital on Page 14, we do see an increase year over year, both in absolute The terms and relative terms, this is primarily driven by the increase of inventory that we also saw in the previous quarter. And it's due to that the regulatory shortages and risk thereof, we've decided to purchase What we can in order to secure orders that we receive from customers. And once we come back to more normal Raw material situation, this will quickly go down and come back to historic levels. We don't see any changes in the underlying payment When it comes to suppliers or customers, we do expect to see working capital coming down quickly Once the run-zero situation comes back to more normal levels. And if we then turn and look at Page 15, and we look at the cash flow.
We see that the strong EBIT is offset by temporarily higher working capital, I. E. The inventory level. The level of investments is still below depreciation. And the accrual that we've done for the insurance settlement of SEK544 1,000,000 that was paid in October as planned.
So the cash has been received here by Higgs Fuller after the quarter closed. Then if we move over to Page 16, a look at the net debt situation. It continues to improve despite the buyback from a unit debt decisions this year and the sum of lower cash flow here in the quarter. And the net debt to EBITDA also continues to improve Both compared to last year previous quarter, we now stand at 0.59%. So we continue to strengthen an already Strong financial position also after this quarter.
If I then sum up the quarter, I would like to say once again that It's a good quarter for us, very good sales development and a good result, although A little bit hampered on the margin by the raw materials impact mathematically. We are having a pricing and the business model where we do compensate. So there is no change in that. But The quarter is, of course, fantastic with the insurance settlement money. And of course, the properties is dramatically good.
And then that is, of course, helping a even earlier strong balance sheet. We are seeing a turbulent situation in the quarter from the automotive segment. If we then turn Page 2 going forward And focus for 2021, of course, it's the continued health and safety focus. And We are, for sure, on our toes and we are flexible in the export organization to manage the volatility in demand. And that is especially with a focus on handling the volatility in the light vehicle production and also the disturbances in global supply chains and raw material prices.
But we have high flexibility, and we have a proven business model to handle that. We also continue to evaluate our future manufacturing footprint. And of course, our M and A focus is intact and strong And now with even further stronger balance sheet, we have even more possibilities. So with that, I think we leave it open for Q and A.
Thank you. And our first question comes from the line of Douglas Lindahl of Kepler Cheuvreux.
Please go ahead. Your line is open.
Hello, gentlemen. Hopefully, you can hear me.
Yes.
Yes. Thanks for taking my questions. I understand it's a Difficult market environment for you right now. And it seems as if you are building inventory. Is that Part of how you're handling the situation right now?
That's my first question.
Absolutely correct. I mean, we are It's coming up to Peter and my desk, of course, and we are supporting the organization in securing whatever we can secure for the future and then for coming orders. We are keen to service customers, and we have a balance sheet to support that. And we think it's temporarily a very good action to take.
And just on the market situation, has how would you say that things have evolved throughout the quarter? Have I understand it's been sort of a stop and go. But is there any sort of trend you can extrapolate throughout the quarter?
It's very difficult. I mean, it's 1st of all, it's a little bit of a vacation quarter in Europe in July, in the north and in August in the south of Europe. And But overall, we see more disturbances and stop and go and stop towards the end of the quarter.
And that's fair in North America as well, I
guess. Yes. That's valid in North. And that's also I think it goes in line with the announcements you and we all read about the OEMs stoppages.
Yes, yes.
In the other segments, we don't see that.
Yes. The report came out a bit late, but just briefly looking at it, it seems like your cost base is still at very impressive levels, I would say. Is there a risk That this is as good as it can get now with your recent acquisitions and sort of post COVID world, cost will increase going forward?
I think we can come back to what we said also previous quarter that both Q2 and Q3, we worked Very, very hard to push the costs down, partly also because we've seen these challenges and we feel the need to compensate. Going forward, as mentioned before, I think one can expect us to come up a bit because it's difficult to keep That kind of cost pressure in the long run. But again, I think we before we mentioned that around or just below €200,000,000 for a quarter is a fully reasonable level. And we don't see any reason to change that picture.
Okay. And one final question for me then. It's you already touched upon it, but your recent acquisitions, is it possible to give a bit more comment on How the integration work has been progressing with those? And any sort of sites of Increased profitability levels for them already? Or any comments on that would be
No, the integration work is going as planned, although we acquired the latter one, Honeker, in the middle of The holiday and then of course, obviously, this is closed in Spain. So that month hasn't been the best For the integration work, of course, but the integration work, I'm not worried about that. I mean, we know the company, we know the products, we know the people And the synergies are there. They will come. It takes a little bit longer, and it's counteracted by a little bit of a less efficient pricing model than we have, which takes a little bit time to correct Or Adjust, as you say.
And of course, the automotive Exposures is reasonably high as well with that where there we have stoppages affecting them. But the acquisitions are good. There's nothing coming up, which we don't like and didn't know, except for a little bit slower pricing adjustment model.
So I guess In this market environment where pricing adjustment has been crucial, they are potentially underperforming relative to where they should be on a normalized basis then.
You are 100% right in that. And then we are correcting that. But it will take some time.
Yes. Okay. Thank you very much.
Thank you. And our next question comes from the line of Kol Karm Johan Dahl of Sandstrom Bank.
George and Peter, just a few questions. Firstly, on volumes. I was wondering if you could just Help me get my arms around the volumes that you're actually achieving in this quarter. It seems as if organic Volume growth, if we strip out the raw material inflation, is it high or sort of low single digit positive, would you say? And I was wondering
It's mid to low. It's mid to low.
Got you. Very interesting. And then I wonder, What's your visibility on this volumes? We had the light vehicle production was down 20, I think, in the quarter. So it just seems fairly substantial.
And what's in your judgment, what is the opportunity to actually keep these volumes if you look sort of 1, 2 years out.
Oh, I mean, we are I'm not sure I catch you 100%, but Please comment if I'm answering wrong. But if I got you right, We are very confident that the volumes are there, and we haven't lost any volumes. I mean, we are gaining volumes in light.
Do you think, Georges, it is sticky volumes, this new contract that you're chasing? You seem to be taking share. Do you think you will like to
Yes, absolutely. Absolutely, I'm confident.
And to what extent do you think this is volumes insource volumes that are returning to the market, I. E, which would impact everyone positively. And to what extent is it your share gains?
No, I think that one is constant. There is no change in those behaviors.
Okay. On the you talked a bit about your working capital and inventory buildup. At the same time, you talk about the pressure on margins from having to substitute materials, etcetera. I was wondering, Is there are these do you manage to profit from building inventories in this rising raw material costs market, Which is offset by the sort of complexity in switching supplies, etcetera. I'm basically looking at those two gross numbers.
Or is it
100% correct. 100% correct analyzes. It's positives and negatives in the same thing. You are correct. You are correct.
But I got you right that the net you think is negative or?
The net of that, the net is it must be positive. I mean, we are getting We haven't calculated in that way, but I mean, thinking about it, I mean, that the net must be positive. I mean, we are getting the orders out, and we're getting the product made.
Yes, because the thing that is shown in the financials is, of course, if we were not able to deliver on orders, what would the tech cost be? And one of the main drivers of actually buying as much raw material is to make sure that we can deliver on orders. And that is one of the reasons Why we believe we're taking market share in the markets because we can deliver.
Now I was thinking more in a sort of apples to apples scenario on flat Volumes sort of if you're boosted profitability by your ability to build sort of inventory And you also have cost obviously for the complexity in switching.
No. If volumes are equal, then it's negative.
Okay, got you.
Yes. But I mean, we are doing it in order to avoid volume drop.
Yes. That's for sure. Thanks.
Then I mean, we are business we are very business oriented here, and we have the balance sheet to support it, and it's a short term. And then Peter and I, I mean, business people are coming to us with it and then it's a 22nd answer, of course. I mean, we the business. And we are long term, of course.
And we have a third question from Karl Bucharest of ABG Sundal Collier.
Please go ahead. Your line is open.
Yes. Thank you. Hello, gentlemen. So the first question is on we're talking a lot about the automotive side and the issues within that Space for many participants. Just a bit curious on the other end markets and perhaps if you could give some comments on, Let's just say, we have our top 4 end markets for you, what you're seeing there and both in terms of demand, but also if You see encountered similar challenges in those areas?
Good in all other sectors, good demand And then good volume for us, and that's where we are, of course, taking share when we can get raw materials. I mean, there's good demand. Customers are calling off unwanted volumes from us. So good situation in all the other segments. I see.
Without any exceptions, Particularly good in wire and cable, actually.
Okay. And is it strictly related to automotive for you when it comes to Production disturbances and difficulties in mixing and uneven production rates and everything like that.
I mean, from the raw material situation, it's, of course, all over. That is affecting the other segment as well. But the volume drop and the frequent change of planning is from Automotive.
Understood. And what's the customer feedback that you hear from your customers and From the OEMs when it comes to price acceptance and where The OEMs otherwise regular tendency to adjust prices downwards at the start of every year. I mean, could we see an exception also next year Because of the rapid increases in input costs?
I mean, we see and we hear and we feel strong resistance on our pricing increases. That doesn't change our pricing model. I mean, for us, it's a must. I mean, We have our pricing model. We always had it, and we are sticking to it.
We are firm. We are humble that at the end, we are correct that at the end of the day, we are for that is, of course, very tricky for the supply chain with these rapid changes.
And just my final one, as you mentioned on When it's a bit challenging again, what have you seen in terms of customers going Towards or from single sourcing, either choosing you as a single supplier or choosing to have you as dual source on top of every Existing one or you in turn having seeing competition from another participant to dual sources?
Yes, I mean, what we see is that and that's the reason we believe we have taken share. We see that We are servicing our existing core customers, and we do help them with some extra volumes as well. And also, we are occasionally helping some others as well, although the priority is the present supply present customers.
All right. Thank you.
Well, thank you.
Thank you. We have a follow-up from Karl Johndahl of Danske Bank.
Can you just update us on energy prices, how that impacted during the quarter and Where we were at the end of the quarter compared to the beginning of the quarter and if that's a relevant factor at all for you guys looking into next year.
That's a very, very good question. And it's a moving target in it, but it actually only moves in one direction, of course. It's upwards. But I mean, this is I mean, we are a global company. We have operations in so many countries, And the situation is different from country to country, and we also have different contracts from country to country.
So The impact is there already, but of course, the big energy
increases
are not everywhere for us and not in every country, and we have Contractual situations in some countries. But there's only one direction, the energy costs are increasing. But there's no huge impact in the quarter probably.
I guess this affects all suppliers In your industry, I guess Oh, absolutely. You think difficult to say, of course, but I'm just wondering whether that's already up for discussions in your price negotiations.
Absolutely. I think we are including that in our pricing model
for sure.
Where would you Either as a price either a surprise or an energy surcharge.
Got you. Yes. Where do you think you've been most Successful in gaining market share, what customer segments do you think primarily?
No, I think it's really the same customer distribution as we have because we've been supporting the present customers in the biggest way we can. And that's where I think we have gained because we have been better in servicing than the 2nd best supplier.
Okay. Thanks.
All right. We are coming to the end, I guess.
Yes. Currently, we have no further questions in the queue.
Thanks a lot. Thanks a lot, everybody, and keep in touch. Thank you very much.