Good day, welcome to the HEXPOL first quarter 2023 earnings conference call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Star then 1 on your telephone keypad. To withdraw your question, please press Star then 2. Please note, today's event is being recorded. I'd now like to turn the conference over to Peter Rosén, CFO. Please go ahead, sir.
Thank you, welcome to the presentation of the first quarter of this year. Presenting today will be, apart from myself, Georg Brunstam, our CEO. The agenda for today is to first give you a business update, go through how we continue to execute the business model, including look at sustainability, then go through the financials and the focus areas for the rest of the year. We will finish with a Q&A session. With that, I hand over to Georg, who'll take you through the first part of the agenda today.
Hi, everybody, Georg here. Very welcome to our call. If you look at page 4, I will start to comment on that slide. We delivered another strong quarter, in fact, our best quarter ever. A very strong start of the year. Good sales in all regions and product segments. We see improved automotive sales, varying a bit, though, in some regions and customers. Overall, improved sales. We are continuing to be on top of our business model, and we are executing well. Price management is, as you know, a crucial part of our business model, and we are executing well there, too. We have a good product and price mix in the quarter.
In fact, it's a record quarter at SEK 946 million compared to SEK 775 million last year. We see a good improvement on our margin from Q4, actually a very good improvement on the margin. I'm happy with that one. We still see continued uncertainty. We see good improvements in supply chains, both for ourselves and also for our customers. The availability of raw materials is improving for us. Some specialties are still problems, but overall, it's improving. We see good development in Americas. We see some uncertainty in Europe, in fact, high uncertainty in building and construction, particularly in building, where we see lower sales overall. That is not a surprise to us.
I think it's in many markets and many regions, lower sales, but particularly in Europe, in the building area. We see lower raw material prices in quarter one versus quarter four. On specialized raw materials, it's still increasing, however. We have a downturn on raw materials in quarter one. We are continuing our strong sustainability focus, and we connect that to our M&A agenda. Recycling is a very big part of our strategy. Today, it's around 18% of our polymer raw materials, and they are coming from recycling materials. That is a very strong, good development. In fact, I think it's some 80% up from last year.
On the sustainability side, we have also signed and committed our science-based targets letter, that has been accepted. We are in that process as well. The recent acquisition is McCann Plastics, they're consolidated from December 1st, they are developing well as planned. If you then turn to page number five, I will comment a little bit on the two business areas. The comments on the group, they're very similar to the ones on non-compounding. No further comments on the HEXPOL component than I had on the total comment. A strong, good development in Americas. Lower volumes in building and construction and supply chain improvements and somewhat lower raw materials in the quarter versus the previous quarter.
Strong EBIT, improved margin. Engineered Products had a good quarter, a very strong development in Asia, and a strong EBIT and the good performance is continuing also in Export Engineered Products. On the M&A side, we are focused, we are following our strategy. We see increased activity levels. However, maybe a little bit more tricky on the valuation for the time being. I can comment that more later on. I guess you have some questions around that. The acquisitions we have done the last two years, they are now completely integrated, except for McCann, which is still in process. They are all integrated, both in organization and in the geographical organization. They are performing according to the integration plan, which now is closed.
We also had a well-attended, some of you who might have been with us. It was a very well-attended venue, our Capital Markets Day in Åmål, Sweden, where we focused on our business model, and we had a deep dive in the biggest part of our business, which is Americas. We actually flew in our president from Americas to Åmål. He attended the meeting. That was a very good meeting in our view. Hope you have all felt the same. We also had a deep dive in our sustainability agenda. If I then turn page to number six, we, you can see the culture house of HEXPOL. We have, as you know, a strong culture and we have a strong execution culture.
We are committed, and we are close to customers, and we are all working on making our customers sustainable. We are entrepreneurial, and we are true, very competent specialists. That is our culture house, which I hope you have seen before. If you turn page, you will see our strong business model, which we are executing very well. It's core values in the middle, and we are acting in a fragmented market with a lot of M&A opportunities, including synergies in that. We are also, on the left side, operating a strong sustainability agenda in it. You can see the four parts with global presence, where we benefit from shorter supply chains in a big way. We are local. We do coordinate our sales globally. We are flexible, we are batch-oriented.
We are running stop and start all the time, and we are good at that. Then we have very long and strong customer relations, high stickiness, a lot of testing and approvals needed from customers, but also from end users. Of course, the main thing for us is to develop customer solutions. A strong business model. I'm sure you have seen it before. We are executing well on it. If we turn to page 8 and look at the sales development for the quarter. We saw growth for the quarter that was strong with an increase of 16% compared to the same quarter last year, with good sales in all markets and all product areas.
That being said, especially America showed overall continued very good, strong development, and also the development for HEXPOL Engineered Products was strong during the quarter, not least in Asia. Sales to the automotive-related customers in total showed improvements, but it's still varied from market to market. We see continued high uncertainty in Europe with lower sales to the primarily building construction industry, but we also see that to some consumer-related end products. Raw material prices are still higher than last year, but sequentially, we saw lower raw material prices and subsequently also lower sales prices that has then a negative impact on our sales, but not on gross profit. All in all, we delivered sales of SEK 6 billion, which is an increase then of 16% compared to the same quarter last year.
Out of this increase, 7% came from the acquisitions of Almaak and McCann. We also saw a positive FX-effect on top of that. Organic sales growth was flat in the quarter compared to last year's quarter. All markets and product areas showed good sales around the 16% growth, whether it's in the Americas, Europe, or Asia. Worth mentioning that part of the European growth is driven by the acquisitions that we did last year.
Turn to page 10 and look at the financial overview for the quarter. As Geo mentioned, we delivered the best quarterly result ever with an EBIT of SEK 946 million, which is an increase of 22% compared to last year. The margin came in at 15.8%, which is 80 basis points above last year, positively affected by better product mix and also price changes. The margin also shows 100 basis points sequential improvement compared to Q4 of last year. Overall, we did see of our margin. In the quarter, we saw relatively high cost for the financial net, this is to large part affected by negative FX effects, mainly related to Sri Lanka, but also to certain amount in Mexico.
Roughly half of the financial net cost in the quarter is related to FX effects. The rest is just the cost of funding. The equity asset ratio remains very high at 60%, and the return on capital employed is still at a very high 19%. We delivered a good operative cash flow of about SEK 600 million, which is well above what we did same quarter last year, where we were around SEK 100 million. If we turn to page 11 and look at the financial highlights, as mentioned before, we did see an increase of 16% of our sales to SEK 6 billion, while the operating profit came in at SEK 946 million and well above what we did last year, which was also a strong quarter.
At the same time, we saw the operating margin increase to 15.8% following on positive mix effect, but also price adjustments. It's worth mentioning, as we've done several times before, that our margin will move with the price adjustments that we do. When we pass on price increases, like we did most of the last year, we pass on the absolute increase, not the percentage increase, 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. Vice versa, as we've seen in this quarter, where raw material prices are down and we lower prices, we see an improvement in our gross margin percentage. Please keep that in mind.
If we then turn to page 11 and, sorry, page 12, and we look at the drivers of the operating profit for the quarter, we see that the increase in operating profit is mainly driven by higher sales, but also by the higher gross margin that we saw in the quarter. The higher sales and higher gross margin are part offset by somewhat higher OpEx in the quarter. OpEx is up compared to last year, driven by the acquisitions of almaak and McCann. We also see negative FX effects on this line in the P&L. Then there is an increase of inflation, not least the salary inflation that in many countries come into effect beginning of January in the new year.
If we then turn to page 13 and we look at HEXPOL Compounding business area, we delivered sales of SEK 5.6 billion in the quarter, which is an increase of 16% compared to Q1 last year. The increase is driven by the acquisitions of almaak and McCann that add about 7%, but also positive FX effects. As mentioned before for the group as well, we did see good sales development in all the markets and product areas. From an end customer segment perspective, we did see higher sales to automotive, while other segments are primarily building and construction, saw lower sales. The operating profit came in at SEK 873 million, which is well above last year, positively affected by the higher sales and the higher margin of that sales.
If I can ask you to turn to page 14 and take a look at Engineered Products. We saw that sales increased with 12% to about SEK 370 million, with overall strong performance in the area, but not least in Asia, where we saw a good development. Operating profit came in at SEK 73 million and well above last year, driven by the higher sales but also by the higher margin for the quarter, which was up to 19.6%. If we then turn to page 15 and we take a look at the working capital. We see we do have higher working capital compared to last year in absolute terms, but this is driven by the acquisitions of almaak and McCann that together added SEK 340 million in working capital.
At the same time, working capital in relation to sales improved compared to last year. Sequentially compared to Q4 last year, we do see higher working capital, both in absolute terms and in relation to sales. This is driven by relatively highest sales towards the end of the quarter, therefore driving up accounts receivables. There's no change in underlying payment terms compared to previous quarters, and inventory is on the same level as it was in Q4 of last year. If we turn to page 16 and we take a look at the cash flow. We delivered a good cash flow of around SEK 600 million second quarter, which is well above last year's SEK 100 million for the same period.
The only item standing out here is the higher sales towards the end of the quarter that resulted in higher accounts receivables and therefore working capital, that temporarily had a negative cash flow impact here in this quarter. We will of course turn into cash flow in the coming quarter. If we turn to page 17 and we look at the net debt, the net debt stands at SEK 2.5 billion, with a net debt-to-EBITDA ratio of 0.6. All in all, we continue to stand with a very strong financial position, and this is after having done 2 acquisitions last year and also an extra dividend that we paid out last year. All in all, a very strong financial position at the end of the first quarter of this year.
If we then turn to page 18, I will just sum up the quarter very quickly. Again, we delivered a strong quarter, and then we actually delivered the best quarter ever by far. We executed our strong business model well. We saw some improvements in the automotive sales, and we saw a good Americas, good development in Americas. We saw a not surprising bad development in the building construction area, and particularly in the building area. We see supply chain improving for us and also for our customers. We have some bottlenecks on some specialty raw materials. We also see in the quarter versus quarter 4 that the raw material prices are going down.
We also see that the sustainability focus is strong, and then it's actually giving us good effects as well. We now have a recycling content on our polymer raw materials of 18%. And we have McCann being under integration. The other acquisitions we did in 2022, 2021, we now have fully integrated and taking the synergies out, in. All in all, a very strong quarter for us. If you turn page to page 20, you can see the going forward priorities. Of course, the health and safety part is crucial. With the uncertainty prevailing, we have a strong focus on handling volatility both up and down. We are good at that.
We are batch manufacturers and we are close to our customers. The current remaining challenges we need to manage, and the raw material price decreases we need to handle as well in a clever price management way. We will continue to execute strongly on our business model, including active M&A, supported by a strong balance sheet. We will have further development in our sustainability work. By that, I think Peter and I open up for questions and answers.
Thank you. If you'd like to ask a question, please press star then 1 on your telephone keypad. If you'd like to remove yourself from queue, please press star then 2. Today's first question comes from Victor Hansen with Nordea. Please go ahead.
Thank you. Hi Georg, Peter. A couple of questions from my side. Firstly, I'm wondering if you could tell us more about what products are driving the positive margin mix here in Q1?
I think it's an overall matter. It's not driven by any particular products or regions. I think we have a good price management in all regions. Maybe of course the volume increase is helping in the automotive. That is not a structural thing, but it's more that there's a better volume development in that area.
Yeah. Understood. Then, your SG&A was up quite a bit here year-on-year and sequentially. Do you expect to get compensated for this on pricing further ahead?
Absolutely. I can comment that we are absolutely taking in the Wage inflation and all other cost inflations in our pricing model. Peter, you can comment the figure.
If we look at compared to last year, OpEx increase is driven by the two acquisitions, negative FX effects, and then as both you and Georg mentioned, the inflation and not least the salary inflation. If we look at the sequential increase, that is difficult to compare to Q4 because Q4 is a short quarter with a lot of holidays and vacations, which tend to bring down costs. If you look at compared to Q3, which is a more better quarter to compare to, there's an increase of SEK 20 million from that quarter to this quarter. That's driven by the acquisition of McCann and then the primarily the salary inflation that comes into effect from 1st of January in a lot of countries where we are present.
We are absolutely not taking on any costs anywhere, rather the contrary. Of course, the salary inflation is there, and then we see that basically in every country.
Okay, great. I was hoping you could tell us more about your M&A pipeline. Perhaps if it's similar to last year, have you seen any changes? Also on valuation, the expectations among sellers, if you could comment something on that.
Yes, I can. How should I say? Our M&A agenda is unchanged, very focused, and we know exactly what we're looking after. We actually see more assets out there, but we see more difficulties in closing the deals right now due to the fact that valuations has gone down in general, but maybe not filtered through everywhere. Also, we also see some uncertainties in the forecast of a targets. All in all, more things to look at, more opportunities, but maybe the valuations has to come through also in the private sector.
Yeah, understand. A final question here, from my, from my side. I'm wondering if you have seen any benefit, recently from the oil and gas segment, here in the quarter in your backlog?
I mean, the energy segment is strong for us. It's a good segment for us.
Yeah. Thanks a lot. That's all for me.
Thank you. Our next question today comes from Julia Utbult with SEB. Please go ahead.
Hello. Thank you. Julia Utbult with SEB. I would like to start off with a few questions on the recycled materials. does you count those as the specialty materials that you also see increasing prices of? If so, do you also have less availability on those? How is the development going here?
That's, Julia, Georg here. It's an extremely good question. It's one of our difficulties in our day-to-day struggle. It's not a uniform picture at all, not even in countries or regions. I mean, it varies a lot. Recycled material tends to go up in price, and of course, we price that accordingly. That availability can be good, but it can also be very bad from time to time. This varies and it takes a lot of focus, takes a lot of work, and there's not a one clear answer to your question. Though it's a question we work on hard every day. There's more demand for recycled material in general.
Understood. Thank you. Given your relatively high share of recycled material in polymers, would you say that you're gaining market shares from from this? Like that's it's a clear path in your strategy, or how is it impacting your gain share?
No, no. It's good for us. I mean, it's absolutely a trend, we have a lot of projects and requests on it. For sure, that is very positive for us to be successful in those products. We are. We need to do more.
Okay, perfect. Some questions on margins and price adjustments. Given your lead time and potential catch-up effects, do you think we can expect those high growth margins also for Q2, or was this the peak, so to say?
Good question, Julia. As you know, we don't give forecasts for coming quarters. It would be difficult to answer that one. It's also difficult to say whether this is the peak or not, because what will happen is, of course, that we will move with the changes in the raw material prices. If they continue down, then there will be further price adjustments down. Then everything else being equal, the margin percentage will go up. I think we need to come in a little bit further into the year to see a more stable price development before we can answer that.
I can add to that, as you know, we have no lag in our system. I mean, we are pretty instant, both up and down.
Understood. Thank you. My last question is about the price and volume split, and also if you can specify the volume from automotive and building and construction as opposed to details from the positive and negative side.
I mean, we don't report volumes per se, but if we look at from an end customer perspective, when it comes to automotive, we did see higher sales and higher volume. I'd say that when it comes to automotive, volume, it's high single digit volume growth in the quarter. That high single digit volume growth is offset by lower volumes for building and construction primarily, but also to consumer-related end products that are down.
Okay. Is it possible to say if you had price increases or decreases at the net this quarter?
We had price decreases this quarter compared to-
Okay. Thank you. That's all.
Compared to-
Yeah.
Sequentially, we have price decreases. Yes.
Okay. On a year-over-year price basis?
On a year-over-year, quarter-over-quarter, Q1 last year to Q1 this year, there are still price increases here. They are
Okay.
Smaller, but still up compared to last year.
Perfect. Thank you very much. That's all for me.
Thank you. Ladies and gentlemen, as a reminder, if you'd like to ask a question, please press star then one. Our next question today comes from Karl Bokvist with ABG. Please go ahead.
Thank you. Good afternoon. Most questions have been answered. I just wanted to follow up on a comment you made last quarter in terms of inventory adjustments among customers. Do you feel that this has now been, let's say, worked through among them, or is it still an effect that you are seeing impacting your business?
We still see a bit of it, but to a lower extent.
Understood. Are there any particular end markets where people are more actively working down inventory? I mean.
Yeah, it's.
Yeah, sorry.
More consumer-related segments.
Understood. Just on, I understand perhaps the seasonality within the quarter, but is it possible to say anything that you saw any kind of differences in sales activity throughout the quarter or now in early April?
No. I mean, throughout the quarter, we didn't see any seasonality and changes. However, as Peter said, more working days, for example, in March, took the accounts receivable up, of course. That is a normal pattern, when there's more working days in the month.
Understood. Just finally, we hear a lot of data points from a lot of industrial companies regarding automotive, but you have also outlined your ambition to kind of, let's say, increase the amount of content in electric vehicles, et cetera. Do you feel that you're actively, you know, gaining those contracts on those platforms that are set to enter the market now for the coming years?
Absolutely. We are in that process, and it works well.
Understood. That's all for me. Yeah, just to clarify that, sorry for going back on it, but if we just think about it, 0% organic growth and just a slight support year-over-year. Just would it be fair to assume that volumes were down somewhat year-over-year?
Yeah, low single digit volume down.
All right. Yeah.
offset by a low single digit price increase compared to last year.
Understood. That's all for me. Thank you.
Thank you. Our next question comes from Andres Castanos-Mollor with Berenberg. Please go ahead.
Hey, thank you very much, Georg and Peter, for taking my questions. Most have been asked, I wanted to ask about the very high margins in Engineered Products. Is this still related with the effects and the situation in Sri Lanka, or is this sustainable, and we will keep seeing high normalized margins here?
No, it's not related to the Sri Lanka effect. It's good volume development, is the base. Good sales and good project work in the... Asia is coming back. We see that in HEXPOL Engineered Products. Also good demand from products in energy savings and materials handling.
Thank you.
I was also wondering about your strategy ahead while other competitors also start cutting prices potentially aggressively. What would you do about that?
If competitors are price aggressive, we sell on our values. We are not price sellers. Then we have superior products in many cases and then we are value sellers.
That's a great answer. Thank you.
Thank you. Our next question comes from Gustav Österberg with Carnegie. Please go ahead.
Thank you, operator, and good afternoon Georg and Peter. Just a final follow-up. If you could elaborate a bit on the M&A environment and how your thoughts are going here. I mean, you still, despite the acquisitions and some extra payments in 2022, your leverage is down to low levels. And with the cash generation that you have, it should be possible to continue to be more aggressive on M&A. What's your current thinking in this environment that we have today?
Exactly what you're saying. We feel and think that there are more opportunities for us. I must say, particularly on the private sellers, it takes a little bit time for them to come down in the expectations of a multiple. I mean, when they have friends who sold last year at multiple X, they want the same this year, that's not how the market looks like anymore. A little bit, how should I say, gap on the multiples right now. More assets to look at and then the more opportunities, and then we have a strong balance sheet.
I appreciate the color. That's all. That was all questions from my end. Thank you very much.
Thank you.
Ladies and gentlemen, this concludes our question and answer session. I'd like to turn the conference back over to the management team for any closing remarks.
Thank you, everybody, for listening in and also posing questions to us. We wish you a very nice Friday afternoon. Thanks from us.
Thanks a lot, everybody.
Thank you. This concludes today's conference call, and we thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful day.