Welcome to the HEXPOL Q3 presentation. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to the acting CEO and CFO, Peter Rosén. Please go ahead.
Thank you, and welcome to the presentation of the Q3 for 2023. I will first give you a business update, then go through how we continue to execute on our business model, then go through the financials, and then summarize the quarter before we finish off with a Q&A session. So if I can ask you to turn to page four in the presentation, and I'll take you through the quarter. As you've seen, we delivered yet another strong quarter with an EBIT of SEK 930 million, which is 11% above what we did the same quarter last year.
At the same time, the EBIT margin continues to improve, and we delivered 17% EBIT margin, which is up about 50 basis points compared to Q2 this year, and it's up 280 basis points compared to Q3 last year. The drivers of the higher margin is the stringent execution of the business model, which includes price management and good product and price mix. Following on the strong EBIT and also the improvements that we saw in working capital, we also delivered a very strong cash flow of close to SEK 1 billion in the quarter. When looking at demand and sales during the quarter, we see a similar picture as we did during the Q2 this year, with stable demand on sales to the automotive end customer segment, while the demand from building construction was down substantially in all our markets.
And we also see a similar picture when it comes to consumer-related products and, to a lesser extent, some areas within general industry. Sequentially, we also saw somewhat lower prices on raw materials, resulting in lower sales prices during the quarter. At the same time, the trend of decreasing raw material prices seemed to flatten out here during the quarter, and it sort of remains to be seen how this will develop going forward. Work on sustainability continues with development of products and discussions with our customers on their needs. And also, as mentioned before, the M&A strategy favors acquisitions with high recycled content and capacity. And if I then ask you to turn to page five, and we continue on the performance during the quarter.
We see that for Compounding, the automotive end customer segment shows improvement, but still with very development across our markets, with Americas being a more positive market than Europe when it comes to this area. The automotive strike in the US had no impact, no material impact for the group in the quarter. We did see some parts of our business was impacted, where demand was lower for some specific compounds, but it was not material for the group as a total. As during the Q2 this year, we continued to see lower, very low demand from building construction, as well from the consumer-related end customer segments. And this lower demand offsets the automotive demand as a total. On a positive note, there is stable supply of raw materials and the supply chains for HEXPOL work overall very well.
During the quarter, we continued to see the raw material prices come down some both sequentially and especially compared to the same quarter last year. At the same time, we do see the decrease flattening out and prices going forward can be expected to be either flat or increase some. And overall, as mentioned, Americas show relatively better market performance, compared to, for example, Europe, while in Asia improved versus the same period last year. And overall, we delivered good, good EBIT and further improved margins. Engineered Products delivered sales in line with last year and also strong EBIT. EBIT was down some compared to last year, but this is fully driven by negative FX effects in Sri Lanka that we saw during the quarter.
When looking at M&A, we have a pipeline that we're working on, and we certainly have the financial resources to do more acquisitions when we can complete those. The acquisitions that we've done during the last two years are now fully integrated into HEXPOL business. Then if I can ask you to turn to page seven and the business model. We've mentioned this several times before, but I still want to highlight one of the key aspects of the business model, which is price management. It is key for us, not only when raw material prices move upwards, but also when they decrease, as we're seeing during this year. It is important for us, and we are very agile when managing the price movements, whether they go up or they go down.
And if I can ask you to turn to page eight and looking at the sales development? We delivered sales of about SEK 5.5 billion Q2, which on the total level, is down some 8% versus the same period last year. Organic sales were down 14%, while the acquisition of McCann added about 2% in sales. And in addition to this, we also saw some positive effects of about SEK 250 million . Sales to automotive-related customers in total showed improvement, but still varies from market to market. And following on the lower demand, sales to building construction as well as to consumer products are down compared to last year. Our sales prices are down, compared both to last year and also somewhat sequentially this year as well, following on the lower raw material prices.
As mentioned before, lower sales prices impact our sales amount, but everything else being equal, it has no impact on EBIT in absolute terms. Then, if I can ask you to turn to page 10, and we look at the financial overview for the quarter. As mentioned, we delivered a strong EBIT of SEK 900 million, and a good increase of 11% compared to Q3 last year. The margin came in at 17%, which is 280 basis points above last year, positively affected by good product and price mix, and it's about 50 basis points above Q2 this year. The equity asset ratio remains high at 63%, and the return on capital employed is high and above the 19%.
Again, we delivered a very strong cash flow here of almost SEK 1 billion, which is an increase of about 37% above the same period last year. If I can ask you to turn to page 12, looking at the operating profit. Looking at the profit drivers, we see that the increase in operating profit compared to same period last year is mainly driven by the higher gross margin. OpEx is up somewhat compared to last year, and this is driven by the acquisition of McCann, negative FX effects and inflation, not least the salary inflation. At the same time, the costs in the quarter are in line with the previous quarters this year, so no change there. Then, if I can ask you to turn to page 13, we'll take a look at HEXPOL Compounding in the quarter.
And the segment delivered SEK 5.1 billion in the quarter, which is 8% below Q3 last year. And as mentioned before, the lower sales are driven partly by lower demand from building construction, consumer-related products or customers, but it's also the lower sales prices. However, the operating profit came in at SEK 862 million, which is well above last year with a strong margin improvement, positively affected by good product and price mix. And if I can ask you to turn to page 14, looking at the engineered products segment. Sales for that segment were in line with last year at SEK 360 million.
Operating profit came in just below SEK 70 million, which is somewhat below last year, and also the margin is down a little bit compared to Q3 last year. However, the decrease in margin is fully driven by negative effects in Sri Lanka for the quarter. And then, if I can ask you to turn to page 15, we'll take a look at the working capital. And the working capital came in below last year in absolute terms, despite the acquisition of McCann, that added about SEK 70 million in working capital. And also sequentially, we see some improvement in absolute terms. And also, working capital in relation to sales continued to improve compared both to last year, but also sequentially during this year. And the movement is related primarily to inventory improvements.
There is no change in the underlying payment terms. And then, if I can ask you to turn to page 16, looking at the cash flow. As mentioned, we delivered a very strong cash flow in the quarter, SEK 963 million, which is well above last year's SEK 700 million, so it's an increase of almost 40% compared to the same period. And this is driven both by a strong EBIT, but also lower working capital in the quarter. And all of this translates into what we can see on page 17 in our net debt, which decreased further, and at the end of Q3, it stands at SEK 2.2 billion, with a net debt to EBITDA ratio of 0.5.
So all in all, when we look at the pure financials, we continue to stand with a very strong financial position here after Q3. And then just to summarize the quarter, on page 17, without going into all the comments, but it's a strong quarter from an EBIT perspective, with SEK 930 million in profits, and a margin that improved both sequentially, but primarily versus the same period last year. And also, we delivered a strong cash flow in the period here of SEK 1 billion. We saw that lower demand from end customer segments, primarily with building, construction, and consumer-related products, offset sales to automotive, and it had negative impact on our organic sales development during the quarter.
Also, this lower sales prices, driven by lower raw material prices, impact the sales amount negatively, however, not EBIT, as you can see. Our work on sustainability continues, both in the product development, in close cooperation with customers, but also when looking at the M&A agenda, which is supported by our very strong financial position and our strong balance sheet here after Q3. That is the presentation of the Q3, and I happily open up to Q&A.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Julia Utbult from SEB. Please go ahead.
Hello, Peter. Thank you for the presentation. The first question is on pricing, and you delivered a good EBIT margin improvement and even better gross margin. So I assume you have a favorable cost-price balance, just as you write in the report, and here you, you've seen raw material prices been falling. And on the other hand, I assume that negative volume had negative impact, so I would like to ask for the price and volume split here. And you also mentioned you had some positive mix effects, so any guidance here would be helpful, please.
Yeah. Yeah, as mentioned before, during the quarter, both sequentially and compared to Q3 last year, we see volumes coming down a bit and also prices. And if we take the two different periods, versus if we look at Q2 this year, volume is down low single digit, and price also low single digit, which makes up the difference compared to Q2 this year. When we look at Q3 last year and the difference, on the total, we see volume is down about mid single digit, and price is also down mid-single digits.
Okay, so relatively similar there. And on the mix effect?
Yeah, what we do see is that we have, when we look at the total, we have a somewhat better product mix and more, a little bit more high profit margin mix sold, compounds sold during the quarter, which supports the EBIT margin.
Okay, thank you. And then a question on the construction-related demand. So looking at the construction market in North America, there are large differences between the communication around residential and infrastructure projects. So, and the latter has been holding up relatively well. So can you say anything about the exposure here among your customers, and how your transparency is here among your customers? How is your construction exposure both in Europe and Americas?
Yeah, when we look at the building construction, it's grouped together, but the part that is down substantially is new housing, new buildings. And infrastructure in the U.S. is somewhat more positive than compared to what we see in Europe. But the thing to keep in mind is when we look at how much of our compounds go into new building, new housing, compared to infrastructure projects, we see a lot more of our compounds go into new buildings. So when new housing drops substantially, as it has done, our content in new housing is bigger than it is for infrastructure projects.
So it's a double hit in the sense that, yes, new housing construction is down, and then our share with those customers is much higher than it is for infrastructure projects that are more stable.
Okay, that's very clear. Thank you, and I will go back in line.
The next question comes from Douglas Lindahl from DNB Markets. Please go ahead.
... Peter, thanks for taking my questions. I have a few, I'll ask them one by one. Just starting with a few follow-ups there on pricing, which you comment is now flattening out. When do you think that will sort of entail more of a neutral year-over-year impact with regards to your organic growth impact, or sales, sales growth impact? Will we see it already in Q4 or more towards Q1, as of, as it stands right now?
Good, very good question. Difficult to answer. And the reason why it's difficult to answer is that some of the raw materials that we use are severely impacted by what happens in the world around us. So for example, even though oil is... The price of oil is in the long term one key driver, and that is moving up and down very much what happens both in Ukraine, but also in the Middle East. So it's difficult to say exactly when we will come to a point where there is prices are-
Just based on, sorry, but just based on what prices are right now then? Assuming there's no changes.
Yeah, as I mentioned, we've seen prices, raw material prices on as a total starting to flatten out now, and we can expect those to remain flat for a while.
Okay. Typically, the impact would be like a few months or weeks, right?
More months than weeks, yes.
Yeah. Okay. And then just to follow up on the construction exposure there, which has been obviously tough and appreciate the clarification on new housing versus infra. But are you starting to see the new housing components, you know, the second derivative, maybe flattening out a bit, so falling less sharply year-over-year?
I can only say that we see big decreases, both in Q2...
Yeah
... and Q3. I don't think we've seen it flatten out yet. Hopefully, it has, but difficult to say.
Mm. Okay, thanks, appreciate it. And then just finally, your balance sheet now is extremely strong, and cash flow, obviously very strong as well. And I think you mentioned M&A in the presentation, also in the report, very much on top of your agenda. But my thinking is that you have room for M&A and extra dividend and buybacks or potentially buybacks. What's your thinking with regards to your balance sheet and maybe being a bit more aggressive there with deploying that?
I mean, as I mentioned, and you know, our priority and focus is M&A, and that's what we want to do.
Yeah
And that's what we plan for. If and perhaps when we come to a point where we and or the board and together feel that we're overcapitalized, then we will look into how to manage that, and extra dividend or share buyback are various options.
For the moment, priority and focus is M&A.
The M&A landscape, would you say that there are large M&A deals available that you're looking at?
We have a pi-
Because to me, it's like you could do both.
We have a good pipeline, and there are a number of companies that we're interested in acquiring. The challenge that we face a little bit right now is that it's simply too, do we agree on where businesses are today and how they will perform in the near mid-term.
Yeah
... from a timing perspective, and it has impact on expected prices. So I think that-
Yeah
... we're in such a period where that's a fairly big discussion point.
Yeah, we seem to hear that quite a lot, so. But good, thanks so much for your answers, Peter.
Thank you.
The next question comes from Johan Dahl from Danske Bank. Please go ahead.
Yes, good afternoon, everyone. A few questions. Just on this product mix, Peter, I will ask. So do you agree with the picture that it has improved sequentially throughout the year? That you've seen sort of step by step throughout the year, or is that sort of exaggerating it? Or, and also, I wonder to what extent is the improving mix a function of how your different customer segments is developing? And to what extent is it that you're actually providing more value-added compounds on sort of new clients, new contracts, just to understand the stickiness here of that product mix.
Yeah. When we talk about product, positive product mix, it's primarily versus last year. During the year, this year, if we look at sequentially, there hasn't been that big movement. So it's primarily positive product mix compared to last year. When it comes to which customer segments that is, I would say it's more related which kind of products customers order than driven by mix of customer segments. So within a customer segment, end customer segment, we can have different compounds with different profitability. So it's more driven by which type of compounds that are requested than the mix of end customer segments. And then when it comes to the stickiness, of course, it's our ambition to remain, to keep those compounds being sold to our customers.
... But do you have any visibility there or is it sort of it is what it is, or?
No, I mean, we have visibility into what our customers order, of course, and what we do to be able to continue to deliver those specific compounds.
All right. On the, I think you talked about the accelerating pace to recycle.
Mm-hmm.
I just, you know, wonder, what's the risk here that, because it seems to be going really, really quickly from primarily automotive, I guess, the demand is recycled products, but are there M&A opportunities available in this space? What's the risk here that those assets are becoming really pricey as, you know, everyone have to adapt here to demand taking off?
Put this way, I mean, our view is that the demand for recycled products will continue to increase. And for us to be able to meet that demand going forward, it will require a combination of both doing M&A and also develop the products internally with the resources that we have today. And whether those assets acquisitions would become more pricey because they contain more recycled content, that might be the case, but then also the profitability of those companies should increase. So I don't view it as a risk that, you know, they will become too expensive to acquire.
I think that's the way the development, for example, within automotive will develop, and we can do both acquisitions and develop our own products to meet that demand.
Is there an organic opportunity for HEXPOL to start collecting, and, providing sort of more raw materials for recycled, or is that not something you're looking at the moment?
Yeah, we're looking at it, but it's early days, but we're looking at it. And I think one should make the distinction between when it comes to TPE, for example, Almaak, or sorry, TPE, we have ordered Almaak who's doing this, and we're also looking into what we can do on the rubber compounding side.
All right, thanks.
Thank you.
The next question comes from Andres Castanos-Mollor from Berenberg. Please go ahead.
Good afternoon. Congratulations on the strong brand and margin expansion. Lots of good questions being asked already. I just have one more on the strength of the auto end market and the impact of the strike. You mentioned it's not meaningful in Q3. How is it going to be for Q4? Thank you.
That's a very good question. I think when it comes to the automotive strike in the US., it changes almost by the day. But if I take the easy part first, as I mentioned, in Q3, we didn't see any material impact, for the group as a total. We had some impact on parts of our business, but not for the total as such. If this goes on for longer and expands, it may have more impact, but it's too early to say. And why do I say that? Well, just see what happened the last two days.
First, the union extended the strike to include a bigger facility producing trucks, which was negative, and then it only took a day or two, and there was a message that a tentative deal had been done with one of the automotive producers. So it moves quickly. But I think over time, if we just assume that the demand for vehicles still remain, then it's more a question of timing, because then the cars still need to be produced. So where we stand today, our view is, it can have some impact, but in the long run, it shouldn't have any impact.
All right. Thank you. That's all.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
Thank you very much, everyone, for listening in and posing questions. And yeah, thank you, and I wish you a very nice week, and when you get that far. Thank you. Take care. Bye.