U.S. Markets open in 5 hrs 49 mins

Edited Transcript of HPOL B.ST earnings conference call or presentation 24-Oct-19 12:30pm GMT

Q3 2019 Hexpol AB Earnings Call

Oct 26, 2019 (Thomson StreetEvents) -- Edited Transcript of Hexpol AB earnings conference call or presentation Thursday, October 24, 2019 at 12:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Karin Gunnarsson

HEXPOL AB (publ) - CFO & IR Manager

* Mikael Fryklund

HEXPOL AB (publ) - President & CEO

================================================================================

Conference Call Participants

================================================================================

* Douglas Lindahl

Kepler Cheuvreux, Research Division - Analyst

* Johan Dahl

Danske Bank Markets Equity Research - Analyst

* Karl Bokvist

ABG Sundal Collier Holding ASA, Research Division - Analyst

* Klara Jonsson

SEB, Research Division - Research Analyst

* Mattias Holmberg

DNB Markets, Research Division - Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Hello and welcome to the HEXPOL AB Q3 results webcast. (Operator Instructions) Today, I am pleased to present Mikael Fryklund, the CEO; and Karin Gunnarsson, the CFO. Please go ahead with your meeting.

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [2]

--------------------------------------------------------------------------------

Thank you. Welcome all of you to HEXPOL's quarter 3 report update.

First, I will do an introduction of HEXPOL, then we will present the quarter 3 and January to September and finally a Q&A session. Let's now move onto Slide 3. HEXPOL is a world-leading polymers group with strong global positions in advanced polymer compounds, gaskets for plate heat exchangers and wheels.

Slide 4. HEXPOL's vision is to be the market leader, #1 or 2 in select segments, to generate profit, growth and shareholder value. Then Slide 5, we have strong global market positions, global lead position for rubber compounding, strong European position in Thermoplastic Elastomer Compounding, and a strong position in high-performance elastomers, this is a new product segment driven by the MESGO acquisition. So US position for reinforced Polypropylene Compounding, and global leading position in gaskets for plate heat exchangers, and global market coverage in wheels for forklift trucks and castor wheels. We have a global presence with operations in 14 countries, and 97% of the sales is outside of Sweden.

On Slide 6, you will find the listing of all our locations, and we have added 41 units since 2010, including the most recent Preferred acquisition which was done July 1st. Then on Slide 7, you will see the strong growth we have had over the years, driven by high pace of acquisitions.

On Slide 8, you can see where we are in the value chain and our business model. We have a global approach for supply locally. We focus on the critical part of polymer products, the material which is instrumental for the properties of the products which our clients manufacture, as well as the clients' internal manufacturing processes. So there is a lot of technical know-how in what we offer. The market, as such, is fragmented with few global players and many local. On Slide 9, at the top, you will see a stable organization and we have 2 business areas, 93% of the sales in Compounding and 7% in Engineered Products.

On Slide 10, you have the customer segments we are active in. Automotive is the biggest segment with about 36% of the sales. However, we have presence in many other customer segments, for example engineering and general industry with about 30% of the sales, and building and construction with about 10% of the sales over to many other segments like customer industries and medtech. So a good split on many different segments. On Slide 11, you have the growth story with significant sales and EBIT development over the years. Slide 12 is an overview of Preferred Compounding, acquired recently. Preferred brings significant competitive advantage to our customers in the Americas region with improved supply chain, leading research and development and engineering services. Preferred has also high-performance elastomers capabilities following the acquisitions of the Mesgo Group and Kirkhill Rubber. Preferred is a large acquisition. The company has annual sales of around US$240 million with an EBITDA margin well below the HEXPOL Group.

Then over to the financials for the third quarter on Slide 13. Sales increased sales by 23% to SEK 4.244 billion driven by acquisitions to a very large extent. Operating profit, excluding nonrecurring items, increased by 11% and amounted to SEK 583 million. We have in the quarter nonrecurring items of a total SEK 100 million which for the most part was integration and restructuring costs. I will give further comments on the restructuring project later on in this presentation.

Operating margin excluding nonrecurring items was 13.7% versus 15.3% previous year driven by acquisitions, lower organic volume, mix change and amortization of intangible, acquired intangible assets. Earnings per share excluding nonrecurring items was SEK 1.27 versus SEK 1.17 previous year.

Then over to slide 14, we have the different drivers of the sales development. As you can see, in the quarter sales increased by 26% driven by acquisitions. Organic growth impacted negatively by 8% and currency positive by 5%. So in total as earlier mentioned, an increase by 23%. The corresponding numbers for year-to-date are 16% driven by acquisitions minus 8% organic and 7% impact by currency share and a total increase by 15%.

Then over to Slide 15, we have the split, the sales split on sales development by region. Americas stands now for 59% of total sales year-to-date and the sales increase in the quarter was 27% driven by acquisitions, mainly Preferred. Europe stands for 37% and the sales increase in the quarter was 22%, also to a large extent driven by acquisitions and in this case the Mesgo Group. And Asia stands for 4% which is a decline in sales of 8% in the quarter. Then I hand over the word to Karin for further comments on the financials.

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [3]

--------------------------------------------------------------------------------

So when we look at Slide 16, we had strong cash flow in the quarter that was actually up 57%. Even after the acquisition of Preferred, we have a strong balance sheet with an equity/assets ratio of 53%. The net debt increased compared with Q3 2018, but since then we have paid dividend and we have made 2 acquisitions, so Mesgo Group in October, 2018 and Preferred Compounding July, 2019. So the total acquisition ratio is SEK 3.9 billion. The net debt at the end of September includes also lease liabilities according to IFRS 16 with SEK 518 million.

If we then go to the next slide, Slide 17, here we have an overview of our 2 business areas, HEXPOL Compounding and HEXPOL Engineered Products. HEXPOL Compounding represents 93% of the group's sales. HEXPOL Compounding increased sales by 25% driven by the acquisition of Preferred Compounding in July and also Mesgo Group and Kirkhill Rubber second half of last year. HEXPOL Compounding increased their operating profit excluding nonrecurring items by 12% and the operating margin amounted to 13.7% which Mikael mentioned before is affected by acquisition, lower organic volume, mix and amortization of intangible fixed assets. HEXPOL Engineered Products represent 7% of the group sales and HEXPOL Engineered Products had stable sales and somewhat lower operating profit.

If we then go to Slide 18, HEXPOL Compounding increased sales by 25% driven by the acquisition of Preferred in July and Mesgo and Kirkhill last year. HEXPOL Compounding has considerably higher volumes with higher volume in Americas and Europe, while the volumes were lower in Asia. Adjusted for the acquired operations in Preferred Compounding and Kirkhill Rubber, the volumes were lower in Americas. And adjusted for the acquired operations in Mesgo Group, the volumes were stable in Europe. We also noted that when the sales decline at customers within rubber compounding with own mixing capacity, they tend to insource somewhat more which has affected the organic sales growth. The operating profit, excluding the nonrecurring items, increased by 12% and the operating margin was lower affected by acquisitions, lower organic volume, mix changes and amortization of acquired intangible assets.

If we then go to Page 19, as we mentioned before, Preferred Compounding was acquired first of July this year and it's a notable rubber compounding in North America. We have considerably higher sales in HEXPOL Compounding Americas with increased sales to automotive-related customers, building and construction, engineering and general industry, as well as wire and cable. Adjusted for the acquired entities, the sales were lower to automotive-related customers, building and construction and stable to engineering and general industry.

We also had increased sales in HEXPOL Compounding Europe with increased sales to automotive-related customers, engineering and general industry, building and construction as well as wire and cable. Adjusted for the acquired entities, the sales were lower to engineering and general industry and stable to building and construction and wire and cable. We had lower sales in HEXPOL Compounding Asia with lower sales to automotive-related customers. We had slightly lower sales in HEXPOL TPE Compounding and we had lower sales in HEXPOL TP Compounding with lower sales to automotive.

If we then go to Slide 20, the sales for HEXPOL Engineered Products were stable. Sales were stable for HEXPOL Wheels and slightly lower for HEXPOL Gaskets. The operating profit for HEXPOL Engineered Products was slightly lower affected by problems in the drive chain of an important raw material to one of the HEXPOL Wheels plants.

If we then go to Slide 21, here we have a summary for the first 9 months of 2019. We see that the sales increased by 15% driven by the acquisition of Preferred Compounding, Mesgo Group and Kirkhill Rubber, and also positive currency effects. The organic sales were down by 8%. Operating profit, excluding the nonrecurring items, increased by 6% and we had strong operating cash flow, an increase by 40%. Our financial position remains strong, equity/assets ratio of 53%. And I will now hand over to Mikael to summarize the third quarter.

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [4]

--------------------------------------------------------------------------------

Let's then go to Slide 22, which is a summary of the quarter. As said, we had a strong sales increase by 23% to a very large extent driven by acquisitions and operating profit, excluding nonrecurring items, increased by 11% to SEK 583 million. Operating cash flow was very strong, an increase by 57% to SEK 812 million. The strong cash flow was driven by working capital improvements in acquired companies. And earnings per share, excluding nonrecurring items was SEK 1.27. Then let's go into Slide 23 which gives further indications of the restructuring and integration that we are now running. Restructuring of production capacity in HEXPOL Compounding Americas is estimated to approximate US$10 million in quarter 4. And this is costs in addition to costs taken in the third quarter. Costs in 2019 then include closing of 2 production units, Preferred's head office, and adjustment for the overhead organization. Further adjustment of the capacity might be needed in 2020 depending on the general market development in Americas for the next year and that would that mean a cost of approximately US$10 million. We estimate the cost synergies will be approximately US$5 million during 2020 and that cost synergies will be approximately US$9 million on an annual basis after integration and restructuring projects are completed after 2020.

So then we can move into the Q&A. So Operator, we are now ready for the Q&A session.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Mattias Holmberg of DNB Markets. Please go ahead.

--------------------------------------------------------------------------------

Mattias Holmberg, DNB Markets, Research Division - Analyst [2]

--------------------------------------------------------------------------------

Congratulations on a good report. I have a couple of questions. First of all, great that you shared more details on your estimated synergies associated with Preferred Compounding. I'm just curious what these synergies imply. Would it mean that Preferred reaches say the group level margin? Or would there be additional upside if they manage to get that high?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [3]

--------------------------------------------------------------------------------

It's always (inaudible), and this also includes some changes of the operational footprint, the manufacturing footprint. So this is basically what we anticipate to achieve for 2020 and 2021 as a result of the projects they are currently running. We know based on experiences that afterwards, after let's say integration/restructuring, you gradually can continue to grow over time. And we should also remind that the optimization of the manufacturing footprint in Americas is considered both let's say the benefit of total Americas operation of legacy sites and Preferred sites. And we have always an ambition to get to the HEXPOL average level. So this is what we have outlined now is for what we see as far as 2020 and 2021 basically. From my point of view, I think given what I know about the Preferred business, and I know quite a lot now, I've been visiting all the sites, I think that we in the long run will be able to be let's say on HEXPOL group level with this business because it's an excellent business.

--------------------------------------------------------------------------------

Mattias Holmberg, DNB Markets, Research Division - Analyst [4]

--------------------------------------------------------------------------------

Great. Another question on Preferred, just to make sure that we would put the right numbers in the model. You mentioned that the company has roughly USD 240 million in sales and just considering that we're looking at roughly a 10% organic sales drop so far this year, are those USD 240 million referring to 2018 sales or is that sort of last 4 months, or how should we think about that?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [5]

--------------------------------------------------------------------------------

2018 sales.

--------------------------------------------------------------------------------

Mattias Holmberg, DNB Markets, Research Division - Analyst [6]

--------------------------------------------------------------------------------

Great. A final one from my side maybe, looking a bit at development in North America, you're talking about potentially making capacity adjustments in the next year. So what could trigger you or what will make you pull the trigger on making that decision?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [7]

--------------------------------------------------------------------------------

That's a good question. That's based on that we see a further slowdown in the general market, that the markets will go down in general so to speak. There is let's say a general softening in the market and if the market would go down further during the quarter next year, then we might have to take a decision to further restructure. But that's not decided now because we think with the actions that we have taken, closing 2 production sites, and ahead of this we have done enough work for now, so to speak, if I might put it like that. But it could be more given the general market. So if the market continues to go down further so to speak, then we could take such decision during the course of next year.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from the line of Klara Jonsson of SEB.

--------------------------------------------------------------------------------

Klara Jonsson, SEB, Research Division - Research Analyst [9]

--------------------------------------------------------------------------------

This is Klara from SEB. Just following up on what you said about your Preferred acquisition, just about that long term you could have this acquisition uptick to group-level margins. And then your synergies that you announced indicate they are just around some SEK 90 million and that would indicate that you do still have synergy from SEK 200 million over time. I mean where will those synergies some from? Is that up until 2020 is the SEK 90 million? I mean what would you have to do to get Preferred to your level after that?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [10]

--------------------------------------------------------------------------------

Let's say that's my view looking into the business as such, knowing the different types of products they offer and different type of compounds, the production sites. And then basically, based on our experience what we normally can achieve in a such business with that kind of position and so on. So I can't say right now when we would be able to get to HEXPOL average level, but I think that we should be able with this business to get to that level, but when is very hard to say at this moment when we are in such early stage and right now are running closer sites and so on. Basically (inaudible) right now, so to speak. So that's something that we'll have a better view of I would say after next year how we can proceed so to speak. But given, as I said, the product scope and the more positioning of customer segments, I don't see any reason why they should in the long run be lower.

--------------------------------------------------------------------------------

Klara Jonsson, SEB, Research Division - Research Analyst [11]

--------------------------------------------------------------------------------

That sounds very promising, so thank you very much. Can you say anything about the profitability level of Preferred Compounding right now? I know you said that it's a little bit below your own, but can you say a bit more?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [12]

--------------------------------------------------------------------------------

We don't usually reveal the profitability levels on single businesses actually. I can't say that.

--------------------------------------------------------------------------------

Klara Jonsson, SEB, Research Division - Research Analyst [13]

--------------------------------------------------------------------------------

Okay. But the synergies start to kick in and then the purchasing synergies for example?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [14]

--------------------------------------------------------------------------------

It will be gradual improvement. We have made some savings on SG&A costs and this is continuing gradually so to speak. And then we estimate that we will have the synergies during next year of about USD 5 million.

--------------------------------------------------------------------------------

Klara Jonsson, SEB, Research Division - Research Analyst [15]

--------------------------------------------------------------------------------

Yes, sure. Can you say anything about how your underlying margin developed in the quarter? So excluding the impact from the recent acquisitions?

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [16]

--------------------------------------------------------------------------------

The operating margin is lower. And one part is of course the acquisition of Preferred where we communicated that the profitability is much lower than HEXPOL.

--------------------------------------------------------------------------------

Klara Jonsson, SEB, Research Division - Research Analyst [17]

--------------------------------------------------------------------------------

Okay, sure. So another question if I may, you talked about further capacity adjustments in 2020, that those might be needed depending on development of the general market. What kind of organic development would you have to see in order to take that restructuring decision?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [18]

--------------------------------------------------------------------------------

You mean to take the next step so to speak and then do further restructuring? Yes, it has to be let's say a more -- we have the (inaudible) communication during the course of this year. And let's say we would have a similar further decline next year, then we obviously have to review exactly what to do so to speak. Of course, we have different scenarios in mind and that would mean an additional cost of USD 10 million.

--------------------------------------------------------------------------------

Klara Jonsson, SEB, Research Division - Research Analyst [19]

--------------------------------------------------------------------------------

I guess if you continue to see contracting market next year, you will...

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [20]

--------------------------------------------------------------------------------

It's more let's say a general contracting market due to let's say general market slowdown in the U.S.

--------------------------------------------------------------------------------

Klara Jonsson, SEB, Research Division - Research Analyst [21]

--------------------------------------------------------------------------------

And then one last question, you had slightly better organic development than in Q2 where you saw 10% organic decline. Is part of that adjustment amount for any end markets or the customers just stocked less aggressively? Or do you see any change?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [22]

--------------------------------------------------------------------------------

There were some movements that was let's say during the quarter more positive actually. For example, in automotive in Europe, we saw organic was improving actually. So there were some shifts between different segments where there were some positive signs actually in the quarter.

--------------------------------------------------------------------------------

Klara Jonsson, SEB, Research Division - Research Analyst [23]

--------------------------------------------------------------------------------

Your customers, are they done with destocking now? Maybe that's a hard question, but is there something...

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [24]

--------------------------------------------------------------------------------

I know how it used to be. In front of, let's say, in a case of (inaudible) summer, like in Europe in front of August typically, we typically see a slower market. Then the customers on top of, let's say, lower volumes, they also do some destocking in addition, so to speak. And then they, let's say, they made more destocking than they anticipated that they needed, then it can be kind of an improvement afterwards, in the next quarter. So it's hard for us to say right now what is the kind of general change in automotive pick up in let's say further (inaudible) due to destocking in the second quarter, or rather in August I mean. And then it jumps back again in front of August.

--------------------------------------------------------------------------------

Operator [25]

--------------------------------------------------------------------------------

Our next question comes from the line of Douglas Lindahl of Kepler Cheuvreux.

--------------------------------------------------------------------------------

Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [26]

--------------------------------------------------------------------------------

A few questions from my side as well. Mikael, you mentioned that automotive in Europe was improving somewhat sequentially compared to Q2. I was more curious on automotive in Americas. What has happened there compared to previous quarter? Any comment on that?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [27]

--------------------------------------------------------------------------------

Sales were lower just looking organically on the sales was lower in automotive in the Americas. So there let's say the pattern was different compared with Europe actually.

--------------------------------------------------------------------------------

Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [28]

--------------------------------------------------------------------------------

Just thinking about North America automotive in Q2 compared to automotive North America in Q3? Sequential.

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [29]

--------------------------------------------------------------------------------

Yes, sequentially.

--------------------------------------------------------------------------------

Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [30]

--------------------------------------------------------------------------------

Year-over-year but sequentially in North America automotive, is there any difference now in Q3 compared to Q2? Is it becoming less negative, more positive? Or anything to report on that?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [31]

--------------------------------------------------------------------------------

(inaudible) of this. My feeling from my top of the head was that we were more let's say (inaudible) in the second quarter actually in automotive. I think there were some questions about, and we saw this as well, it was a very slow June. There was comments from the market about it. It was a very slow June in the second quarter in the U.S. Surprisingly low actually in such month in the quarter 3 actually.

--------------------------------------------------------------------------------

Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [32]

--------------------------------------------------------------------------------

So potentially somewhat less negative in Q3?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [33]

--------------------------------------------------------------------------------

Yes. indiscernible].

--------------------------------------------------------------------------------

Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [34]

--------------------------------------------------------------------------------

Okay. So moving on, I had a question on M&A. You've now done quite a lot obviously. Do you think your M&A potential is hindered now going forward given your sort of market dominance in Europe and North America?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [35]

--------------------------------------------------------------------------------

It's a great question. We have of course a lot of big consolidation. They required a lot during the year. And realistically in the long run, I see more opportunities. I'm talking about the long run. I see more opportunities in thermoplastics and TP given that we have acquired quite a lot in the US and Europe. But knowing also that we are a big player, we get always opportunities actually because we are so known in the market. We get always opportunities to acquire other compounders. And actually, during the course of my time I've been with the company, I have actually rejected more cases than I have accepted to acquire in rubber compounding. So I think there will be opportunities, but our ambition, what we look for, we are able to see more opportunities that are let's say of interest for us which have a strategic fit. In the long run, I see more opportunities in thermoplastics and TP actually.

--------------------------------------------------------------------------------

Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [36]

--------------------------------------------------------------------------------

Just one more clarification with regards to the potential restructuring here in 2020. At which point, I guess it's depending on the market environment, but can you say sort of will it be next quarter you will announce something on that? Or when can we get some additional clarification on that piece?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [37]

--------------------------------------------------------------------------------

That depends on the market development. It's hard right now to say when we anticipate it, because as you know, we have very short lead time in our operations and thereby as I said, we don't have any long order book where we could say, okay, we go down significantly let's say mid next year or so. We don't have that possibility to see in front of us. So I think that we will have to wait and see how the market develops going forward.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Our next question comes from the line of Karl Bokvist of ABG Sundal Collier.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [39]

--------------------------------------------------------------------------------

First of all, I'm just curious here which facilities are you planning on closing? Are these the ones that are currently very close to your existing ones? Is it in Ohio or Tennessee or -- just out of interest?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [40]

--------------------------------------------------------------------------------

I can't more mention what we so far have announced so to speak because we can't talk externally what is still let's say kind of scenarios. But what we have done so far is that we are closing a Preferred site in Ohio and then also a legacy old HEXPOL site right now.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [41]

--------------------------------------------------------------------------------

All right. Just a clarification here, you talked about cost synergies USD 5 million during 2020 and then USD 9 million on an annual basis. I'm just curious, should one interpret the USD 5 million as a round up to the USD 9 million or should one add up USD 5 million plus USD 9 million in terms of just total synergies?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [42]

--------------------------------------------------------------------------------

It is let's say not in addition. It is USD 5 million that we see that we would have post impact. It would be let's say on top of this restructuring that we are doing right now actually. And then we will see an impact, synergy impact of USD 5 million for next year, 2020, and then USD 9 million from the end of 2020, 2021 and onwards

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [43]

--------------------------------------------------------------------------------

All right, so one should think about USD 4 million incrementally from 2020 afterwards?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [44]

--------------------------------------------------------------------------------

Yes, that's correct.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [45]

--------------------------------------------------------------------------------

Then just reading your report, I apologize if I missed this, but could you give some comments on European automotive in Q3? Just the indications of how much it was down? And then a follow-up, what have you seen during October, I mean during the start of Q4?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [46]

--------------------------------------------------------------------------------

We don't comment on the current quarter. But automotive was actually for us it was, we had an organic increase in automotive in Europe in quarter 3. We don't give let's say more information than we have, select information so to speak, we don't give more than we have in our presentation. But there was an increase actually and that's also, according to the statistics we have, it's also let's say according to the macros what we have seen in the quarter.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [47]

--------------------------------------------------------------------------------

All right. Because just from the data I can see here is that basically you then have outperformed light vehicle production in Europe, I think. Should one interpret the positive delta view here is a combination of market share and positive inventory effects?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [48]

--------------------------------------------------------------------------------

I think so. I anticipate that in second quarter it was some destocking effects among the (inaudible) and OEMs. And then maybe they destocked a little bit too much so to speak and then we get the positive effect in the third quarter.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [49]

--------------------------------------------------------------------------------

Understood. Previously, you talked about some challenges passing on prices to customers. Given that you now have Preferred under your own umbrella so to say, do you think that the pricing situation will improve or has already improved given that you can now control the prices that Preferred are charging as well?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [50]

--------------------------------------------------------------------------------

What we are focusing on actually, given this acquisition is actually to focus on the costs, on cost synergies and reduce our own costs. And we had also during the course of this year the decline in organic sales. So what we have been focusing on is on the cost side. So that's our main focus. And then let's see how the market develops in the long run. But just to underline, our emphasis is now to focus on our internal costs and reduce the costs in order also that's also let's say (inaudible) before they are consolidate in the market. And if you are too let's say too aggressive on price, then you also can organically lose more business. And we want to avoid that, we want to be cautious and let's say be responsible how we act on the market. And now it's evident that we had an organic decline that we prefer to adjust our costs.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [51]

--------------------------------------------------------------------------------

Understood. Then 2 quick questions for me. The first one is, you had quite a significant working capital release this quarter. How should one think about Q4? Should one expect positive working capital effects or negative? What should we just assume for the full year?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [52]

--------------------------------------------------------------------------------

We don't give any guidance but what I can say is, and I think we have noted that before, that typically the position still, if they don't manifest always like this, that they have much more working capital than we have. And thereby we see opportunities to reduce the working capital. We have started up activities and been successful both with respect to Mesgo and they had quite a lot of working capital and also actually with Preferred. Maybe it's a little bit surprising given that it was a prior HEXPOL company, but that's something that is our experience that we always can reduce working capital. And that's done over time. It takes a while to get down the working capital because it's a lot of let's say both kind of mental thinking and also to have the right procedures and routines. Then you can see positive development that is let's say gradual.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [53]

--------------------------------------------------------------------------------

Understood. Then just finally, can you talk a bit or shed some light on your underlying cost inflation? Are you seeing any significant salary increase or anything like that that also perhaps pressures your underlying cost base?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [54]

--------------------------------------------------------------------------------

We are focusing right now on the costs quite a lot and in general, the raw materials have been let's say stable. And so I would say it's not that let's say, it's not really that much pressure on increasing costs.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [55]

--------------------------------------------------------------------------------

All right. And just finally, thank you, Karin, for your time at HEXPOL and wish you all the best in your future endeavors.

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [56]

--------------------------------------------------------------------------------

Thank you very much. Thank you. This is my last call. Thank you.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

Our next question comes from Johan Dahl of Danske Bank.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [58]

--------------------------------------------------------------------------------

Yes. Mikael and Karin, just trying to get my head around this restructuring program. How should we read -- you're taking a charge in Q3 and in Q4. Those SEK 200 million, is that what is going to result in some USD 9 million in savings? And would that be separate from the potential actions next year?

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [59]

--------------------------------------------------------------------------------

That is after all the restructuring. And also after restructuring during 2020.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [60]

--------------------------------------------------------------------------------

I didn't get that. What's the situation?

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [61]

--------------------------------------------------------------------------------

This is after all the restructuring and integration is done, and that is our best estimate today.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [62]

--------------------------------------------------------------------------------

So including some of the actions in 2020 you expect to run to sort of USD 9 million savings?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [63]

--------------------------------------------------------------------------------

Yes, after the restructuring, then -- because restructuring will continue during 2020 regardless so to speak.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [64]

--------------------------------------------------------------------------------

I'm just trying to understand which charges are going with which savings. Also, how much of the charges are cash and what's write-downs? So basically, what I'm after is that if you're including such as procurement savings, etc. in the USD 9 million you're mentioning as synergy effects in the acquisition.

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [65]

--------------------------------------------------------------------------------

We have the total synergies of procurement and the savings on SG&A and the fixed costs and so on. But of course, there is both let's say cash and noncash in the savings. We are not giving any split from this.

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [66]

--------------------------------------------------------------------------------

If we take the first, the SEK 100 million that we reported in the third quarter, that's also combination, but most of that is actually will be cash. It's not -- we haven't paid everything yet. And then in Q4, it's still an estimate. So we need to come back later when we have all the detail. (inaudible). And the same goes for 2020, if we make another reduction of the production capacity.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [67]

--------------------------------------------------------------------------------

How many FTEs are you taking out roughly?

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [68]

--------------------------------------------------------------------------------

How many employees?

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [69]

--------------------------------------------------------------------------------

Yes. Hello?

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [70]

--------------------------------------------------------------------------------

Yes, we are still thinking about it.

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [71]

--------------------------------------------------------------------------------

As I said, we have a number but that includes also that we have to make let's say further reduction during the course of (inaudible) to give the more sentiment.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [72]

--------------------------------------------------------------------------------

And what is the number?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [73]

--------------------------------------------------------------------------------

In total, it is around 200 people.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [74]

--------------------------------------------------------------------------------

What has the response been from your clients which you can tell us regarding the amalgamation of Preferred and HEXPOL U.S.?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [75]

--------------------------------------------------------------------------------

So far the feedback we have got is positive and we have been managing these in a responsible way and really had a dialogue with the clients how to optimize the strategy what's best for them and for us so to speak. Because we have let's say, we can always say optimize the supplies and the, for example (inaudible) different types of compounds in different types of sites and so on. And thereby can let's say logistically improve the supplies. But also have a more optimal setup because of course clients, like we, have different views about okay, what type of components is better produced in different types of sites and so on, so that's something that we are looking on. That was also something we communicated when we made the announcement (inaudible) that this will strengthen our supply chain and R&D and so on. So that's something we have been focusing on quite a lot including for our clients.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [76]

--------------------------------------------------------------------------------

Okay. And then finally, on the bridge, sort of bridging last year's result in Q3 with this year's result in Q3, I appreciate you don't want to disclose individual companies, but how much roughly does acquisitions contribute this year compared to last year in the bridge?

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [77]

--------------------------------------------------------------------------------

Can you repeat the question? How much -- I mean we have Preferred in Q3 and we'll have Mesgo in Q3 this year. And we have part of, I mean we acquired Kirkhill September of last year. And Mesgo was included on first of October.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [78]

--------------------------------------------------------------------------------

So how much does that add up to in this Q3 compared to last Q3, those acquisitions?

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [79]

--------------------------------------------------------------------------------

Well, if we look at the sales, it was...

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [80]

--------------------------------------------------------------------------------

You mentioned in the report on sales, but we don't know on earnings.

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [81]

--------------------------------------------------------------------------------

We have the information regarding the sales, but we do not reveal the profit as you know.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [82]

--------------------------------------------------------------------------------

I was just thinking as sort of group together maybe. But okay, never mind then. Let's see if I had any other question. You referred to negative mix in this quarter. What was that specifically?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [83]

--------------------------------------------------------------------------------

Yes, that's let's say a pattern that you'll see in some of our business. And this is let's say this can change (inaudible) for a while and this is quite a lot dependent on the different type of products, how different type of compounds and products are sold actually. So it is split on different types of businesses actually. And this can shift from one period to another actually. So basically, you have to drill down on the products and compound, type of compound and customer it looks like. But internally, we have always followed up on different type of businesses of course and then we can see further let's say a little bit more product by product groups have gone down or up. That can shift.

--------------------------------------------------------------------------------

Johan Dahl, Danske Bank Markets Equity Research - Analyst [84]

--------------------------------------------------------------------------------

But was mix particularly poor or particularly good in Q3?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [85]

--------------------------------------------------------------------------------

Poor or good, you asked earlier? It was the mix had an impact, but to give let's say a brief overview about the operating margin, acquisitions clearly, now also driven by Preferred. And also that we had lower organic volume. And then we had also some mix impact that negatively impacted.

--------------------------------------------------------------------------------

Operator [86]

--------------------------------------------------------------------------------

Our next question comes from the line of Karl Bokvist of ABG Sundal Collier.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [87]

--------------------------------------------------------------------------------

Yes, thank you. Just a follow-up here. Perhaps I misunderstood you, but this quarter you took USD 100 million in costs and then should one interpret that one could see USD 10 million in further restructuring costs in Q4 as well, so in total about...

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [88]

--------------------------------------------------------------------------------

Yes, that's right.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [89]

--------------------------------------------------------------------------------

Okay. So almost USD 200 million in 2019 and then potentially USD 100 million more in 2020?

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [90]

--------------------------------------------------------------------------------

That's right.

--------------------------------------------------------------------------------

Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [91]

--------------------------------------------------------------------------------

In order to achieve about USD 9 million in savings on a run rate basis?

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [92]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [93]

--------------------------------------------------------------------------------

(Operator Instructions). And there are no further questions at this time. Please go ahead, speakers.

--------------------------------------------------------------------------------

Mikael Fryklund, HEXPOL AB (publ) - President & CEO [94]

--------------------------------------------------------------------------------

So thanks a lot, and that was all for now. So thank you from Karin and myself.

--------------------------------------------------------------------------------

Karin Gunnarsson, HEXPOL AB (publ) - CFO & IR Manager [95]

--------------------------------------------------------------------------------

Thank you, everybody.