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Edited Transcript of HPOL B.ST earnings conference call or presentation 30-Jan-20 2:00pm GMT

Q4 2019 Hexpol AB Earnings Call

Feb 7, 2020 (Thomson StreetEvents) -- Edited Transcript of Hexpol AB earnings conference call or presentation Thursday, January 30, 2020 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mikael Fryklund

HEXPOL AB (publ) - President & CEO

* Peter Rosén

HEXPOL AB (publ) - CFO & IR Manager

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Conference Call Participants

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* 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

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Presentation

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Operator [1]

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Hello, and welcome to the HEXPOL AB Q4 results Call. (Operator Instructions) Today, I'm pleased to present the CEO, Mikael Fryklund; and the CFO, Peter Rosén. Please go ahead with your meeting.

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

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Yes. Thank you. Welcome all of you to HEXPOL's fourth quarter report update. First, I will do an introduction of HEXPOL then we will present the financials and the drivers behind and a short update on the restructuring and integration projects and finally, a Q&A session.

Let's move then into 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 market leader, #1 or 2 in selected segments, to generate profit growth and shareholder value.

Then Slide 5. We have strong global market positions, global leading position in rubber compounding, strong European position in Thermoplastic Elastomer Compounding, and a strong position in high-performance elastomers and a strong U.S. position for reinforced Polypropylene Compounding and a global leading position in gaskets for plate heat exchangers, and global market coverage in wheels for forklift trucks and castor wheels. And a global presence with operations in 14 countries, and 97% of the sales is outside of Sweden.

Then on Slide 6, you will find a listing of all our locations, and we have added 41 units since 2010, including the most recent preferred acquisition, which was closed July 1 last year.

On Slide 7, you will see the strong growth we have had over the years, driven by high pace of acquisitions.

And on Slide 8, you will see where we are in the value chain and our business model. We have a global approach to supply locally. And we focus on the critical part of our polymer products 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 know-how in what we offer. And the market is fragmented with few global players and many local.

Then on Slide 9, you will see the organization. We have 2 business areas. As you know, 93% of the sales in Compounding and 7% in Engineered Products.

On Slide 10, you have a customer segment we are active in. Automotive is the biggest segment with about 36% of sales. However, we have a presence in many other customer segments. As for example, engineering and general industry with about 30% of the sales, and building and construction with about 10% of the sales. And then over to Consumer Industries and medtech. So there is a split on many segments.

On Slide 11, you have the growth story with significant sales and EBIT development over the years.

Then on Slide 12, which gives an overview of Preferred Compounding, acquired recently.

Preferred brings significant competitive advantage to our customers in the Americas 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 -- our annual sales were around USD 240 million with an EBITDA margin well below HEXPOL Group, as mentioned earlier.

Then over to the financials for the fourth quarter on Slide 13. Sales increased by 6% to SEK 3.774 billion driven by acquisitions to very large extent. Operating profit, excluding nonrecurring items, amounted to SEK 522 million, thereby in line with previous year.

We have in the quarter nonrecurring items of a total SEK 99 million, which relates to the integration of restructuring costs. I will give further comments on the restructuring project later on in the presentation.

The operating margin, excluding nonrecurring item, was 13.8% versus 14.7% previous year, affected by lower organic volume, acquisitions and amortization on acquired intangible assets. Excluding the Preferred acquisition, the operating margin was on about the same level as previous year.

Earnings per share, excluding nonrecurring items, was SEK 1.20 versus SEK 1.18 the previous year.

On Slide 14, we have the different drivers of the sales development. As you can see in the quarter, sales increased 15% through acquisitions. Organic growth impacted negatively by 13% and currency, positive by 4%. So in total, the sales increased by 6%, as mentioned.

Peter will comment more on the growth on the following slides to give more granularity. The gross profit numbers for the full year are 16% through acquisitions, minus 9% organically and 6% impacted by currency changes.

And in total, sales increased by 13%.

Then on Slide 15, we have the sales split and sales development by region. And Americas stands for 59% of the total sales year-to-date and the sales increase in the quarter was 12%, driven by acquisition, Preferred. And then Europe stands for 36% with a slight decline in sales of 1% in the quarter. And Asia stands for 5% with a slight decline in sales of 2% in the quarter.

Then I hand over to Peter for further comments on the financials.

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Peter Rosén, HEXPOL AB (publ) - CFO & IR Manager [3]

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Thank you. And if we look at Page 16, as Mikael mentioned, sales were up in the quarter compared to last year, and it was driven by acquisitions and positive currency effects. The operating margin came in at 13.8%, which is on the same level of previous quarter but is below last year.

However, it should be noted that excluding the acquisition of Preferred, the margin in the quarter would have been similar to last year levels, which is especially strong considering the lower organic volume that we saw in the quarter.

And we closed the year with another quarter with very strong operating cash flow. It's up 8% versus last year despite somewhat lower profit in the quarter. Net debt increased compared to same period last year, driven by a dividend payout of a bit less than SEK 800 million. And of course the acquisition of Preferred with SEK 2 billion.

This means that we continue to have a strong balance sheet with an equity-asset ratio of 56%. And net debt end of December includes lease liabilities, according to IFRS 16, with about SEK 440 million.

And net debt in relation to EBITDA, excluding leasing, show a very strong ratio of 0.76. So all in all, we showed a very strong financial position in the last quarter of the year.

If we then move over and look at our 2 business areas in more detail, at Page 17. Just first take an overview of the 2 business areas. And HEXPOL Compounding represents about 93% of the group sales. And the business area increased sales with 7%, and that is driven by the acquisition of Preferred in the U.S.

At the same time, the operating profit increased on the back of higher sales. The operating margin came down some, driven by the Preferred acquisition. And Preferred has a lower margin compared to HEXPOL Legacy businesses.

But it was also impacted by the lower organic volume and also to a certain extent the amortization of acquired intangible fixed assets. If we look at the Engineered Products, which then represents the 7% of our group sales, the area showed stable sales, but some of lower operating profit, primarily negatively affected by supply issue of an important raw material for us.

If we move over to Page 18 and take even more detailed look at the 2 segments, we saw in the Americas -- we saw higher volumes but somewhat lower volumes in Europe, while the volumes in Asia were stable. However, if we adjust for the Preferred acquisitions, volumes are also that lower in the Americas.

And overall, the lower organic volume was affected by generally softer market demand, not least when it comes to the automotive industry. And in addition to this, we saw increased in sources -- in-sourcing of basic compounds with some customers that have their own mixing capabilities.

And we saw specifically in the U.S., what we call the Tire &Toll volumes, dropped substantially in the quarter compared to same period last year. And also this year, depending on the holidays, we saw that several customers closed down longer than normal over Christmas, which also affected the demand negatively.

Operating profit, excluding nonrecurring items, increased some on the back of the higher sales. Operating margin was lower, affected again by the acquisition and the lower organic volumes. If we then move over to Page 19, and we take a closer look at how sales to the various customers develop.

We saw higher sales in the Americas with increased sales to automotive-related customers, to building and construction and what we call engineering and general industry. However, adjusted for the acquired entities, that is, Preferred, the sales were lower to automotive-related customers, increased building and construction and were stable to engineering and general industry. It should be noted that if we look at the production volumes of cars in the U.S., they fell with about 9% in the quarter, and that affected us in the U.S.

When it comes to Europe, we saw slightly lower sales. We had stable sales to the automotive-related customers, but we had lower sales to engineering and general industry and also to building and construction. And on a positive note, production of cars in Europe dropped 5% in the quarter, but our sales were stable. And when it comes to Asia with the lower sales, primarily affected by lower sales to the automotive industry. HEXPOL TPE Compounding showed a little bit lower sales as did TPE Compounding, again, affected by lower sales to the automotive industry.

If we then move over to Page 20 and look at Engineered Products, sales were, as a total, were stable. Where we saw within the segment, we saw HEXPOL Wheels show a little bit lower sales, and that is where Gaskets showed stable to somewhat positive sales. This segment was negatively affected on a profit level due to the delivery problems of one of the crucial raw materials for us.

If we then move over to Page 21 and summarize the quarter. We did see sales increase but driven by acquisition and positive currency effects. And the operating profit, excluding nonrecurring items, came in on the same level as last year. The lower margin compared to last year was affected by the lower organic volume. And the acquisition of Preferred which came with lower margins and the HEXPOL Legacy business. Earnings per share, excluding nonrecurring items, increased to SEK 1.20 per share. And as I mentioned before, we continue to stand financially very strong with further improvement in cash flow and high equity-asset ratio.

If we then move over to Page 21 to look at the summary for full year 2019, sales for the group as a total increased to 13%, driven by the acquisition of Preferred and also positive currency effects. At the same time, organic sales were down with 9%, affected by the lower demand from primarily automotive business, combined with in-sourcing of basic compounds with some customers as well as customers closing down longer than normal during the Christmas holidays.

Operating profit, excluding nonrecurring items, increased with 4%. And the cash flow increased with very strong 29%.

And as I mentioned before, when we closed the year, we do that with a very strong financial position with a strong equity-to-asset ratio of 56%. And then I hand over to Mikael, yes.

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

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Let's then go Slide 23, which gives further indications of the restructuring and integration that we are running in connection with the acquisition of Preferred. The product proceeds according to plan. The restructuring production capacity in Compounding Americas amounted to approximately USD 10 million in the fourth quarter as we commented on -- that we anticipated in connection to the quarter 3 report.

Costs in 2019 includes closing of 2 production units, Preferred's head office and adjustments of our overhead organization. This is now carried out and completed. Further adjustment of capacity might be needed in 2020, depending on the general market development in Americas. And we have the -- earlier commented, approximately USD 10 million. And this will be investigated in the coming months.

We still estimate cost synergies will be approximately USD 5 million during 2020 and that the cost synergies will be approximately USD 9 million on annual basis after the integration and restructuring projects are completed end of 2020.

So operator, we are now ready for the Q&A session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line Mattias Holmberg of DNB Markets.

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

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First one is on your development in the organic growth. And I'm just curious if you believe that your management change in the Americas business, has that sort of led to any internal issues that has caused this deceleration in growth compared to the third quarter? Is the decline entirely market-driven?

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

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No, not at all. Tracy was fully involved in the business until the end of quarter and his successor joined in the beginning of January.

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

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Okay. And also staying to the topic of growth. I've heard from some other players in the industry that there's been some destocking among automotive manufacturers, primarily in the U.S., in the fourth quarter.

So I'm just curious because you mentioned quite a lot of effects of longer holiday closures, working day impact, et cetera. If you were to look at the day-to-day volume, if you could do such an analysis, how would the underlying development had been in Q4 compared to last year?

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

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Yes. It's -- let's say, that we saw -- and this is according to public statistics, IHS. The automotive light vehicle production decline was 9% in the fourth quarter in the U.S. 9%, that's quite a lot, actually. And the sales almost better though. So there was clearly a destocking in the supply chain. That's very true.

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

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Okay. And have you seen any signs of this destocking sort of coming to an end in your discussions with your customers?

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

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Let us say that this is what we saw in the quarter. And there clearly -- and we comment on that. We heard that there were longer Christmas holiday shutdowns in December than normally and so this was an effect that we clearly saw in December.

And then, let's see what happening -- what will happen going forward. Sometimes -- and we have seen that in cost, that when customers take, so to speak, longer shutdowns than what needed, then we can get the positive effect in January and vice versa. So let's see going forward.

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Operator [8]

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

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [9]

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Douglas here. A few questions from my side. Continuing on the topic of U.S. automotive. And purely based on the data you've seen so far since the most updated data you have, would you say that this negative trend has continued beyond Q4, towards the latter end of Q4, meaning you see no sort of positive inflection in the U.S. automotive market currently? That's my first question.

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

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Let's say, if you look into the production of light vehicles in the U.S., for the full year, it was a decline of about 4%. And then it was 9% down in the fourth quarter. And this is a typically an end-of-year effect with the standard Christmas holiday shutdowns. So it's hard to estimate what will happen going forward.

If you, let's say, read from, let's say, public forecast, what they believe and so on, what kind of information they captured about the market. They believe that the market will, let's say, be in a decline of 2% to 3% globally for 2020, for example. Then they talk about the full year.

So it's very much dependent on what happens in the -- what will happen in the first quarter. It's very much dependent on, from my point of view, this effect that we saw with extended Christmas holiday shutdowns.

How was that impacting? Had they known, taken down the factors to the right. And still we see, let's say, more and more normal underlying development what will be safer impact or less.

Sometimes, as I said, when they close down more than was need, then we can see positive impact also in January. So let's see what happens percentage going forward during the quarter.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [11]

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Okay. So no sort of clear direction as of now?

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

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No, exactly.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [13]

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Moving on. You announced those 2 production facilities in the U.S. Are you already seeing some positive benefits of this in terms of the pricing dynamics? Or are volumes just still too low to reap sort of the benefits from this? And if so, when would you potentially begin to see the benefit from the closure of these facilities, you expect?

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

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Yes, that is an issue. You should see, just looking toward the closure of these 2 plants, we should see positive effects during the first quarter because, of course, when we closed down the (inaudible), of course, it created a lot of the fixed costs.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [15]

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Yes. I'm just thinking of -- I realize that, of course. But I mean more on the pricing dynamic, if that has an impact on overcapacity in the market. Is that enough to...

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Mikael Fryklund, HEXPOL AB (publ) - President & CEO [16]

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No, I wouldn't say that the impact of the pricing -- not in short run, at least.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [17]

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And in accordance with Q3, obviously, you said that you might do adjustments from capacity in 2020 and maybe you came back to this now as well. You said that it will most likely be addressed in the coming months, but now when Q4 is in books, would you say that Q4 was in line with your expectations in terms of market performance? Or was it even worse than you had expected when you reported Q3?

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

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I must say it was -- imports was because of, to a very large extent, the light vehicle production decline in the U.S. It was more than I expected. Overall, for the full year, it was 4%. It was down like, 2%, 3% up to quarter 3, and then it was significantly down in the fourth quarter. And that effect was more than I expected.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [19]

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Okay. So the likelihood of this capacity adjustments needing to be done, I guess, has increased since Q3 then?

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

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Yes. I would say so.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [21]

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Okay. And one more question.

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

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Yes, you have to comment. It depends a little bit on the development going forward. We have to review the situation. As we have been commented to -- but what was, let's say, a kind of unique for their extended Christmas holiday shutdowns and the inventory reductions among customers and what is, let's say, the underlying effect in the market. That's something that we have to review during the first quarter now. We know also that General Motors had launched a strike in the U.S., which also impacted, of course, these numbers.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [23]

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Okay, understood. Just my final question is a bit longer term. Coming back to your margin target of 17%, what do we need to see in the market and what do we need to see internally from HEXPOLAB in order for you to deliver on above 17%? Consensus is currently obviously not believing in that happening in the short term.

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

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No. No. To be honest, we are now in the market decline, and we have commented previous, [we see] some stronger decline in the underlying market due to short-term in-sourcing effects on customers.

So the market has to improve, then we can see, on the other side, that positive effect because then the customers have to outsource more. So that's very crucial to get, let's say, to get into a stronger market, again, to be able to get to higher pricing margin that is -- and meanwhile, we will take care to adjust the capacity accordingly.

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Douglas Lindahl, Kepler Cheuvreux, Research Division - Analyst [25]

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But -- so assuming a recovering market -- a possible growing market, basically, and you're having similar setup that you have now, 17% EBIT margin, it's doable, you would say?

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Mikael Fryklund, HEXPOL AB (publ) - President & CEO [26]

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Yes, I don't -- let's say, in this space, I would like to focus on the actions that we are taking. If you take the right actions now, addressing the capacity that then -- and reducing thereby the cost base, we will get that when the market is, let's say -- improvement, we will get back in a strong shape than before the market declined.

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Operator [27]

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

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Klara Jonsson, SEB, Research Division - Research Analyst [28]

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Yes. So firstly, I want to ask you quickly, you mentioned that ex -- recent I mean, the underlying EBIT margin, your underlying adjusted EBIT margin was flat year-on-year in Q4 after contracting in Q3. So could you explain what drove this sequential improvement?

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Peter Rosén, HEXPOL AB (publ) - CFO & IR Manager [29]

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So what I said was that the margin that we had in Q4 was on the same level as Q3 and is down compared to Q4 last year.

And one of the drivers of us coming down compared to Q4 last year is the acquisition of Preferred. Preferred has a lower operating margin than the HEXPOLAB Legacy business. And the ambition, of course, is to increase that margin. At this point, we haven't come that far in doing that, it's something that we're working on. But -- so it's just for comparable purposes. When the margin goes down compared to last year, one of the big drivers is Preferred.

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Klara Jonsson, SEB, Research Division - Research Analyst [30]

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All right. So could you -- regarding the synergies, could you provide any indication of how much within numbers so far you've had Preferred with you for 2 quarters now?

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Peter Rosén, HEXPOL AB (publ) - CFO & IR Manager [31]

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Sorry. I was a little bit uncertain on the question.

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Klara Jonsson, SEB, Research Division - Research Analyst [32]

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Yes. So I'm guessing that you've seen some synergies from the Preferred Compounding acquisition already, as it's been with you for 2 quarters. Could you provide any quantification of how much that is?

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Peter Rosén, HEXPOL AB (publ) - CFO & IR Manager [33]

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No, sorry. We don't go into that much detail when it comes to specific parts of the business.

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Klara Jonsson, SEB, Research Division - Research Analyst [34]

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All right. Okay.

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

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(inaudible) again, if you can, let's say, we don't quantify the numbers, but if you take, let's say, what the -- when we announced the restructuring and integration, let's say, important part was to close down these 2 production units that we've done -- was done by the end of the quarter. And then the head office and then the adjustment of overhead organization.

This has been completed, so to speak. And then we are reviewing the overall footprint connected to (inaudible) to let's say -- and of course, a part of the restructuring. But we can't quantify in numbers right now. We have a -- what we have, let's say, highlights this -- that the cost synergies of approximately USD 5 million for the 2020 level. This is something we see [comfort].

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Klara Jonsson, SEB, Research Division - Research Analyst [36]

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Okay. So none of the -- those $5 million are in the numbers already? Or...

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

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Yes, we saw -- let's say, we took some adjustments of the overhead organization all that being was done (inaudible) impacts during the third quarter and we saw also impacts, some of it in the fourth quarter.

And then when it comes to the shutdown of the site, I can't really see an effect of it during the quarter because the closing was down during the quarter. And the USD 5 million, that is for 2020.

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Klara Jonsson, SEB, Research Division - Research Analyst [38]

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Okay. So (inaudible) value for next year then. Okay. So my next question is about Engineering's profitability. You mentioned that it was negatively impacted by deliberate problems from a raw material supplier, if I'm not mistaken. Could you explain what happened? And how big the impact was, and maybe also if it's the -- if its -- looks to be stronger. (inaudible)

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Mikael Fryklund, HEXPOL AB (publ) - President & CEO [39]

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You asked to what extent the...

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Klara Jonsson, SEB, Research Division - Research Analyst [40]

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Yes, you mentioned that you had delivery problems. Could you explain if that impacted your profitability and how much?

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Mikael Fryklund, HEXPOL AB (publ) - President & CEO [41]

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Yes. It impacted the profitability. We estimate that (inaudible) was, let's say -- that's the big difference compared to the previous year, definitely.

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Klara Jonsson, SEB, Research Division - Research Analyst [42]

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All right. Okay. Do you have -- is there any solution in sight for those problems or will they continue to harm profitability into 2020?

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Mikael Fryklund, HEXPOL AB (publ) - President & CEO [43]

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We will continue to, let's say, to work on this matter. We have been working on this, basically throughout 2019, and it will continue actually (inaudible).

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Klara Jonsson, SEB, Research Division - Research Analyst [44]

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Okay. And then my last question, if I may. Raw material prices, especially oil and natural rubber, has come down. To what extent do the lower prices help your margin in Q4? Could you provide an indication?

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Mikael Fryklund, HEXPOL AB (publ) - President & CEO [45]

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Yes, I would say that we don't comment that much on how (inaudible) our pricing. We always take care to compensate in a fair way, when it goes -- moves up and down (inaudible) so to peak. And the -- we commented that we saw that the raw materials has gone down a slightly and that had some impact on our coal prices, of course.

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Operator [46]

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Our next question comes from the line of Johan Dahl of Danske Bank.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [47]

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Yes. Just the (inaudible) question again. Was the impact worse or less, would you argue, is the deflation effect from raw materials prices in Q4 compared to Q3?

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

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It was -- between quarter 3 and 4 the (inaudible) very small, actually. So that is minimally, I guess, it seems, the 2 quarters.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [49]

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All right. A question on just your volumes to automotive in the U.S. You talked about 4% light vehicle production down U.S. in the last 12 months. There seems to be a fairly big gap compared to your organic volumes towards automotive. Can you just elaborate how you look on that? To what extent is that, sort of the competitive problems, i.e., market share related or what is sort of market related?

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

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Yes, it's a very good question. And we commented on this in the report. When the market is in a decline, and in the fourth quarter, it was, I would say, a steep decline. The light vehicle production was down 9% in the U.S. When we see what I call tactical in-sourcing, that's a short-term in-sourcing. In general, it is more on [mixing] to cost.

But anyhow, the market is declining. We have a somewhat steeper decline than the underlying market. Since customers tend to keep up the volume in their own mixing and then not it is increasing. We have a somewhat stronger growth, the customers then have to outsource more than the underlying market. So what I say that if the customers keep up their own capacity utilization, let's say that they have in-house mixing and they keep up their own capacity utilization, then our decline will be 9% plus the customers decline in their own mixing. So there's going to might be, let's say, it was to take the customers decline, so to speak. So -- and I definitely can say that there is no, let's say, share loss more than that we have lost share for customers, so to speak.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [51]

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Okay. What's your visibility on exactly this point? The customer in-sourcing looking in the next year, is that something that you just find out once it's happened or this is something where you are having an insight into?

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

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This is something that it's hard to have an overview. Of course, we had some, let's say, information on the customers capacity, no doubt. And -- but how much they in-source that's depending on how the market will develop.

If there is, let's say, a decline in the market -- solid decline in the market, then there will be customers. Typically, on more basic process as we commented, that we in-sourced to keep up their capacity utilization. If the market will stabilized, then we don't have -- and this effect or if the market will improve, then we don't see that we can -- on the contrary, we see a positive effect. So it's very much depending on what is happening in the underlying market.

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Johan Dahl, Danske Bank Markets Equity Research - Analyst [53]

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Okay. Just a final question. There seems to have been a slightly strong, some favorable mix in the quarter, I think, Peter, you alluded to that as well. Can you just clarify exactly what that was? Was it lower tire volumes or what was going on?

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

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Yes. Let's say -- Peter, you

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Peter Rosén, HEXPOL AB (publ) - CFO & IR Manager [55]

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Yes. I think if you're referring to that we mentioned that despite organic volumes coming down that we could keep the margins up. Yes, if we look at the volumes that we have actually sold, that yes, in that sense, there is a little bit positive effect.

For example, we mentioned that Tire &Toll volume came down substantially compared to same period last year. This is volume that where we produce on behalf of somebody else. And these are large volumes as the margin is quite low. And those volumes dropped substantially. So the volume drop is more than we actually see on the margin.

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Mikael Fryklund, HEXPOL AB (publ) - President & CEO [56]

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So basically, we see more effect on basic compound because that's what the customers easily can in-source, so to speak.

You see less on more advanced compounds, and typically the Tire & Toll, which is the (inaudible) that's something that we don't see as the core business, so to speak. And then we also saw big substantial decline, as Peter mentioned. And of course, that gave, let's say, a positive mix impact then.

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Operator [57]

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(Operator Instructions)And our next question comes from the line of Karl Bokvist of ABG Sundal Collier.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [58]

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Yes, and welcome, Peter. So just first of all, perhaps a bit of a follow-up here, but could you shed some light on the pricing situation in the market, in general? Has it -- is it more or less the same, either year-over-year or sequentially or however you would like to look at it.

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Mikael Fryklund, HEXPOL AB (publ) - President & CEO [59]

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I would say that the pricing situation has been, I must say, very stable in '17 and '18, it was a quite big price increases, raw material price increases and a lot of, let's say, focus on compensation for the raw material price increases. In '19, the situation has been very stable, actually.

It's a slight decline we see on the raw materials. And -- but you have very stable compared with '17 and '18. So yes, so that's the situation.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [60]

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All right. And then most operating and market comments have -- questions have already been answered. So then I turn to some technicals here. Just first of all, if we look at both net financial expenses and taxes, they deviate quite a bit compared to what we have seen in the past quarters. I was just wondering if you could perhaps explain the differences here.

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Peter Rosén, HEXPOL AB (publ) - CFO & IR Manager [61]

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Absolutely. In the fourth quarter, we have a low tax cost. It's driven by 2 things. One is the mix of our sites and countries. So we have a little bit more favorable, let's say, call it, tax mix. So some of the countries we had lower taxes, we have relatively bigger volumes. That's one driver. That one is simply that we have been -- a little bit over occurred on the tax cost in the previous 3 quarters, and that comes up positively in the P&L in the last quarter.

So when it comes to tax rate, going forward, I think one should take a look at the full year tax rate, which should be a reasonable level for the group.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [62]

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All right. And the net financial expenses?

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Peter Rosén, HEXPOL AB (publ) - CFO & IR Manager [63]

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There are some movements. It differs a little bit depending on the funding cost at that point. But from an overall point of view, they're quite small movements.

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Karl Bokvist, ABG Sundal Collier Holding ASA, Research Division - Analyst [64]

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Yes, understood. And then just a final one. I was just wondering if you could kind of shed -- give some insight because I couldn't find it in report when it comes to the leasing liability amortization that you have in your financial cash flow. Now we're talking maintenance questions here, but it will still be quite helpful.

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Peter Rosén, HEXPOL AB (publ) - CFO & IR Manager [65]

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Yes. We have a leasing liability of SEK 441 million included in the reporting. And of course, depending on which number you look at, that's also included in our net debt position. I can also, offline, give you a little bit more details where to find those numbers.

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Operator [66]

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And we have no further questions on the line. Please go ahead, speakers.

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Mikael Fryklund, HEXPOL AB (publ) - President & CEO [67]

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Yes. Thank you, and I think that we can thereby close the call. So thanks a lot.

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Peter Rosén, HEXPOL AB (publ) - CFO & IR Manager [68]

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Thank you very much.