Hexatronic Group AB (publ)

Welcome to this presentation of our Q1 2024 report. You will be listening to Pernilla Lindén, our CFO, and also Martin Auerberg, our Deputy CEO, and myself, Henrik Larsson-Lyon, that is the CEO of the group. So, the agenda. We will first look at Hexatronic at a glance. We will look at some Q1 highlights, a financial overview, business overview and then in the end the summary and market outlook followed by a q a so at the glance so when we look at the markets we are operating in it's it's a strong need for fiber optic networks we see that a low number of homes are connected with fiber optic networks and that's across all the strategic growth markets we operate in We see also that 5G deployment drives the need for fiber optic networks, like the backbone, but also connecting small cells. We see that the increasing use of data-intensive technologies creates a growing need for fiber connectivity for enterprises and data centers, and that's a strong driver. Now we will come back on that. We also see a shift from copper to fiber in harsh environments, such as oil and gas, sensing, defense, oceanographic and subsea applications. And on top of this, there are quite some significant government initiatives to support fiber deployment in especially rural areas and especially in the US, UK and Germany, but most countries have this. This picture shows the fiber penetration in a number of markets and we have highlighted the strategic growth markets we have. These figures are updated. We got new figures in March and for Europe it's figures that are from the study performed in September last year and for the US study that was made in the end of 2023. And we see some movements. So for instance, Germany has moved up to 10%. I believe it was around 7% a year ago. UK has increased to 17%. US, 24%. But as you can see and compare to, for instance, a very mature market like the Swedish market when it comes to fiber to them, which is around 70% penetration, there is a long way to go in many markets. And as I mentioned on the first slide, there are some big government initiatives in order to provide fiber to rural areas. And the biggest ones here are in the US, where we have the BEAD program. And there are actually several other programs that also support fiber rollout. But the BEAD program is around 42 billion US dollars. We can say that we haven't had a lot of movement of that lately. When we reported in Q4, we had Louisiana that was fully approved and had got their funding. As of yesterday, there are three more states that have got the full approval and their funding to start to put out areas for bid. But we see a slight delay in these projects. In the UK, Project Gigabit, that's ongoing and constantly new areas that are put out for bid. And we also see that in Germany in their gigabit strategy that they have started to come out for bid in the market. So these government initiatives are on the move. If we then look at Hexatronic as a total, a summary. We have revenues of 7.8 billion SEK and that's a rolling 12 basis. We have an EBITDA also on rolling 12 month basis of 1 billion SEK. If we look at the average growth over the last five years, it's 36% per year when it comes to the revenues and 55% when it comes to EBITDA. On rolling 12 months, we have an EBITDA margin of 13.3% and we are roughly 2000 employees. This starts to be more important when we look at our business. We have three focus areas. So the biggest one is fiber solutions, and that's where it all started for us. In the quarter, it represented 71% of our total revenue. And that's where you have fiber to the home, transport networks, submarine cables and so on. So it's quite a wide area and representing 71% of our revenues. Growing in terms of importance is harsh environment and data center. So if I start with harsh environment, it represented 15% in the last quarter, our total revenues and data centers, 14% of our total revenue. And I will come back with some more information about that later in the presentation. If we then move into Q1 highlights, So we continue to see a strong operating cash flow and also a good contribution from the new focus areas, data center and harsh environment. Net sales decreased 16% year on year and quarter over quarter 4%. We had a negative organic growth of 27%, and you might remember that in Q4, we had 23% negative organic growth, so roughly the same level. And this is due to the softer market conditions we see in fiber solutions. We should also say that Q1, but also Q2 last year, they were two record quarters for us. And in Q1 last year, we grew 52%, so really strong quarters that we provides a tough comparison. When we look at harsh environment and data center, they grew by 397% and 40%. And we can say in harsh environment, it's mainly by acquisition. And in data center, it's mainly organic growth, so strong growth there. EBITDA amounted to 168 million SEK, and that corresponds to a margin of 9.4%, which is pretty much in line with last quarter. We had an earnings per share of 0.31 SEC compared to 1.09 in the corresponding quarter last year. Cash flow from operating activities was 270 million SEC compared to 28 in the last corresponding quarter. And we had a cash conversion of 234%, so really strong. And it was primarily driven by continued optimization of our inventory levels. The interest bearing net debt excluding IFRS 16 is in line with the previous quarter and it amounted to 2.1 billion SEK. And we have a leverage ratio that increased from 1.4 to 1.7 this quarter compared to year end. And that was primarily due to lower profitability in Q1 this year compared to Q1 last year. If we look at the leverage, including IFRS 16, it increased from 1.7 to 2. And our order book corresponds to a little bit more than two months. It's unchanged more or less since year end. And I would say we are back to the levels that we have been talking about that we had before the pandemic, the war in Ukraine. Significant events then. So what we have announced is that we merge two of our Swedish subsidiaries. So it's Hexatronic Cable and Interconnect Systems and Hexatronic Fiber Optic. So that will be Hexatronic Sweden. And that's for more efficiency. The nomination committee have proposed Magnus Nikola as an election for chairman of the board. And that will be at the AGM 7th of May in Gothenburg. And you're all very welcome. The board of directors proposed to the AGM that no payment of dividend will be made for the financial year 2023. And we also announced yesterday that we will extend the executive management. So Jakob Skog, who is head of our focus area, Harsh Environment, will join the executive management as of April this year. And in June, we will welcome Pernilla Grenfell as head of investor relations, and she will also join the executive management team. Looking at the last five years, and I mentioned this in the beginning, we have had a strong growth of revenues, 36% in average per year. And we have had a strong EBITDA development in the average 55% over the last three years. And earnings per share even stronger with 64% on average. And just to remind, we have two financial targets that we communicate. One is we want to have a total growth of revenue of at least 20% per year, and an EBITDA margin between 15% to 17%. And both these targets, we say, are over a business cycle. And I would say currently, we are for fiber solutions down in the business cycle. Moving into financial highlights, I will hand over to our CFO, Pernilla Lindén.

Thank you, Henrik. So, we had a total net sales of close to 1.8 billion SEK in Q1, with an overall decline of 16% or a decline of 333 million SEK, compared to a very strong first quarter last year. Quarter over quarter, we had a decline of 4%. We had an organic decline of 27%, primarily attributed to fiber solutions in Germany, US and UK. Markets that are mainly negatively affected by higher financing cost and higher cost of inflation. The organic decline was partly offset by acquisition driven growth of 11% from Rochester Cable and Fibron Cable in the harsh environment area. us net in the data center area and atg that was acquired in 2023 and as as hendrik said our focus area harsh environment grew with 397 percent and data center with 40 percent overall we had a very limited exchange rate effect in the quarter Looking at a gross margin, we had a gross margin of 40.5%, which is in line with Q4 gross margin, but 4.2 percentage points lower than a record high quarter last year. That is mainly due to lower manufacturing utilization, some price pressure in some markets and mix effect. And the mix effect is related to Fibon cable and Rochester cable within harsh environment with lower than group gross margin, but with an EBITDA that contributes positively to a group margin. If we're looking at our operating expenses, we are in line with last quarter and 56 million SEK lower than last year, even if we have invested in new acquisitions during 2023. For Q1 2024, we had an operating expense of 27.5% of sales compared to 27.6% in previous quarter. We have previously communicated that we have initiated a cost saving program. And that program is mainly related to a reduction of production staff, but also white collar workers in fiber solutions in several of our geographical markets. The program generates an annual cost saving of approximately 90 million. The program has been gradually implemented and finalized by the end of 2024. Overall, we had an EBITDA of 168 million or 9.4%. A 54% decline compared to last year, but in line with Q4 EBITDA margin. We had a strong operating cash flow in the quarter. Cash flow from operating activities before changes of working capital of 160 million SEK. A positive effect of working capital of 155 million SEK. During the quarter, we have continued to work on optimizing our inventory, which resulted in a reduction of 88 million SEK. Due to holidays in connection with the quarter closing, accounts receivable and accounts payable have been slightly affected by deferred payments, which has been carried out the first week of April. But overall, a positive effect of 67 million in the quarter. Total cash flow from operating activities amounted to 270 million SEK corresponding to a cash conversion of 234% in the quarter compared to 8% cash conversion last year. CAPEX investment in the quarter of 68 million SEK or 3.8% of sales and 460 million SEK rolling 12 which corresponds to 5.9% of sales. The investments in the quarter is mainly driven by capacity investment in the US. After two investment heavy years in 2022 and 2023, and after completing the investment program in the duct factory in Ogden, Utah, that will be finalized in the third quarter in 2024, We believe that we will be able to grow for several years without extensive investments in the fiber solutions area. As communicated last quarter, our estimate is that investments in 2024 and onwards will amount to approximately 3 to 4% of sales, of which approximately 1 to 2% are expected to be maintenance investments. 92 million is related to acquisitions, 80 million payment of additional purchase price related to the acquisition of Fibon Cable and USNet. In addition, a minor add-on acquisition that was made during the quarter in form of M-Connect and also minor investment in a joint venture company. And during the quarter, we have amortized our RCF of an amount of 124 million SEK and amortized our lease liability of 31 million SEK. Interest bearing net debt, which corresponds to net debt excluding lease liabilities, amounted to 2.1 billion SEK at the end of the quarter, which is more or less in line with last quarter. Interest bearing net debt in relation to pro forma EBITDA on a rolling 12-month basis, a key ratio that reflects our existing bank covenant, has increased from 1.4 to 1.7 during the quarter. And the increase is mainly due to lower profitability in the first quarter compared to Q1 in 2023. Including IFRS 16, it corresponds to an increase from 1.7 to 2 in the quarter. At the end of Q4, we had 795 million of cash and an unutilized backup facility of 998 million SEK, which gives a liquidity of approximately 1.8.

Thank you, Pernilla. So we continue with the business overview and we start by looking at the performance in each focus area we have. And that's fiber solutions, harsh environment and data center. And just to say our ambition is to over the year provide more information, especially around harsh environment and data center. So if we start by fiber solutions and we put the head and continue to navigate through a softer market, you see that revenues went down from roughly 1.9 billion to 1.3 roughly versus last year. And when we look at the business development there, the decrease in sales, it's primarily driven by higher financing costs for our customers. cost inflation, and also to some extent, high inventory levels in some geographical markets. I've mentioned that before, that for us, we have seen that to a lesser extent, but several of our larger competitors have had a big effect of this. And I can say, we see that these inventory levels out in the market, they start to normalize, I would say. And also, as I mentioned initially, the comparison versus Q1 last year is a tough one because it was a record quarter for us. When we look at the market development, and it's very much due, in our opinion, due to higher cost of capital, inflation and high inventory levels, that has led to a softer market for fiber solution across most of the geographies we are operating in. We see that these governmental subsidies that I talked about, but it's not only those three markets, it's in most markets we operate, they will have an increased impact on the market going forward. And in combination with the normalized inventory level, we expect to see a gradual recovery of the market in the later part of 2024. I should mention also that If you look at these different markets, the governmental subsidies are good because it focuses on areas that most probably wouldn't have been built because the business case is not possible to get together for an operator. But it's still the small part. The biggest investment in fiber solutions is by the existing operators in the different markets. And I would say private equity financing, a lot of new entrants to the fiber network markets. If we look at harsh environments, we are capitalizing on trends within defense and energy. And you see the growth that we have been seeing a couple of times from 52 million in Q1 last year up to 259 million in Q1 this year. And it is driven primarily by the acquisition of Rochester Cable and Fibron Cable. And they are both active in dynamic subsea hybrid cables. And it's primarily applications in energy and defense. When we look at the markets and forward, there is a strong demand, both in defense and energy markets. And we expect that trend to continue over several years going forward. We see also an expansion of existing sea-based infrastructure, and it's a great interest in renewable offshore energy production. So that's good for our business in harsh environment. When we look at data center, it's an organic growth, primarily driven by hyperscale build out. And you see that revenues increased from 182 million to 256. And it's primarily an organic growth. A part of it is due to the acquisition of the US net in the US. We see a strong growth in the product and service business in both our main geographies, which are the US and Europe. The main market driver here I would say is the acceleration of the implementation of AI and that requires significant data center capacity and I would say it's a shortage today and we expect this also to remain over several years going forward. If we then move into geographies and here I comment on our total business in each geography and we start by Europe excluding Sweden where we saw a sales decline, but partly mitigated by the growth of harsh environment and data center. So it represents 46% of our total business. We saw the sales decline compared to last year, previous quarter last year, primarily due to software development within fiber solution. And the decline is primarily due to Germany and UK. And we had, as I said before, a very strong Q1 last year. We see a softer market in all markets, but as Germany and UK is the largest market for us, that's where it affects us the most. We continue to see a solid performance within harsh environment, and that's primarily then fiber on cable. When we look at the markets, we see that the higher cost of capital and inflation high inventory levels that has led to continued soft markets for fiber solution in germany and uk but i also mentioned in most markets and you will see this explanation for all geographical areas and both for harsh environment and data center the the market continues to show strong demand And as I mentioned before, it's primarily due to defense and energy market, but also AI development. If we then move to North America, we continue to position the company for long-term growth. North America represents 37% of our total revenue. And when we look at the business, we had a decline of 8%. And that's mainly due to decreased sales of ducts, and that's for blue diamond industries. And then we partly mitigated that by the acquisition growth of harsh environment and also US net, as I mentioned before. Our FTTH system sales in the US and Canada were slightly behind Q1 last year, and that was primarily due to some delays in a couple of projects. We continue the investment in the new factory for Blue Diamond Industries in Ogden, Utah. And that will expand addressable markets for ducts to include Western US, which we have not been able to deliver to before. And it's a big market. And as we have said before, we expect that market to be ready for production in Q3 this year. Market development. same as i talked about in europe the higher cost of capital inflation and high inventory levels that has led also to a softer u.s market primarily within duck but also fiber to the home we expect to see small effects of the bead program in the later part of the year only louisiana fully approved i mentioned earlier that we yesterday three more states have been approved fully approved and that means they get their funding and can put projects out to bid and we see that the rest of the states in the us they have lined up and are waiting for the final approval so we expect to see more states coming online here later If we move then to Sweden that's nine percent of our total revenue and there we had a sales decrease by eight percent and that's primarily driven by softer fiber to the home market and for the market development it's the same explanation as I said before with the cost of capital inflation that has led to a softer market. And the last geographical area is APEC, so Asia Pacific, and there we saw a decline of revenues of 25%, but it's primarily explained by a delivery of the submarine cable that we had in Q1 last year to South Korea, and to a lesser effect, a slower FTTH market in Australia and New Zealand. And I will repeat myself, but on the market development for the fiber to the home market, it's the same explanation with the higher cost of capital and inflation. Then if we move to the final part of the presentation, we have a summary and market outlook. So as a summary, we had a strong cash flow. primarily driven by a reduced working capital. We continued our diversification through harsh environment and data center, and that to some extent mitigated the current conditions in the fiber solutions area. And net sales primarily impacted by continued challenging conditions within fiber solutions, and also the comparison to a very strong Q1 last year. Profitability was in line with previous quarter with an EBITDA margin of 9.4%, 9.1% in last quarter. And we continue to maintain a strong financial position with a leverage ratio of 1.7. Then market outlook. We expect a strong market within harsh environment and data center for 2024 and for several years. And that's fueled by investments in defense, energy and AI primarily. And in fiber solutions, we expect the market to remain weak in the coming quarters and then a gradual increase in the demand in the later part of this year. And the main reasons why we see this is normalizing of inventory levels. We see the BEAD program to have some effect this year. And that's the main reasons why we see gradual recovery of the market. I can say there is still so much to do in the fiber to the home space in many markets. Good. Then we move into Q&A. We have a number of people who have already listed for questions. We would like that each person raising questions try to limit themselves to around three questions so we have time to go through the list. So I leave over to the Q&A session.