Hexatronic Group AB (publ)

Thank you very much. This is Henrik Larsson-Lyon, CEO, Hexatronic Group. And you will be listening to myself, our CFO, Pernilla Lindén, and Martin Auerberg, our Deputy CEO. So let's start. This is the agenda for today. So we will have quickly Hexatronic at a glance. We will look into the Q3 highlights. a financial overview, a business overview, and then a summary and market outlook. And then after that, we have a Q&A session. So first, Hexatronic at a glance. If we look at the markets we operate in, they are in fiber optic infrastructure. And what we see as the big market drivers, there is a low number of homes still connected with fiber optic networks. And that's primarily in our big strategic growth markets. We also see that 5G deployment drives the need for fiber optic networks. And to that increasing use of data intensive technologies creates a growing need for fiber connectivity among enterprises and data centers. And we also see a shift from copper to fiber in harsh environment application. And that could be like for us in oil and gas and sensing and defense application and very much subsea applications. And to that, we see in many countries, most Western countries, I would say, there are significant government initiatives to support the fiber expansion. For instance, in the US, UK and Germany, and then it's very much in rural areas. So there you have the big market drivers. Then looking into sustainability, it's clear that it's very much on the agenda more and more, and it's also high on our agenda. And we have focused our sustainability work in three areas. We call them planet, ethics and people. And we have highlighted three of our priority targets in our 2030 roadmap, and that's climate neutral, operations own operations 100 equal pay and also 40 at least gender equality among all employees but of course there are a lot of different targets and the upcoming csrd is is really a big framework that is being implemented currently Then if we look into specifically fiber to the home, which is a quite big part of our business, this hasn't changed from the last presentation. We get an updated slide early next year. So these figures are from September 2023. But I would say they tend not to move dramatically in only one year. But we see that our strategic growth market, Germany, UK and US, we have highlighted them here, still have a very low penetration when it comes to fiber connected to homes. And you see in the bottom some countries that have come much further, like Sweden and Korea. so still a lot to do and i mentioned before there are significant government initiative to support rural deployment where an operator has difficulties to get the business case together the biggest one being the bead program in the us being 42.5 billion us dollars and we'll talk a little bit more about that later There is one in the UK, Project Gigabit, which is a 5 billion pound project. And in Germany, also a subsidy program of 3 billion euros per year. All focused on rural deployment of fiber. If we look in total of Hexatronic, we are enrolling 12 months. We have revenues of 7.6 billion SEK and EBITDA profit of 0.8 billion. Over the last five years, we have had the yearly growth of 33% in average of the sales and 43% yearly when it comes to EBITDA. And the EBITDA margin on rolling 12 months is 10.4. And we are roughly 2000 employees. Looking at our different focus areas, so fiber solution continued to remain as the biggest one, 74% of revenues in Q3. And that's where we have all the fiber to the home, we have the submarine cables, we have the duct business in the US and so on, quite a wide portfolio. Then if we look at the harsh environment, that's 14% of total revenues and for data center, 12% of revenues and this is for Q3 this year. Then if we move into Q3 and the highlights. So we saw a sequentially improved profitability and a solid cash flow. Net sales grew 2% to 1.951 million SEC in Q3. And compared to last year, this is driven by higher sales in fiber solutions in North America and also our new focus areas, harsh environment and data center. We continue to see quite a weak demand for fiber solutions in Europe and also then a price pressure in most markets, I should say, in fiber solutions. Compared to the previous quarter, sales decreased 4% sequentially then. Harsh environment and data center grew 47 and 8% respectively. And that's compared to Q3 last year. And this is primarily driven by acquisitions. EBITDA amounted to 230 million down from 296 last year. And the EBITDA margin improved to 11.8% sequentially, where we had 11% in Q2. Compared to Q3 last year, where we had an EBITDA level of 15.4%, it's mainly higher rates and cost and depreciation that explains the difference. Cash flow from operating activities of 144 million, and that corresponds to a cash conversion of 70%. The interest bearing net debt excluding IFRS 16 reduced by 70 million compared to the previous quarter and amounted to 1.9 million. 1.19 billion SEK. And our leverage ratio that increased from 1.9 to 2 during this quarter, and that's due to the lower EBITDA level in Q3 this year compared to Q3 last year. And we have an order book corresponding to roughly 2.5 months of sales. And we expect that we see that as a normalized level in our business. So it's a quite short order book. And I should point out that all what we have in the order book will not be delivered in the next 2.5 months. We have orders to be delivered next year in the order book also. Then events during and after the quarter. And the first one is about myself. So I have announced on September 17th that I decided to step down after more than 10 years as the CEO of Hexatronic. Never had that much fun in my working life as I've had during this time at Hexatronic. And the board has initiated a recruitment process for a new CEO. And I will remain in my role until a successor is appointed. Then on October 1st, we completed the acquisition of parts of the Icelandic company Endor. And this is in data center. This acquisition will further broaden our offering in the data center market. And we also add new expertise or competencies. And it strengthens our customer base and presence in Iceland, Sweden and Germany. And then on October 15, we started up our new duct and pipe factory in Ogden, Utah. They will manufacture HDP pipes, and that's both for telecom and power cables, telecom companies and energy utilities. And it will serve the western part of the US, which we have not been able to serve before. So it's opened up a new market. And it's our fourth duct factory in the US. And the production will start in a small scale and is planned to ramp up in line with the increased demand. Looking five years back and i mentioned this in the introduction but net sales development we have this yearly growth over the last five years of 33 percent and the ebitda development of 43 percent over the last three uh five years and earnings per share share the 48 percent in yearly increase Then we are moving into the financial overview and I will hand over to our CFO, Pernilla Lindén.

Thank you so much, Henrik. So if we look at, we had a total net sales of almost 2 billion SEK in Q2 or 1,951 million SEK with an overall growth of 2% or a growth of 35 million SEK compared to last year. Quarter over quarter, we had a decline of 4%, but in constant currency on par with Q2. We had an organic decline of 2%, but an acquisition driven growth of 6%. Sales growth is primarily driven by higher sales in our FDTH business in the US, Austria and Finland, but also within our focus areas, data center and harsh environment. We continue to see a weak demand for fiber solutions in Europe, mainly in UK and Germany. And that combined with prevailing price pressure had a negative effect on sales during the quarter. The acquisition driven growth comes mainly from Fibron cable in the harsh environment area and US net and DCS in the data center area. We had a 3% negative effect on exchange rates this quarter, and that is mainly attributed to the weaker US dollar. Our focus areas, harsh environment grew in total with 47%, data center with 8%, while fiber solution had a decline of 5%. Looking at our gross margin, we had a gross margin of 43.1%, 0.8 percentage points above Q3 last year. The positive effect is related to the improved margin in the harsh environment, mainly due to Rochester cable temporarily had a lower production efficiency in Q3 last year. And the country mix within fiber solutions with strong sales in the FTTH business in the US. If we're looking at our operating expenses, our operating expenses in percent of sales is 27.8%. In percent of sales, it is in line with Q2 in both absolute in percent of sales, but increased in absolute term compared to last year. And that is mainly due to acquisitions we have done and increased freight costs. Looking at our depreciation, that has increased compared to last year due to the capacity investments that we have done over the last years. In percent of sales, it has increased to 3.8% of sales. It's an increase of 0.8 percentage point compared to last year. Overall EBITDA of 230 million SEK or 11.8% compared to Q3 last year of 15.4%. But EBITDA margin is up from 11% in Q2 24 to 11.8% now in Q3. We had another quarter of solid operational cash flow. Cash flow from operating activities before changes in working capital of 206 million SEK. We had a negative effect on working capital of 62 million SEK. During the quarter we have increased our inventory mainly mainly due to increased raw material due to the startup of a new manufacturing plant in Utah. We had a small reduction of accounts payable and that was partly offset by reduced accounts receivable. Total cash flow from operating activities amounted to 144 million SEK corresponding to a cash conversion of 70% in the quarter. Total Capex investments in Q3 of 77 million SEK or 3.9% of sales. And in rolling 12, it was 308 million, which corresponds to 4% of sales. The investments in the quarter are mainly driven by the capacity investment in the US and investments in the new manufacturing facility in Utah for duct manufacturing. And after two investment-heavy years in 2022 and 2023, and after completing the investment program with the Duct factory in Utah, we believe that we will be able to grow for several years without extensive investments in fiber solutions. As earlier communicated, our estimate is that investments onwards will amount to approximately 3-4% of sales yearly, of which approximately 1 to 2% are expected to be maintenance investments. Group financing activities amounted to 25 million SIG, mainly explained by amortization of lease liabilities of 33 million and sales of shares linked to incentive program of 12 million in the quarter. Overall, we continue to have a solid cash conversion. As Henrik said before, interest bearing net debt, which corresponds to net debt excluding lease liabilities amounted to 1.9 billion SEK at the end of the quarter, which is a reduction with 74 million SEK compared to last quarter. Interest-bearing net debt in relation to pro forma EBITDA on a rolling 12 basis, a key ratio that reflects our existing bank covenant, has increased from 1.9 to 2 during the quarter. The reduction of interest-bearing net debt could not cover for the lower profitability in the third quarter compared to Q3 in 2023. Including IFRS 16, it corresponds to an increase from 2.2 to 2.3 in the quarter. At the end of Q3, we had 676 million SEK of cash and an unutilized backup facility of almost 1.2 billion SEK, which gives a liquidity of approximately 1.9 billion SEK. we have a continued solid financial position.

Thank you very much, Pernilla. move on to the business overview and starting looking at the performance by focus area so if we start by fiber solutions we saw a slightly better market in the us but still weak markets in the uf in europe You see the quarter-over-quarter and year-to-date figures, so we're quarter-over-quarter down 5% in fiber solutions and year-to-date 21%. Looking at the business in fiber solutions, the sales decline is primarily due to continued weak demand in Europe and also to that price pressure that we see in most markets. We saw a slightly increased demand in the US and that's mainly in the fiber to the home business. And as I mentioned before, we start up the Ogden Utah plant, the production here in October, and that is growing our footprint in the western part of the US, which we have not been able to serve before. If we look at the market in fiber solutions, it's still the high cost of capital inflation and to some extent inventory buildups during the pandemic that have led to a weak market for fiber solution and that we see in most markets, I would say. We also see that the market is coming back to the seasonality effects, meaning in the Nordic hemisphere, there is a lower demand in Q4 and Q1 due to winter. But we also expect that interest rates decreasing that will improve the market conditions gradually. We also see that governmental subsidies, they will have a positive effect on the market over several years going forward. Looking into harsh environment, it's really the trends within defense and energy that is driving this business. And we had a quarterly growth of 47% and year-to-date 113%. This growth is primarily driven by the acquisitions of Rochester Cable and Fibron Cable that we did last year. and they are active in what we call dynamic hybrid cables and that's subsea application and it's mainly for energy and defense markets. We see a strong demand in defense and energy markets, and we expect that demand to remain strong for a long time to come. It's highly specialized products. This business is within long customer relations and very experienced teams. And as we said before, stable and growing market long term. And we also see that the expansion of existing sea based infrastructures, and that's a great interest for renewable offshore energy production. Moving to data center, the growth is primarily driven by hyperscalers, build out and M&A. Looking at the figures for Q quarter over quarter, it's plus 8% and year to date plus 26. And this growth is attributed to both organic but also the acquisition of US net last year. In the quarter, one of our most important European customers and the hyperscaler approved us also as a supplier for the US market, which is very positive. And we completed the acquisition of parts of Endor in Iceland on October the 1st. And here the market driver is very much related to AI. And that requires a lot of data center capacity and drives the expansion of data centers globally. Could also add that it also requests infrastructure, fiber optic backbone infrastructure investments. Then if we move into different geographies, and this is the total business, then Europe, excluding Sweden, that represents 45% of our total revenue. And here says the client partly mitigated by expansion in new focus areas. So we saw a slight decline of sales compared to the corresponding period last year. And that's primarily due to the softer market development in fiber solutions. And it was primarily in Germany and the UK. We continue to see a solid performance in harsh environment and that's fiber on cables primarily. Data centers was slightly behind last year and that's also a little bit timing of different project deliveries. When we look at the market development, this higher cost of capital and inflation that has led to an effect, the market still soft market for fiber solutions. And again, primarily in Germany and UK for us. But I would say overall, we see this in most markets. We see both new focus areas and that's fiber, that's harsh environment and data center. They continue to show strong demand and that's very much related to defense and energy markets and then implementing AI that drives that. Looking at North America, North America represents 38% of our total revenue. We saw a slight increase in demand in Q3 in fiber solutions. We are positioned for long-term growth in North America. So sales grew 13%, and that's driven by higher organic sales in FTTH system in the US, and also to some extent the acquisition of USNet for the data center activity in the US. Our duct sales in BDI was slightly lower than last year, and that's primarily due to pricing. The new Ogden Utah factory, we opened that in October, as we mentioned, and that will expand our footprint in the western part of the US. We see the final CapEx investments there in Q4. And we will start up production small scale. We will have some startups cost in Q4 and Q1. The market development for markets in duct and FTTH system are still cautious, although we have seen signs of improved market conditions for especially fiber to the home build up in the US. And the BID program is progressing and it's expected to reach the market now mid 2025, mid next year. And as of today, 55 of 56 states or regions are fully approved. And when we released our Q2 report in July, it was 17 states regions that have been improved. So big progress there, but a little bit delayed compared to what we expected when this will reach the market compared to what we said in Q2. Sweden representing 9% of our total business. We saw a quite stable FTTH market. Sales decreased by 11% compared to Q3 last year. But last year we had a rather big submarine cable project that we delivered. So if we exclude that, it's quite stable business there. And we also see the market developments, that relatively stable market. Then Asia Pacific representing also 9% of total revenues, quite stable performance. We saw a little bit softer market in Australia and New Zealand. In total sales declined by 7% and we saw a little bit lower sales in Australia and New Zealand. But also here we had a submarine cable project that was delivered last year in Q3 and that was to Japan. Excluding that, no material changes. The market development, it's the same as we have said before. It's the cost of capital and inflation that has led to soft markets, especially in fiber to dome. Then we move on to the summary and market outlook. So in summary, what we have said during this presentation, net sales grew 2% to 1.9 billion SEIK in Q3. That was primarily driven by higher sales in fiber solutions in North America and in our new focus areas. We continue to see a weak demand in fiber solutions in Europe and also a price pressure in most markets. Profitability improved in Q3 compared with Q2, up to 11.8% versus 11% in Q2. Cash flow from operating activities of 144 million, and that corresponds to a cash conversion of 70%. We continue to maintain a strong financial position with a leverage ratio of two at the end of September and the order book at approximately 2.5 months of sales, which we see as a normalized order book in our business. The duct factory in Ogden, Utah, start production small scale in October. and we also see that we have an interesting pipeline of potential acquisition candidates and that relates them to environment and data center where we focus our mna activities and the last point then that i've decided to leave hexatonic after more than 10 years Looking at the market outlook, start by saying that we see this return to seasonality variations in fiber solutions and meaning we expect a lower activity in the market in the fourth and first quarter. We are cautiously positive for next year, and we see signs of improved markets in several countries. The BEAD program in the US, as we mentioned before, we expect to see that start to reach us and the market in mid 2025, and it will primarily be good for blue diamond industries. In the long term, we continue to see solid structural trends that support the continued expansion of fiber optic systems globally. There is still a lot to do, and we talk about AI and everything that drives fiber optic systems. And we see strong market for our new focus areas for a long time to come, mainly driven by investments in defense, energy and AI. So that was the last part of the presentation, and now we will have the Q&A.