Hexatronic Group AB (publ)

Good morning and welcome to this presentation of our first quarter earnings. I am, sorry. My name is Rickard Fröberg, I'm CEO of Hexatronic Group and with me today our CFO, Pernilla Lindén and Deputy CEO Martin Åberg. As usual, we will start with a very brief overview of the Hexatronic Group. And today we are a global business with operations in over 40 countries and sales in over 100 countries. We have about 2000 employees and revenue last year was just over 7.5 billion SEC with an EVITA margin of 10.6%. As you can see, we're quite well diversified with three different business areas. Fiber solutions being the biggest, accounting for about two thirds of our revenue. Harsh environment and data center are smaller but growing in importance. Just over half our turnover is from Europe. North America accounts for close to 40% and APEC sales are just over 10% in total. We have 18 production facilities covering the markets well with production in each of the continents where we're active. And it has been for quite a while actually an important strategy for us to have local production set up to be close to our customers. And obviously this is extra important and a strength in today's world where trade barriers are only increasing. So let's get to the main event and take a look at the Q1 highlights. We're quite pleased to present today a solid quarter with growth on top line and a beta level driven by very strong performance in our data center business. Starting with sales, we landed at 1882 million SEC, which is 6% higher than last year and also slightly higher sequentially, which is in line with the seasonality we were expecting. And in fact, this was the first quarter since Q3 2023 where we saw a modest organic growth. The beta improved 10% year on year due to operational leverage and business mix offset to an extent by higher freight costs. And a beta margin therefore was up 40 basis points and landed at 9.8%. As already mentioned, the main performance driver was the data center business area, which had a record quarter and 41% sales growth. Fiber solutions saw slightly lower sales with APAC up, Europe flat, and North America was lower year on year, affected by some one-off shipments in Q1 of last year. Our net debt coverage is stable at just under two times EBITDA, which allows us room for future investments. And we maintain our cautiously optimistic view for the remainder of 2025. Some key events in the quarter. So first, I joined the team on March 1, so I have been here about two months now. It's been a very intense induction and an absolute delight. I must say Hexatronic is a fantastic company and it's truly a privilege to lead this team. We have also implemented our three business areas and the segment reporting now is therefore following that structure. This gives us better transparency and is also well aligned with how we operate the business. We have, of course, seen quite a bit of volatility and uncertainty related to tariffs. I think it's important here to note that Hexatronic's direct exposure is quite low. It's less than 5% of our total sales that are subject to the US tariffs. Related to this and in line with our longer term strategy, we have decided to start manufacturing also of fiber optic cable in the US. And then after the end of the quarter, we were quite happy to lock in the refinancing of our bank loans. So here's an overview of our three business areas. Fiber solution is still the biggest one and today is about two thirds of group sales, but has a slightly lower margin. So the share of the beta in the quarter was just over 50%. Harsh environment is about 15% of total, both for sales and for profits. And data center now accounts for about one fifth of sales and one third of profits in the quarter. So we continue to see diversification and increasing weight of the focus growth areas of harsh environment and data center. This is what we expect to see and this is what we want to see. Just one note here is to remember the seasonality that we have talked about, where typically fiber solutions has the weakest quarter in Q1 and Q4, while data center has typically the strongest quarter in Q1. Now let's go through the business areas and starting with fiber solutions. Overall, we saw a 2% sales decline with growth in APAC. Europe was flat and North America declined. And the main factor of the North America decline versus last year is that we had some significant submarine cable shipments from Sweden in Q1 of last year. Sequentially, the sales in North America were higher than in Q4. EBITDA margins saw a slight increase with business mix and capacity utilization as positives, and this was somewhat offset by higher freight costs. We continue to view North America and APAC as growth opportunities, but we also note that the recent tariff debates are increasing market uncertainty to an extent. The BID program looks to be somewhat delayed. However, important to remember that the bulk of the market in the United States is bad. Europe continues to be a tougher market with an expectation of flat growth and continued price. Focusing here on operational efficiency and cost reductions. Moving on to harsh environment, this business grew by 5% in the quarter. The efficiency improvement that we have talked about primarily in Rochester cable are on plan. While we still have a lot more work to do, things are moving in the right direction with a profit improvement in the quarter of about one percentage point. And we've known for some time that Rochester would require a fair bit of work and also investment as it was an under invested and I would say somewhat neglected carve out acquisition from a larger corporate business. The longer term outlook here for harsh environment is fundamentally favorable with defense and energy sectors expected to remain strong. And now we get to the star performer of the quarter, which is data center. So here I'm going to hand it over to Martin, who is leading that business area.

Thank you, Rickard. As we mentioned earlier, the data business area normally has a stronger first half year due to vacation periods in both the third and fourth quarter. In the first quarter, sales growth was 41% and EBITDA growth was 37%. And this is compared to our first quarter last year, which was also a record quarter. All businesses in the business area performed in the quarter. We had strong growth in both Europe and in the US. We grow both product sales and service sales, although we grow service sales stronger. And this was expected since we have a stronger exposure to the fast growing cloud segment on the services side. The carve out of part of Icelandic Endor that we acquired in the fourth quarter of last year contributed to a strong start to the year. For Hexatronic, all these sales are, of course, accounted for as inorganic growth. But if you compare the sales of this business compared to the sales before the acquisition, they have more than doubled the sales in the quarter. And this is, of course, a fantastic start that we are very pleased with. Moving over to the outlook. At the investor update that we did a month back, March 28, we zoomed in on the service market on the data center and customer segment. And just to quickly summarize the market outlook from research firms, the cloud segment is expected to grow at around 15 percent CAGR from 25 to 2029. While the other parts of the businesses are expected to have a market growth corresponding to sales CAGR of 2 to 9 percent for this period. Overall, we expect market growth in all parts of the business era to be the highest growth in the cloud segment. We're actively working to diversify the business area regarding customers, offerings and also end customer exposure. In the quarter, we made good progress with a few promising new customers, which has good potential to both diversify the business and contribute to growth and development of the business going forward. If we move over to M&A, we have talked about a strong pipeline in the data center business area over the last six to nine months. And several conversations have moved forward and our ambition to make a few acquisitions this year remains. We were a bit more specific on the investor update in March in terms of what we are searching for. And it is both within our current main focus area, which is ICT services, but it's also to broaden our service offering to other areas such as electrical and security. And to summarize, the market remains strong and we hope to come back to you about acquisitions in the data center business area in the near future. And with that, I hand over to Panila to summarize the financials for the quarter.

Thank you, Martin. So our total sales for Q1 was 1.9 billion SEK, with an overall growth of 6%. That was driven by a record quarter for data center and harsh environment continued to develop positively. Why fiber solutions were slightly down? Organically, we had a growth of 1% and a 4% acquisition driven growth, mainly from the recent acquisition, Endor, within our data center business. And also we had a positive FX effect during this quarter. If we're looking at a gross margin, we had a gross margin of 41.6%, which is 1.1 percentage point above last year. And that is mainly due to manufacturing efficiency within fiber solutions and the harsh environment. Our operating costs were .6% of net sales in the quarter compared to .5% in Q1 2024. And the increase of the operating costs to net sales is mainly related to increased freight costs and also the cost related to the change of CEO. Depreciation has increased compared to last year due to the capacity investments that we've made over the last years and a percentage of sales at 4.1%. And overall EBITDA of 184 million SEK, up 10% compared to last year or .8% of net sales. Financial net of 31 million SEK, and that is mainly related to interest expense. We had also a positive effect of exchange rate differences of revaluation of additional purchase price. Tax amounted to .3% compared to .4% and the lower tax rate is explained by higher portion of deductible interest expenses. Earnings per share at 0.42 SEK. If we then go over and talk about our fiber solutions, total net sales of fiber solutions of 1.2 billion SEK in Q1 with an overall decline of 2%. Europe was flat compared to last year. Decline in Sweden was partly offset by growth in UK and Germany and continued strong growth in Finland and Austria. As Rickard said before, sales in North America declined. Sales in North America were lower than last year but are increasing with the US. And we had made submarine cables that was included in Q1. The US duct business showed increased volume but that was offset by lower prices than last year. An APAC and rest of the world increased with 16% mainly due to orders to Micronesia and the rest of APAC. EBITDA of 167 million SEK, a growth of 3%. Depreciation at 5% of sales and that is .4% higher than last year. And that is due to the capacity investments that we have made over the last years. An EBITDA of 105 million SEK, 1% growth compared to last year or an EBITDA margin of 8.5%. And that is 0.2 percentage points higher than last year with a positive effect from higher capacity utilization in the factories and that is partly offset by the increased freight cost. We had low capex investments in the quarter, only 4 million SEK or .3% of sales and that was mainly related to maintenance. If we move over then to harsh environment, we had a total net sales of harsh environment of 286 million SEK with an overall growth of 5%. And growth is mainly driven by sales to APAC and rest of the world. Europe was in lime in last year and North America was declining. But the companies within harsh environment have an international customer base and the majority of revenue is related to larger projects, which is why sales per geography can fluctuate from quarter to quarter. EBITDA of 39 million SEK growth with 13% depreciation at .3% of sales. EBITDA of 29 million SEK or 15% growth compared to last year. And EBITDA margin strengthened compared to previous year as a result of the ongoing work with manufacturing efficiency within Rochester Cable. Carpex investments in the quarter of .2% of sales, which is mainly related to maintenance investments in Rochester Cable. Data center, total net sales of 362 million SEK with an overall growth of 41% and as Martin said, which is a record quarter for our data center business. And we are pleased to see that it's a strong development for all units and a positive contribution from the Endor acquisition business. And we had a fantastic start with Endor that was more than doubling their sales in the quarter compared to last year. EBITDA of 72 million SEK growth with 35% and depreciation at .2% of sales. EBITDA of 68 million SEK growth compared to last year or a margin of 18.8%. And in the data center business, the Carpex investments is quite low and the quarter was 1 million or .3% of sales, which is mainly related to maintenance investments. If we go over and looking at our cash flow, overall our cash flow was not overall at satisfactory. Operating activities before changes in working capital of minus 50 million SEK. We had a negative effect of working capital of 192 million SEK. Accounts receivable has increased with 204 million SEK during the quarter and that is mainly due to increased sales and customer mix. Inventory has increased with 127 million SEK, which is partly offset by increased accounts payable. Total Carpex investments of only 14 million SEK or .8% of sales and that is mainly related to maintenance investments. And as we have communicated earlier, after the heavy investment years of 2022 to 2024, we believe that we were able to grow for several years without any extensive investments in the fiber solutions business. Group financing activities amounted to 34 million and that is a monetization of lease liabilities. If we then are looking at our interest bearing net debt, which corresponds to net debt excluding lease liabilities, that is amounted to 1.9 billion SEK at the end of the quarter, which is an increase of 43 million SEK compared to with last quarter. And that increase is partly offset with increase of the rolling 12 EBTA. So interest bearing net debt in relation to to perform EBTA on a rolling 12 months basis is stable at 1.9 for the quarter. At the end of Q1, we had 499 million of cash and an unutilized backup facility of 1.3 billion SEK, which gives us a liquidity of approximately 1.8 billion SEK and we have a continued solid financial position. Now I will hand over to Richard again.

Thank you, Pernilla. And let's go to the summary here. So again, if I summarize the highlights of Q1, it was a solid quarter with sales growth of 6% and EBTA growth at 10%. The data center business continues to impress and had a record quarter. And this growth is helping with our diversification and more than offset the slight decline in fiber solutions. We have a solid balance sheet and look to continue acquisitions to further drive growth. And that's primarily in data center and harsh environment. And recapping our outlook and guidance for fiber solutions, we do expect Europe to continue to be rather challenging with price pressure and limiting growth in 2025. But we see opportunities to offset in North America and in APAC. Harsh environment, we expect a continued and gradual margin improvement. Data center continues strong performance, albeit probably not on the same level as quite in Q1. And we are, as you heard, quite hopeful to execute one or a few acquisitions in this year. And all in all, we therefore maintain our cautiously optimistic view of 2025. And with that, we're wrapping up the presentation part for today and we will move on to taking some questions.

To ask a question, please dial pound key five on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Max Baco from SEB. Please go ahead.

Yes, good morning. I hope you can hear me. Nice to hear your voice again, Rickard. So basically two questions from me. Hi. Starting with fiber solutions in North America, as you said, the majority of the decline explained by one of shipment here in Q1 last year. So, I guess, could you perhaps add some flavor to what you're seeing in Hexatronic US within the fiber system sales? And then also within the duct business, I guess, Blue Diamond Industries and also Cana to some extent, you said higher volumes but lower prices. And that has been the case now for a couple of quarters, if I remember correctly. Yes, on prices during the business, are you seeing some kind of stabilization sequentially or is it continue to see a continuous decline? So two questions basically, Hexatronic US and the duct business.

Yes. So first of all, a few things here. So one, the numbers that we're presenting here is North America and that includes Canada. Canada was a low quarter, we're rather concentrated in the customer base in Canada. So there's one or two customers. And if they play big orders in the quarter or not, it makes a difference. And Canada was low in the quarter. But in the United States, in particular, as Pernilla mentioned, we see volumes actually increasing, but pricing is lower than a year ago. So that's right, Max. We're seeing sequentially though, I'm seeing at least for the duct business that pricing seems to have stabilized versus prior quarter. But we still have one or a couple of quarters where we're lapping last year that were lapping what was higher prices last year.

Okay, understood. Perfect. And then one question on harsh environments. I mean, as you alluded to at the investor update, the clear ambition here for 2025 is to improve the profitability, which we saw here in Q1 already, up some 60 basis points, I think it was. So just wondering your ambitions here for 2025 for the full year for the harsh environment segment. I mean, the magnitude of the improvement that you are aiming for, is it a similar level as we saw in Q1 or do you hope to see an acceleration here throughout the year in terms of profitability? Yeah,

we're definitely working for a continued, I would say, slow and steady improvement higher than what it was in Q1. But there's a lot of work still remaining there. And as you mentioned, Max, this year, we are we see growth opportunities, but we're really focusing on the margin improvement, we think in the short term is the most important one for shareholder value. But longer term, we also see good growth opportunities. The market is definitely there.

Okay, perfect. That's all for me at the moment. I'll jump back into Q. Thank you very much. Thank you.

The next question comes from Adrian Galani from ABG Sundal Collier. Please go ahead.

Yes, hello. I'd like to start off with a question just on the data center segment. Given that we only have limited historical figures on the new segment structure, can you talk a bit about how lumpy sales and earnings are in data centers? Because Q1 was obviously a very strong quarter, but was there anything unusual in this or are these figures that you think you can be able to replicate going forward as well?

Thank you, Adrian. It's Martin here. But as I said, I mean, it was a very strong quarter. I think we talked a bit about the seasonality that we have the strongest first half year and especially Q1 has been the strongest. If we look longer term, a few years back, we have provided that during the investor update and it has been steady growth. So we say, I mean, underlying the expectations that continue to grow, but we expect to have the same pattern. We've got a stronger first half year than the second half year.

Okay, understood. For my second one, I might be reading too much into this, but previously you included a reminder on seasonality in the outlook statement saying that Q2 and Q3 should be at a higher level compared to Q1 and Q4. Now that that's not included here, but should we still expect that there should be just a seasonal uptake into Q2 or are you more pessimistic about that now?

No, we think that seasonal pattern still remains and the one that you're referring to Adrian is for fiber solutions in particular.

Okay, perfect. I'll jump back into Q. Thank you.

The next question comes from Stefan Ward from Pareto Securities. Please go ahead.

Thanks. I have a couple of questions also tagging along previous questions here. On the price situation in the US, were you referring to lower prices year on year? Was that for the duct business alone or is it also for fiber solutions broader?

That was mostly for the duct business.

How would you describe fiber solution pricing environment in the US at the moment?

It's more of a system sell, so it's not as clear cut there. I don't see it moving really clearly either up or down.

Okay, great. Thanks. Then you mentioned in Europe fiber solutions. I read it as stable demand but continued price pressure. Is that the correct interpretation or would you add some color to that?

Yes, I think that's correct.

Okay, then also on this referring to the seasonality that Adrian spoke about just recently. Last year you had a sequential increase of 14% in the second quarter. I understand that we can't perhaps comment exactly on the figures, but is it similar to that magnitude of seasonality that we can expect also in this year?

Yes, you're right.

We're

not going to comment on the exact figure. What we have said is that we expect both for data center that has a different seasonality that we did show quite clearly I think at the investor update and for fiber solutions. We expect that the pattern to be similar.

For the pattern will be similar to last year.

That is our expectation and that pattern is similar to what we saw prior to COVID.

Okay, just a final question if I may on data center business. It's almost a third or it is a third of group EBITDA in Q1 and it's growing stronger than the rest of the group even though there is seasonality in that. Is that likely framework to have for the full year that data center can become one third of group EBITDA?

I think what we said before, if you look at the season pattern, data center has this year and also last year the strongest Q1 while we see that Q1 is a weak quarter for the fiber solution. Based on that we wouldn't say it would be a third.

Okay, thanks.

So we're checking in. Our next question

comes from Max Bako from SEB. Please go ahead.

Yes, thank you Max here again. Perhaps taking the opportunity to ask a bit more high level question. I mean, Rickard you have been on the job a couple of weeks now at least. And of course you touched upon this during the investor update. It would be interesting to hear your impressions once again. I know that you have traveled around quite a lot and met many of the subsidiaries and so on and it seems to be some efficiency work that can be done within the group. I mean, fiber solutions in Europe and of course, sports environments and so on and so forth. So if you could just talk about how you will approach this, will you work in a different within the group compared to how we have done it before and so on and so forth. If you could elaborate a bit on that.

Yes, sure. We have a decentralized structure and a decentralized philosophy. I think that's quite important. We want the commercial decisions to be made as close to the customer, as close to the market as possible. I don't see that changing. At the same time, we are working quite actively and have for some time with how do we extract the benefits of being part of a almost 8 billion SEC group when it comes to purchasing volumes and skills and so on. I think there are further opportunities there when we're talking about things like reducing scrap in our factories where we see that those levels are different between the different factories when it comes to being world class in how and when we purchase things like I think those are some of the main opportunities that we want to drive.

Okay, understood. I guess we will hear more about it in the future. Thank you.

Thank you, Will. Thank you, Max.

Question comes from Stefan Ward from Pareto Securities. Please go ahead.

I have a question regarding the financial targets. We had the Q4 report before you came on board, but then we had also the C&D update, the end of March and now the Q1 update. You haven't done any changes to your financial targets, which is annual growth of 20% over a business cycle and even some audience of 15 to 17%, if I remember correctly. Are these still valid, would you say, or are they under review or can you comment anything on... because I'm a little bit... you haven't got any hard sort of guidance for 2025, so this is what we have to rely on then.

Yeah, I would say yes, they are still valid and yes, they are also under continuous review as with any company and as you pointed out, those targets are over a business cycle and they also include M&A, which we haven't done in a while. And I think we're in the cycle. I think we're still in the more challenging part of the cycle, although we're hopeful that it won't be too much longer.

Okay, and regarding the profitability, that is also what we should expect from the company going forward.

Those are our targets.

Okay,

thanks. More phone questions at this time. So I hand the conference back to the speakers for any written or closing comments.

Yeah, I think we have one written comment.

So, good morning. Question on cash conversion. You have done a good job in stabilizing EBITDA with an EBITDA of 184 million SEK, yet operating cash flow is negative 5 million. It has been an increase of 127 on inventory and also the accounts receivable. Can you give a little bit more highlights on the reasoning? So when it comes to receivables, that has increased due to that we've had higher sales, but also it's a change of mix of customers. Some of the large customers that we have have a little bit longer payment terms, and hence why the number of days have increased slightly. We're talking about where that we are somewhere between 55, 58, something like that. We are a little bit higher today. We are at 59, 60 days. And that is mainly due to the customer mix. And when it comes to the stock, that is we have partly increased it due to the seasonality, but we're also say also a little bit higher than we want to be. So we will continue to to work to reduce it. We have another question here. What should we expect in Capex for 2025 and going forward? We have earlier communicated that our ambition is to be within three to four percent of sales for the full year, which is one to two percent is maintenance and the rest is capacity. If we're looking at our fiber solutions business, we are saying that the main investments will be in maintenance, but also then some small Capex investments overall. So we're saying three to four percent harsh environment. Our ambition is to be around five percent. And there is also maintenance and capacity and then data center less than one percent.

I think that's it for the questions. So once again, just we will wrap things up here. And thank you, everyone, for calling in today.