Hexatronic Group AB (publ)

Good morning, everyone, and welcome to Hexatronic second quarter presentation for 2025. As always, we start with a very brief reminder of who we are. Hexatronic is today a global business supporting customers around the world with products and solutions needed for fiber connectivity and the ever growing communications needs. We sell products and solutions under the Hexatronic brand and a few other brands as well. And we manufacture in 18 production facilities across nine different countries. Our turnover is about $7.5 billion SEC annually, and the business is organized in three business areas, fiber solutions, harsh environment, and data centers. Moving on to look at the quarter that just closed. We had a sales decline of 6%, which was entirely explained by currency headwinds. This is mainly the SEC strengthening against our key selling currencies like US dollar and euro. Overall profitability also saw a year on year decline with a beta margin landing at 8.9% in the quarter. And it was the fiber solutions business that caused this profit decline. We saw a weaker than expected quarter in both Europe and particularly in North America. On the other hand, our data center business overperformed again with another record quarter of very strong growth and profitability. And the harsh environment business area also had very solid results. In fact, all time high with double digit organic growth. Our cash flow, which you may recall, was negative in the first quarter, turned positive, as expected, with a 74% cash conversion. This contributed to keeping our net debt leverage constant at a rather comfortable 1.9 times. So all in all, we were, of course, disappointed by the underperformance in Fibre Solutions, but we also take away a number of positives elsewhere in the business. Here are a few key events that were announced during the quarter. In April, we refinanced our bank debts, maintaining the key terms and conditions from our previous agreement. We were also very pleased to see our climate targets approved by SBTI, and we renewed a seven-year contract with one of our very long-standing customers, which is Corus in New Zealand. And then two recent events after the end of the quarter, as the performance of fiber solutions was weaker than expected, we issued a profit warning together with preliminary results about a week ago. And as response to this weakness, we have initiated a performance improvement program to address those challenges. Here is an overview of our portfolio with the three business areas, Fibre Solutions, Harsh Environment, and Data Center. Fibre Solutions is still the largest business, now about 65% of total sales, and the two other are roughly 17 to 18% each, slowly but steadily growing their share of total. However, if we look at the EBITDA, it's a different and pretty significant picture. Data Center was almost on par with Fiber Solutions in second quarter. If you add Harsh Environment, these two businesses are now generating well over 50% of Hexatronics profits in the quarter. And we can draw two conclusions from this. One is we want to see and we expect to see Harsh Environment and Data Center continue to grow their share. This is primarily where we are investing. This is where we see strong growth opportunities, especially the data center is a high growth asset life business that we see a lot of value creation from. Parts environment is also on a positive trajectory and we continue to invest in this business as well. And the second conclusion is that clearly fiber solution is underperforming. We are at 6.4 EBITDA in the quarter, which is not where we should be. So I consider this now a turnaround situation. We have invested quite heavily in this business over the last several years, and we are just not seeing satisfactory returns on those investments in the quarter. And that is, of course, the reason we have initiated a performance improvement program, which we will come back to. So if we move on and start by taking a little bit closer look at fiber solutions. We saw lower than expected demand in Europe and in particular in North America. In the US and Canada, we have a handful of key customers and for different reasons, most of them placed low orders in the quarter. In total, North America was down 23% year on year, which was a disappointment, especially since we're aiming to grow in this important market. Our conduit business in North America, so this is the Blue Diamond Industries, we actually saw good volumes but low pricing where year on year there's still a meaningful price decline. Profitability in fiber solutions then was hurt by the lower volumes, by price pressure, and also to an extent by the business mix as North America is traditionally overrepresented as a profit contributor. Going forward, here we expect the market in Europe to continue to be rather challenged during the remainder of the year. It's a market currently characterized by some overcapacity and competition for volume, and we know that other companies are also struggling here. In North America, the market outlook is better, and we're working very hard to broaden our business and customer base and get back to growth. And as mentioned, we have initiated a performance improvement program across fiber solutions. Based on where we are, there's a need to adjust our cost, but it's also about shifting resources to where we see growth opportunities and broaden our focus beyond the FTTH segment. And that actually leads me to the next slide. What we see here is an overview of the different product segments within Fibre Solutions. It's a slide that we have used before, but it's slightly updated. And there have been some questions about market share and whether we're losing market share, especially in the light of some data points and some peers that have a more positive view than our recent performance. And to answer that question, we really need to look a bit more granular at the business mix within Fibre Solutions. So on the upper left-hand side, this is the fiber to the home, or FTTH, last mile segment. This has traditionally been Hexatronic's focus area. It's where we have the majority of the business within fiber solutions. It served us well for a number of years. But it is, at least in Europe today, a market that is still a bit challenged. the growth in the market there is growth in the market it's really coming mostly from the upper right hand corner which is a transport and interconnect segment and this is more the backbone of of the fiber optic networks and there's there's pretty strong growth here driven primarily by the data set the rapid growth in data center and we are capturing the data center growth inside the data centers we're capturing that in our data center business area um the the connection between data centers and the infrastructure is within fiber solutions and this is an area where traditionally hexatronic has not had a very big position we have some business in places like scandinavia for example but here's an opportunity that we could tap more into this growth in the future that we're not really today in the middle on the upper side here is the conduits and pipes so again this is the blue diamond industry's business mostly and here we see actually strong volumes but we see rather rather low prices still in this business And then there are some smaller market segments on the bottom here. So we have the submarine cable business. It's more of a niche segment, very good growth prospects and healthy margins in this one. And same for wireless. And then we also have some smaller segments, instruments and tools to round out the portfolio. So I think for me, the conclusion is that the biggest markets are the top left and the top right. And we are at least currently stronger in the segment that doesn't really show the big growth today. There is growth in North America in the fiber to the home, but this is for us a smaller business than the one in Europe. So. Moving on then to the next slide and the next business area, which is harsh environment. Q2 was a good quarter for this business area. In fact, we saw all time high sales and EBITDA with organic growth of 10%. This was on the back of strong project delivery. And as a reminder, this is a largely project based business. Therefore, it's important to look at the longer term trends rather than just individual quarters. Nevertheless, we're very happy with the quarter performance and importantly, the trends here are favorable. We see strong investment into the defense and offshore energy markets, and we expect this to continue. As we have described before, we continue to focus on margin improving activities, including some CapEx investments in the Rochester cable business in the US. Next and last, but certainly not least, business area is data center. And once again, it's a star performer. And I will hand it over to Martin Oberg, our deputy CEO and also the leader of that business area.

Thank you, Rickard. So we closed a strong quarter with 35% organic sales growth. Actual sales in the quarter grew 38%. It was negatively impacted by currency, but fully compensated for by the carve out from ender that we closed end of last year. Sequentially, it was at a similar level as the previous quarter, which was a record quarter. We have high growth numbers across the business unit, but the service market in the US and Europe showed the highest growth in the quarter. In terms of EBITDA, it was a record quarter with 72 million SEK, or a margin of 20.8%. This is two to three percentage points higher than our expectations. And this was due to a few larger projects that came in at higher margin than expected. Moving over to the outlook. As presented during the investor update in March earlier this year, the data center market is expected to show strong growth throughout this decade. especially the cloud segment that according to independent market research is expected to grow at a sales CAGR of plus 15% from 2025 to 2029. Looking at the second half of this year, we expect continued strong growth year over year, keeping in mind that the first half is a stronger period than the second half of the year, and this is due to vacation periods in August and December. We continue to focus our M&A activities towards harsh environment and data center and have a very healthy pipeline, especially on the data center side. This is a slide from our investor update event where we talked about further diversifying our data center business, both in terms of applications and in terms of segments or end customer markets. Today, we're mainly strong in the cabling services in data centers. And this includes design, product management, installation, and day two services. But during the quarter, we have continued to broaden our indoor services by recruitment within adjacent service areas, such as audiovisual, wireless, and also security solutions. And security solutions is typically installation of CCTV cameras, access control, and video management systems. In terms of segments or end customer markets, we're also winning more businesses for all the different applications on the left hand side. And this is towards other markets than data centers. This being hospitals, schools, commercial buildings. Those customers require the same services as our data center customers and allow us to further diversify our customer base and market exposure. further diversification on applications and segments. And this is an important part of the data center business unit strategy, both organically and in our strategic acquisition pipeline. And with that, I hand over to Pernilla to summarize the financial of the quarter.

Thank you, Martin. As Rick had said, we had a total net sales of 1.9 billion SEK for Q2 with an overall decline of 6%. On the other hand, organically, we had a decline of 1%, and that is explained by the weakened and expected performance in fiber solutions, partly offset by the record quarter for both harsh environment and data center. And we had 1% acquisition-driven growth from a recent acquisition indoor within our data center business. And we had 6% negative effect on exchange rate for the quarter, primarily attributed to weaker US dollar, Aussie dollar, New Zealand dollar and Korean won. If we're looking at our gross margin, our gross margin decreased to 40.1% compared to 42% in Q2 2024. And the reason for that is the weaker than expected performance due to lower demand in our FTTH equipment and price pressure within our fiber solution business. And the weaker demand was noted in both North America and Europe. And as well as our low capacity utilization and fixed cost coverage in our factories within fiber solutions. Operating costs were 27.6% of net sales in the quarter, which was in line with Q2 2024. And the reduced operating cost in absolute numbers is mainly related to lower freight costs explained by decline in net sales within fiber solutions and lower costs for long-term incentive programs. Overall we had an EBITDA of 169 million SEK or 8.9% compared to Q2 last year of 11%. Net financial items of minus 31 million that is mainly related to interest expense and tax rate amounted to 30.3% in the quarter compared to 33.1%. prior year. The lower tax rate is explained by higher portion of deductible interest expenses and earnings per share for the quarter at 0.38 compared to 0.44 last year. So if we look at fiber solutions, our total fiber solutions had a sales of 1.2 billion SEK in Q1 with an overall decline of 16%. as I said before, due to the weaker demand of FDTH equipment and price pressure. Organically, it was a decline of 9%. Europe declined with 12%, and that is mainly related to lower performance in Germany, Sweden and UK, but also in Finland. Note that Finland had a record quarter last year, so it was still a good performance in Finland. North America declined with 23%, and that is mainly related to Canada, with a slowdown in the FDT build-out of FDTH, but also our US business, where some of our customers have placed lower orders. As Rick had said, the conduit business in North America saw good volumes, but very low pricing, where year over year is still a meaningful price decline. And APAC finally declined with 8%, but increased with local currency. Positive development both in Australia and New Zealand. We had an EBITDA of 138 million SEK. It's a decline with 40%. Profitability was hurt by the lower volumes, low capacity utilization and continued price pressure, but also by the business mix as North America is traditionally a higher price and margin market. We had depreciation of 59 million SEK or 4.8% of sales. And depreciation in percent of sales has increased by 0.6% compared to last year. And that is mainly due to that we had lower sales. But low capex investments in the quarter, 16 million or 1.3% of sales, which is mainly related to maintenance. So if we go over to our harsh environment business, overall, we had a sales growth of 4% in the quarter. but with an organic growth of 10%. And that is driven by our defense business and the energy sector. And as we previously communicate, the companies within Horsham environment have an international customer base and a majority of revenues from larger projects, which means that sales per geography can fluctuate between quarters. We had an EBITDA of 40 million SEK and margin in lime in prior year at 12%. Sequentially increased profitability and some positive effects from improved production efficiency in Rochester Cable. CAPEX investments in the quarter of 9.3 million or 2.8% of sales. And that is mainly related to production and efficiency improvements in Rochester Cable. If you then look at data center, total net sales for data center at 344 million SEK with an overall growth of 38%, organically a growth of 35%. It's a strong development in all units, but especially the service business in Europe and North America. And contribution from the acquired businesses is in line with our expectations. We had a strong EBITDA margin of 20.8%, although two to three percentage points higher than expected due to a couple of larger products with strong margin. COPEX investments is light in the data center business for us. So we had COPEX investments of 3.7 million or 1.1% of sales. Cash flow from the operating activities before changes in working capital of 176 million SEK. Overall a negative effect of working capital of 45 million SEK. Account receivable has increased with 35 million during the quarter mainly due to higher sales and customer mix offset by increased accounts payable. inventory has increased with 62 million mainly due to the lower sales within our fiber solution business but overall cash flow from operating activities of 131 million and a positive 74 percent cash conversion total capex investments in the quarter of 30 million or 1.6 percent of sales and that is mainly maintenance investment overall Interest bearing net debt, which corresponds to net debt excluding LIES liabilities amounted to 1.8 billion SEK at the end of the quarter, which is a decrease of 121 million compared to last year. And that is mainly due to repayment of loans of 32 million and a positive FX effect of 70 million. And that was partly offset by decreased rolling 12 EBITDA leading to an interest bearing net debt in relation to pro forma EBITDA on a rolling 12 basis, which is a key ratio that reflects our existing bank covenant. And that is stable compared to the last quarter at 1.9 times. At the end of Q2, we had 518 million SEK cash and an unutilized backup facility of 1.1 billion, which gives a liquidity of approximately 1.6 billion SEIC. And we have a continued solid financial position.