Hexatronic Group presents year-end report 2023

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Fourth quarter (October 1 – December 31, 2023)

• Net sales increased by 4 percent to MSEK 1,861 (1,795). Sales decreased organically by -23 percent.
• EBITA decreased by 45 percent to MSEK 170 (310), corresponding to an EBITA margin of 9.1 percent (17.3).
• Adjusted EBITA margin of 10.7 percent (adjusted for restructuring costs of MSEK 29).
• Operating profit (EBIT) decreased by 52 percent to MSEK 138 (291), corresponding to an operating margin of 7.4 percent (16.2).
• Net profit decreased by 12 percent to MSEK 191 (218).
• Earnings per share after dilution amounted to SEK 0.94 (1.06).
• Leverage ratio (net debt/EBITDA (pro forma), R12) amounted to 1.7x (1.3x).
• Cash flow from operating activities amounted to MSEK 462 (292).

Significant events during the quarter

• Hexatronic acquires USNet and strengthens its position in the US data center market with a broader service offering and cross-selling opportunities.
• Hexatronic enters into a new senior term loan facility agreement of MSEK 500 with its existing lenders.
• Hexatronic downgrades short-term outlook and expects that the EBITA margin, excluding restructuring costs, will amount to 12-14 percent for the second half of the 2023. Furthermore, the company is initiating a cost savings program that is expected to result in annual savings of approximately MSEK 90.

Significant events since the end of the quarter

• The Board of Directors proposes to the Annual General Meeting that no payment of dividend will be made for the financial year 2023.

CEO Henrik Larsson Lyon in an interview about Hexatronic Group's Year-end report 2023

Comments from the CEO

Strong operating cash flow and continued growth in new areas 
During the quarter, we improved operating cash flow and delivered sales growth, mainly driven by our expansion in Harsh Environment and Data Center. This despite a continued weak market climate in Fiber Solutions, mainly in the US and Germany. EBITA margin excluding restructuring costs amounted to 10.7 percent in the fourth quarter and 13.1 percent for the second half of the year, in line with the communication published on November 21, 2023. Like the rest of the industry, we expect the market in Fiber Solutions in the first half of 2024 to continue to be affected by higher financing costs, cost inflation and high inventory levels in some markets. We are addressing these challenges through the previously communicated cost savings program and continued focus on operating cash flow. During the second half of 2024, we expect market demand in Fiber Solutions to increase gradually. In parallel, we will continue our strategic ambition to grow our businesses in Harsh Environment and Data Center to further strengthen our diversification, both areas with strong underlying market drivers.

Profitability in line with previous communication
Adjusted for restructuring costs of MSEK 29 related to the cost savings program, EBITA margin for the second half of 2023 was 13.1 percent (17.8). This is in line with the 12-14 percent previously communicated. The EBITA margin for the fourth quarter amounted to 10.7 percent excluding restructuring costs (17.3) and 9.1 percent including restructuring costs. Lower capacity utilization in Fiber Solutions and price pressure in some markets explain the decrease compared with the corresponding period last year.

Continued growth in Harsh Environment and Data Center
Fourth quarter showed a total sales growth of 4 percent compared to the corresponding period last year, which can mainly be attributed to completed acquisitions in Harsh Environment and Data Center.

Harsh Environment grew sales during the quarter primarily driven by the acquisitions of Rochester Cable and Fibron. Rochester Cable developed very well both operationally and in terms of profitability, and had a continued strong order intake. Fibron has developed well and in line with our expectations.

Data Center also developed strongly during the quarter. As previously communicated, USNet was acquired during the quarter. USNet is active in project management, decommissioning and relocation services of data centers in the US. USNet complements our existing company DCS well in the US market.

Expansion in Harsh Environment and Data Center continues to be a strategic focus area for our long-term growth and diversification. Both areas benefit from strong underlying macro trends and in the fourth quarter they together accounted for almost a third of Group sales and contributed positively to the EBITA margin.

As we communicated on November 21, 2023, the market conditions in Fiber Solutions, particularly in the German market and the duct market in the US, have weakened, resulting in a 23% organic decline in Group sales in the quarter. We believe that higher financing costs and cost inflation have contributed to a deterioration in investment calculations and thus the postponement of projects.

North America
North America showed sales growth of 15 percent in the quarter, mainly driven by the acquisition of Rochester Cable, as well as increased sales in Canada and system sales in the US. It is particularly reassuring that our system sales in the US continue to grow, which is a sign of strength for our core offering in Fiber Solutions. This development partly compensated for lower demand for duct in Blue Diamond Industries.

The completion of the new production plant in Ogden, Utah, is proceeding according to plan. The plant expands our addressable market for duct to include the western United States, which is a significant market. As previously communicated, we expect the plant to be ready for production during the third quarter of 2024.

Europe
Fourth quarter sales in Europe, excluding Sweden, were in line with the corresponding period last year. A weaker development in Fiber Solutions, especially in Germany, was offset by a positive development in Data Center and the acquisition of Fibron.

Sales in Sweden decreased 19 percent, due to lower activity in fiber deployment but also lower activity in sales to mobile operators during the quarter.

APAC
APAC showed a sales growth of 12 percent. This is mainly due to the acquisitions of Fibron, Rochester Cable and KNET which showed positive sales development in these regions.

Strong operating cash flow
Cash flow from operating activities amounted to MSEK 462 in the fourth quarter, compared with MSEK 292 in the corresponding period last year. In line with our plan, inventory levels and accounts receivables continued to decrease during the quarter, partly offset by decrease in accounts payable. We continue to focus on optimizing our inventory levels in 2024.

Continued financial flexibility
We continue to have good financial flexibility for creating long-term value, even though we, during 2023, made historically extensive acquisition- and capacity investments, totalling approximately MSEK 1,500.

During the quarter, interest-bearing net debt (i.e. excluding IFRS 16) decreased by MSEK 383 and amounted to MSEK 2,111 at the end of the quarter. The decrease is mainly attributable to a strong operating cash flow. Interest-bearing net debt in relation to pro forma EBITDA on a rolling 12-month basis, key ratio that reflects our existing bank covenant, decreased from 1.5x to 1.4x during the quarter. Including IFRS 16, it corresponds to a decrease from 1.8x to 1.7x in the quarter.

To strengthen our financial flexibility, we entered into a new senior term loan facility agreement of MSEK 500 with existing lenders under the existing agreement and subject to the same credit documentation and covenants.

Lower expected investments and acquisitions in 2024
We have completed two years with a high investment level. In 2022 and 2023, we invested in two new duct factories in the US, of which one is completed. In addition, we significantly expanded our production capacity in several of our production units within Fiber Solutions. After completing the investment program with mainly the completion of the duct factory in Ogden, Utah, in the third quarter of 2024, we believe that we will be able to grow for several years without extensive investments in Fiber Solutions. In total, Hexatronic invested 67 MSEK in the fourth quarter and 518 MSEK during the full year 2023. We estimate that capital investments in 2024 and onwards will amount to approximately 3-4 percent of sales, of which approximately 1-2 percent are expected to be maintenance investments.

On the acquisition side, we have continued to identify and build relationships with profitable companies that have a strong market position, primarily in Harsh Environment and Data Center. After the end of the quarter, we completed a small add-on acquisition to the Data Center company IDS in the form of the UK based company M Connect, which will contribute to increased profitability in IDS.

For 2024, we expect significantly lower investment levels in acquisitions compared to 2023.

Cost savings program proceeding according to plan
On November 21, 2023, we announced a cost savings program that affects approximately 160 employees and is expected to lead to annual savings of approximately MSEK 90. The program is proceeding according to plan and is expected to yield full effect from the end of the first quarter, 2024. The cost of the program, which affects the fourth quarter, amounts to MSEK 29, which is in line with the initially estimated MSEK 30.

Expected gradual increase in market demand during the second half of 2024 in Fiber Solutions
Our view of the market remains, and we expect continued weak market demand in Fiber Solutions in the coming quarters and then a gradual increase in market demand in the second half of 2024. In the second half of the year, we expect to see the initial effects of the BEAD program in the US, while inventory levels are expected to have normalized. With our expanded capacity, we are well positioned for an expected increase in demand, even if this means lower capacity utilization in the short term.

In Harsh Environment and Data Center, we expect market demand to remain strong during the year.

As communicated in the third quarter of 2023, our order book is back to pre-pandemic levels. At the end of 2023, we had an order book corresponding to just over 2 months of sales, compared with about 5 months of sales at the end of 2022. Before the pandemic, we typically had an order book corresponding to about 2 months of sales.

Fiber optic networks are critical infrastructure and the degree of penetration remains low in many countries, such as the US, Germany and the UK. We therefore see strong underlying structural trends supporting global build out over the long term. Primarily privately financed projects but also projects financed by subsidies from several government investment programs such as the BEAD program in the US, Gigabit Strategy in Germany and Project Gigabit UK. Similar programs exist in most countries.

Welcome to join us on our growth journey.

Henrik Larsson Lyon
President and CEO Hexatronic Group AB (publ)