Hexatronic Presents Interim Report Q3, 2023

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Link to the recorded telephone conference.

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Hexatronic Presents Interim Report Q3, 2023

Third quarter (July 1 – September 30, 2023)

• Net sales increased by 11 percent to MSEK 1,917 (1,729). Sales decreased organically by -13 percent.
• EBITA decreased by 7 percent to MSEK 296 (317), corresponding to an EBITA margin of 15.4 percent (18.3).
• Operating profit (EBIT) decreased by 12 percent to MSEK 266 (302), corresponding to an operating margin of 13.9 percent (17.5).
• Net profit decreased by 35 percent to MSEK 172 (266).
• Earnings per share after dilution amounted to SEK 0.85 (1.30)
• Cash flow from operating activities amounted to MSEK 107 (255). 

Events during the quarter

• Hexatronic completed the previously announced acquisition of Fibron BX, a leading OEM manufacturer of electro-optic cables for harsh environments and strengthens the company's position in the Harsh Environment market.
• Hexatronic acquires ATG Technology Group Limited, a strategic acquisition of a distributor within fiber optic solutions in the New Zealand market.
• Hexatronic provides an update due to softer market conditions primarily in the US and Germany, and foresees a negative organic sales growth during the second half of 2023. The EBITA margin is expected to be in line with the financial target of 15-17 percent during the second half of 2023.

Events since the end of the quarter

• Hexatronic acquires USNet and strengthens its position in the US data center market with a broader range of services and cross-selling opportunities.

Hexatronic CEO Henrik Larsson Lyon, in an interview about Q3, 2023

Comments from the CEO

Strong acquisition growth and profitability in line with targets

During the third quarter, sales continued to increase with a growth of 11 percent compared to the corresponding period last year, driven by acquisitions. As previously communicated, we noted softer market conditions in the US and Germany, which resulted in an organic decline in sales of 13 percent during the quarter. Despite a softer market, we delivered an EBITA margin of 15.4 percent. This is a decrease from 18.3 percent in the same period last year, which was a record quarter, and reflects the softer market conditions resulting in lower capacity utilization as well as price pressure in some markets. 

North America
North America showed a sales growth of 4 percent in the quarter, driven by growing sales in Canada and the acquisition of Rochester Cable. This development compensated for  a lower demand of duct as well as some postponed project deliveries of Fiber to the Home (FTTH) systems.

In the US, there is still a strong focus on growing our FTTH business and securing our local offering in order to capitalize on the effects of the BEAD program, which we expect to start to take effect in the second half of 2024. As planned, all production lines in our factory in Clinton, South Carolina, have been installed and commissioned since the end of the quarter. At the same time, we continue to establish the new plant in Ogden, Utah, which will expand 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 in the third quarter of 2024.

Europe
Sales in Sweden decreased by 15 percent, where we saw lower activity in fiber deployment as well as lower activity in sales to mobile operators during the quarter.

The Rest of Europe showed strong sales despite softer market conditions in UK and Germany. Sales growth amounted to 19 percent, primarily explained by positive sales development in our acquisitions IDS, Rochester Cable and Fibron, combined with positive sales growth in Finland and Austria. High cost of capital and inflation has resulted in lower return on investments, hence postponed projects in the UK and German market. In Germany, the structure of governmental subsidies for fiber network expansion in rural areas was also changed, which created a delay of projects. For Hexatronic's part, we managed to counteract the softer market in the UK through good growth, primarily with a major existing customer. 

APAC
APAC showed a positive sales growth of 34 percent. This is attributed to the acquisition of South Korean KNET in combination with several project deliveries in Australia. During the quarter we acquired ATG, a distributor of fiber optic solutions based in New Zealand. We see several synergies between ATG and OSA in Australia while strengthening our regional presence. 

New growth areas 
Expansion within Harsh Environment, Data Center and Wireless continues to be a priority to ensure long-term growth and diversification. Today, the first two areas represent approximately 18 percent of the Group's pro forma sales.

In Harsh Environment, we saw sales growth, primarily driven by the acquisition of Rochester Cable earlier in the year. During the quarter, we also completed the acquisition of Fibron, which strengthens our offering in electro-optical cables for harsh environments, while we see good potential to realize synergies with Rochester Cable. Today, Harsh Environment represents just over 12 percent of the Group's sales on a pro forma basis.

After the end of the quarter, we acquired USNet, which is active in project management, installation and rebuilding of data centers in the US. USNet complements our existing company DCS well and creates a stronger platform in the US data center market through a broader range of services with opportunities for cross-selling. Data centers today represent around 6 percent of the Group's annual sales on a pro forma basis.

We continue to focus on strategic acquisitions in these areas while pursuing initiatives to drive organic growth, including realizing synergies.

Cash flow
Cash flow from operating activities amounted to MSEK 107 in the third quarter, compared to MSEK 255 in the corresponding period last year. In line with our plan, we continued to reduce our inventories during the quarter, while accounts payable decreased. We continue to prioritize the reduction of our inventories for the remainder of 2023.

Outlook
In the later part of September, we communicated an expected negative organic sales growth and an EBITA margin within our financial target of 15-17 percent for the second half of 2023. We maintain this view. 

With supply chains back to normal and to some extent a softer market, we have during the year seen that the order book in relation to sales gradually decreased and is now basically back to normal levels. At the end of the quarter, we had an order book corresponding to just over 2 months of sales compared with just over 5 months of sales at the end of the corresponding quarter last year. Before the pandemic, we normally had an order book corresponding to about 2 months of sales.

We expect that the overall market for investments in fiber optic telecommunications infrastructure in the coming quarters will continue to be at the same level as in the third quarter. The main reasons are higher cost of capital and inventory build-up in some of the markets. 

Fiber optic networks are a critical infrastructure, and the degree of build out is still low in many countries, such as the US, Germany and the UK. We therefore see strong underlying structural trends supporting global build out. 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.

Governmental subsidies are expected to have an increased positive impact on the market going forward. In combination with normalizing inventory levels, we expect a gradual market recovery from H2 2024. 

Welcome to join us on our growth journey.  

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

Publication
This is information that Hexatronic Group AB (publ) is obliged to make public pursuant to the EU Market Abuse Regulation. The information was submitted for publication, through the agency of the contact person set out below, on October 27, 2023, at 07:00 CEST.