Sequentially improved profitability and solid cash flow
Third quarter July 1 - September 30, 2024
- Net sales increased by 2 percent to MSEK 1,951 (1,917). Sales decreased organically by 2 percent.
- EBITA decreased by 22 percent to MSEK 230 (296), corresponding to an EBITA margin of 11.8 percent (15.4).
- Operating profit (EBIT) decreased by 25 percent to MSEK 200 (266), corresponding to an operating margin of 10.2 percent (13.9).
- Net result decreased by 38 percent to MSEK 107 (172).
- Earnings per share after dilution amounted to SEK 0.52 (0.85).
- Our new focus areas, Harsh Environment and Data Center, continued to develop positively in the third quarter.
- Leverage ratio (net debt/EBITDA (pro forma), R12) amounted to 2.3x compared to 1.7x as of December 31, 2023.
- Cash flow from operating activities amounted to MSEK 144 (107).
Significant events during the quarter
- President and CEO Henrik Larsson Lyon has informed the Board of Directors that he has decided to end his operational career and step down from the role of President and CEO after more than ten years in the position. The Board has initiated the recruitment of a new CEO. Henrik Larsson Lyon will remain in his role as President and CEO until a successor has been appointed.
Significant events since the end of the quarter
- No significant events occurred after the end of the quarter.
COMMENTS FROM THE CEO
Sequentially improved profitability and solid cash flow
The third quarter saw sales growth for the Group of 2 percent compared with the previous year. This is primarily driven by higher sales in Fiber Solutions in North America and our new focus areas, Harsh Environment and Data Center. At the same time, the continued weak demand for Fiber Solutions in Europe, combined with prevailing price pressure, had a negative impact on sales during the quarter.
Compared to the previous quarter, sales decreased by just under 4 percent in the third quarter. At the same time, we improved profitability sequentially to an EBITA margin of 11.8 percent and continued to generate solid cash flow.
Sequentially improved profitability
Despite challenges with price pressure and a continued weak market in Fiber Solutions, it is gratifying to see that we have continued to improve profitability. The EBITA margin was 11.8 percent in the third quarter, up from 11.0 percent in the previous quarter, mainly driven by higher gross margin. Compared with the third quarter last year, when we reported an EBITA margin of 15.4 percent, it is primarily increased freight costs and higher depreciations that explains the difference between the years.
Fiber Solutions on par with the previous quarter
In North America, we continued to see a slight increase in demand during the quarter, especially in our fiber connections to the home (FTTH) business, which developed strong. We are seeing increased interest in our cost-effective and flexible FTTH system among US customers, which is pleasing. There is continued price pressure on duct sales, and we expect this to continue in the coming quarters. In early October, our new duct factory in Utah was completed. The factory will be our fourth duct factory in the US and complement our offering geographically through proximity to customers in the western United States. This means we are now well positioned as one of the few suppliers with a nationwide offering in the US. Production will start on a small scale and expand next year as demand increases. For the fourth quarter, we expect only marginal volumes from the new factory, while at the same time, it entails higher costs in the start-up phase, which will be charged to the fourth quarter of this year and the first quarter of 2025.
In Europe, demand remains weak, and prices are under pressure in most markets. In particular, the UK and German markets remain at low levels.
Sales in APAC declined during the quarter due to weaker market, primarily in Australia and New Zealand, and the fact that last year's third quarter included a delivery of submarine cables.
Overall, sales in Fiber Solutions decreased by just under 5 percent in the third quarter of this year compared with the corresponding quarter last year. Compared to the previous quarter, sales were approximately 2 percent lower.
Positive development for new focus areas
Our new focus areas, Harsh Environment and Data Center, continued to develop positively in the third quarter. Compared with the corresponding quarter last year, sales increased by 47 percent and 8 percent, respectively, mainly driven by acquisitions. The new focus areas account for 26 percent of the Group's sales in the third quarter.
Sales in Harsh Environment are slightly lower sequentially than in the second quarter. The changes between quarters are explained by the timing of deliveries of various projects.
In Data Centers, sales are sequentially slightly lower in the third quarter due to lower activity during the holiday season. During the quarter, one of our most important European customers approved us as a supplier for the US market. After the end of the quarter, we completed the acquisition of parts of Icelandic Endor. The acquisition means that we will further broaden our offering in the data center market, add new expertise and strengthen our customer base and presence in Iceland, Sweden, and Germany.
As previously communicated, our acquisition agenda primarily focuses on strengthening the offering and presence in Harsh Environment and Data Center. We currently have an interesting pipeline of potential acquisition candidates.
Reduced net debt and continued good financial flexibility
We continue to have good financial flexibility for long-term value creation. During the third quarter, our interest-bearing net debt (i.e., excluding IFRS 16) continued to decrease and amounted to SEK 1,922 million at the end of September, compared to SEK 1,996 million at the end of June. We continue to show solid operating cash flow during the quarter, with a cash conversion of 70 percent.
The interest-bearing net debt to EBITDA on a rolling twelve-month basis, reflecting our bank covenants, increased from 1.9 to 2.0 times during the quarter. Including IFRS 16, this corresponds to an increase from 2.2 to 2.3 times EBITDA during the quarter. This is explained by a lower EBITDA result for the last 12-month period compared to the previous quarter.
Outlook for the fourth quarter and beyond
We are now entering a seasonally weaker quarter, and we consequently believe that sales will be lower than the just-concluded third quarter. In Fiber Solutions we have seen a return to the seasonal variations that prevailed before the pandemic, i.e., lower activity in the fourth and first quarters due to winter conditions. Overall, we are cautiously positive for next year and see signs of improved markets in several countries, although macroeconomic factors make the situation difficult to assess in the short term.
In the long term, we see underlying solid structural trends that support the continued deployment of fiber optic systems globally. The positive driving forces expected to contribute gradually to a better market situation are lower interest rates and government initiatives. These include the government investment program in the US, BEAD, which we believe will be an important driver for primarily our duct business for many years to come. The program continues to progress, and so far, 55 out of 56 states/regions in the US have been approved for BEAD. The program is now expected to start reaching the market by mid-2025, which is later than previous estimates.
For our new focus areas, Harsh Environment and Data Center, we believe that the market will remain strong for a long time to come, mainly driven by investments in defense, energy, and AI. For Harsh Environment, a stable end to the year is expected, albeit lower than last year, when the fourth quarter was a record quarter positively impacted by a larger delivery to the defense industry.
The order book at the end of the third quarter corresponded to approximately 2.5 months of sales where we estimate a normalized order book is 2 to 3 months
Hexatronic is today well positioned for continued profitable growth. We have diversified the business well in recent years, with investments in Harsh Environment and Data Center being attractive growth areas. At the same time, we continue to develop and strengthen our offering in Fiber Solutions.
Welcome to join us on our growth journey.
Henrik Larsson Lyon
President and CEO Hexatronic Group AB (publ)
Presentation of the interim report
Hexatronic will present the interim report at a webcast conference call today, October 25, 2024, at 10:00 CEST. CEO Henrik Larsson Lyon, CFO Pernilla Lindén and Deputy CEO Martin Åberg will participate.
Link to the webcast: https://ir.financialhearings.com/hexatronic-group-q3-report-2024
Please direct any questions to:
Henrik Larsson Lyon, President and CEO, + 46 (0) 70-650 34 00
Pernilla Lindén, CFO, + 46 (0) 70-877 58 32
Pernilla Grennfelt, Head of Investor Relations, +46 (0) 70 290 99 55
For further information, visit https://www.hexatronic.com/en/investors
About Us
Hexatronic creates sustainable networks all over the world. We partner with customers on four continents - from telecom operators to network owners - and offer leading, high-quality fiber technology for every conceivable application. Hexatronic Group (publ.) was founded in Sweden in 1993 and the Group is listed on Nasdaq Stockholm. Our global brands include Viper, Stingray, Raptor, InOne, and Wistom®.
This information 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 persons set out above, at 2024-10-25 07:00 CEST.
