HEXATRONIC GROUP AB (HTRO) Q1 2026 Earnings Call Transcript

Good morning, everyone, and very welcome to this Hexatronics Irvings call for the first quarter of 2026. I'm Rika Fröberg, Group CEO. I have with me today Pernilla Lindén, our CFO, Martin Åberg, Deputy CEO and Head of Data Center Business Area, and Patrick Johannesson, Head of Investor Relations. Before we dive into the presentations, just commenting on this beautiful picture that we have here. It's an aerial footage of our flagship site in Hudiksvall, about three hours north from Stockholm, where we are today. And you see in the background, you can see the factory. And in the foreground, there's a ship that has docked here, and it's clearly loading submarine cable from the factory. and these are big cables and the only way that you can really transport them is from is via ship so with that said let's dive into the numbers and the presentation for the quarter which was in line with expectations overall we had revenue of 1.7 billion sec which was an organic decrease of two percent and this decrease was entirely driven by fiber solutions in europe whereas most other areas of organic growth. Adjusted EBITDA at 146 million sec, or 8.6% margin, which is sequentially slightly higher than the last couple of quarters. And we see that the strategic shift in our mix continues, with data center and harsh environment now contributing over 60% of adjusted EBITDA. And for the first time, the data center business in this quarter was the biggest profit contributor to the group for fiber solutions we saw a soft quarter revenue wise where market conditions in europe continue to be weak however the cost reductions are now coming through and adjusted beat the margin strengthened somewhat over the last two quarters data center continues strong margins and growth and harsh environment again so good organic growth but a margin that in the quarter was impacted by some unfavorable product mix. Operating cash flow was modestly positive, which is consistent with our typical seasonality and our net debt saw a slight increase as expected. Significant events in this quarter. We finished the first phase of our performance improvement program, the phase that was announced already in September of last year. And we made an acquisition in harsh environment or rather the acquisition was announced in the quarter but it was actually closed as of april 1st so it's not included jovo that is not included in the numbers of the quarter and we made some leadership changes in fiber solutions so we now have a clear regional commercial structure as well as created global teams for product management and supply chain. This slide, you've probably seen it as you follow us. We use it consistently because it's an important one. It clearly shows the ongoing transformation of Hexatronic. So we take Fiber Solutions, which was essentially all of Hexatronic a few years ago, and it still continues to be the largest business area in revenue, now accounting in this quarter for 58 percent of sales and 39 percent of adjusted EBITDA. Harsh environment continues to grow and has increased a couple of percentage points to about 17 percent of sales and including the UO1 pro forma basis will be roughly 20 percent of total and the biggest change is data center that's increased to 25 percent of sales and 46 percent of our adjusted EBITDA and that again makes data center for the first time now our biggest profit contributor in absolute terms and this shift is important um of course it's it's partially driven by the challenges that we've seen in fiber solutions but the bigger factor is the growth of the smaller business areas that now make up 44 of net sales pro forma so they're starting to become very meaningful and changing the makeup of hexatronic as a company and this gives us increased diversification but also, I would say, an improved portfolio mix as harsh environment and data center have higher margins and higher growth. And as a reminder, we have set a target that these two business areas are to account for at least half the business by 2028. So you can see here that it's a target that we feel we are well on track to accomplish. Diving in then to the different business areas one by one and starting with fiber solutions. The sales number, as noted, was weak in the quarter. And again, it really is market conditions in Europe that are challenging. And in this case, we also saw that unusually cold weather in the beginning of the year was an added headwind. Consequently, we had a January that was very slow. Some pick up in February and a rather strong March. So there was a positive ramp within the quarter. And we see that continuing with what looks to be a pretty solid April. If Europe was soft, the U.S., on the other hand, was a positive. And we have now for some time, we've set an expectation, I think, that sometime during 2026 that we will see momentum gradually pick up. And we actually saw that clearly in the quarter. And already in Q1, our organic U.S. sales were growing nicely, with a positive trend also exiting the quarter. You don't see that in the North American number, which is an effect of one major customer in Canada that had very low sales in the quarter. But for the U.S., we are now back to growth, which is very encouraging. It was also encouraging to see that despite a revenue drop year on year, the adjusted EBITDA margin improved sequentially. And there are two main drivers for this. So one is business mix. There was some impact where the APAC business, which is typically higher margin for us, had a strong quarter, but it also shows that the cost reduction program is effective. In fact, we're ahead of plan here, meaning that we saw most of the savings from the initial 110 million sec on annual basis. We saw most of that already into this quarter a little earlier than expected. We also saw some rapid developments when it comes to input costs. Resin prices and fiber prices are both going up. The drivers are different, where resin is really related to oil price and what's happening in Iran and the Middle East. Whereas for fiber, the main driver is really the root cause here at the booming demand for hyperscalers, which means that supply, it's a supply and demand thing where supply is getting increasingly tight. And we're responding, of course with price increases and we are confident that these costs will be fully passed on we also see competitors raising prices and however there might be a temporary under absorption on the way up we have of course we have existing contracts and already place orders that we need to that we need to honor but in totality we're pretty confident that that the costs will be fully passed on on an absolute basis overall in terms of market demand going forward we expect the europe headwinds to persist no worse no better at this point while the u.s momentum for growth continues or even strengthen so in summary a lot happening in fiber solutions some challenges and increased i would say volatility but also really encouraging to see the expected improvements in the in the important U.S. market is materializing, and also an adjusted EBITDA margin that after five sequential quarters of decline is now moving in the right direction. Moving over to harsh environment then, here the organic sales were strong, 9% growth, following the trend from prior quarters. EBITDA margin was hampered a bit by unfavorable product mix, and it's mostly defense orders in our u.s business where as we have flagged there's now an impact from the u.s government that shut down that we saw late last year this product mix was affecting dynamic cables whereas the connectivity segment and the sensing segments were both performing strongly and i i think we've said this almost every uh quarter but this is a pronounced uh project business it's not unusual to have some swings between the quarters and we need to look at i think the full year or the longer term trends still i think it's fair to say that for this quarter we're pleased with the top line but not necessarily with the margin and on the outlook we we do see the effects from the government shutdown also uh spilling into q2 but not beyond that longer term we're bullish about this base um it's it's of course difficult to really predict that what will happen geopolitically and the macro outcomes at this point but fundamentally though our two largest customer segments which are defense and oil markets and if anything we expect to be positively affected for example there's a lot of optimisms about Venezuela becoming a potential market still early days and we're not we're not seeing any orders but quite a lot of optimism among some of our customers there and then uh jovo system technique and we are absolutely delighted about the this acquisition uh it's a company with about 100 employees in northern germany and the core business is connectors that you see on the picture here and connector assemblies and they're sold mainly to defense applications we see this business as a proven market leader attractive prospects both long-term and short-term and in particular it supports our strategy to grow into leading player in connectivity solutions and we see opportunities to expand this business today they're very strong in Germany and I would say Central Europe but we we see that through the broader reach of Hexatronic we can expand across Europe and potentially worldwide and with this deal harsh environment business will be approaching 1.5 billion sec against our stated 2 billion sec target for 2028 so it's an important step towards that ambition therefore we feel good about this one the business trend and the momentum is strong and the deal has a good value too and i will now hand over to martin to give a bit more color on the specific deal and the terms

Thank you, Richard. So let us have a look at the transaction structure and the purchase price. The acquisition was structured as a charity where we acquired 100% of the shares in the business. At closing, which occurred after the end of the quarter on April 1st, the fixed purchase price of 11.8 million euro was paid. And in addition to the fixed purchase price, there is an earn-out that is capped at 7.6 million euro depending on the future performance of the business and it is structured in a way that it's self-funded from the cash flows from YOLO. The potential earn out is based on the average EBTA over the next five years and will be paid out in the second quarter in 2031. If we then zoom in on the transaction multiples, The fixed purchase price represents an EV EBITDA multiple of 4.6 times and this is based on the 2025 profitability. Adding the earn out to the EV EBITDA multiple it can increase from 4.6 to a maximum of 7.6 times the 25 EBITDA. In order to reduce the valuation risk we are based on a long period of five years it is also based on the average or the accumulated profitability over the full period to avoid the risk of paying an earn out if a single year have an abnormal profitability level and finally in order to achieve the full earn out the company has to achieve a strong increase in profitability from where we are today if we then move over to the development of our data center business area for the first quarter the first quarter was another record quarter in terms of sales and profitability and we are pleased with a strong organic sales group of 20 percent geographically it was especially a strong u.s market that drove the strong sales group looking at the adjusted ebitda or ebitda it ended up at 73 million in the quarter which is a record and the adjusted margin is higher or in line with the last two quarters but it is two percentage points below the corresponding quarter last year and there are two main reasons that we would like to highlight behind the slightly lower margin the first is that our organic initiatives to expand our service offering is loss making but we expect that to be break-even level within the next three to six months and the second reason is strengthening of our organization to be able to continue to grow. And that's not only this year, but for several years to come. Looking at the second quarter, we expect a slightly higher probability than we had here in the first quarter. And then moving over to our market outlook, same message as we had last quarter. And that is generally a very high activity in the market. The market is expected to be driven by the hyperscalers or the wider cloud segment and if we look at our business mix the cloud segment remains the larger segment followed by the data center enterprise segment approximately 30 percent of our sales is towards customers with similar and high requirements and this is also a focus of our growth journey in order to have a balanced and resilient business mix if we look at our mna we are very active and have a strong pipeline with targets in different phases and finally to summarize the quarter our focus is to continue to strengthen our offering and to grow the business organically and by acquisitions and with that I hand over to Pernilla to summarize the financials for the quarter.

Thank you Martin. So overall we had net sales of 1.7 billion in the quarter with an overall decline of 10 percent organically we had a decline of two percent the strong performance the strong organic growth in data center and harsh environment was not able to fully offset the organic decline in the fiber solutions mainly coming from the emea region we had two percent acquisition driven growth from our recent acquisition communication zone within our data center business and our most recent acquisition JOVO will be, as Martin said, consolidated in harsh environment from the 1st of April in 2026. We continue to have a negative effect on exchange rate in this quarter. It's actually minus 9 percent and this is more or less all currencies that are weakened compared to the Adjusted gross margin at 41.3%, which is similar level compared to prior year. As Rick had said, our initial performance improvement program is finalized within Q1 as early communicated. And we have implemented these savings a little bit earlier than expected, meaning that we saw most of the savings within the quarter. Adjusted operating costs were 29.5% of net sales in the quarter, compared to 28.5%, but lower in absolute numbers. Adjusted EBITDA of 146 million, with an adjusted EBITDA margin of 8.6 compared to 9.8 last year. and the EBITDA margin compared to last year was negatively impacted by the lower sales in fiber solutions compared to the same period as last year as well as some price pressure and unfavorable product mix in harsh environment but noted that the EBITDA percent is up from Q4 2025 from 7.2 to 8.6. Net financial items of minus 14 million SIG is related mainly related to net interest expenses of 28 million, a positive effect of 14 million in other financial items which is related to revaluation of additional purchase price and acquisition options attributed to both currency effects and change assumptions. The effective tax rate decreased by roughly 15% points due to the recognition of a deferred tax assets related to non-deductible interest expenses from prior years supported by available deferred tax liabilities in the same jurisdiction. If we then take a look at Fiber Solution, total net saves for Fiber Solution of 1 billion with an overall decline of 20% organically and declined with 11%. A decline due to weaker demand in the FDTH equipment, primarily micro and price pressure overall in the industry. And that is mainly related to the European organization, meaning Europe declined with 13% due to the weak performance across primary markets, and also that the lack of material submarine cable revenue within the quarter. North America declined by 18%, but we had, we're pleased to see that we had organic growth in our U.S. market, but that was not able to offset the decline in Canada and also the negative FX effect and the growth in U.S. is mainly related to the FTTH business. APAC grew with 28% driven by all primary markets and were related to some larger projects. The fiber solutions business also then of course were affected, the positive affected by the performance improvement program that was finalized during Q1. Resulting in adjusted EBITDA of 61 million or 6.2%. Profitability was hurt by the lower sales volumes mainly within my product and continued price pressure partly offset by the implementation of the performance improvement program. Sequentially we are on the same level and margin increased by roughly one percentage point. We have no CAPEX investments in the quarter, 9 million or 0.9% of sales, which is mainly related to maintenance. Harsh environment. So total net sales for harsh environment of 283 million C, a decline of 1%, but an organic growth with 9%. Growth driven by biodynamic cables, and connectivity solutions overall. And as previously communicated, the companies within harsh environment have an international customer base, and the majority of revenue comes from larger projects, which means that sales and margin can fluctuate between the quarters. Adjusted EBITDA at 24 million SIG and margin of 8.5, due to an unfavorable product mix driven by timing of projects and the U.S. government shut down in 2025. COPEX investments in a quarter of 10 million or 3.6% of sales mainly related to production and efficiency improvements in our U.S. manufacturing plant. As Martin said, a record quarter in data center with total sales of 434 million SEK with their overall growth of 20%, organic growth of 20% and the acquired growth of 8% from communication zone that was acquired in November. That was offset by the 9% negative EPICS effect. Adjusted EBITDA margin of 16.8%, two percentage points lower than prior year, mainly due to organic investment to grow and broaden our service offer. COPEX investments in the quarter of 3 million or 0.7% of net sales. Cash flow from operating activities before changes in working capital of 112 million SEG. Negative effect from working capital of 83 million in the quarter. That is mainly related to increased accounts receivable due to a strong end of the quarter. Partly offset by the increased accounts payable. Cash flow from operating activities of 29 million SIGC representing 26% cash conversion. And overall then when it comes to investments, we had maintenance CAPEX investment of 22 million SIGC equivalent to 1.3% of SIGC. Net debt, which corresponds to net debt excluding lease liabilities amounted to 1.7 billion SIGC at the end of the quarter, which is an increase of 90 million compared to last quarter and that is due to the strengthening of the U.S. dollar, just a revaluation and investment in our operations plus a decreased rolling 12 adjusted EBITDA leading to a net debt in relation to pro forma adjusted EBITDA on a rolling 12-month basis of 2.2 during the quarter. Looking forward we have a burnout connected to a prior acquisition that will be paid out in Q2 2026 which will increase leverage by roughly 0.2 percent or else equal. After that we expect the leverage to come down operationally.

At the end of Q1 we had 603 million of cash and 1.1 billion of unutilized backup facilities which gives us a liquidity of 1.7 billion so we have a continued solid financial position okay if i summarize the key takeaways from the quarter net sales were down two percent organically and this decline was entirely caused by the headwinds in fiber solutions in europe but we turned a corner to reclaim organic growth in the important u.s market and now with a sequentially improving margin data center was now the largest profit contributor and again saw strong organic growth and margins harsh environment delivered solid organic growth and we saw a temporary margin decline here so all in all the ongoing transformation of hexatronic continues with harsh environment and data center continuously increasing in importance and they now account or about 44% of sales after the Yorva acquisition. And we have a solid financial position with discipline in both cost controls and M&A. Finally, a few words on the outlook and starting with fiber solutions. We do expect the headwinds in Europe to persist at, I would say, roughly the same level as today. No better, no worse is what we're seeing in the market. but offset by growth in North America. Macro environment is impacting raw material cost and we are countering with price increases. Timing is still to be seen and therefore there could be some temporary risk or pressure to margins. If so, we expect that this would be primarily in Q3. So we would come back with an update after the second quarter where we have more clarity. Also noting here that the submarine business is looking very strong with an order book that is largely full for 2026 and starting to get pretty full for 2027 as well. We're almost at the point where its capacity is the bottleneck more than anything. Timing of shipments is important. They were low in the first quarter. we see a little bit more shipments but not major in q2 and the big peak this year will be in the third quarter where we have some large shipments scheduled of submarine cable and as noted we saw most of the cost savings already in the first quarter so we expect these to remain of course but not a major step up in coming quarters for data center i think it's a pretty simple story really continued strength in this business demand is good order book is good and we do expect a modest margin increase in q2 for harsh environment the longer term outlook is positive the market is robust particularly in defense however for the same reasons as in q1 we could see margins to be somewhat muted in q2 with the normalization in the second half and then some overall factor As Pernilla mentioned, we have seen FX as a major headwind to our top line in recent quarters. That should now start to abate going forward with the exchange rates that we're seeing today. We do expect a slight increase in leverage in Q2 driven by an upcoming earn-up payment.

And we do continue to have an attractive M&A pipeline with focus on data center and harsh environment. so with that we'll move over to q a section if you wish 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 please limit your questions to a maximum of two if you have additional questions feel free to rejoin the queue the next question comes from Max Bako from SEB. Please go ahead.

Thank you. Hi, Richard, Martin and Penilla. Thank you for taking my questions. Perhaps starting with the cost increases and also the price increases going forward. You said that you expect to be able to fully compensate.

Can you give any indication of the magnitude that you expect how much will prices be increased within the fiber solution segment as it looks right now if you have anything to add to that i i don't think thank you max um fully understand the question i don't think we we will give a number on that uh one there's you know it's for competitive reasons but but also quite frankly we don't know what's happening uh to oil prices um what i will say and the way i would think about it is um the the uh you know the plan and the ambition is to keep gross profit uh in absolute terms so in sec or dollars uh the same we're not intending to increase prices more so that we make more money but we're certainly planning to pass on 100 of the price increases as i said Possibly with some timing, what we've seen historically is that sometimes on the way up, you're lagging a little bit on the price increases, but you typically make that back on the way down because you can hold on to higher prices for a little bit longer when raw materials come down. So over the cycle, I see it as a net zero sum game, but there could be some phasing potentially.

Okay, sounds very reassuring. And then the next question on the harsh environment segment, which as you guided for ahead of the quarter impacted by both the weather and then also the government shutdown in the U.S. margins down some 1.7 percentage points year over year. Do you expect to see a similar magnitude in Q2 or perhaps less so?

Yes.

On the margin pressure.

Yes, we see that effect also within Q2.

Okay, understood.

I think that was my two questions for the moment. i'll jump back in the queue thank you max the next question comes from adrian galani from abg sundal collier please go ahead uh can you at least split out how much of the rom and the pnl is red cancer things can you give a rough approach um i mean fiber i i don't have a number because

it depends so much on which specification on fiber and it also depends on on contracts that are confidential um i think for resin the uh the rough guidance is that at least so far what i've seen is that it's it's followed uh quite correlated with oil price so the oil price is up 10 percent i'm not sure if that will hold in the future but so far it seems to be a rule of thumb okay and uh the raw material that that's that's not something that we're disclosing At this point, I'm not sure that there is a discrepancy. We're working through that at the moment. I think resin prices is more or less a spot market. It's a commodity, but there are lead times, right? So it's more about measuring what we have in inventory and what we have on the water, so to speak, versus how quickly we can increase our prices. uh the fiber market both on our you know on the sourcing and on the customer side tends to be a little bit uh longer contracts all right thank you adrian i i understand that this is something that's important uh again i think reality is that there will be some impact to the top line here which is very difficult to predict because the world changes every day uh but again i i do think that it's a reasonable assumption that over time the gross dollars gross margin dollars or sec will be largely unimpacted thank you the next question comes from frederick nielsen from red eye please go ahead thank you hi um i was thinking about the improvement in the u.s fiber solution market is that both within duct and your fiber systems and is it current customer increasing their rollouts again or is it more new customers coming into you it's it's yes yes and yes it's both new customers and also um some some historical customers that had slow build-out levels last year are coming back uh with much more aggressive plans now um and it's also it's both fiber cable and duct and conduit and i i would say in particular recently particularly in conduit we've seen uh very good volume momentum you know we have talked about that has been the case for a while but it's so far been offset by uh year-on-year price declines I think that year-on-year price decline is mostly behind us now.

Okay, I see that's clear. And regarding investments in data center, as far as I understand, you are looking for more niche markets perhaps rather than investing more into hyperscalers. I mean, why is that given the very strong growth we see within hyperscalers?

Yes. So, I mean, hyperscaler, we have served the hyperscaler market for a very long time, very long relations. We're very well positioned to continue to capture that group. So we'll continue to focus on that market. What we're saying is that we would like to have a balanced and very resilient business mix. So still we expect hyperscalers to be dominant in our exposure but we also would like to broaden the customer base and it's the customers with very high requirements and a similar offering so it's very much in line with what we have been doing what we're doing okay great that's all for me thank you the next question comes from Max Bako from SEB.

Please go ahead.

Yes, hi again. Two more, if I may.

Of course.

Thanks. So, perhaps, circling back to the harsh environment segment, you said beyond Q2, you expect to be back to normal levels in line with quarters seen previously. But shouldn't we be able to expect some some continued margin improvements beyond q2 year over year driven by underlying improvements in rochester cable and then potentially also some some operating leverage on volume growth yes i think that's that's a fair uh expectation and i would have the same expectation uh i think given the first quarter i don't really have that visibility to to commit to that here and now but that would be the expectation perfect um and then on fiber solutions i mean you have talked some time about the very strong demand within submarine cables and you highlighted here that you know for the books for 2026 and almost 2027 as well do you have any concrete plans to to expand the capacity up in hood exam for submarine cables it it's i mean we're looking at different options uh obviously and i think uh if we have if we have any concrete plans we will come back and inform the market about that in due time okay yeah understood uh that's possible thank you the next question comes from adrian galani from abg sundal collier please go ahead uh yeah

What is it that in Q1 and then in Q1?

First of all, we mentioned two things that impacted the cost for the quarter. If we look at our organic initiatives, we expect a smaller loss we expect it to be retrieved in the next quarter or the following quarter. And also a mix of projects is what we're expecting.

Okay, thank you. Turn them in the outlook, which is a rough indication.

Yeah, we had a similar peak in Q4 of last year, and we expect that Q3 this year will be at that level or probably a little bit higher than that, even. So there's at least 50, if not a little bit more, additional sales in that segment compared with Q1 and Q2. and that's pretty good profitability.

Okay, that's fair.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. There are no more phone questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.

Thank you. So we have a few questions also coming in online, so we will read those so that management can answer them. So the first one is, could the input cost inflation in fiber solution lead to demand destruction, especially if you raise prices one to one? What does your dialogue around this with customer look like?

I think in the U.S. the market is strong enough that it's not an issue. and and keep in mind these are big construction projects and the uh you know the the material part tends to be uh 20 or less uh so even if there's significant increase to the to some of the materials uh the total project cost doesn't go up that much um i would be i would be more um concerned about that as a possibility perhaps in uh in the european market which is a little bit soft already we're not seeing it today but i'm not ruling that out thank you rickard so the next question is what do you think about upcoming orders from the bead program so this is an interesting one and it's been discussed uh very heavily and uh back and forth it's by now it's clear that the bead program is moving forward i think we're already starting to see some effect of it in the market but i think it's pretty minor today um however as of the second half of 26 i expect it to become a more uh meaningful driver of volumes in the u.s but also keeping in mind that you know the bead program is is one of many factors uh i i've said for some time now i think we should look at it as a cherry on the cake uh and not bead alone will drive the market i think that there are many other factors that are also important interest rate is one of them a lot of the funding is not beat a majority of the funding is still private and a lot of that is private equity and interest rates are very important thank you for those comments rikad so the next question is could you put your submarine cable comments into perspective so we say in the quarter largely fully booked for 2026 and filling up for 2027 what is the magnitude of such and order book relative to the sec 50 delta mentioned in q4 2025 yeah we're deliberately um trying not to disclose it exact for competitive reasons exactly how much uh we're selling and and you know what margins or pricing we have there uh so i i would i think i would repeat what i said that it's looking it's looking good uh we have an almost full order book for 26 and it's quite rapidly filling up for 27 as well thank you for that rickard next question is what is the typical lag in terms of margin recovery when you put prices through based on your experience i would say a couple of months okay thank you and then we have a last question also

So can you give a guidance on CAPEX, which has been very low now for the last five quarters? What's a reasonable expectation for the full year?

So the guidance that we have given when it comes to CAPEX is that it would be very low then for data center, around 1%, and that's probably what we've been seeing. Harsh environment, 3% to 5%, which is also where we've been. Where we've been lower is within the fiber solutions area. And then we guided over time that it should be around 3%. And what we've said there is as well that we have capacity in many areas. But if we see that we need some more capacity, then we will add that over time.

Thank you for that, Pernilla. There are no more written questions online, so I hand it back to Rickard for some final comments.

Okay. Thank you, everyone, for calling in today. and we will see you again in three months time.