Release Date: July 16, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Hexatronic Group AB (HTROF, Financial) reported a sequential net sales growth of 14% in Q2, driven by a modest recovery in Fiber Solutions and continued growth in Harsh Environment and Data Center segments.
- The company achieved a strong cash flow from operating activities amounting to SEK221 million, corresponding to a cash conversion of 115%.
- Harsh Environment and Data Center segments showed significant growth, with Harsh Environment growing 95% and Data Center growing 31% compared to Q2 last year.
- Hexatronic Group AB (HTROF) maintained a strong financial position with a leverage ratio of 1.9 at the end of June.
- The company signed a new contract with NOVOS FiBER in the US, expected to generate approximately SEK400 million in revenue over three years.
Negative Points
- Hexatronic Group AB (HTROF) experienced a negative growth of revenue of 10% and a negative organic growth of 18% compared to Q2 last year.
- The EBITDA margin decreased to 11% in Q2 from 17.9% in Q2 last year, despite an improvement from 9.4% in Q1.
- The Fiber Solutions segment faced a decline of 23% in Q2, primarily due to higher financing costs, inflation, and price pressure.
- The company reported a higher tax rate above 30% of pretax profit in Q1 and Q2, attributed to non-deductible interest expenses.
- Hexatronic Group AB (HTROF) expects continued price pressure in the Fiber Solutions and duct business in the US throughout the year.
Q & A Highlights
Q: Could you talk a bit about the outlook, especially regarding the seasonal variations and the net impact from improved underlying market activity in Q4?
A: We expect the market to gradually improve towards the end of the year, but we also anticipate some seasonality effects. Q4 typically has only 2.5 months of business, and customers usually avoid holding large inventories at year-end.
Q: How do you see the potential impact on the BEAD program if there is a change in the US presidency?
A: The BEAD program is part of the IIJA infrastructure investments and Jobs Act, a bipartisan deal. With 17 states already fully BEAD approved, it would be challenging to reverse or stop the program.
Q: The margin after raw material costs was up significantly compared to last quarter. Does this indicate an improvement in the pricing situation for fiber?
A: We have seen similar price pressure globally in Q2 as in Q1, with a bit more pressure on the duct side in the US. Overall, there has been no improvement in pricing.
Q: With the Utah factory nearing completion, are we seeing the full effect on the cost base from that plant in Q2 numbers?
A: We have some costs already, but more operating costs will come as we start production. The plant will have a gradual ramp-up depending on market demand and customer acquisition.
Q: The tax rate was above 30% of pretax profit in Q1 and Q2. Why is it higher than historical levels, and will it reverse in the second half of the year?
A: The higher tax rate is due to non-deductible interest. Changing this structure will take time, so we don't expect it to change in the second half of the year.
Q: Did price pressure in Blue Diamond Industries worsen in Q2 relative to Q1, and how do you expect it to progress during the year?
A: We saw increased price pressure in the duct business in the US in Q2 and expect it to remain throughout the year. An uptick in market demand is needed to ease this pressure.
Q: Regarding Harsh Environments, was the strong performance in Q2 driven by any specific projects that won't recur in Q3 and Q4?
A: The growth in Harsh Environments is driven by both organic sales and M&A. You should expect some fluctuations between quarters, but less so year-over-year.
Q: With the Utah plant nearing completion, should we expect CapEx to come down in Q3 and Q4?
A: We will still see CapEx investments for Utah in both Q3 and possibly into Q4.
Q: How do you view the duct market in the western part of the US with the new Utah plant?
A: The western US is a significant market with fewer competitors. We have national customers showing great interest in our western plant. We will start production gradually and increase as demand picks up.
Q: How much of the growth in Harsh Environment and Data Center was organically driven in the quarter and year-to-date?
A: In Harsh Environment, most of the 95% year-over-year growth was M&A-driven, with some organic growth. In Data Center, the 31% growth was more evenly distributed between organic and M&A-driven growth.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
