Welcome to the Hexatronic Investor Update September 2025 presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key 5 on their telephone keypad. If you are listening to the presentation via webcast, you can ask written questions using the form below. Now, I will hand the conference over to CEO Rikard Fröberg. Please go ahead.
Good morning, everyone, and once again welcome to beautiful Stockholm and this Investor Update. I'm Rikard Fröberg, CEO of Hexatronic Group, and here is the purpose of the session today. First, we want to provide more insights into the three business areas that make up Hexatronic of today. These business areas were created earlier this year and are the way we manage and run the business. As you will see, fiber optic communications is the common denominator, but there are important differences between the business areas. As we know, the fiber solutions business is currently the one that is challenged with difficult market conditions, and we are therefore launching today a performance improvement program and will give specifics about its content. Finally, we're also introducing new financial targets now by business area to replace our previous group-level targets.
With me today, I have Deputy CEO Martin Åberg, CFO Pernilla Lindén, and Head of Harsh Environment, Jakob Skog. Here is the agenda, and we're already into the first point, which is an introduction. We will go to fiber solutions, followed by data center and harsh environment. Last, I will do a short wrap-up, and then we will take your questions. I've been here now for about six months in role, and of course, initially there was a sharp focus on just getting to know the business, our customers, investors, and employees, of course. Rather soon, it became clear to me that we have some really exciting opportunities in our business, but also need to make some changes, particularly when it comes to fiber solutions business. We announced in July a necessary performance improvement program, and today we are here activating this program and starting the implementation.
As I look at Hexatronic and where we are today, there are a few key insights and reflections. Clearly, Hexatronic has enjoyed strong growth and success for a number of years up until about 2023, but then the tide kind of turned, and we now need some course corrections. I view the creation of the business areas as a critical step on that journey. The business areas all have different needs and opportunities, and by organizing ourselves this way, we can better focus on each of them. Two business areas are very much on track with strong performance, strong value creation potential that really could transform this company. The third one, fiber solutions, is in a turnaround situation. We have been very focused on the FTTH or the fiber to the home market, and for a long time, that market served us very well, but now it's challenged.
We need to adjust our cost base to this new reality.
You are the last party in the conference.
We have to find new sources of growth. That is exactly what the performance improvement program is designed to do. Two words that you will hear repeated throughout the presentation today are diversification and differentiation. First, diversification. We will, of course, continue to serve the FTTH segment, but if we look at the longer-term horizon, there is an opportunity for Hexatronic Group to build significant positions in harsh environment solutions and data center solutions, which we think can be about half the business by 2028. Within fiber solutions, we have opportunities to diversify beyond just fiber to the home. Second is differentiation. Historically, I would say that Hexatronic Group has driven differentiation primarily through innovation and a strong system selling approach. We will continue with this, and in fact, on innovation, I feel that we can accelerate.
We will deliberately expand and invest in the part of our portfolio that has higher differentiation. We are now also taking some steps to reduce capacity in the more standardized segment. With this approach, we can gradually shift or move our business blend or the center of gravity towards the higher differentiation, which always tends to have more stickiness and also higher margins. This is a journey, and we are on that journey already. If we go back a few years to 2021, Hexatronic Group was pretty much a pure-play Northern European fiber solutions business. Today, one-third and growing of our business is the new businesses. If you do the math on our new financial targets, you will quickly realize that by 2028, we could be about 50-50 on revenue and more than 50% on profits from data center solutions and harsh environment solutions.
That is a very different company from the Hexatronic Group of 2021 and even today. If we take a look now at the new financial targets, you will see that we are setting a higher margin target for data center solutions and harsh environment solutions than fiber solutions. This is driven by their level of differentiation being higher than fiber solutions. You will also probably notice that the 15% EBITDA target for data center solutions is actually slightly lower than where we are today, where we have been trending in recent quarters. We do not want to lower our margins, but this is a longer-term target over a business cycle. We're currently putting a fair bit of resources for organic growth into that business, which we feel will pay off long term, but in the short term is a bit of an investment.
For harsh environment, it's the other way around. We're not yet at the 15% margin level. Also, important to note, this is a longer-term target. We feel that with the nature of that business, we should be able to get to 15% over time, but it is a step-by-step plan. Also, for fiber solutions, we're currently trading lower than this target, and we'll cover shortly what needs to happen to close that gap. The second financial target is the 2028 top line. This does include M&A growth, which has always been an important driver for Hexatronic Group. You will see again that we have an ambition to grow both harsh environment and data center substantially, which will in turn gradually drive up the blended margin of the group. With that introduction, we will be heading on to the section covering fiber solutions.
Skip that one, and let's start with a recap of the portfolio that sits within fiber solutions. The biggest share here is the FTTH and transport network products. While there is some product overlap between the two, the easiest way to think about it is that the FTTH or fiber to the home is the last mile, the fiber to the home or the last mile, right? The transport networks are more the middle mile and the backbone. Typically, larger cables, higher fiber counts, the motorways of data network, if you like. It's currently that transport network market that sees growth, driven by the need to connect data centers around the world, while FTTH is clearly quite soft, particularly in Europe. You have submarine cable, which is a smaller business but highly differentiated and showing good margins as well as growth prospects.
Conduit and pipes, it's perhaps the least differentiated part of the portfolio, and this is unsurprisingly where we see quite heavy price pressure. We have some currently smaller segments rounding out the portfolio with instruments, tools, wireless products, and training. As a consequence to the current FTTH market softness, we saw a clear decline in demand after the boom years in 2022 and 2023. There seemed to be a bit of a stabilization, but unfortunately, and somewhat unexpectedly, there's been a renewed decline in demand in recent months. That brings us to where we are today. We're starting at about SEK 5.2 billion revenue on a run-rate level, and we have set a target to reach SEK 6 billion by 2028. This is about 4% annual growth, and we see that most of that growth will come from the U.S. market organically.
In fact, we expect Europe to be rather flat. On the margin side, we target 10% EBITDA over a business cycle. Today, we were at 6.4% in Q2 after four consecutive quarters of margin compression. This margin decline is troublesome. Clearly, we have a lot of work to turn this around, and that work starts today with the performance improvement program targeting SEK 110 million of EBITDA improvements through hard and direct cost savings. This SEK 110 million corresponds to, for fiber solutions, about 2% of EBITDA margin. Based on where we are today and that savings, you can see that we will close a fair chunk of the gap, but not all. The remainder of that gap, we plan to close from operational excellence initiatives such as procurement savings, scrap rate reductions, and things like that.
These savings are more long-term oriented and will be gradually captured with start in 2026. Let's take a look at the program in its totality. It has three main components: one, cost savings from consolidating the footprint; two, operational excellence; and three, growth initiatives. I would call it like one is short-term and hard cost savings, followed by more medium-term margin and productivity improvements and a growth. Zooming in on the first component in those cost savings, we are today announcing that we plan to close the plant in the Netherlands, a factory called Weterings, and consolidating volumes in Europe in our facilities in Sweden and Austria. This will give immediate cost savings and also benefits in higher volumes and better loading for the remaining lines. We're also restructuring and right-sizing the broader organization across Europe, both blue-collar and white-collar. Some smaller unprofitable businesses will be discontinued.
In total, these actions correspond to a workforce reduction of about 120 FTEs. I will now hand over to Pernilla for some more specifics on that part of the program.
Thank you, Rikard. The performance improvement program phase one, called Consolidate Footprint, consists of savings in total of SEK 122 million and an EBITDA effect of SEK 110 million. The EBITDA impact from the cost reduction activities is compared to the cost levels the first half of 2025. The program consists only of sustained savings, so no short-term savings. The program is linked to fiber solutions and is mainly in the EMEA region. The program includes the planning of the closure of the Netherlands manufacturing plant called Weterings. We also consolidate volumes to our other manufacturing plants in Sweden and Austria, as well as right-sizing our other manufacturing sites, commercial and back-office teams. Overall, two-thirds of the program is linked to FTE reductions. In total, 120 FTEs are affected.
We have indirect labor savings of SEK 58 million, SEK 26 million of direct labor, and then the rest is related to reduced facility costs, other costs, depreciation, and offset by some discontinued business, mainly related to the closure of Weterings. In summary, the performance improvement program phase one, called Consolidate Footprint, consists of a total EBITDA effect of SEK 110 million. The cash effect, the cost of the program, is SEK 125 million, and the non-cash effect is SEK 105 million, totaling a total cost of SEK 230 million. The one-time cash effect of SEK 125 million is mainly related to severance costs, facility costs, and transition costs. The non-cash one-time consists mainly of tangible assets and inventory related to the consolidation of the manufacturing footprint in EMEA.
Overall, the cash payback of the program is 1.2 years, and the materialization of the program will gradually take effect with full run-rate impact end of Q1 2026. By that, I will hand over to Rikard again.
Moving on then to the second component of the program, which is operational excellence. This is slightly more long-term in nature and will target reductions in scrap rates, improved yields, sourcing savings, as well as reduced working capital, mainly in inventory. We're not disclosing a specific number here, but to give you an idea, I would describe it as this is the way to close the remainder of the gap after the SEK 110 million of direct savings. Last but certainly not least, we have targeted growth initiatives to get the fiber solutions business back to growth. Let's take a look at where we see the main ones. Starting with the FTTH market, this graph shows that some of our core markets are beginning to become mature.
The Nordics, except for Finland, have been there for quite a while, and while there's still solid business to be had in those markets, the rate of fiber build is more driven by things like new construction and infrastructure. The UK is also beginning to see this shift with 70% now of homes passed and a clear trend towards homes connected rather than homes passed. However, the U.S. has a lot of build to do and remains our biggest growth opportunity within fiber solutions, both from market growth and from share gains, as we are a quite small player in the U.S. Germany remains at low levels but hasn't really picked up and probably needs some trigger, maybe a political change for that to happen. We've been waiting for that and others have as well.
We haven't really seen Germany pick up pace yet, but at some point that is bound to happen. However, while it's clearly then a mixed picture for the FTTH outlook, there are some adjacent segments with growth opportunities. Main ones listed on this slide with the most imminent ones on the left-hand side. Starting with submarine cables, while it's not very large today, it's a concrete and immediate opportunity for growth where Hexatronic is well positioned. Same with transport networks. It's a market that Hexatronic traditionally has put a little bit less focus on, but we're shifting that and we start to see a growing pipeline of opportunities here. Wireless is a segment that is forecast to show growth in coming years from an overall densification of networks, whether it's 5G, fixed wireless, or other.
There are some interesting plays in security applications and electrical utilities, but these are more long-term for Hexatronic. Let's take one minute and just review in a little bit more detail the submarine cable opportunity. These are cables manufactured in our flagship plant in Hudiksvall, Sweden. They are not the transatlantic cables, but rather for short and medium distances, such as connecting Sweden and Finland, for example. We see good demand and growth in this segment. It's fueled by an overall increase in data traffic, but also factors like security concerns and build-out of windmill and wind energy. This is an area that we expect to grow and invest in. An important enabler for growth in fiber solutions is innovation and product development. Innovation has long been in Hexatronic's DNA.
However, I think in recent years it has stood back somewhat as a lot of resources have been so focused on capacity expansions. Here we have an opportunity to now reboot and put once again more focus and more resources to true product innovation. I see opportunities to accelerate both the innovation process and also the commercial launch process with an objective to cut the overall lead time from idea to market quite significantly. I actually wanted to share today an example of a recent innovation that I think is great. It's about VIPER microcables. Microcables is one of our core brands, and it's been around for a while now. We recently launched an upgraded version, and while it may not look all that different, it's actually a significant improvement for the end user. In this case, that's the installer.
This is a first-to-the-world dry microcable, which means it doesn't have any of the typical grease that's needed to protect the fiber on the inside. Therefore, you can install it without wiping off the grease. This saves time and avoids a rather messy operation. In addition, there's a protective yarn inside, which on the new version sticks with the cover. When you strip the cover off, it sticks there, again saving time for the installer who doesn't have to manually remove it. If you do this, if you're an installer, you do this every day, all day, it's quite a big change. For me, this is a great example of innovation. Let's see if we can review a video that actually demonstrates this. Can we get the video, please? All right, you saw here clearly illustrated on the left, significant reduction in the time for the installer.
Really addressing an unmet customer need and therefore improving the customer's productivity and the total cost of installation. This is classic Hexatronic. Wrapping up for fiber solutions, to summarize here, we will reclaim the profitability. One, we're taking actions to reduce costs to the tune of about two percentage points of EBITDA margin. Two, operational excellence initiatives to drive margins further over time. Three, investments in growth and innovation. With this plan, we're targeting 10% EBITDA and SEK 6 billion of sales. That wraps up things for fiber solutions, and we move on to data center and Martin.
Thank you very much, Rikard. Today, I will provide an update of the data center business area. We'll talk about our offering. We're going to emphasize on the services side, talk about our financial targets that we are introducing, talk a bit about the state of the market outlook going forward, and also conclude with, okay, what is our strategy to really achieve those targets going forward? Looking at the financial overview, over the last three years, we have established a platform for growth. I will come back to that, but we have a very strong geographical presence. We have a strong offering and so on. Over the last three years, we have grown this platform to SEK 1.2 billion in sales or more than $120 million. This corresponds to an average annual growth rate of 46% throughout this period.
The majority of this growth comes from acquisition, I would say roughly 70%, but it's also a very strong organic growth rate. The business has been very profitable throughout this period. Over the past three years, the EBITDA margin has been in the range of 13% to 18%. Last 12 months, at 17.3%. Moving over to our offering, we are in a unique position to provide especially IT services to the data center builds. This is both for the U.S. market and the EMEA market. The core of this is to design and build the data center IT infrastructure, and that is really working hand in hand with our customers for the installation in the first phase, but then continue after the installation is complete. This is what we call smart hands or day two services. Here, we typically work a few years with the customers.
In some cases, the teams have been around the data centers for more than five years. Moving over to the product side of it, connectivity. This is our bespoke fiber optical assembly and patch panel solutions for end users. The products are designed and produced in the U.S., and we have this local production. We can really have short lead times to the customers and provide them with the products they need. Containment, that is our hot and cold air product offering. Every data center needs this product range. What we do is that we have the capability to design, produce, and manufacture this product offering. This is both in the U.S. and in EMEA. Finally, the LAN offering. This is a supply of copper-based systems for commercial products. It's end-to-end structural cabling, panels, cabinets, and wall boxes. It's a full turnkey solution for our customers.
We mainly focus on the Italian market, but it's also international sales outside Italy. As you can see, we have a combined product and service offering, which today is quite evenly split between services and product sales. The main growth potential we see is within services, where we address both the hyperscale and the colocation segments. This is really the segment of the market that is expected to have the highest growth rates over the next five years. Here we zoom in on our different services. We start from the top with the fit-out services. For us, this is really where it starts, the installation of fit-out. Typically, we have an in-design cycle here that can last for several months. From our design, we can then transfer an empty space or a white box to an operational-ready data center.
Moving on to the professional services, I talked about the managed services. When the data center operation is ready, we have these managed services, or what we call day two services. This is to support our customers, and they have daily cabling and engineering requirements throughout the lifecycle of a data center. Here we really can support them for a long period of time. Relocation comes next. After some years, the customer needs support in upgrading the infrastructure. Typically, it is after three to four years of time. The hardware has then taken a number of generations, and with more processing power, you would like an upgrade. This is where we can support our customers with the upgrade, and we can do it at their site, or we can help them relocate to a different geography.
Over the past six months, we have also increased our focus to three new business or service areas. Those have we traditionally, to a smaller extent, addressed, mostly done via subsuppliers. Those three new areas are electrical, physical security, and invoice wireless. That is basically our services side. To summarize the service side, we have a very sticky position with our customers. We help them from the initial design phase through installation, and then we support them for several years throughout the data center lifecycle. When they need to upgrade or relocate, we help them there as well. Now, by strengthening our focus on adjacent installation and managed services, we've become an even more strategic and integrated partner to our customers. This is super important with the high build rates and expansion our customers are doing. They are more dependent on having strong partners.
If we move over to our breakdown of revenue, overall, we have a clear focus towards the data center and customer segment, but we are very well diversified in terms of our offering and also our customer base. Close to 50% of our sales is today services, and the other 50% is quite evenly split between connectivity and LAN that we just talked about. We have this small containment part that is an interesting growth opportunity for us, both in Europe and in the U.S. If we look over to the breakdown of end customers, 40% is roughly to the cloud segment and 30% to the enterprise segment. 70% in total of our sales today is towards the data center market. If we look in the customer concentration area, our largest 10 customers today account for roughly 50% of our sales.
We have a good diversification in this business unit as well. Looking at where we are present today geographically, we are established on the two main key markets, and that is North America and Europe. Looking at the latest Deloitte report, those two geographies account for roughly 70% of the world market. When they forecast up until 2029, they see that those geographies will account for roughly 70% at that point in time as well. With the strong growth, it is really in our existing home market that we see that it will have strong growth. In terms of split of sales, 62% Europe, 36% U.S., and as discussed, quite evenly split between services and products. We continue to focus where we are present in our home markets. Today we're introducing two financial targets for the data center business area, one for sales and one for profitability.
Starting with the growth target, it is to grow sales from SEK 1.2 billion to SEK 3 billion until 2028. This corresponds to approximately a CAGR of 30%. To put this in perspective, over the last three years, we have grown 46% annually in sales. The first half of this year, we have not made any acquisitions in the data center business area, but we have been growing with 24% organically. All in all, the strong market outlook that I will come back to, that we see throughout this decade, makes us confident. This is also combined with a very actionable M&A pipeline that we see that we will hit this 2028 sales target. If we move over to the profitability target, the target is 15% EBITDA over a business cycle. If we look at LTM, until June, last 12 months until June, we were at 17.3%.
Over the last three years, we have been at plus 15%. We are today above this target. We have very healthy margins on both products and service side, and slightly higher on the product side. We have our own branded, very limited third-party products, so healthy margin on that. Also on the services side, we provide very critical services to the data center. They invest massively. There we can also charge a premium compared to different end customer segments for the same type of services. All in all, looking at our existing data center business, it is today performing above the profitability target, even after adjusting for a few products with higher than normal profitability. We are confident in the profitability target. This also gives us room for acquiring services businesses that we typically, on average, see are at 15% or just below.
Moving over to the market outlook, here we have four data center market segments. The numbers are from the most recent Deloitte report, and that covers the period from 2025 to 2029. If we start from the bottom and talk about the on-premise enterprise customers, the traditional data centers, this is data center owned and managed by the end customer or the customer itself. These are typically client-having CapEx, a bit slower technology path, and this market is expected to grow at single-digit growth rates. The higher growth segment of the market is the off-premises or the cloud segment. Here we see a transition from on-premise to off-premise, and that is for the reasons just mentioned. This is where the colocation data centers come into play. They are also referred to as multi-tenants. Multiple companies can share the same building, so it provides good scalability.
They share power, they can share cooling, internet connection, physical security, and all infrastructure you need. Basically what they do is that they move into an apartment, but they bring their own service. Depending on what you need, the needs you have as a customer, you can move into a one-bedroom apartment, a three-bedroom apartment, or a five-bedroom apartment. It's scalable in that sense. If the customer decides he needs the entire building, renting all apartments, then it is really a hyperscale lease market segment. Finally, hyperscale own, this is what you read about in the news. It's a very large data center. They are typically owned by companies: Microsoft, Google, AWS, Oracle, and the likes. To conclude, for more than 10 years, we have been working as a close partner to several of these cloud players.
This is the part of the market that is expected to have the highest growth rates for the next five years, throughout this decade. This is an important market for us because it accounts for 40% of our sales. We have good exposure here, and we see that we'll continue to grow in this segment. In terms of growth, to continue on that, we look at it from two different perspectives: first, our offering, and then the customer segments. With regards to the offering, we see the main opportunity within the services side. Here we are addressing the fast-growing cloud as I just described, and we have done that for more than a decade. Our main service today is what we talked about initially with the ICT services.
We will continue to grow and serve our customers with ICT services, but we'll also focus to increase our share of all that with our customers. We're doing this by increasing our focus on those adjacent services that are requested by our customers and that we already today partly serve through subsuppliers. These are the services that I mentioned: electrical, indoor wireless, physical security. Recently, we have made a strategic initiative to grow this side of the business by recruiting more than 30 new and skilled, experienced colleagues. For this initiative, we've had a very strong start, but we expect to be loss-making on this initiative with $1 million to $2 million SEK per month this second half of the year and turn it to break even early next year. We expect it to be quite a substantial opportunity already for 2026.
On the end customer dimension, 70% of our sales today is focused on the data center market. This will continue to be our key focus going forward. That said, we'll also continue to focus on our other 30% of the market. This is important for our diversification, especially when we talk many years ahead. The same services are requested for these end customer segments. We will really focus on the niches that have the highest requirements, where we still can enjoy good margins. An example of that is high-end customer offices and demanding industries, just to take a few examples. If we move over to M&A, we'll continue with our low-risk approach to M&A, working our existing markets, acquiring businesses that we know about, that are having similar offerings as we're having today.
We see that they are trading today or the sales price in the market is roughly 5 to 7 times EBITDA. We will focus still on the small, mid-sized segment of the market, so say enterprise value typically below €50 million. We'll continue to have this approach where we get aligned interests with the entrepreneurs, with the selling management teams, and also cap the downside using earn-out structures. If we're looking more on what we're searching for, and as we said, we see the main growth opportunity within the services side. The reason being also on the M&A is that some years back, there was a very high consolidation wave on the product side for data centers. We still see that it's super fragmented on services, both in the U.S. and in Europe.
We have conducted a structured search, and we have more than 200 companies on that list at different stages. To summarize where we are and the opportunities we see ahead of us, the market is a strong market. As long as we can see, we see it as continuing to be strong, at least throughout this decade. If we look at our mix, 40%, as I mentioned, was in the really high-growth segment, and then we have also an enterprise segment that is lower growth. If we look at the business mix, we see the addressable market is expected to grow at approximately 10% per year. We have in the past successfully gained market shares, and we see with the entrepreneurial team we have today, we see that we have good opportunities to continue to beat the market.
If we look at the financial targets, the majority of the sales is expected to come from acquisitions. Over the last few years, we have built a strong M&A pipeline, and we have several ongoing discussions at different stages, and we have ambition to close deals this side of the year. Industry peers are trading at industry multiples, I would say, at 5 to 7 times EBITDA. It is really accretive to earnings. What's also attractive in the data center business is that it's very asset-light. We're talking about networking capital to sales of 12 to 14% and capex levels of approximately 1%. Finally, we're introducing financial targets for the business area, the sales of the 3 billion SEK in 2028. We're confident to achieve this with this strong market growth we see and with the M&A pipeline we have today.
The same with the 15% EBITDA margin over the business cycle. We are today 2% above this, and we can look at LTM numbers, but also taking into account that we focus on acquiring services business that might be at 15% or slightly lower. We have some headroom there as well. All in all, we are in a good position. We are established on the main markets that are forecasted to have strong growth for the foreseeable future. With that, I would like to hand over to Jakob, that is Head of our business area, Harsh Environment.
Thank you, Martin. As Martin said, I'm having the pleasure of heading Harsh Environment. Today, I'll talk about the three units we have built within Harsh Environment, the markets we are in, with a dive on the RV segment, financial targets, and growth. We are mainly in the offshore applications, as you can see here on the nice picture. Let me start with an overview. It consists of the three business areas: dynamic cables, connectivity, and critical sensing. In critical sensing, we still have a legacy business into the backbone network. Since our last presentation, we've actually seen an uptick in activity, mainly driven by the bespoken data center build-out around the world. The strategy for us is to capitalize on the know-how and deploy that into growing sensing business areas. Our value proposition is a capability to enable very accurate temperature guidance to our customers.
Such a guidance is depicted here on the lower right. It is a system that can actually give a very precise temperature profile of a steel caster. We have installations worldwide and consider ourselves as the market leader in fiber optical sensing in the steel caster sector. Installing such an optical system drives the need for not only fibers, but also fiber connectorized solutions. There is a very close link with the connectivity unit. The connectivity unit serves all our main markets, being defense, industry, and energy. Here we act as the trusted advisor to mainly OEM companies. Our strength is in the optical understanding of how to combine optical cables and often two very different connector types from two different suppliers. It could, for example, be a radar system in Norway being installed or upgraded on a destroyer from a British manufacturer.
Each of them, we are the missing link helping to connect seamlessly those two systems. Over the years, we have grown a profound close relationship with key customers. We act almost as an integral part of the customer's design cycle. Our expertise is the design of such solutions in harsh environments like a critical radar system. Finally, to the left, we have the largest unit, dynamic cables. They are called umbilical cables because they act as multi-function cables carrying energy, data, and often a third function being, for instance, fluids. You can see such a cable down here to the left. They work as a working cable, and unlike conventional cables that are laid out, these are actually reeled on, reeled off multiple times. Such a reel on, reel off is what you can see up to the left corner where it is a part of an ROV system.
The yellow robot is called a working-class ROV, and these are the workhorses in multiple types of offshore applications. They're used in all parts of the lifecycle from exploration to decommissioning. I will come back a little bit later in a deep dive on those markets. The business unit is dominated by the dynamic cables. It currently generates more than 80%. Those working cables are, as just said before, mainly deployed in offshore installations, but also increasingly in defense, and connectivity has grown relatively quite a lot in defense. If we look at the customer segment breakdown, we are still dominated by energy, either directly or indirectly, but seeing an increasing activity in both defense and industry. Those markets are characterized by very long life cycles. We often see eight to even 10 years, or even further if it's a submarine, up to 20 years of deployment and design wins.
We have a very broad customer base, and even though a substantial part of the sale can be characterized as project sale, we have a high degree of recurring customers having almost the same top 10 customer concentration. Having said that, we do have more and more new customers coming on board, making the concentration amongst the top 10 going down from 50% to 40%, enabling us to have an even stronger and more diversified portfolio to grow from in the years ahead. Long-lasting designs are especially seen in the ROV markets. If we look at the ROV markets, we are in all the markets depicted here, being oil and gas, renewables, infrastructure, and so forth. These ROVs are in subsea construction, underwater inspection, maintenance, asset monitoring, as well as environmental monitoring.
ROVs are used in many offshore applications in the defense and recently even more to monitor the critical infrastructure. Recently, we also see an uptick in the trench and plow market. The trench and plow markets are being deployed in offshore renewables and infrastructure build-out and also driven by the high growth in offshore data cables. Trenches drive an increasing demand for specialty umbilicals and can be directly correlated to the increase of offshore cable laying activity. If we look more into how the market is divided, you can talk about new builds, service and maintenance, and asset and operator owners. We play in all three subsegments, and I've mentioned a few of the main customers here, operators. In terms of cable consumption, the largest part is being deployed in the service and maintenance segment.
However, being designed in the OEM segment does give you a head start when the cables must be serviced. We supply across all three segments and aim to be the preferred choice within the service and maintenance area. The largest of the three is the service and maintenance market. Just last week, Oceanering was awarded a four-year contract by Petrobras. Petrobras and their massive build-out is expected to drive a substantial part of this growth in this area over the next three to five years. Speaking of growth, we've definitely grown mainly by the acquisitions of the two large acquisitions in 2023, being Rochester Cable followed by Fibron. With the pause of acquisitions in 2024, we've been in a steadier period of organic growth as well as improving our profitability in the acquired businesses. We are trailing at a SEK 1.2 billion currently, and we are trailing around 10.5% EBITDA.
It is a project business, and in general, you can expect to see larger swings quarter over quarter than what we've seen in the last three quarters. Our focus going forward is on leveraging that we have manufacturing sites in both Europe and in the U.S., which enables us to better service international customers. With those two manufacturing sites, we are well positioned to capture the anticipated growth in the defense markets. In the defense market, especially in connectivity, we have a very strong foothold in the Nordics, as well as having an assembly set up in the UK. We wish to grow both organic by following our large accounts internationally and inorganic with a geographical focus. Being in close proximity with a service setup is a competitive edge here.
Like for data centers, we are introducing two financial targets for the harsh environment solutions business area: a growth target and a profitability target. The target to grow is to reach at least SEK 2 billion in the year 2028, which corresponds to a CAGR of 16%, where it is both organic as well as inorganic. It will be a combination of organic sales, growth, and acquisitions. Looking at the EBITDA target of reaching 15% is ambitious. However, the main levers here are getting Rochester Cable business up again, which I do believe is manageable, as well as driving business even more towards the defense and the high-margin industries. Then top it with acquisitions, we should be able to trend towards 15% no later than in 2028. A sustained growth within harsh environment solutions is believable when looking at the main markets we serve.
We actually see no shortage in the energy demand. Even if the geopolitical situation changes to a more peaceful world, which would lead hopefully to lower oil prices, there is an underlying very strong growth demand in energy. These cycles are very strong, and alone the installed base of offshore sites does require continued maintenance. In defense, our cable and connector sale is mainly driven by the naval build-out worldwide. It is a sector that is the second largest investment area for the military budgets. The upgrade, replenishment, and recent announcement of many new build-outs does signal a very strong growth ahead of us. In the industrial area, Rochester Cable has a very strong North American position, and we see a quite positive trend in the current business environment in North America.
As well as in general, as stated also in our last call, we continue to see more industries embracing the intrinsic value of fiber optics in harsh environments. To support our growth, we will have ambitions to acquire businesses in all three areas, with the bias of strengthening our cable harnessing and connector businesses, especially around the defense and industrial area. That market is a highly fragmented market space, both in technology, size, and geography, and is very suited for acquisitions for us. We have an ambition to acquire one to two companies, aiding to better have geographical coverage as well as portfolio expansion. Defense and industry markets are favoring high mix, low volume, and highly complex sales processes. Thus strengthening with acquisitions fits very well with our sweet spot and our stronghold of today. Looking ahead, we do have a strong market outlook.
The underlying demand in the energy sector remains very strong in the foreseeable future. If we look at the defense market, I've highlighted just two programs here, being ARCUS. It's a joint initiative between Australia, the United Kingdom, and the United States. It's a program that will run beyond 2040, and amongst other initiatives, it encompasses upgrades of new builds of submarines for all three countries. Recently, Norway announced an order for British destroyers, and we believe Sweden and Denmark are expected to follow suit. We are well positioned with local presence and sale to the prime contractors in Norway, Sweden, the UK, and the U.S., as well as having a sister company in Australia. As stated earlier, Rochester Cable is well on its way with efficiency targets we have set forth.
From a profitability standpoint, it might not quite be there or in line with our targets, so it will remain our focus in the next year. It's a multi-pronged approach where we invest in both people, the equipment, and modernizing the infrastructure, and we are well on its way. In connectivity, we expect to follow the growth of our defense primes, and we've been working with them for many, many years. We will also capture new industries while they embrace the intrinsic value of these hybrid solutions. We'll try to strive to strike the balance between the two business units, dynamic cables and connectivity, and that implicitly implies that our acquisition targets will mainly be within the connectivity sphere. I have a very positive outlook, and with these words, I'll give the final remarks back to Rikard.
Thank you, Jakob. All that remains for me now is to wrap things up, and then we will go to take questions. These are the key points that I hope you will take away from the session today. For fiber solutions, due to the current headwinds, we're taking decisive actions to consolidate and take out significant costs, but also go after growth. The capital needs going forward are relatively low, so we turn this business around and now drive for maximum cash flow. This cash flow can fund some really exciting growth opportunities in the harsh environment and data center space. If we're successful here, it can really transform what this company could be in three years' time. We hope that you want to join us on that journey. With that, I think we'll thank everyone for tuning in, and we will move to questions.
I know that we've had some questions come in already electronically.
Sure. We have one question here. Any more details on what happened in fiber solutions during Q2 2025? Based on peers' reporting, the softness seems to be more related to Hexatronic than a market issue. Any improvement during Q3?
Okay. A lot there. I don't think we have any more details on Q2 today than what we said at the time. I would disagree. When we look at the European market, I don't agree with the notion that it was Hexatronic. We know from many discussions that we have, this is a tough market. I think maybe in the U.S. it's a little bit different, especially we see there that the transport network market is quite strong, and we have some peers who are more positioned to that market, having quite positive momentum and also positive outlook. As I said before, we are shifting some focus there. We haven't seen it in our numbers yet, but we have a pipeline and an outlook there that is building, and that's making me hopeful for 2026.
In terms of if we see, there was a question, do we see an improvement right now? No, we don't. It continues to be a rather challenged market.
The second question then, in fiber solutions, do you expect any lost volumes for production plant close down and FTE reduction?
Yeah, I think the similar question came a couple of times. Yes, but it's not that material because there is, and I'll hand it over to Pernilla to comment on the numbers, but there's some irrigation business in the factory in the Netherlands that we don't intend to move. There's also a small business in Germany that we are exiting.
Up to $50 million.
Less than $50 million.
Less than $50 million, yeah.
In top line.
Yeah.
The EBITDA impact that we have given is a net number for any margin that was there.
Yeah. What M&A assumptions have you included in the financial targets in terms of acquisition multiples and sales growth per segment driven by M&A?
If we start with the M&A multiples, I mean, throughout the last 10 years, we have seen the multiples being roughly five to seven that we are doing and peers are doing. We expect it to be in that range going forward as well, and that is also the conversations we're having today. It's quite narrowed in to that range. In terms of M&A, we have not separated organic and M&A-driven growth, but we expect a substantial M&A growth, especially within the data center, but also within the harsh environment side.
If you could continue on the M&A agenda, how is the M&A agenda intended to be financed?
To be financed, yeah. We have a leverage today that we think is rather comfortable, so there's room to go a little bit higher there, especially if we see that short term, it's the right thing to do. Clearly, this is where the turnaround of the margin in fiber solutions is so important, both from a cash flow perspective and also from a net debt to EBITDA multiple perspective. We need to focus on that. We need to keep a close eye on the next six to nine months. Beyond that, I think that we will quite significantly start to delever from the cash flow generated by the business.
What is the timeline for the financial targets regarding profitability, especially on fiber solutions and harsh environment?
Starting with fiber solutions, the first step of that program, the $110 million, Pernilla, we've said that we will start to see some small effects in the last quarter of this year. As of Q1 of 2026, we will see most of that. The next bucket is the operational excellence. I would expect that to start kicking in during 2026. For harsh environment, I think I will hand over to Jakob to provide some color. As we have said a couple of times in this presentation, it will be a gradual process to increase. I think it's also important to remember it's a project-based business, so separate quarters can go a little bit up or down.
I would say on an annual basis, if we see a percentage point or two of margin improvement in a year, that would tell me that clearly we're on the right track, and I would be quite satisfied with that. It's not going to happen overnight. Anything to add, Jakob?
No, you're spot on.
Perfect.
That's all right. I expect at least to be there by 2028.
Postponing fiber optic cable manufacturing in the facility in South Carolina to 2027, but at the same time, ambition is to grow and diversify the customer base in the U.S. and Canada. How does that make sense?
Yes, we need that facility to focus. If we're really going to get the operational improvements, we need to focus on yield rates improvements and scrap rate reduction and that kind of stuff. At the same time, introduce a new and slightly different type of manufacturing, which we think would be a stretch. We also now have more certainty on the tariffs, and when we see that the tariffs weren't as bad as they could have been, combined with the relatively low volumes of that specific cable that was intended for production in the short term, I think it's quite manageable.
I think you have partly answered this question before, Rikard, but we'll take it again. You assessed Europe fiber on the market as low. Is it due to competition or lower demand?
It's the combination, right? Clearly, there's been, we added capacity quite significantly a few years ago, and so did many others. A lot of capacity added, and then the demand did not keep up with that. I would say it's both. It's an imbalance of demand versus available capacity.
Which type of data center does Hexatronic focus on? Hyperscale owned, leased colocation, or enterprise?
Today, and over the last few years, we've been working on all those three segments. I would say where you see most growth today, and where also our focus is, is the colocation or hyperscale leased. The background to that is that when you build a large data center today, it takes time to get permits for power and so on. Many different actors have decided to build a colocation space, and the larger players like Microsoft, Oracle, AWS, and so on have decided to rent that entire space. That is really where we have seen the growth in the market now. It's a big focus for us.
It appears reasonable to infer that you estimate the addressable market for data center solutions will grow by 10 to 11% in total based on the data you provided. Based on this, one could assume that approximately two-thirds of your 30% CAGR ambition might be driven by M&A activity. However, do you also anticipate capturing additional organic market share to complement this growth, or is it focused primarily on acquisitions?
No, we don't disclose this in any detail. Of course, over time, it's always difficult in many years to beat the market. I would say, historically, in the first half of this year, we have had clearly outperformed the market. We're doing strategic initiatives, as we mentioned, that I believe we're investing more than many of our competitors. We expect to be a bit tighter in the market, but clearly, a significant portion of the sales to reach those 3 billion will be from acquisitions.
What are the main reasons behind the much more cautious long-term outlook for FTTH compared to just one year ago?
Yeah, I wasn't here a year ago. I based the outlook on what we're seeing in the market today. I think we have to be realistic about the rate of volumes that we see today. and also the outlook for the next 12 months.
How large market share of the harsh environment market does Hexatronic have?
It's a difficult question because it's so fragmented. Beyond those areas that I just mentioned today, we are in the top three areas. We don't disclose market size or share.
From the 11 states that have come the furthest in BID, I note that 74% has been allocated to fiber, more than initial fears of 50% early in the summer. Is your outlook on BID more positive now than relative to when you reported in Q2?
I think it's maybe not more positive, but a little bit more clear. It seems to me that BID will move forward during 2026. It seems that, yes, fiber will be a substantial part of it. There was some speculation that at some point that maybe BID would be entirely scrapped, maybe it would all go to satellite. That doesn't seem to be the case. We've also been clear that I think we said 80% of the build in the U.S. is privately funded. We need to base our strategy on capturing the privately funded market. If and when BID comes, it should be icing on the cake and not something that our strategy hinges on. Yes, I do today, I do expect that BID will start coming into the market sometime during 2026.
I think that was all from what we have received, questions that we have received.
Okay, I will wrap it up then. Thank you to all the speakers, and particularly thank you to all our investors and listeners today.
Thank you.