Hexagon Ab B Shs New

Good day, ladies and gentlemen, and welcome to X-Con QT Report 2023. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question, you will need to press star 1-1 on your telephone. I would now like to hand the conference over to the CEO, Paolo Guglielmini. Please go ahead.

Thank you very much. Good morning and welcome to our Q2 2023 conference call. I'm very pleased to confirm today another strong set of results. We're going to go through the detail of it. Before I cover the highlights of the quarter in more detail, I want to spend a moment on the short attack and the related report last week. We fundamentally disagree with the report and its conclusions. Hexagon has always conducted its business with integrity, and we are all committed to accurate communication and transparency towards the market. For the benefit of our existing and future stakeholders, we will certainly issue a response covering the key claims in due course. So my presentation today will focus on the business performance in Q2, but of course, I look forward in the Q&A to welcome any questions from analysts and investors. So I suggest we start with slide four and the highlights of the quarter. So we have posted a strong organic growth quarter. Growth came in at eight percentage points with resilient demand across most of the divisions. We had very good momentum for new solutions and recent acquisitions showed very good progress, which was great to see. We have closed out at 84 percentage points of cash conversion within our guidance range, 66 percentage points of adjusted gross margin, and 29 percentage points of adjusted operating margin. Fourth June is the month of Hexagon Live. We gathered in Las Vegas with a lot of customers and partners. We're going to talk about some of the highlights from the show. This morning, we have announced an efficiency plan to continuously progress towards delivering on our margin target and fund incremental organic growth. We move on to slide five, further detail from the income statement. We have posted in Q2 2023 1,366,000,000 of operating net sales at 8% organic growth delivery on Q2 2022. Structure accounted for 2 percentage points of growth, with currency headwinds having an impact of minus 4 percentage points, with total reported growth of 6%. We posted adjusting operating earnings of 394 million for an adjusted margin of 28.9%. As you can see from slide six, current CNFX that has a material impact in the quarter, we thought it would have been useful to add some color on it and bridge the gap between Q2 2022 and this quarter. On the basis of Q2 2022, we have added 102 million of organic volume, which contributed to 46 million of adjusted operating earnings. Currency shaved 45 million off top line and 37 million off operated earnings, predominantly down to the movement in Chinese currency appreciation of Swiss franc towards the Euros and movement in USD versus Euro. Structure added 20 million of sales and six of operated earnings. So all in all, flushing out currency impacts, we will deliver a one percentage point margin improvement versus Q2 2022. In terms of cash flow, changing working capital delivered 10 million. Cash flow from operation added up to 364 million. For an overall cash conversion, as discussed, of 84%. Working capital to sales ratio was Moving on to slide number eight, if we look at the pillars of growth within the quarter, we can say it's been the quarter of autonomy. As you can see on the right-hand side of the slide, the autonomous and positioning division delivered 31 percentage points of growth with very strong demand for our autonomous back across multiple industries. We're going to talk together with Ben later about another announcement that came in this morning. We're very pleased to see the conclusion of multiple quarters of work from our team. We're going to integrate our autonomous stack within the context of a mining application, the largest deal that the group has ever closed. So autonomous stack delivers for us growth, not only in automotive, defense, agriculture application. But of course, it's also behind some of the growth that we have seen in geosystems despite headwinds in the construction market. Geosystem grew 7% in the quarter. Still within the geospatial enterprise solution part of the business, SIG, so our portfolio for safety infrastructure and government applications declined by 9 percentage points along the lines of what we discussed already in Q1. We are addressing some of our areas of underperformance, and we are pulling back from particularly service engagement. There are labor intensives that are diluted to our operation and don't entail usage of IT from Hexagon. When it comes to the industrial enterprise solution side of the business, it was great to see manufacturing intelligence up 11 percent continued momentum both in bookings and in shipments with growth that came from both the devices and the software side of the business and we'll talk about the growth in ali this is a continuation on the good growth that we've experienced already in g1 both in core and in the enterprise asset management newly acquired portfolio within ALI. So moving on to slide number nine, a few words about Hexagon Live. It was a great event. It's always an amazing opportunity to meet with customers, get their feedback, present innovation, launch new technologies. We had 2,800 people attending in between channel partners, strategic and technology partners, and of course, a lot of customers from around the world. Tens of sessions and keynotes and a lot of attendance to our content stream online. I also want to point your attention here to some of the partnerships and collaborations that we've announced within Hexagon Live. You know that we've been working with Sony semiconductors for a long time. If you look at our reality capture portfolio that probably got developed within 2017 and 2019 now accounts for a good percentage of the growth that we experience in geosystems. We've worked with Sony semiconductors on some of those technologies and we look forward to integrating their time-of-flight image sensor and software technologies to keep on enhancing the speed, the accuracy of those reality capture solutions. We've doubled down on our partnership with AWS, one of our of course, key partners when it comes to cloud deployment. Microsoft is, of course, a very important partner for us when it comes to artificial intelligence. It's got to do with the way not only we offer new capabilities and new value to customers through our solutions, but also we use some of their technology to deliver more efficiency and in that automation in the way we operate internally. If we move to slide 10, I want to point out your attention particularly to the collaboration with NVIDIA. NVIDIA has been a partner of ours within Geosystems and the Autonomous and Positioning Division already for a long time. What we have announced at Exegon Live is something new and exciting, we believe. We're going to connect our cloud platforms, HXDR, our digital reality platform, as well as Next with with NVIDIA Omniverse. What are we trying to achieve? I mean, Omniverse, as you know, is a computing platform that enables development of 3D workflows. It's got very powerful AI physics-based simulation capabilities. So you can see how the handshake of HXDR in which we fuse large quantities of 3D data with that simulation capability can deliver value to customers. We are very active commercially already now. with customers both in the industrial and geospatial space. Moving on to an analysis of growth across divisions, Ben Matlin. Yeah, good morning, everybody. If we go to slide 12, just the breakdown of growth by geographic region and industry. So if we start with surveying, we saw a bit of a slowdown in North America and Western Europe in the quarter, but that was offset by good growth in the rest of the world and very good growth in the reality capture portfolio. We also saw a stabilization in markets in China after the weakness we saw last year. In power, energy and mining, we saw a strong development across the board. Mining continues to have a fantastic growth as a result of increased mine automation. and demand for safety solutions. In power and energy, we continue to see an improvement in the underlying market and the benefits of diversification for airlines. In discrete manufacturing, we see overall good momentum in manufacturing markets, although we did see some slowdown in North America. Electronics remain strong for us across the board. In infrastructure and construction, we see a slowdown in some European markets for machine control, and China still remains slow. Otherwise, I'd say good growth in most other markets and strong demand across the board for our AEC software portfolio. In automotive, we see very strong demand for metrology and manufacturing intelligence software solutions. And we had several strong wins in the quarter, including for electric vehicles. And in aerospace, another strong quarter as that market continues to recover from COVID. And as Paolo already mentioned, very strong demand in A&P in defense for anti-jamming equipment. If we go to slide 13, geospatial enterprise solutions, they had sales of 679 million euros in the quarter. So that was organic growth of 6%. An EBIT of 208.6 million. That was an operating margin of 30.7%. That was down compared to last year due to the currency translation and transaction effects that Paolo mentioned earlier. By subdivision, Geosystems, they had 7% organic growth. There we saw a strong demand for mining solutions and reality capture. The stabilization in China, as I mentioned, probably too early to say a full recovery, but we do see some improvement in that market and a slowdown in developed economy construction markets. In SIG, public safety was flat, but organic growth ended up being 9% because of the exit of some low-margin contracts that we mentioned at Q1. And in AMP, 31% organic growth, obviously exceptional. Across-the-board strength, but I would highlight precision agriculture, where demand is very good, and the defense-related contracts that I mentioned earlier for anti-jamming solutions. We go to slide 14, first customer win, Mortenson. They're a US-based top 20 builder and engineering service provider across a number of construction markets. As we described at Hexagon Live, they're working with the Citizen M hotel chain to try and disrupt the hospitality industry by introducing prefabricated or modular construction processes to accelerate the overall timeline of a construction job. Documenting project progress is obviously key to stay on time and budget, and it's great news that they're using our solutions, Oxflu, Multivista, and Avia's progress tracking software to keep the project on track. Slide 15, a customer win with Asia Air Survey, and they're one of the largest and leading geospatial firms in Japan. The Japanese government has a digital twin program to map its major cities. It's obviously a very difficult thing given the tall buildings and complex shapes and infrastructures that those cities have. So it can be a very labor-intensive process. They've been using Hexagon's world-leading imaging and LiDAR systems, such as the CityMatter, which is shown on the slide, and our related software to accelerate the process of capturing that data and creating visual twins of cities. Next slide, 16, a product launched from Hexagon Live, one of the highlights, I would say, HXDR Reality Cloud Studio. This is a cloud-based platform to host our reality capture data so we can stream it from our sensors in the field and provide tools to automate the process of meshing together different point clouds into one vision, as well as providing visualization, measurement, and collaboration tools between field workers and the office which obviously saves a lot of time for our customers. And in terms of payment model, this will be a subscription-based payment model for our customers. Next slide, please, 17. As Paola mentioned, and we put out in a press release today, we had a very large customer win, probably the largest in Hexagon's history, which was won across our mining and autonomy and positioning divisions. and it follows a proof of concept that we did with the customer a couple of years ago. In terms of the size of the contract, it has potential to be high tens of millions overall contract value delivered over five years starting next year. The customer is Mineral Resources, which is a leading diversified resource company in Western Australia. Their mission is to automate 120 road trains in the Pilbara region of Western Australia to overcome labor shortages and improve safety of their operations and move 35 million tons of iron ore a year using this system. So we've worked with them to develop the world's first autonomous road train. What we've sold into the project is our autonomy and positioning hardware, collision avoidance systems, fleet management, perception software to control the vehicles. as well as drive-by-wire technology to manage them and steer them. And the result of that for the customer will be significant fuel and labor cost savings, as well as improving efficiency and safety. Next slide, 18, the final one on GES. The acquisition of Hardline that we announced last week, and that extends our mining division's push into mine automation. Hardline are a market leader in remote control technology based in Canada, and they sell the connectivity and control systems required for the tele-remote operation of heavy mining machinery. So in the slide, you can see this operator is controlling an underground mining loader a long way away from the mine, which is obviously great for safety and employee well-being. So with that, I'll hand back to you. Yeah, thank you. If we move on to the industrial enterprise solutions part of the business in slide 19, we posted sales of 687 million euros in the quarter and organic growth of 11% with good EBIT delivery as well. Manufacturing intelligence grew at 11 percentage points. It was great to see not only growth-based growth across regions, but also a very good contribution from innovation and newly released products and solutions. I would say the devices business was predominantly driven by demand for quality control and new methodology embedded in production of e-vehicles and batteries. And then we've seen very good adoption for our software portfolio. China in particular grew By 12 percentage points is a continuation of good momentum. We are very good factory in that market as a result of localization, as a result of very effective key account management. If we move on to the asset lifecycle intelligence division, we grew by 11 percentage points with good underlying SaaS and subscription adoption, good growth at the ARR level. The growth took place across both the core and the EAM portfolio, something that we're going to talk about in a second. There was very good continuation of momentum in terms of adoption of these technologies in new industries to keep on fueling that organic growth. In slide number 20, if we talk about manufacturing intelligence, it's clear that there's increasing adoption of our technologies the expansion of these portfolios related to e-vehicles. In this case, I mean, in the quarter, we have expanded our commercial relationship with one of the leading global EV manufacturers in China. When these companies standardize in our tools and methods and practices and technologies, and then of course they grow their portfolio or they grow their volume, this is very good news for us. The challenge is how to double down on production and scale production so rapidly without encountering quality issues or safety issues. So in this case, we help them in terms of not only quality control, but also managing all that quality data through their facilities, production lines, and suppliers. If we go to slide 21, it was great to see a significant commercial win with one of the leading semiconductor manufacturers, a complex organization, a large portfolio, hundreds of thousands of employees, 50,000 external contractors, and a difficult portfolio for them to manage and keep evolving on. They have an ongoing push. to digital transformation. And we're going to work very tightly together. The relationship started with an adoption of our enterprise project management tool called Ecosys, an acquisition that has been made a couple of years ago within ALI. And then we have expanded the relationship to embed smart material management technologies, design tools, And so it was great to see that happening and driving ARR in ANI. If we move to slide 22, we have partnered and closed a significant opportunity in a global leading biotech and pharmaceutical company. This customer has the challenge of developing and producing on a massive scale medicines and vaccines so of course asset management has got a lot to do with it this customer is standardized on the enterprise asset management SaaS solution as their solution of choice as the key to unlock productivity as they roll out production and of course Our EAM solution is deeply embedded in their software stack to maintain a digital twin of their operations that is constantly up to date. If we move to slide 24, this morning we have announced an operational efficiency program targeting annualized savings in the range of 160 to 170 million euros. kicking in from the end of 2024, beginning of 2025. This program will require an investment of 200 million euros that will take place within Q3. The implementation period for these rationalization efficiency initiatives will be over the next six quarters in between Q3 2023 and the end of 2024. What do we plan to do and how do we plan to unlock these efficiencies? It's got to do with synergies, so driving more cross-divisional cost savings via the creation of shared services centers and leveraging technology synergies between the divisions, something that we have been working on for the last several quarters within the leadership team, and now we're ready to pull off. As you know, we've been on a push to reduce our offices Already in the last quarter, we need a step-up investment to continue and accelerate from that perspective. We think we can pull off another reduction of roughly 25 percentage points. This is also going to help not only rationalize the cost structure, but also bring the teams together and help from a synergies perspective. We have a few areas of underperformance that are partly being flagged already in the past that we want to rationalize and right-size from a cost perspective. And then last but not least, there's a lot of opportunities to keep on embedding more and more physical and digital automation tools in the way we operate. It's got to do with technology development, R&D, and using more AI within our operations. It's got to do with physical automation and robotics in manufacturing, in calibration of our devices, and it's got to do with, of course, back office and process automation from that perspective. In conclusion, in slide 25, it was a very good organic growth quarter despite the slowdown in construction and infrastructure. We've seen good momentum in terms of deal flow, in terms of booking and revenues. Cash conversion is back within target range. We think we have a very good plan behind the efficiency initiatives that have been just announced, and that's going to help us fund new growth initiatives as well as keep on delivering incremental margin to target our long-term goals. We had a very successful Hexagon Live global event to set the foundation for tighter relationships with partners and customers. And then we're pleased to announce that we're gonna have a capital market day towards the end of the year on the 7th of December in London. And I believe the team will follow up with more specifics within the next couple of days. Operator, we can go to Q&A. Thank you.

Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star 1-1 on your telephone. We are now taking the first question. And the first question from Joachim Gnell from DMB Markets. Please go ahead. Your line is open.

Thank you very much. So can we start off by just talking a bit about the timing of the efficiency program here? The last one was announced from three years ago and appeared to be more related to enduring changes in demand. So can you just comment a bit about how this program is different and how much of the targeted savings stem from what you owned prior to, say, 2020 versus the 34 acquisitions you've made since the last program, and also perhaps the split between GES and IES when it comes to the cost savings you see.

Yeah, what I would say, I mean, the restructuring program that was announced in 2020 had to do with severe and sudden drop in demand. This is a much more long-term sort of strategic investment in efficiency. is going to address most of our businesses and the two segments that you have just mentioned. And again, I mean, it's got to do with right-sizing our cost structure when it comes to some of the underperforming areas, areas that we perceive as being less core for us for the future. We've done a lot of work with the divisional leaders and their technology leaders to identify areas of potential overlap when it comes to technology development. So we're going to try and increasingly reutilize technology components across divisions. We also have the opportunity of lowering the cost of serving the business by creating more shared functions within the divisions. And that's simply going to allow us to reinvest more aggressively in incremental organic growth and keep on delivering marginal profitability to drive the business up to the margin levels that we have committed to the market.

Thank you, Paolo. And also, can you comment a bit about the pacing through the quarter when it comes to particularly geosystems of the growth studies and how you think incremental softness within construction infrastructure can be more than offset by mining and reality capture also going forward.

Yes, thank you. I'm glad that you mentioned the reality capture portfolio. At the end of the day, we talk about innovation. And as you know, we have geared up R&D spend in the last couple of quarters. If you look at the RealityCapture portfolio, we started developing those tools back in 2017, and now the portfolio accounts for 10 to 15% of that portfolio. There's a lot of underlying growth, and when you have a category that delivers so much value and it's got so much growth momentum, that helps soften the impact of a market backdrop that might not be just as positive. So I would say there's bigger trends behind that 7% growth rather than what's macro per se. Mining has got very good momentum. I would say the sales motions of mining and those deals tend to be a little bit more longer term. So there's underlying demand behind that market and forces that are much more long term. So we expect to see a continuation from that perspective. When it comes to demand that is strictly related to the construction sector, we basically have seen the world at two speeds. I mean, we've seen softening in demand in the US as eagerly anticipated in the last couple of months and softening in demand in Central Europe as well, particularly in Germany. But we have a lot of momentum when it comes to China. We have a lot of momentum in Asia Pacific. We're doing very well in the Middle East. We're doing very well in South America. So we are capitalizing on all of those opportunities and we have good market motions in those parts of the world.

Thank you. Thank you for your question. We are now taking the next question. Please stand by. The next question from Daniel Jurbeck from Ensobank. Please go ahead. Your line is open.

Thank you, operator, and good morning, gentlemen. I've got a question on financial expenses. Can you just tell us a bit on how much was impacted by current effects and how much was the interest cost from your gross debt?

Yeah. Hi, Daniel. No, the increase in financial net is coming from higher interest rates, not really currency.

Perfect. We should expect similar level going forward.

Yeah, that's right. And I think we'll obviously have to see how interest rates go going forward. If they keep going up, then I guess there'll be some up with pressure on that number.

Perfect. The question I had also on the deal you took with the mineral resources, that could be really nice going forward here. But the question is, this company has built their own road to get this working, I guess. Do you see similar potential elsewhere in other parts of the world or is this really a unique company doing this?

No, good question. You know, I think obviously we have to deliver this project and it'll go through a phase of gradual ramp up before the real deliveries start over four or five years. But I think, you know, this case study could prove one that opens up opportunities with other mining customers. All of them have the same problem that the mines are a long way from the ports where they need to ship the oil from. They need to get it from A to B. Traditionally, they built railways, which is obviously expensive, and if they can use existing infrastructure and automate that, it can obviously reduce their costs without compromising on safety. So yeah, I think if the project goes well, it could definitely hopefully lead to further project win.

Thank you. And my final question would be on cash conversion, now back in the targeted range, but how to think of the second half for this year in terms of working capital changes?

I think we're going to see a continuation of good momentum there. We had a little bit of pressure in the last quarters coming from inventory, coming from still the long-term impact of building inventories on electronic components that is dissolving. I think we're going to keep on staying within that 80% to 90% cash conversion range. That's good.

Thank you very much and have a great summer.

Thank you. Thank you for your question. We are now taking the next question. Please stand by. And the next question from Alexander will go from Bank of America. Please go ahead.

Thanks very much and good morning, Paolo and Tom. I guess first question just on... your comments with respect to the short report. I understand the need to be measured and considered in response and without wishing to necessarily to give too much credence to something you don't necessarily believe in or fundamentally disagree with. But do you not recognize the need to be more proactive here, particularly if there are factual inaccuracies that you can highlight? I guess it's a question of of optics in terms of corporate governance as well rather than necessary technically if there's no issue as you in the Greenbridge statement point out. That would be the first question, please.

Yeah, hi, good morning. Yeah, look, I mean, we're coming out of a silent period. We've looked deeply into the report and for sure we're going to come back. We think it's important for us to do so for the sake of, you know, analysts and investors that have followed the group for a long time. As I said, deeply disagree. We think that there's factual inaccuracies and there's allegations that deserve being responded to, and we're going to do it over the next days and weeks for sure.

Okay. Do you think there is a need for more significant changes in terms of corporate governance at Hexagon?

Look, what I would say is that you always have to look for opportunities for improvement. I think governance has already evolved over the last year as the group evolved. There have been changes in the board a couple of months ago. So I think that's a question for the board, something that everybody is looking into very deeply.

Okay, thank you. We'll look forward to hearing from you then in due course. A couple of questions then just on the operations in the quarter. I wondered if you could just dig a little bit into the dynamics around construction exposure for us. I noted your comments there on Western Europe being down a couple of percent organically. So how much is construction actually down for you? What are the dynamics that you're seeing there with respect to the sort of the projects that people are doing and the specifications, I guess, that people are doing around that? And is that the reason why gross margins were down queue on queue in what's normally a traditionally stronger quarter in the year? Thank you.

Yeah, hi, Alex. I mean, in terms of gross margin, taking that one first, there's a couple of factors. One, you're right, there's a divisional mix. So if the system's growth slows down, it's a higher gross margin business, it has a drag. Plus, in Q1, ALI had more perpetual deals than it had this quarter, which obviously boosts your gross margin on day one. They were the two dynamics that explain the sequential drop-off in the gross margin. And FX, some of the FX effects probably had a drag on the gross margin as well. In terms of geosystems, I mean, the way that I would cut it is probably 40% of geosystems is not really tied to construction. 20% is mining, 10% or so is reality capture. Another 10% is geospatial imagery or AEC software. That 40% has its own dynamic. The 60% that is more construction-driven, and by that I mean the surveying tools and machine control, generally that's weighted to larger projects. That's where you use machine control. That's where surveyors will work. But obviously we don't have perfect visibility on which jobs the equipment is being used on. But that's our kind of historical analysis. Of the 60% that's construction-driven, what we see is a slowdown in North America and Western Europe, and that's probably two-thirds of that 60%, and the other third is still very strong growth in Asia, Latin America, and other developing economies.

Okay, so just to clarify then, the machine control comment you made in your prepared remarks is referring to this business here, not machine control in factories?

Yeah, absolutely. Machine control is the automation that you'll put on dozers and excavators to just make construction processes more efficient.

Gotcha. Very clear. Thank you, Ben.

Thank you for your question. We are now taking the next question. Please stand by. The next question from Sven from Barclays. Please go ahead. Your line is open.

Great. Good morning. Thank you for taking my question. First, can you provide some insight into what products drove the increase in capitalized R&D over the last year? And over which time period we should see these having an impact on revenue? And when should we see amortization stepping up as a result of that? And then my second question is stepping a bit back. You obviously delivered very strong, still very strong organic growth. Capitalized R&D were up in the quarter significantly, despite that you didn't really deliver any progress on the margin. So what is really happening in the underlying cost base? Normally, when you would deliver kind of 8% organic sales, we probably would expect to see some improvement on the margin. So can you help us reconcile this a bit?

What I would say, without getting into detail of the individual innovation areas or the associated capitalization ranges, what I would say is that we are going through an R&D investment cycle. The gross margin was up year on year. The mix has changed. And I would say from a capitalization perspective, we are going through a particularly large number of transformational activities and therefore capitalization follows as per IAS. I would add comments we've made in previous quarters. Coming out of COVID, there was some catch up on some R&D projects. On top of that, you have the normal investment in things like the BLK series. And then on top of that, the platforms like HSDR, like NETS that we've spoken about previously. A lot of investment going into autonomy, right? I mean, you don't just turn up on day one and win a contract with a big mining company to automate their road trains. There's a lot of investment up front that you have to do to do that. And autonomy in agriculture on highways, it's not really something that you and I are buying yet that will come in the future. They're the kind of things that we're investing in on top of the kind of normal product cycles. So, you know, as you'd expect under the accounting standard, once those products are launched, then you start to amortize and it will catch up.

Okay. And on the underlying cost?

What I would say is that, as you know, we've done investments in excess that have seen the light of day over the last month. So that, of course, is an incremental investment area. We are expanding the DLK series to keep innovating in an area that is giving good payback in terms of growth. As Ben was alluding to, We are seeing good progress when it comes to autonomy, and that autonomy stack, both the software side and the drive-by-wire element, will be able to be monetized in multiple industries. And then last but not least, I would say effects as an impact. We have a cost structure and a cost base specifically in geosystems in the innovation hub that is relatively high in Switzerland and in Swiss franc and then, of course, has moved towards the Euro, as you've seen in the bridge.

That's helpful. Can I follow up just on the cost development and the outlook for the second half? In OPEX, we are up 4% sequentially in the second quarter. If you now think a bit about the second half, will the cost curve normalize before the impact of the cost savings program? or will you continue to grow costs at this rate?

I think we have done the bulk of the investment as we discussed, so it's possible that we're going to see year-on-year impact as these new investments continue to develop. But I would say we're going to see relatively shortly the impact of those savings program kicking in, so I don't think we need to make any step-up investment from this moment onward, and we think we have good sales momentum as well, allowing us to keep on leveraging the business from an incremental margin perspective.

Okay, great.

Thank you.

Thank you for your question. We are now taking the next question. Please stand by. And the next question from Adam Wood from Morgan Stanley. Please go ahead. Your line is open.

Hi, thanks for taking the question. I wonder, first of all, if I could just dig in more specifically on corporate governance and obviously one of the areas of focus with Greenbridge. Could you maybe just talk a little bit about how you think about that perception of conflict between Greenbridge and Hexagon investing either together or at different times and how you think about managing that perception risk in future? And then secondly, in the context optimization plan there's a talk of um rationalization of non-core assets could you maybe give us a little bit of a feel of the size of the program here whether it's in in revenue terms or something else and give us an idea whether that's assets that you intend to sell or more businesses that you intend to wind down as we've seen in sig thank you yeah hi adam good morning uh so when it comes to divergence i mean for us um

It's very important that we also frame the investment for what it is in terms of Hexagon and what that can do for shareholders. We have a long term relationship with Diversion. We are technology partners. That is one of the very most advanced companies that we could work with in terms of advancing additive manufacturing, right? So if we want additive manufacturing to deliver on its promise, it's all about comparability of quality with traditional technologies. If Diversion succeeds in what it's trying to do, it's going to be a sea change and a massive opportunity for ourselves. So I think that's very important to remark. In terms of the specific transaction here, As has been already pointed out, from our perspective, there was no related party transaction involved, so we didn't feel the need to disclose anything specific besides the investment that we did leading the D investment round back in December. And again, when it comes to governance, I can only point you to the board in terms of controls and in terms of processes, I just know that there's a lot of focus from everybody on making sure that, again, we are as transparent as possible on these topics. And Adam, on the non-core side of things, I mean, you know, there is a focus to, you know, in certain areas of the group, improve the revenue quality. As Paola mentioned, and you saw at Q1, right, in SIG, we have walked away from some low-margin contracts that hexagons technology and beyond that there are a few more businesses that are dragging on the group at the moment so we're going to take measures to structure them and then we'll decide whether they end up being core or non-core. We're not talking about a large part of the group, it's probably 100 million euros of revenues maybe a little more in line with what we've talked about before.

Perfect, that's very helpful, thank you. Thank you for your question. We are now taking the next question. And the next question, please go ahead.

Yes, good morning. This is Johan Eliasson at Kepler Chevro. I have a question coming back to Daniel's question about the cash flow. Obviously, good that you see the cash conversion rate being strong in the second half as well. Now, your cash conversion rate obviously excludes the cash impact from this restructuring program, as I understand how you define it, where you highlight the 200 million euro outflow. Now, last year, you sort of... increase your network and capital by almost that amount, 170 million. And so far, we've seen a little bit of a release in Q2 of 10 million. But how would you see this going forward? Do you think the network and capital release on the back of better sourcing and supply situation can sort of offset most of this headwind from the 200 million euro outflow related to these programs?

I think we'll have to see in terms of the facing of it. I mean, there's obviously going to be a little bit of an investment upfront in these programs, but as I say, the savings you get from the program, ultimately more or less pay for it, right? The program pays for itself, but you will get the benefit in terms of the cashflow from the savings above the line. So they should net out, but there might be a little bit of investment upfront as we kick some of these measures off.

And specifically the networking capital release, how do you see that playing out? Is it more limited?

I mean, networking capital is not really related to the reorganization program, but I think for the second half of the year, as Paolo said, I think we can keep doing a good job on working capital. We still have areas where we can release. I wouldn't say we're optimized in terms of where we'd like to be at the moment. And I think for the second half of the year, we would hope to be in the 80% to 90% range, same as Q2.

Okay. Thank you. Thank you.

Thank you for your question. We are now taking the next question. Please stand by. And the next question from Naisho Inyang from Berenberg. Please go ahead. If you'd like, Mr. President.

Hi, good morning. Thank you for taking my questions. I've got two, if I may. First one is, the strong performance in the AMP business unit grew 31% year-on-year. I was wondering if there are any one-off drivers in that number. Presumably, the large contract you won in the quarter, we haven't seen any revenue contribution from that. So if you could help me understand the underlying performance, excluding one-off factors, that would be super helpful. And I'll follow up the second question afterwards.

Yeah, sure. No, I mean, I think AMP, they did benefit in Q2 from some large deliveries around the kind of gadget anti-jamming technology that they have. And that probably will help Q3 as well. But I would say underlying that, there is strong... double-digit growth across the board in agriculture and some of their other businesses. So yeah, helps a bit in Q2, it probably will help Q3, but the underlying growth rate is still very strong.

Thank you. And then the large contract that you had warned about, you mentioned that will come through, was it starting from next year, the next five years? Yeah, that's right, yeah. Perfect, thank you. And last question is on the cost program that you've announced today. So with that in mind, I know that we've got a capital margin state coming up later in the year, but how should we think about the EBIT margin target, the mid-term EBIT margin target that you have set previously, over 31% by 2026, I believe? Are we likely to see an upgrade on that number?

Yeah, I mean, as we discussed, look, there's going to be a... an impact in terms of margin improvement, and there's going to be the opportunity to invest also a portion of those savings into innovation and growth, both technology and the market. We will see in December. So we have a good, strong set of targets that are already out there, and we'll discuss in London how do we look at the future and if we should think of any change. That makes sense.

I look forward to the event.

Thank you very much. Thank you.

Thank you for your question. We are now taking the next question. Please stand by. And the next question from Hedi Garland from SEB. Please go ahead.

Thank you. I have three questions. First one on the savings program. Any reason to expect that you don't keep more or less all of that or Do you think you'd have to give some of that away to customers or if there's a meaningful area that you could see costs offsetting it? Then secondly, I didn't fully get you, on the mineral resource contract, what was the support to second quarter organic sales growth from that to the extent there was any or is that all to come? And then thirdly, and maybe I'm repeating a question already asked here, but on the critique and the divergent transactions specifically, We need to buy the book in terms of disclosure and everything. Should Greenbridge and Exxon really be invested in the same assets? Thank you.

Hi, Henrik. I'll take the Minres one because it follows on from the last question. So there was no contribution to second quarter revenues from that project. This project will run for five years starting in early 2024. So no contribution this year. And then what I would say on the savings program, Eddie, you know, we plan to keep as much as possible of the value that we're going to create through these initiatives. And we have, you know, a very strong line of sight and we're going to get cracking with the program already in August. And then, yeah, when it comes to divergence, again, once more, I mean, the timeline of our involvement with divergence is relatively clear. uh so we've invested in in uh december uh 2022 we thought that 100 million was an appropriate level of investment uh that gives us uh sort of skin in the game that gives us the opportunity also to um have an influence on the innovation roadmap of divergence and possibly look at opportunities to monetize some of the technologies that one we might be able to jointly create um Again, Greenbridge has decided to make an investment for potentially different reasons, but as a shareholder, I would simply think that having more skill in the game from the chairman in this transaction can only be seen as positively. If there's a governance aspect to this, I'm sure the board will come back and clarify further.

Thank you. Thank you for your question. We are now taking the next question. Please stand by. And the next question from Toby Hook from JP Morgan. Please go ahead. Your line is open.

Yes, hi, good morning, and thanks for the questions. So just following up on the prior questions around the short report, appreciate comments at the beginning, and you stated there that you fundamentally disagree with the conclusions. Just more broadly, though, could you just give us a little bit of a sense for what some of the factual inaccuracies are? Any additional color there would be really helpful. And then just on the analysis around the organic growth, the report obviously suggests that organic growth is overstated. So again, kind of any thoughts on this specific topic would be really helpful. Thank you.

Yeah, I mean, hi, Toby. As Paola said, this is probably not the forum to go through this in detail. So we are going to come back with a detailed answer on the report. From our perspective, the analysis of organic growth is an analysis of M&A, basically, right, in terms of a bridge. And there, I think, you know, we report the contribution to growth from M&A every quarter. You know, we report it as structure for 12 months, and then it becomes organic. And that's for all acquisitions, the same as every other company. And we've reported the revenues for every acquisition that we've made that we see as materials. And for us, that is any acquisition with revenues over 15 million euros. That's been either in the press release or in the annual report for the last six, seven years and beyond. And for bigger deals, for things like EAM and ETQ, we've given you more information. We've given you the valuation, the purchase price of the acquisition. We've given you revenues. We've given you profitability. So you can work out the multiple. So I think we've actually given quite a lot of information around that. That doesn't seem to be reflected in the short stellar report. Now, I'm not going to go into the kind of factual inaccuracies. We'll come back to that. But in our view, we fundamentally disagree with the report, both in terms of the way it's been put together and its conclusions.

Much appreciated. Thank you.

Thank you for your question. There are no further questions at the moment. I will hand back to the management for closing remarks.

Yeah, thank you very much for spending the last hour with us. Again, we have very good momentum and we think that the efficiency plan and the innovation initiatives that we have in motion will keep that going. So thank you very much and we also look forward to seeing you many of you as possible later in the year in London so have a great summer thank you thank you and that's conclude the conference for today thank you