Hexagon Ab B Shs New

Good morning. Thank you all for joining our Q2 2024 earnings call. Despite headwinds in our core markets, we have delivered a solid quarter of incremental operational and strategic improvements. In this Q2, we recorded sales of €1,353,000,000 impacted by weakness in the construction sector and slowing investments in automotive, affecting sales of our sensing and robotic systems. Growth in recurring revenues remains strong nevertheless, up eight percentage points to 560 million euros, driven by subscriptions and SaaS revenue momentum. In Q2, we also have hit the new all-time high of 67.3 percentage points of gross margin, very importantly, making incremental improvements across all of the five divisions. This came as a result of investments in innovation to constantly optimize the cost structure of our portfolio, came through diligent pricing to counter inflation, favorable mix, and operational improvements. Moreover, the manufacturing intelligence and SIG divisions benefited from the divestment of non-strategic business units in prior quarters. Strong operating margins followed this gross margin expansion, landing at 29.5 percentage points versus prior year at 28.9%, also supported by gains from the rationalization program. Cash management was strong, with conversion at 85%, which is in line with the annual guidance, and operational cash flow before NRIs has grown by 17 percentage points year on year. Looking into Q3, we expect demand to remain challenged, but we also expect these operational improvements to continue, as well as the momentum in recurring revenue. Very importantly, Q3 will also be particularly active for us in terms of new products introduction across divisions, positioning us strongly to capture market shares as demand improves. If we move to slide four, in terms of geographic trends, we see America's Middle East and India as the areas in which we experience more sustained growth-based commercial momentum. In the U.S., manufacturing, data centers, public safety, and defense demand remains strong, despite a large competitive deal booked in Q2 2023 skewing our revenue growth this year. In Western Europe, despite uncertainty in the automotive supply chain, in machine shops, and the construction sector, we managed to grow by 4 percentage points with particularly strong momentum in the Middle East across industries. Aerospace and process industries remain positive in Europe, driving demand for software and for more automation. In China, we saw a revenue decline of 4 percentage points, although against an 11 percentage points of growth comparative last year, with order intake although softening on the back of several consecutive years of good growth. As you know, we have a very strong team in place in China, and so our team is always making the most out of its market environment, so we stay positive for the future of our operations and growth in that region. India confirms the positive trend for sure with good underlining growth. We have a strong commercial team in place. We're localizing the business in India wherever necessary to continue to build up our operations and leverage growth opportunities into the future. Looking at the divisional performance in slide 5, manufacturing intelligence was flat against an 11 percentage points of growth in Q2 2023. ALI grew at 9%, geosystems contracted by 5 percentage points. AF declined by 2 against a very strong quarter last year. SIG grew by 6 percentage points. As you can see, Geosystems managed to maintain a strong 32 percentage points of operating margin despite the top-line decline, and all of the other divisions delivered on strong year-on-year margin improvements. If we now look at each of the divisions one by one, we're first of all looking at their quarterly development over the last year or so. Without going into too many details, you see in Q3 last year we reported robust growth, particularly manufacturing intelligence, ALI, and AS, and then software competitors will come our way moving into Q4. Manufacturing intelligence in slide seven. We have delivered revenues of 484 million euros at an operating margin of 26.7%, a good improvement year over year. We've seen positive progress with our laser trackers and precision robotics growing strongly, particularly in the commercial aerospace sector. Good growth in our software portfolio, simulation, and enterprise quality management solutions has pushed recurring revenue up in MI by 4 percentage points year-on-year. The margin progression of 70 basis points was achieved through the divestment of PMI and the continuous efforts on rationalization and operational excellence. The asset lifecycle intelligence division in slide eight recorded sales of 203 million euros, up nine percentage points year-on-year. SaaS revenues grew by 20% in the quarter, with recurring revenue up 10 percentage points as we keep on building a strong foundation for the future. ALI keeps on delivering good incremental margin on this growth, and its cap generation remains strong. Also, it was great to see in the quarter our largest wins coming from asset management applications for data centers and design solutions positions into the pharmaceutical and medical sectors as a push to continually diversify the business. In Q2, we have released more capabilities to guarantee digital continuity between design and engineering, all the way to operations and maintenance, supporting our cross-sell activities. And we have acquired a very interesting SaaS solutions for asset performance management that will definitely strengthen our portfolio. Moving now to Geosystems in slide nine. we have recorded sales of 405 million euros in the quarter down five percentage points as mentioned demand for surveying equipment and construction tools is impacted by interest rates and low confidence but we are convinced that our innovation pipeline is strong and will stimulate demand into the future in the geosystem software portfolio we have seen 12 percentage points of growth in recurring revenues driven by very good adoption for HXDR, our digital reality platform now hosting more than 60 terabytes of data and projects, and our software portfolio for design, project management, and field solutions. Pricing, cost management, and rationalization help support the growth and operating margins for geosystems in two. If we look now at autonomous solutions in slide 10, the overall demand environment is broadly unchanged for the AS division, if not for a degradation of confidence in the agriculture sector that we serve through accurate positioning solutions. The flattening of our top line is more a function of tough competitors and strong sustained growth in the prior period, but the adoption of monitoring and safety solutions in mining, in high-end positioning, and autonomy in transportation is still positive. AS recorded sales of 141 million euros in Q2 at a strong operating margin of 37% versus prior year at 35 percentage points. Also in this case, recurring revenues grew strongly at 22 percentage points year over year, driven by corrections services contracts. Safety, infrastructure, and geospatial in slide 11. This division recorded sales of 120 million euros, up six percentage points year over year, at an operating margin of 20%. It was a good quarter for SIG, driven by the adoption of our public safety and security software solutions. In particular, the adoption of OnCall, our computer-aided dispatch platform, remains very good, both in terms of performance in field, once deployed, and pipeline development and overall market reception. We will now move to finance with David Mills.

thank you paolo in the following financial slides i would like to take you through what was a resilient performance considering the challenging economic backdrop which consequently impacted organic growth with the business delivering incremental ebit margin one and continuing to generate cash flow securely in the target range moving on to the income statement starting with q2 2024 stepping through the sales bridge sales of 1 billion 353.4 is a reported growth of minus one percent negatively impacted by fx of minus 0.4 and equally a 0.4 net impact from structure giving zero organic growth notably gross margin improves significantly year over year to 67.3 percent as we've previously discussed this is an important component of our ebit one expansion and was delivered by a broad-based divisional improvement. Operating earnings increased by 1% despite the flat growth to $399.5 million, with a 60 basis point improvement in the margin to 29.5%, the details of which I will break out in the following profit bridges. The earnings before taxes were equivalent due to the increased interest expense of $42 million versus the prior year of $36, offsetting the increased EBIT. So in this quarter, we had interest expense equal to the prior quarter sequentially. Taxes being 80% in line with prior year bring us down to an EPS of 10.8 Eurocent. For reference, the EBIT 1, including PPA, includes 28 million of amortization, and so dilutes the percentage by 208 basis points to 27.4. Moving on to the next slide, gross margin. As already mentioned, the Q2 was an all-time high gross margin at 67.3. This brings the rolling 12 months to 66.5, up from 65.9. So a 60 basis points improvement, continuing the overall upward trend. The strong quarterly performance being from improved margin in all divisions, and therefore with multiple drivers, including pricing discipline, the rationalization program, product innovation, enhanced by both a positive divisional and product mix, and further improved by the structural divestment. Moving on to slide 15. In the same way as we discussed the achievement of our long-term financial objective free bit one margin development at the CMD, we can see this coming to fruition in the quarter. With one of the key components being gross profit improvement, as seen on the previous slide, adding an incremental 170 basis points. Despite the flat organic progression, both sales and G&A costs are holding in absolute terms under the percentage of revenue, with the rationalization program helping offset inflation and thus not diluting the EBIT1 margin. As anticipated, we have a negative minus 1% impact on the net R&D, which is predominantly the increased amortization as new product releases are introduced, as we see the flattening of the gross r d spend sequentially excluding the incremental spend on the large automation pro automation project in as and the capitalization rate is consistent at 56 the accumulation of this being the improvement on the year-over-year ebit margin of 70 basis points moving to slide 16 the profit bridge in q2 profitability Bridge currency has an accretive EBIT1 impact. This is despite the negative currency translation on sales of 5 million, having a corresponding 2.5 million EBIT at the margin of 50%, as it's outweighed by the net year-over-year translation, which is a positive 6.8 million, driven from the current year loss of 4.5 million against the prior year loss of 11.4 million. The translation movements are less material this quarter, driven mainly from continuing currency trends, with the further devaluation to the euro of the CNY by 2%, where sales exceed costs, and appreciation in the Swiss franc of 0.5%, which has the opposite characteristic, offset by a reversal in the 12-month trend on the US dollar, which appreciated by 1.2%. The structural element is accretive and reflects the net impact of acquisitions less disposals, In the quarter, the disposal of the hand tool business in MI and the IT services in SIG exceed the incremental acquired sales of which the material elements were hardline in the AS division and in the period YAMC and X-Watch in Geosystems. The marginally negative organic sales element has no dilution impacts. So excluding the accretive impact of currency, we would have delivered a further 20 basis points improvement in EBIT1 in Q2, which is in line with the Q1 performance. Moving to seasonality. From a modeling perspective, I would like to revisit the long-term seasonality for hexagons, which we have previously presented. And for Q3, historically, this has been moderately weaker from both the working capital and EBIT one margin perspective relative to the preceding Q2. Post the COVID years, which have their own dynamics, the Q2, Q3 EBIT margin seasonality has been somewhat masked by the FX transaction impact and any relative geographical shift in the Asian market, which have their own phasing. That said, if the margin is adjusted for these one-time FX impacts, the seasonality is more evident. Moving on to the next slide, to the cash flow, which builds positively on the improvements from Q4 and Q1, and so continues the strong start to the year. The adjusted EBITDA demonstrates a stronger cash leverage at 4% than EBIT at 1% as the D&A add-back continues to increase. Capital expenditure remaining at a similar level carries a 7% improvement to cash flow post-investment. Networking capital was a $3 million build versus the prior release of $10 million, which generated an operating cash flow increase before tax and an interest of 3%, which is a cash conversion of 85% versus 84% prior year, including cash taxes which reduced and interest payments which increased the improvement in cash flow before non-recurring in 17%. Non-recurring items cash flow of 19.5 million means an operating cash flow of 229 million, up 12%. Moving to the next slide. Following on from the combined networking capital release in Q4 and Q1 of 82 million, Q2 saw a moderate increase of 3.1 million. So the ratio to rolling 12 months sales stayed at 7.3, which is 28 basis points below the prior Q2. The constituent elements of the movement being receivables and prepaids dropped $14 million despite increased sequential sales as collection focus continues with DSOs down to 80 days. We are continuing to manage inventory, but with mixed changes, we had an increase of $13 million, but DII's are holding relatively flat at 118 days as the prior quarter. Though the total liabilities decreased nominally over Q1, the trade DPOs are on a solid quarterly improvement trend up to 58 days. The decrease in deferred revenue is reflective of the billing cycle and was offset by a cyclical increase in accrued expenses. So in conclusion, the quarter again showed the resilience of the business with improvements in EBIT1 performance. Supported by the rationalization program and despite the more challenging macro environment, Cash Focus has given a positive H1 delivery, building on the strong close of 2023. And with that, I would like to hand over to Ben.

Thank you, David, and good morning, everyone. If we go to slide 21, here we give an update on the rationalization program that we launched this time last year to improve our overall efficiency. As you can see, this is feeding into the margin improvement that we have delivered during the quarter. As Paola said, we also see the benefit of the gross margin level of the disposals we made last year in manufacturing intelligence and SIG. And we continue to rationalize our facility footprint, closing a further 24 sites during the quarter. We're now around 70% of the way through that program, which overall aims to reduce our footprint by around 25%. If we move to slide 22, here you can see the overview of the product footprint by division that we presented last year at the Capital Markets Day. And what we've done here is highlight where in the portfolio this quarter's customer product launch and acquisition case studies come from to help your understanding of the new divisional structure. So we go to slide 23. Firstly, an example from manufacturing intelligence. AC Energy Solution Limited is setting up Thailand's first electric vehicle battery factory, and they need high levels of precision in their assembly process to ensure the safe and reliable performance of the batteries. AC Energy have chosen to implement Hexagon's CMM machines and metrology software to underpin their overall quality control process. If we move to slide 24, we have an example from ALI. EcoPetrol, the largest oil and gas company in Colombia, is adopting ALI's product suite to digitize their entire operations, saving time, reducing waste, and generating pretty impressive cost savings. This sale includes SDX, our asset lifecycle information management, or digital twin data platform, and Ecosys, our suite of project management tools. If we go to slide 25, we have another significant customer win for ALI. in the enterprise asset management business, which, as you've seen, has had a strong quarter. One of the global hyperscalers has selected Hexagon's EAM platform to track the condition of their assets in their data center network to both improve maintenance strategies, maximize the uptime of these facilities, and overall improve profitability. If we go to slide 26, we have an example from Geosystems' surveying hardware and software portfolio. Blue Sky International, an aerial mapping company in the UK, is using Hexagon's Leica CityMapper airborne sensors to capture the 3D data needed to make a digital twin of the city of Nottingham for use in urban planning and decision making. And the capture data is also made available for resale via the Hexagon content program. On slide 27, we have a customer win from the SIG division. Here we've won a follow-on order during the quarter from BMW for our on-call dispatch, planning, and response solutions of four of their production facilities in Hungary. This follows a successful implementation of their campus in Munich over the last 12 months. If we go to slide 28, we'd like to highlight an exciting product launch for ALI, the second generation of their successful SDX platform, which was launched a few weeks ago. The new version is a cloud-native multi-tenant SaaS version, which will make it easier to integrate project data as well as operational data to create a digital twin of a large industrial facility. This can be used to transform the way industrial enterprises manage their assets throughout their lifecycle, leading to significant gains in efficiency, safety, and sustainability. Staying with ALI, if we go on to slide 29, We'd like to highlight the acquisition of ITIS Digital, which closed during the quarter. ITIS has developed a modern SaaS-based APM software platform, which can be used to manage a customer's asset strategy, predict the likelihood of failure of these assets, monitor asset performance, and allow you to take timely measures when risks start to increase across your business. This both improves uptime and reliability, and as Paola said, we see strong synergies between ITIS and our existing EAM platform. If we go on to slide 30, we highlight the acquisition of Xwatch, which Geosystems completed in April. Xwatch is a provider of OEM-agnostic machine control and related software technologies, which allow operators to set limits on an excavator's operating height and reach in order to set a predictable working zone. And this significantly increases the safety of those employees working around large machines like this. Finally, if you move to slide 31, another acquisition made by Geosystems during the quarter, Voianci, which is a provider of BIM solutions and reality capture services. Voianci's services are used to digitize all asset types, including industrial facilities, data centers, shopping centers, and so forth, and create a digital twin, which can be used throughout the design, build, and operate phases of that asset lifecycle. And their solutions obviously complement Hexagon's existing leadership in reality capture technologies. So we welcome ITIS, XWatcher, and Voianci to the group. And with that, I hand back to Paolo.

Thank you, David and Ben. So in conclusion, we will see how the market environment develops in the short and mid-term. But I'm pleased with the level of execution that we have demonstrated in the quarter. We remain focused on targeting growth areas focused on executing on innovation and building a more resilient business through recurring revenues, growth and operating margin improvement, efficiency, and predictable cash generation. Therefore, I'm confident in our strategy and the business model for the future. Also, I'm very excited to meet with customers and analysts and investors at the upcoming trade shows later in Q3, where we will show great new solutions and And with this, operator, we're now available to take questions. Thank you very much.

Thank you. As a reminder, to ask a question, you will need to press star 1, 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1, 1 again. We will now take our first question. Please stand by. And the first question comes from the line of Daniel Duerberg from Handelsbanken. Please go ahead. Your line is now open.

Thank you, operator, and good morning, Paolo, David, and Ben. And congrats to nice margins, at least. I would ask you on the R&D spend, roughly 60% of revenues, obviously in no growth markets. That obviously impacts this negatively. But my question is if you can comment a little bit on what you've seen from the launch products and platforms say the last 12 months how has these impacted the the growth for the company if you can give any range of how it's been supported thanks yeah hi good morning Daniel just a couple of comments by division so in terms of manufacturing intelligence and we have done a lot of

efforts in innovation and localization in specific markets and we've seen the results of that in the last couple of years in terms of China sustaining growth rates above competition also because of this level of innovation that was focused on that specific market. The second aspect that is helping supporting the business, supporting growth and supporting growth margin is all the innovation that went into robotics and tracking solutions. There's a big push in commercial aerospace to double down on volumes, and we have the best solutions in the market in terms of optical technologies as well as software that goes with that. In terms of ALI, just to mention one, I mean, you've seen, you've heard from them, a continuation of the investments in STX. It's pretty simple what we're trying to achieve. We want to have the best data strategy for customers, so to keep them in our own environment and connect the various applications as well as we possibly can, maintain continuity and help with our sales. Moving on to Geosystems, I would point out two aspects. Gross managing also comes as a result of investment in innovation. We stay focused on refining the cost structure of our sensors in the market by making more use of AI and analytics at the edge. That's important for customers, and that's important for our own gross margins. And secondly, the 12 percentage points of recurring revenue also comes as a result of investments in HXDR. We have more than 33,000 customers by now. Home projects, very good growth, and so we're positive about it. for the second half of the year and the future. In terms of autonomous solutions, I'm equally excited by what's been done and what's ahead of us in terms of innovation for autonomy and for mining. I pointed out 22 percentage points of growth in recurring revenue. Here again, correction services are unique and differentiated and very valuable for customers as a result of innovation. And then last but not least, it was great to see public safety grow in double digits within the SIG division in Q2 as a result of having OnCall, which is at the moment, the most state-of-the-art computer-aided dispatch platform in the market.

Perfect. Very good answer. May I also just have a follow-up on your ambition in the India market? Your current position a bit brand awareness competition and if it's possible to keep similar margins in India as you have elsewhere, for example, in China.

Yeah, it's a great question. We're building up our operations. The business is still relatively small, but growing at good pace. We have seen good growth for everything that's related to the infrastructure built up, particularly last year. And at the moment, we have 20 to 30 percentage points of sustained growth in manufacturing to support sort of the local market. As you know, we roughly have 2,500 people in India supporting both with the development of local software solutions as well as helping commercially the local market. This is another market in which both on the hardware and the software side, we're trying to localize so that we can address not only the right requirements in terms of data, but also requirements in terms of cost structure.

Perfect. Good luck and have a great summer. Thank you.

Thank you. We will now take our next question. Please stand by. And the next question comes from the line of Alexander Virgo from Bank of America. Please go ahead. Your line is now open.

Thanks very much. Morning, Paolo, David, Ben. Thanks for taking my questions. I have one on growth and one on margins, please. So, you've sort of given a bit of an indication for the first time on what you think is going to happen in terms of Q3 by describing the market as remaining challenging and difficult. Consensus has got 4% growth in Q3 and 6% growth in Q4. I wondered if you could just give us a sense. Does difficult mean zero, as you've done in the quarter here? I appreciate you don't guide, but some sort of help would probably be good. And then I'll follow up with a question on margins, if I may.

Yeah, what I would say is that one of the reasons why we've posted flat business performance in the quarter is because we see that there's uncertainty in the market. The closing time for these commercial projects, right, is the deadline. When it comes to Q3, we think we're going to be trading at similar levels. And then when it comes to the outlook beyond that, we will see it in the hands of a lot of different factors. For sure, we have innovation coming to sustain market adoption. And for sure, we start to meet those competitive figures from prior year.

OK, thank you, Paolo. And then on margins. I guess the issue is that zero contribution from organic in the bridge at the group level masks a lot of what's going on underneath. So I wondered if you could just give us a sense or help us on the moving parts. If I've got my numbers correct, I think the increase from R&D is only about 11 million year on year. You've had close to 40 million in terms of savings year on year. Again, if I've got that correct. So what's going on under the hood by division or some sort of sense as to how we can, again, get a sense of how the margin is going to progress through the rest of the year? Thank you.

Yeah, Alex, I mean, you rightly point out that there's a lot moving. And that's why I tried to put the OPEX bridge in there to give a little bit more flavor of what was moving across the different lines to give a bit more visibility. And I think we've given pretty good transparency there that you can see that we're really holding flat the sales and G&A costs. And that's clearly where a significant portion of the rationalization program is going in. that rationalization program is also fortunately going into the gross margin to support that. So you do see those elements coming through. But we're supporting with no organic growth and improved gross margin and offsetting, obviously, a year-over-year significant inflational increase in cost base. So that's where the majority of the savings program is going and where everything is coming through. So hopefully that gives you a little bit more flavor of what's going on. OK, thanks.

Thank you. We will now take our next question. And the next question comes from the line of Andre from UBS. Please go ahead. Your line is now open.

Good morning, gentlemen. Thanks very much for taking my questions. I'll go one at a time and maybe start with a follow up on the margin. In terms of the savings program, what should we expect for the run rate for Q3 and Q4 compared to the 38 million in Q2?

I mean, the 38 million, as you see, we're starting to approach what the full expectation was for the rationalization program. We've moved at a pace. I think we've moved quicker than perhaps we initially envisaged, giving a fourth quarter for the finish of the program. We're not going to give exact where we're heading in terms of the incremental value, but I think we've moved significantly through the program thus far. If you look at that as an annualized version, we're at, I think, 163 million. So we're very close to what was the original 175 million saving over the 200 million restructuring provision.

Thank you. And a more broader question, thinking beyond 2024, is there an ongoing recurring kind of productivity effort at Hexagon, and this program comes on top, like some companies have something like 3% annual productivity gains as a sort of standing target, and then special programs on top. Or are these the programs that drive those annual savings, and hence we should think about maybe a further program for 2025-2026?

Hi, Andrea. So first, we don't have a further program in sight. I'll say two things. I mean, the rationalization program that we have launched last year captured a portion of these initiatives. And then, of course, there's an ongoing push for efficiency that doesn't require an outlay of capital that we wanted to single out to investors specifically, right? I mean, if you look at the... When it comes to the much talked about generative AI, if you look at two areas, beyond everything that is in beta testing, beyond everything that is at the moment, at least for us, at the level of anecdotal sort of return on investment, there's two pockets of efficiency when it comes to the development effort through GitHub. and the content creation within marketing. There's two pockets of return on investment and productivity that are coming through very strongly, easily measurable, that didn't require a participation from the rationalization effort. In terms of construction into the second half of the year, there's other levers that we can pull based on trading conditions that don't require, again, an outlay of capital as part of the rationalization program.

That's very clear. Thank you. If I may, just a final very quick question. In terms of kind of monthly demand run rates in manufacturing intelligence and geosystems, was there anything unusual during the quarter in terms of monthly run rates and in terms of how this quarter started? Is there anything to call out?

Hey, Andre. In terms of geosystems, I don't think so. I think we see a steady trend, I guess, through Q2 and into Q3. For manufacturing, obviously, if you look at the slide that shows the sequence of quarters, it's been slowing down over the last 12 months or so. I think looking into Q3, we see it's sequentially similar, maybe with a little bit of incremental slowdown in China in Q3. but nothing too dramatic as we went through Q2 and into July.

Great. Very helpful. Thank you very much, all of you.

Thank you. We will now take our next question. Please stand by. And the next question comes from the line of Eric Golrung from SEB. Please go ahead. Your line is now open.

Thank you. A few questions. The first one is, I guess, I'm trying to peg the Q3 here following up on some fire questions. Just the order intake development in manufacturing solutions or intelligence in the quarter. And then the second question on the various software platforms you have and sort of customer responses and behavior to it. You had good development in the quarter, but there's some concern that we're seeing a delay in certain software investments here at customer's. wait for more sort of AI-related updates to various platforms? Is that something you at all are experiencing? And then the third question on the total investment level, CapEx was a bit down in Q4 and Q1, slightly up in the second quarter. What's your expectations there for the second half of this year? Thank you.

Hi, Eric. If I take the MI order trend, if you look to North America and Western Europe, there wasn't a huge mismatch between orders and revenues. But in China, it was a little bit weaker in Q2. So orders were a little bit below revenues. And that's why I think for Q3, we think China could end up being slightly negative, nothing too dramatic. But beyond that, orders were in line with

Yeah, hi, good morning, Eric. In terms of software, we're pleased with the performance in the quarter. I don't think that things are going to change dramatically going forward. A couple of patterns that we have observed One is that services related to software activities seem to be a little bit more under pressure, right? So there's partly a reluctance to do configuration of packages or invest into stronger connectivity of these enterprise solutions to the rest of the stack that customers have, and this tends to have an impact. Secondly, I would say that the speed at which customers make decisions is different between key accounts and customers that are deeper in the supply chain, smaller companies, smaller packages, smaller value application software. And this is not unusual, I think, when there is a slowdown and key accounts have sort of digitalization initiatives that are more long-term, while Smaller customers tend to be, as you know, a little bit more reactive to sentiment and rates.

Yeah, on to your investment question. I mean, we have talked about that our R&D is at a kind of peak level in the innovation cycle at this moment in time. And I did mention that we see outside of the one specific example in the automation, in the AS division, that the R&D is flattening or reducing. So, I mean, we have 156 million capital expenditure, as you said, and I would expect that to be flat to slowly starting to decline is the overall general trend that we're looking for. Thank you.

Thank you. Anyone else take our next question? Please stand by. And the next question comes from the line of Magnus Kruber from Nordea. Please go ahead. Your line is now open.

Hi, Paolo and David. Magnus from Nordea. A couple from me as well. Good momentum in the software business was good to see. Could you say if you benefited from any larger perpetual deals that we should think about or keep in mind as we move into the coming quarter, or should we see the plus nine in ALI as sort of a clean number?

Yeah, I'm not going to say good morning. I don't feel a perpetual move in any unusual sort of way. I think it's just a good acceptance for subscriptions and SaaS where we have good momentum. And then a lot of the innovation in our software portfolio is coming up through subscription uh packages right and uh and i would say those initiatives all the platforms that consume a lot of 3d data created by our scanners tend to be priced on a consumption basis and that tends to funnel into recurring revenues perfect thank you so much that's clear and then a second one could you comment a bit on the weakness in the automotive market this is something that's sort of

decelerated sharply in the quarter, so more of a gradual weakness. Any flavor there you could add to regions or verticals would be very helpful.

Yeah, Magnus, I'd say two things that we noticed. There's a weakness in Central Europe in the supply chain. I think there's uncertainty in the way people spend specifically for capital goods. And then secondly, in China, I think there's been a big wave of investment in and around EV. And you can see that as a byproduct of a few things that are happening in the market, a bit of consolidation and aspects that have got to do with geopolitics. There's more reluctance in investing from that perspective. So what we're trying to do is to stay very focused on growth areas, right? I mean, you heard about pharma, about process. You heard about data centers. You heard about aerospace and energy. All of the divisions are focused on finding different growth areas in industries that are more malleable to investing in digital solutions right now.

Perfect. Thank you so much. And just one final one on the gross margins, 170 dips up year over year. Could you unpack that a little bit between the different components of mix and savings and so on that would be helpful?

I mean, as I say, it's a very broad increase, so it's very difficult to move that into the constituent elements. I think we've been pretty transparent to say it's driven by all of those factors. I could perhaps do it a little bit by some of the divisions that saw some of the different impacts. So, for example, product mix, strong software, and obviously ALI and MI in terms of the rationalization program, it would have been MI and GEO. In terms of the vestments, it would have been SIG and MI. In terms of pricing discipline, it was pretty much across all of them. Got it. Thank you so much.

Thank you. We will now take our next questions. And the next question comes from the line of Joachim Gunnell from D&B Markets. Please go ahead. Your line is now open.

Thank you, and good morning. So on the cost savings program here, which was announced a year ago, since then I would assume that market conditions have deteriorated or worsened. So can you comment whether you think that Hi Joaquin, good morning.

As I said earlier, we don't plan to do anything above and beyond what has been announced last year. We're still working through all those projects and then we have other ways of building efficiency into the business.

Great. And just finally then, when it comes to geosystems and eventual green shoots, what part of the business would you first, where would you first expect to see those and what are you currently seeing?

Yeah, I mean, you know, I think from a construction indicator perspective, you know, you still see the PMIs and the billing indexes and so forth being relatively weak. So if we do get interest rate cuts, it will eventually start to feed into an improvement there. But that historically doesn't come back so quickly. I think what you're more likely to see is a general improvement in optimism around the economic outlook that will then feed into our channel partners starting to buy a bit more inventory ahead of a pickup. And that's normally how a a recovery in geosystems would work.

Thank you.

Thank you. We will now take our next question. Please stand by. And the next question comes from Linus Venn, market from Barclays. Please go ahead. Your line is now open.

Great. Good morning. Thanks for taking my questions. I have three. Maybe we can go to them one by one. I mean, first, you have been very clear on the overall growth outlook for the business for Q3, but maybe you could give us a bit more details on the segments in which you have good visibility and where we could see an improvement or softening in the second half.

Yeah, hi, Sven. Good morning. I think we've talked already about manufacturing intelligence and the outlook. In terms of ALI, I would see a continuation of the good momentum. Then, of course, comparatives change and the mix of software can change, but I would say the outlook is very much unchanged, right? And again, when I see growth coming from a variety of industry sectors, that creates more opportunity. And I think the ALI is set for a good future there. In terms of geosystems, as Ben said, we stay focused on what we can control, right? And then right after summer, we're going to have a global event like intergeo we're going to have the opportunity to showcase our radar and monitoring solutions at min expo in vegas which happens once every four years every time that we come to market with solutions that really add to the financial productivity of our customers' businesses or add to the compliance and safety requirements of these companies, we give them great reasons for coming back to the market and supporting Hexagon. In terms of autonomous solutions, the numbers that you see in terms of top line are more a function of comparatives than a function of the underlying strength and momentum in the business. I also think that we're going to see an acceleration, if not in the second half of the year, into next year when it comes to more autonomy projects that allow us to reutilize components of technology that we already have in-house. I think the outlook for SIG probably will remain similar to the levels at which we have been seeing them grow into Q2. So that makes for the group-wide outlook that we have already discussed earlier.

Perfect. Thank you for all those details. Then another question just on the cash tax. As you noted, they have been much lower in the quarter last year. Can you just give us some details on what role this, how sustainably this is, and how we should think about the cash taxes in a four-year context?

As you know, I mean, variation in cash taxes, it's always a timing shift, and so I think You have to look at the cumulative. I don't suspect we will have a significantly lower overall cash tax in the year, but we have obviously lower cash tax in this quarter. But you can't legislate for time and differences in that element. So I think look at the whole year and think that it's probably likely to be similar.

Okay, perfect. That's helpful. And then just finally, you mentioned geopolitics and the reluctance to invest in some regions. Can you just give us a bit more clarity what exactly happened? Did you see already an impact in the quarter or since then and how material is it at the moment?

I wouldn't call out specific products or areas of the business. I think geopolitical uncertainty feeds into uncertainty in people making purchasing decisions and they might decide to wait and see. So, you know, I think it's more of a high-level top-down effect than something that's kind of micro and you can pin down to specific businesses.

Okay, that's very helpful. Thank you.

Thank you. We will now go to our next question. Please stand by. The next question comes from the line of Daria Ioana Sipos from J.P. Morgan. Please go ahead. Your line is now open.

Hi, and thank you for taking my question. I just wanted to double-click a little bit on the GenAI implementation you mentioned internally. So you mentioned development efforts to GitHub and content creation through marketing. Do you have any kind of early indication of what sort of OPEC savings could result from that implementation, and how advanced is the implementation internally at the moment? Is there more to kind of roll out and gain incremental efficiencies?

Thank you. Yeah, hi, Daria. What I would say is when you look at GitHub, now we start to have a population of software engineers within Hexagon using those co-pilots. That's substantial, right? So we start to have data points that are very interesting, and then we can also analyze in terms of the productivity impact defined by seniority, right, of the development population. So I think we're getting better at utilizing those tools. We do have ratios, of course, in terms of productivity improvements in development. And then it's all a question of what are you trying to achieve, right? I mean, do you want to get to functionalities before competition? Do you want to move delivery date for product development, or do you need to bank on efficiency in terms of OPEX? So what I'm happy about is that there's been very early engagement throughout the organization and a big push to make these adoptions measurable. And then we'll go see how to use these tools in the future so they have an impact also financially for us.

Thank you, that's very helpful. Thank you. We will now take our next question. And the next question comes from the line of Nae So Nang from Berenberg. Please go ahead, your line is now open.

Hi, good morning. Thank you for taking my questions. I've got two, if I may, and I'll go one by one, if that's okay. The first one is a two-parter on the top-line growth, starting with just a clarification question here. I think earlier you mentioned that for Q3, you're expecting at a similar level of growth outlook. Just want to clarify here, similar level to the Q2 or the Q1. And second part of the question is, if I were to assume about low single digit organic growth for 24, if I then take an average for the past three years, looking out to your midterm targets to hit the bottom of the 5% to 7% organic rich growth target, you'll have to do a minimum about 5% growth in 25 and 26. Could you share your confidence level on that growth trajectory, please?

Yeah, hi, good morning. So, yeah, first of all, we refer to similar growth level as experienced in Q2. And then secondly, when it comes to the financial plan from 2022 to 2026, as you know, with the conclusion of H1, We are at the midpoint, and I think so far, as of the end of Q2, we are exactly at the midpoint of the 5 to 7 percentage points of organic growth range that we have indicated and that had baked in from the get-go an expectation of softening and downturn within this period. So, yeah, we stay confident on the achievability of that goal.

Okay, thank you. And then the second question is on the margins. I've noticed specifically around your depreciation amortization cost, and of course your amortization on the capitalized R&D has gone up in the quarter or sequentially going up as well, but the depreciation amortization rate has remained pretty flat, both in Q1 and Q2. Could you maybe help me understand where the savings are coming from despite the amortization cost going up quarter on quarter, please?

I mean, the depreciation cost is up 8 million year over year. So you do see the return of that. And the differential between cap and amortization is smaller in this quarter than it was in the prior year. So it's definitely moving. We've said we're at the peak of our innovation. And as Paolo's alluded to, we have significant future releases also, which will accelerate that rate. But you definitely do see the rates increasing.

Right, okay. And if I may squeeze in one last question, quick question here. On your R&D cycle, you mentioned that we should expect the intangible capex level to stay consistent at Q1, Q2 level, but then should also expect that to wind down in the going out in the after years. Can you give us a timeframe as to when the decline will, when we should start to see a decline?

No, I mean, obviously, we talked about being a peak of an innovation cycle in a relatively short term. I wouldn't want to try and predict where growth and everything else is going over that long term to say where that spend match would go to.

All right. Okay. Thanks. Thank you.

Thank you. We will now take our next question. Please stand by. And the next question comes from the line of Mikael Larsson from Carnegie Investment Bank. Please go ahead. Your line is now open.

Thank you. I have a question about the geosystems and the growth and the modeling dynamics. If you can elaborate on the demand situation for different sensors and the main product areas and how mix shifts within those systems

affecting the margin for that segment yeah hey Mikael I mean I would say if you if you look at it over the last 12 months I would say that we probably had 12 months of weakness within geosystems on the surveying tools machine control a little bit softer but if you look back three or four quarters, reality capture was stronger following the release of the second generation BLK. What you've seen over the last couple of quarters is as the reality capture has hit tougher comps, that has slowed down as well. So that's kind of put downward pressure on Geosystem's overall growth rate. But from a margin mix perspective, I wouldn't call out any big differences between those products. The margin decline in this quarter is more fact that you've got lower volumes offset by savings that we've had from the cost saving program.

Okay, got it. Can you also mention something about the software platforms that you have launched and how they are developing? Nexus, for example, and HXDR seems to be developing well. Can you also mention something about Reality Cloud Studio, for example?

Yeah, sure. Hi, Mikko. Good morning. Reality Cloud Studio is one of the applications within HXDR that is deployed for content and is deployed for hosting and sharing scanning data that comes from our portfolio. In terms of Nexus, I think it's in a different stage of maturity. At the moment, it's used to drive cross-selling within the portfolio of solution in MI. So we're pleased with progress on both, and we stay very positive about the future on both. Okay, thanks.

Thank you. Due to time constraints, we will not be taking any further questions, and I will hand back to Paolo Guglielmini for any closing remarks.

Yeah, thank you. Well, I just want to thank you all for listening in in this last hour. Despite the headwinds, we are pleased with the way we executed in the quarter. We stayed focused on capturing the growth areas that we see out there by industry and regions. And I'm pleased with what the teams have done in terms of building a more resilient business. We have a lot of innovation to look forward to. So yeah, we'll be excited to share more of these updates with you in three months from now. Thank you.