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Good day and thank you for standing by. Welcome to the Hexagon Report third quarter 2024 conference call. 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 during the session you will need to press star 1 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question please press star 1 1 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Paolo Guglielmini. Please go ahead.

Thank you, everyone, for joining our Q3 2024 earnings call. Before discussing the group's performance in the last three months, I want to refer back to the press release that's been published earlier this morning in slide four. The board of directors of Hexagon has authorized management to evaluate the potential separation of the asset lifecycle intelligence division ALI into a new core. New core will also include businesses with strong customer technology and operational synergies with ALI, and namely ETQ, the enterprise quality management software platform that currently resides into manufacturing intelligence. Bricsys, a provider of CAD and BIM software currently in geosystems, as well as utilities and infrastructure, a business currently in the SIG division providing network engineering software. So what are we setting out to do with the strategy? Well, the ambition is to create two public companies at scale with distinctive strategies and financial profiles and to create additional value for all the stakeholders involved. So from slide five, we start looking at what these two global players would look like after a potential separation. Hexagon will be a global market leader in building digital twins at any scale, with an impressive span of innovation, customer footprint, and install base. Our core mission, which is one of deploying robotics, sensors, software, and AI to capture and create insights from digital twins, will become simply more and more relevant in the future. Regardless of the industries that we operate in, we see customers grappling with labor shortages sustainability challenges, competitive demands on quality, safety of communities and operators. And to achieve all those goals, building a digital ground truth of reality, to then improve that through workflows and insights is essential. And that's a massive opportunity of growth for Hexagon in the future. But it's also one that requires focus of intent and dedication of resources. With revenues above €4 billion, world class margins and recurring revenues that are growing across all divisions, Hexagon would have a very strong and resilient financial profile, would have the focus and the resources to build an even stronger market leadership towards this mission. And in slide six, this is what MuCo would look like. Newco would be a pure software player with great scale, with a billion euros in sales, market leading margins and recurring revenues, and a fantastic roster of blue-chip customers. And of course, great opportunities ahead. Newco's portfolio would be best in class when it comes to managing digital projects and assets, and would have the technology, the innovation, the financial and geographic scale to tackle massively important challenges. Think about energy transition, think about grid distribution, think about the modernization of infrastructure, aging workforces, the design of operation of data centers, and their own cyber integrity. Regarding transaction details in slide seven, these will obviously emerge over time. The separation of NUCO would happen in a tax-efficient manner for shareholders. Shareholders would receive shares of NUCO in proportion to their existing holdings in Hexagon. Hexagon is evaluating listing options for NUCO in the US and in Sweden. The separation, spin-off, and listing would be subject to the approval of the board and the shareholders, as well as being subject to other conditions and regulatory approvals. Obviously, there cannot be any assurances that a separation, a spin-off, or a listing will occur. What the timeline could look like in slide eight. We expect this to be a 12 to 18-month process. The reason for the disclosure today is that we value transparent communication with the market, and we thought it was important to disclose the board's interest in this potential transaction, which could be, of course, significant if executed And of course, we wanted to be proactive as well to prevent inaccurate market rumors and speculation. During the course of these 12 to 18 months, we will be transparent with the markets in a variety of ways and setups, from quarterly calls to the specific updates and potentially capital market stays into next year. But for today, this is very much all the detail that we have to share with you on this project. Now moving on to the performance update for Q3 2024 in slide 10. As anticipated Q3 has been challenging because of muted demand in several end markets but also it was a quarter in which we progressed very much in terms of business model in terms of operational improvements and innovation. In Q3 we have recorded sales of 1.3 billion euros down by two percentage points organically. Growth in recurring revenues remained very strong, 7 percentage points up to €565 million. Gross margins continued to be strong at 67% versus 65.5% in prior year, as a result of innovation to drive pricing and cost structure of our products, of favorable mix and operational improvements. The operating margin was solid at 29% despite effects, supported by gross margin progression, but also by the rationalization program that has now come to conclusion, delivering savings at the top end of the initial expectations. The cash conversion in Q3 typically is weaker, but came in at 70%. And so far, we are at 81% for the first three quarters of the year, and we'll conclude 2024 well within the guidance range of 80 to 90%. We're very happy with the reception that's been received at events like Intergeo in Germany, or Minexpo for the mining industry in Vegas, as well as IMTS in Chicago. At those events, we have launched products as well as earlier in the year, of course, they got great reviews by customers and specialists. So even if in the short term we expect demand to remain challenged in Q4, we're very confident that we are positioned well for growth into 2025 as the market environment improves. Moving to slide 11, a few comments by geography. We observe broad weakness that persisting in the construction market across the globe and in China across multiple industries, although now more stable in terms of deal flow and possibly benefiting from the announced stimulus package over the course of 2025 and gradually. Looking at areas that are driving positive demand, I would single out the manufacturing and the public sector in the US for sure, the aerospace market globally, as well as growth markets like Middle East and India. Looking at slide 12, this is where we show divisional performance. On an organic basis, MI declined by 2 percentage points, ALI was up by 6, Geodem by 5, AS by 12, SIG was up by 2 percentage points. So, as you can see, some divisions experienced strong growth in Q3 2023 with tough numbers to beat, notably MI, ALI, and AS. If you look at slide 13, this is where, as ever, we show quarterly developments in sales and EBIT by division. We're going more in the detail of this specific division starting with slide 14 for manufacturing intelligence. We delivered revenues of €464 million at an operating margin of 25.5%. We have seen a noticeable slowdown of activity in automotive, particularly in Europe. And certainly the fact that our Chinese business stayed very strong throughout 2023 makes for a tough set of numbers to beat right now. But we do see good traction in software, with recurring revenues up 4% in MI, and particularly in automation solutions that are driven by aerospace investment and large-scale applications. I think that these markets will remain cautious for the foreseeable future, but we see nothing that's pointing to a loss of market shares, rather the contrary. The team NMI keeps on doing well to deliver margin and cash in the meantime. Looking at ALI now in slide 15. We recorded revenues of 208 million euros, up 6% year on year. You probably could have done more, but also in these industries, there is a tendency for projects approvals to slip and be extended and for customers to be cautious in deploying capital. In ALI, SaaS grew by 16% and overall recurring revenues by 6%. very importantly we are rolling out in ali the new version of our platform that's called sdx to upgrade customers and capture share of wallet in their own design and operations software ecosystems the ali margin is slightly softened in q4 as a result of the gold market investment that we are executing to capitalize on this innovation but i think here we're going to have a very solid outlook for 2025 and beyond Looking at GEO systems now, in slide 16. In GEO, we have recorded sales of 373 million euros in the quarter, down 5 percentage points. As you know, this market is globally impacted by interest rates, by low confidence, so customers are cautious before investing in new systems. The portfolio and the innovation pipeline in Geosystem is strong, and in Q3, again, recurring revenues grew by 13%, also driven by HXDR, which is our digital reality platform. On HHDR, we are embarking plenty of customers. We have users of our scanners, creators, and consumers of geospatial content. And this is a great opportunity for us into the future as the platform scales to build a sizable SaaS business organically. I am expecting that the output for geo gradually will improve from here. But in the meantime, margin performance, as you can see, has remained very healthy. Now to autonomous solutions in slide 17. AES recorded sales of 135 million euros in Q3 at an operating margin of 34%. The drop in Q3 mostly is down to an exceptional performance last year with more than 30 percentage points of growth. Despite some delays, the demand for autonomy in mining and in defense will remain solid for the foreseeable future and offset the weakness in the agriculture market. For those of you who attended MINEXPO, it's clear that the electrification, autonomy and long-term demand for commodities will create stable demand for our positioning and safety portfolio in the future. Also in AS, recurring revenues grew by 11%, driven by our positioning correction services. Looking at the SIG division now in slide 18. SIG recorded sales of 120 million euros, up two percentage points year-on-year, with an operating margin of 21%. Within SIG, our business of services for the U.S. federal agencies declined materially, but we are pleased to see continued growth in the public safety software portfolio as we roll out the new dispatch platform on call that now is live at multiple sites, is very well appreciated by customers, is building very strong references, and is supported by a great pipeline into the future. Public safety grew in double digits within SIG. Slide 19. As discussed in several occasions, we are in the middle of a multi-year innovation push to position Hexagon optimally for growth into the future. And in this view in slide 18, we are trying to single out a few of these releases, starting with 2023 on the left. The launch of the new lineup of precision automation cells in MI called Presto has created in 2024 opportunities and has helped mitigate weakness in other areas of the portfolio already. ALI maintains good momentum this year also thanks to the work that's been done on EAN on its design portfolio and now rolling out this data backbone called SDX to connect these various solutions. We of course have already talked about the good growth on Oncall and as you know HXDR is behind their strong recurring revenue momentum in Geosystems. In Q3 recently, we have just released the new ATS800 laser tracker for MI and a brand new motorized 3D measurement and layout tool called iChrome for Geosystems. And both of these products will pay back their investment within two years of launch. 2025 will be another strong year for product launches and these investments will put us in a position of real strength, particularly as the macro environment improves. David can you now take us through the finance section?

Certainly, thank you Paolo. In the following Q3 financial slides I'd like to take you through what was a continually resilient performance considering the ongoing challenging economic conditions of the quarter. We consequently impacted organic growth with the business delivering consistent EBIT 1 margin and improved cash flow is seasonally weaker than the preceding quarters. onto slide 21 starting with the q3 2024 income statement stepping through the sales bridge sales of 1 billion 299.8 is a reported growth of minus four percent negatively impacted by effects of minus one percent and equally a minus 0.4 net impact from structure giving minus two organic growth notably the year-over-year gross margin improvement seen in q2 continued into Q3 at 67.1%, and again was delivered by a broad-based divisional improvement. Operational earnings decreased by 4% in line with the reported negative growth rate to 37.6 million, and the 10 basis points declined in the margin to 29%, the elements of which I'll break out in the following profit brief. Interest expense and financial cost of 44 million versus 43 million gave a delta on earnings before tax of minus 5%. Taxes being 18% in line with prior years bring us down to an EPS of 10.1 euro cents. And for reference, the EBIT1 including PPA includes 28 million of amortization and dilutes the EBIT1 percentage by 212 basis points to 26.9. Moving to slide 22. Q3 delivered a further strong gross margin of 67.1%, and this brings the rolling 12 months to 66.9%, from 65.9% up by 90 basis points, continuing the important upward trends that we've discussed in previous calls. The strong quality performance being from improved margins in the majority of divisions, and therefore with multiple drivers, as mentioned last quarter, including pricing discipline, the rationalization program, product innovation, and enhanced by both the positive divisional and product mix, and further improved by the structural divertments taken up during various quarters. Into slide 23, we have the profit bridge. In Q3, profitability bridge currency has a minus one diluted EBIT one impact. This is due to the combination of the negative currency translation on sale at 13.6 million, having a corresponding minus 5.6 million EBIT at a margin of 41%. Combined with the net year-over-year transaction impact, which is a negative of 10.7 million from a current year loss of 7.7 against the prior year gain of 2.9. Negative translation movements this quarter were driven mainly from a return to the trend of the depreciation of the US dollar by 0.9% with sales exceed cost, and continued depreciation of the Swiss franc by 1.1%, which has the opposite characteristics. Whereas the CNY this quarter was relatively neutral at an appreciation of just 0.2%. The structural element was marginally accretive and reflects the net impact of acquisitions less disposable. And in the quarter, the disposals of the hand tools business in MI and two months of the ITS business in SIG exceed the incremental acquired sales of which the material elements were Playancy and Xwatch in Geosystems. The organic sales evolution being negative this quarter due to the challenging macro backdrop, but with no negative EBIT impact due to the gross margin improvement in connection with the cost mitigation through the rationalization program. which was therefore accretive 5.7%. So excluding the dilutive impact of currency, we would have delivered an incremental 85 basis points improvement in EBIT 1 and Q3. Moving to slide 24, the cash flow. Moving on to Q3 cash flow, which shows improvement in the cash generation conversion over the prior year Q3. It's seemingly weaker than delivered in Q2. The adjusted EBITDA demonstrates a similar cash generation to the prior year, despite the minus 4% decline in EBIT, as the depreciation and amortization outback continues to increase. Capital expenditure is sequentially down $4 million, but increased over the prior year, which was a lower quarter due to two asset disposals in 2023. Networking capital lower $56 million bills was significantly lower versus the prior year bills of $98 million. which generated an operating cash flow of $264 million, an increase of 5%, which is a cash conversion of 70% versus 64% prior year. Including cash taxes and interest payments, which both marginally reduce, the improvement in cash flow before non-recurring items is 13%. Non-recurring items of 22.7% brings an operational cash flow of $143 million, up 10%. Moving on to slide 25, the Q3 net working capital, as I mentioned, was a bill that fixed 56 million due to the cycle as mentioned in the Q2 call. This increased the proportion of rolling 12-month sales to 8.3. There's still 120 basis points below the Q3 prior year. The constituent elements of the movement being receivables and prepaid increased by 9 million, with the resulting DFO at 84 days, which is in the normal range. Inventory increased by $13 million and will be a continued focus during Q4, which is seasonally the strongest trip in quarter for the group. Liabilities decreased by $14 million with the trade CPOs at a level of 55 and a good improvement over the prior year. A decrease in deferred revenue of $35 million, which is reflective of the billing cycle and in line with the prior year Q3 changes. Accrued expenses are increasing as expected but at a tempered rate based on performance. So in conclusion, despite the continuation of the challenging macro environment and consequential negative organic growth, EBIT1 performance is remaining resilient due to the continued improvements in gross margin coupled with the cost management through the rationalization program, which has narrowly achieved its expected returns. Cash conversion, though seasonally weaker in Q3 than earlier quarters, improved over the prior year, and on a year-to-date basis remains in the target range. And with that, I'd like to hand over to Ben.

Thank you, David, and good morning. If we go to slide 27, firstly on sustainability, we had the good news during the quarter that our greenhouse gas emission reduction targets, which are described here, have been approved by the Science-Based Targets Initiative. To achieve these ambitious targets, we have many ongoing programs, facility upgrades, employee and supplier training, expanding renewable energy use and setting stringent criteria for product development and logistics. So we have good momentum right across the group. We'll update our progress towards these targets in our coming annual sustainability reports. If we go to slide 28, here we have a very important customer win for SIG during the quarter. The Malaysian Emergency Response Services have selected the on-call suite of products to upgrade Malaysia's 999 emergency services communications. This large project will enhance collaboration and data sharing among Malaysia's five key public safety agencies, improving their efficiency and response times. If we go to slide 29, a large project win for ALI during the quarter. A leading European EPC has selected SDX2 to manage their engineering project documentation, which will boost efficiency and productivity. As we described last quarter when it was formally launched, SDX2 is a cloud-native, multi-talent SaaS solution It'll make it easier to integrate project and operational data, create a digital twin of a large industrial facility for use throughout the asset's life. If we go to slide 30, we have a large follow-on order with one of our key accounts in China, BYD, a global leader in electric vehicles and renewable energy solutions. To support their cost reduction, efficiency, and quality goals, we provide a large number of CMMs, measurement arms, and laser trackers plus the associated software during the quarter. If we go to slice 31, we have a custom example from Geosystems. If you've ever wondered at a major athletics event how they get the precise measurements you need in events like the javelin, shot put, discus, and long jump, then here is your answer. Swiss Timing chose Hexagon's total stations at the Paralympic Games this summer to ensure fairness and accuracy in all high-stakes events. We go to slide 32. As Paolo mentioned earlier, we had a very important product release in MI during the quarter, the ATN 800 Absolute Tracker. We see this is a very important launch, which integrates a laser scanner and a laser tracker into one solution, which is unique in the market. This will allow for more detailed feature extraction from large objects, which are measured at the distance, faster scanning and data processing, and you do not need to be an expert operator to get good results. Shipments of the ATS800 will start next year. slide 33 we wanted to highlight a white paper or industry report that hexagon published this week on the topic of digital twins based on a survey we did of 660 companies across 11 different verticals the report looks at how and why organizations are using digital twins the potential return on investment from using them and the pace of adoption of these technologies As we highlighted at last year's Capital Markets Day, we see this as an important long-term driver for demand for Hexagon's technology, which will be relevant for both Hexagon and, in a spin scenario, MuCo. For Hexagon, customers use our suite of reality capture sensors to digitize the real world and build digital twins of assets, and then add layers of analytics on top. In UCO, the digital twin starts with data-centric design and engineering tools, which is taken through construction and into operations, providing customers real-time access to contextual data flowing through the asset lifecycle. So please use the link on the slide to learn more about this important growth drive of the hexagon. And with that, I will hand back to Paola.

Thank you, David and Ben. In conclusion, in slide 35, we will see how the market environment will develop in the short term, but we stay focused on execution, on innovation, customer engagement, financial delivery. And as announced earlier, we constantly look at ways to drive more focus and more value creation. And with that, operator, we are available to take questions. Thank you.

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 Joachim Gunnell from D&B Markets. Please go ahead. Your line is now open.

Thank you. So two questions from my side. On ALI, you consider yourself here a number one or two player in CAD and EAM. So can you discuss a bit on how good business that is really in relation to the competitors and comment a bit on what other players you actually need to listen to?

Yeah sure, hi Joaquin, good morning. We do believe that when you look at the entirety of Muco we have solutions that are truly market leading and on top of that we now with SPX have the right strategy to link the data and build a digital backbone which is essential because customers want to buy into an integrated ecosystem, have access to data that's integrated and The very lion's share of that work in terms of innovation has been done. This is why we all think that Nuco has a very powerful and appealing kind of growth profile. We also think that this business will operate into very interesting areas of growth into the future.

And does this mean, the news today, that you are back at the drawing board here looking over strategic options for other parts of the business as well?

I would say that the definition of this perimeter comes as a result of having looked at strategic options. We've done a lot of work with the leadership team and with the board to review the strategy and we saw that there were these two missions that were emerging from the business. The core mission of Hexagon that lives in the construction site and in the shop floors with the operator where you're actually building reality, where physical construction takes place. And then a second mission that needs to be serving with digital products, designer and information technology experts in a way that's integrated. And so this is why we feel

very good about the the opportunity that we have outlined but of course this morning we have announced an investigation and this is the starting point of a journey of evaluation really okay perfect just on the combined entity then since you now split out software and services on a quarterly basis it's very helpful thank you but I would have thought that the the growth rates here in the software services business would have been higher than what you have seen here today say at 3% or up to 5% if we strip out the effects. Just unpack this trajectory and in your organic growth targets through the cycle, what's the assumption for quality underlying software business versus sensor and robotics?

Yeah, great question. Look, I think the clearest KPI that I can point you towards is the recurrent revenue that we have tried to talk about very transparently by division starting a capital market say. At the end of the day, we are in a low point of the cycle, which is why there's a cautiousness from customers in investing in new CapEx, but you do see recurrent revenue uptake at a good pace, which is on par or above with the software peers, and that's across divisions. It's also one of the reasons why we feel very good about the way we've defined these parameters, because we see gross margin trajectory and recurring revenue trajectory on both.

Lovely. Thank you.

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

Thank you. Good morning. What prompted the hexagon to evaluate the potential spin-off of ALI at this time?

I think the timing is more driven by work that's been done internally. On the one hand, we have worked very collaboratively in the last years, which has allowed us to see more clearly, I think, through the synergies between the various elements. We've always had good synergies between the BricsCAD team and ALI. We've recently built, 18 months ago, a sales team within ALI dedicated to the ETQ portfolio. We see good opportunities for EAM in terms of selling to the infrastructure customers of the utilities and infra business that we're moving into that perimeter. So I think having experienced first-hand those synergies coming together has been important, and then the board has been very close to us and very supportive, and we have come together in the definition of this perimeter.

Okay. And a follow-up on this. Could you say something and elaborate on how ALI is collaborating and integrating with Hexagon's other four segments? So specifically what software that are shared in the group that originates from ALI and how this integration creates value within Hexagon.

Yeah, we certainly have touch points in terms of capabilities between technologies that we sell through the ALI channels and the rest of the organization. I mean, I've talked about HXDR a couple of times in the call today. Part of the deals that we have closed with HXDR also come from the ALI side. But the way in which we have defined the perimeter comes from the confidence that those elements of collaboration will stay into the future and they don't necessarily require for those technologies to be under the same management structure.

All right, got it. And one final, if I may, can you just provide insights into how the order intake developed for the MI segment this quarter.

Yeah. Hey, Mikael. The order intake was pretty similar to the revenue or shipment growth figure. So there wasn't a big difference between the two in Q3.

OK. Thank 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 SCB. Please go ahead. Your line is now open.

Thank you. Two questions. Sorry, three questions. First one on NewCo. How much extra costs do you think you would have to add to that business to make it standalone? And then second question, just a combination here, ALI, ATQ, Bricsys and the SIG part. What's the I guess ALI and ETQ, I understand, if you could just help up with the rationale there with also bringing Brixis and the other asset into this. And then thirdly, I assume you're open to potentially also divesting NUCO if there were bidders at the right price, or is that the path that you've already explored? Thank you.

Yeah, thank you, Erik. So first, when it comes to the cost that's associated with stepping up NUCO, that entity. I think these are some of those details that we'll come back to in the foreseeable future. In terms of BricsCAD, we see opportunities for selling into the ALI customer base BricsCAD and that's something that's been already in the works in the last couple of years. We see a chance to intensify that if ever in terms of providing Very good quality CAD and BIM technologies to own operators and EPCs. Your third question, Erik?

Divesting NewCo rather than a spin-off, or is that something you have looked at already?

We've come together with the board to the conclusion that the strategy that we have outlined and we are investigating is the best course of action. So this is where we are.

Thank you. And then if we could just throw in one more on the business in the quarter to follow up to the MI book to build there. I assume the main drop on hardware in the quarter is in geosystems. Could you just sort of help out sort that out a bit? What are the main variables in that and what trends are you seeing there into the fourth quarter?

I would say that the drop in sensors was probably spread across geosystems. So geosystems was similar to last quarter. For manufacturing intelligence, we saw a drop in China. As we flagged last quarter, we expected Q3 to be weaker than Q2 in China. So I'd say on the center side, it was fairly evenly spread across the two businesses. If you're looking for Q4, I think on the geosystem side, the demand environment looks fairly similar. Comparatives are probably slightly easier, reflecting the comp from Q4 last year. If you look at manufacturing intelligence, I think there's probably still slight negative momentum in North America and Western Europe, but I think that's offset by a probably slightly better development in China.

Thank you. summarize that heading into the third quarter, you sort of indicated a bit weaker growth rates, but you're thinking about the more stable development into the fourth quarter?

Yeah, based on what we know now, it looks like a similar market environment.

Thank you.

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

Great, good morning. Thank you for taking my questions. So maybe just one question on the various assets that you plan to include in the new scope of ALI. Could you just remind us of the growth profile of ETQ Bricsys and this utilities infrastructure business?

yeah hi good morning um broadly i would say etq is growing uh 10 to 15 10 to 15 percentage points in total revenue and faster than that when it comes to sas i think brexit is going through as we speak a transition towards subscription but it probably grew around the 10 to 15 percentage points also in in queue free and has good momentum there's dynamics in that market that make the outlook we think very positive when it comes to utilities and infrastructure which probably is one of the least known parts of our portfolio but we think has a lot of potential when it comes to selling EAM on to telecommunication providers and utilities providers. That business is growing in between single and high, mid and high single digits. So these businesses have different levels of maturity and growth profiles, but we feel very strongly about those synergies that of course we have tested over the course of the last quarters and this is also why As of today, not only we externally announce this investigation to the market, but also internally we announce movements of these teams under the same management structure because we want to pursue immediately that commercial potential.

Okay, perfect. And as you said, the utilities and infrastructure business is not so well known. So could you just give us a rough indication of how large it is from a revenue perspective?

Hi, Sven. We'll come back on that. It's not obviously that we don't know, but it is a carve-out from one business to another. So it depends a little bit on the perimeter of customers that you transfer. We've given you the overall scope of NUCO. you can probably back it out to some degree.

Okay, perfect. And then just when you look at the R&D capitalization, how will they roughly be split between the new and the remaining business?

Yeah, I think this is one of those elements that we will come back to. It's part of the further definition of the financial elements of the transactions.

Okay. And then just a final question on the spin out. From a revenue mix, when you look at it from a cloud on-premise subscription life maintenance part, how will it roughly split between the different types?

We have given a broad perimeter of the transaction. I think you know enough about the size and the pace of growth in both EAM and ETQ to work out the pure SaaS multi-tenant element. of the of the perimeter what's important for the newcom is that it has vast amounts of recurring revenue there's growth that's happening across the board and that's growth that's happening across customer profiles and industries which is why we think this is a very high potential move perfect thank you thank you for all the details thank you we will now take our next question

And the next question comes from the line of Himal Bundia from UBS. Please go ahead. Your line is now open.

Thank you, Paolo, David and Ben, for taking my questions. Himal Bundia from UBS. I wanted to ask about your view on the construction and markets going into 2025. When in 2025 would you expect this to pick up? And to me, could you give us some colour on your expectations for China in 2025, please? I'll follow up with my second question after. Thank you.

Yeah, hi, good morning. You know, I think the construction markets, when you look at it by region, I think Europe's been weak now for a few quarters. There is a lot by different country. I'd say in aggregate, we don't really see it sequentially getting much worse. And as I said earlier, we will start to get some easier comparatives as we go into 2025. We don't see the benefits of lower interest rates yet starting to feed into improved activity. US, the market has been stronger. We saw a little bit of a softening in some of our businesses, machine control and geomatics during Q3. Whether that's the market deteriorating or that's uncertainty ahead of the election, we'll have to see. But I'd say the US generally remains better than the European market. And then if you look at China, China, the construction market there has been weak for almost a couple of years now. We've seen the government announce stimulus measures through Q3. I think they are more geared at construction than maybe the discrete manufacturing part of our business. When we speak to our teams on the ground, they think it will take some time to feed into their activity. It's more of a 2025 tailwind than something that we'll see in Q4.

Thank you. And my second question, I appreciate it's still a review process, but could you tell us what the spin-off could mean for your capital allocation strategy? Should the spin-off be pursued or is it still relatively early? Thank you.

So if by capital allocation you're implying M&A, I think we have opportunities that are very important in both perimeters should we decide to go in this direction. I find also that our M&A activities probably would become more focused and targeted and successful because you are carving out two communities and user groups that need to be addressed with business models that are different and with portfolios that are targeted. So for simplicity, really look at it from the outside in. We're talking about the community of designers, the community of information technology experts, versus the community of makers, right? And these require digital tools that are deployed in a very different fashion. So M&A is important for the group, but I think it's going to be important for both AB in this potential future and for EUCO, but possibly in an even more targeted way.

Great. Thank you.

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

Thank you very much. Good morning, all. Balaji from Citi. Two questions from my side, if I may. Firstly, on the spin-off plan. You mentioned creation of structure under which collaboration between proposed new company and Hexagon would continue in future. If you could elaborate on that. Also, if you could share color on the voting right distribution in the new company. And second question, if you could share view on what you saw in the mining segment during the quarter and did the decline come as a surprise and what your view is on demand here in coming quarters. Thank you.

So in terms of collaboration, I think there's going to be two elements, right? One is the utilization in an optimal way of technology components that are important also for ALI that are coming from the rest of the group at the moment. And that's going to be, of course, no issue at all. And then the second one is what could we do from a hexagon portfolio to be in terms of selling onto the ALI customers and industrial sectors of reference. And that too, should we go down this road, will be a very fruitful partnership. Can you please repeat your second question?

The second part of this question was if you can also share the voting right distribution in a new company. Will it be similar A share and B share the way the current Shake Second business has?

Yeah, as I said earlier, I mean, the detail that we have shared in slide seven is pretty much what we can talk about for today. So we'll come back to you on those aspects. And then your third question when it comes to mining, I think mid to long term nothing changes in terms of demand. I was stunned by the speed of progress on electrification in our economy that I saw at the mining show in Vegas. It's a good thing that they organize it once every four years because the amount of technology and capital and assets that you see is incredible. The scale of transformation is incredible. So we're very convinced that we have the right portfolio and we're going to invest further in mining. It's a brilliant use case for deploying robotics and AI to make an industry more productive. I think in the specifics of Q3, A, we had very tough numbers to beat. B, there's a little bit of cautiousness in that market. You also see it in the way commodities are priced in the short term. And then third, I'd say some of the deals that we expected in Q3 slipped, but we still have a very strong position there. Very clear. Thank you.

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

Thank you, operator, and good morning, everyone. Exciting times indeed. And perhaps my first question is, I guess, on the industrial logic, if you could. expand a bit it obviously seems to make sense you know putting all these um entities together in the new code but but could you you know remind us a bit on the interconnection between you co and call it romanico i i think we've spoken about synergies you know with other parts of hexagon as well but but could you remind us on that place

Yes, sure. Hi, good morning. As I said earlier, the most crisp way to look at this is through the language of the personas that you want to serve, the users that you want to serve. And I think that's the best way to identify why the perimeter has been crafted in the way it has. For Hexagon into the future, we're going to have data creation that of course takes place where physical realities take place. So our sensors and our robotic technologies will be capturing data, 3D data for anything that's real. And our recurrent revenue primarily will come from consuming that 3D data. So that will be software and platforms and AI that's very much tied to where data creation takes place. So the best way to look in simple terms at the logic is really through those two lenses. This is not about software and hardware. This is about integration of software and hardware on the one end and software tools that serve designers and IT specialists on the other.

Okay, yeah, I understood. I guess it aligns with what I think Ben has been talking about quite some time, going from technology-centric to customer-centric. And then perhaps on your financial targets, which I guess could be under review with an entity, but as Hexagon stands today, you have spoken about that you incorporate a downturn in in your forecast for organic growth let's say just you know philosophically i i do say that this is difficult answer but but the downturn that we are currently in is that sort of you know the downturn that you have thought about is it worse than you have thought about definitely you know i guess the context is that you know what we know for 2024 now we're looking on since 2022 we have had organic growth of let's say four four five percent in the low end of your target just you know any color Hold on, that would be helpful.

Yeah, I think as you say, this is the type of downturn that I think all I had in mind a couple of years back. I think the group has grown well in the first part of the planning process, and I'm sure we're going to come back to good growth rates into the future. But the environment is what it is. And then when it comes to target in relation to the potential separation, as we said, this is a 12 to 18-month process. So we know what we need to do and deliver all together into next year. And then if there's going to be a separation, we're going to have more than enough time in 2025 to talk about numbers and targets.

Okay. No, that's good. Thank you very much.

Thank you. We will now go to our next question. And the next question comes from the line of Johannes Scheller from Deutsche Bank. Please go ahead. Your line is now open.

Yeah, good morning. Thanks for taking my question. I just wanted to go back firstly just on the decision between a spin-off and maybe an IPO or a sale of the new co. I mean, you said that M&A for both businesses is still going to be part of the strategy going forward. So I guess you could have raised maybe some cash through a sale or an IPO. Just why did you decide for the spin-off instead? and just a technical question how much of the voting right approval do you need for this from your shareholders to to proceed and then i have another question on the business after thank you okay yeah hi on the uh on the logic i mean we've looked at a variety of elements and options with the board and we're still going to be very much

open-minded about it, but we think that this on the table now is the best solution. And then when it comes to all the rest and the timeline and the path and the approval processes, we will come back in due course.

Understood. And then maybe could you just zoom in a little bit on your automotive business? Obviously, you make comments around European week. I guess that's not surprising. China, maybe it's a bit mixed. You have a strong deal with BYD. Just how do you look at these two regions for your auto business maybe as we go into next year as well directionally?

Yeah, I think At the moment, we have good traction in the US, also in the supply chain of the automotive sector. We feel we have a good competitive positioning in incumbents and entrants, right? So we feel that we are in good shape across the board. Europe is difficult to call, as you know. There's something that's more structural that's going on and the outlook we think it's more uncertain. What we feel very good about is that we have positions of strength in China for sure, but we also are very well positioned in places like Eastern Europe or Turkey where places in which potentially there could be set up of manufacturing facilities in the scheme of how these OEMs will share volumes into the future.

Just a clarification on China. I mean, you had China quite weak on a group level, but automotive was not weak in this quarter.

Yeah, I think automotive specifically was not a standout weakness. We all see that the market, specifically the smaller customers, tend to be very cautious in the way they buy in China. I think the downturn in construction was already happening I do think that MI was particularly strong last year compared to specifically the industrial peers, and that's also why in 2024 comparably some of those growth rates are slow.

That's clear. Thank you.

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

Thanks very much indeed for the opportunity. Hi, Paolo. I wondered if you could talk a little bit about the operational side of the business, just in terms of gross margins. Normally, we see a step up in Q4 at 67 already. So I wondered if you could just give us a little bit of a sense of what you're expecting into the end of the year and how we can think about that sustainably into 2025. And in particular, I guess, dropping that through to the EBIT margins in GEO, which despite the headwinds that you're facing there are over 32%. And then second question, just around free cash flow conversion, obviously improved year on year, but weaker Q on Q, thinking about how strong that ends up being in Q4. And again, thinking about the trajectory into 2025, I guess maybe a bit more for David. Thank you.

okay hi alex good morning uh so from a gross margin perspective the uh the the good news for us is that we've seen gross margin pickups in pretty much all of the divisions so uh for us what's important is that this is not a byproduct of less hardware and more software this needs to be a byproduct of uh all of the divisions working on their managing profile using innovation driving pricing and making sure the gross margin for new products uh uh are uh creative and that was the case so we think also when it comes to uh q4 and then we'll see uh about next year David, do you have comments on cash?

Yeah, the comments on cash. Yeah, I agree. I mean, look, the position is good. We had the seasonal change in Q3, which we knew about. But year-to-date, the cash conversion being at 81% is materially above the 71% that we were at the same point in time last year. we reached 80 percent last year and you know we we expect to be in the 80 to 90 target we don't give obviously quarterly cash but we we expect to be well within the target range okay thanks very much thank you we will now take our last question please stand by and the last question comes from the line of daniel duberg from handelsbank and please go ahead your line is not open

Thank you, operator, and thank you for squeezing me in. Good morning, Paolo, David, Ben. Interesting times. First question is if this evaluation also is about to counteract potentially a political risk and also the fact that cybersecurity makes more of a one-to-one integrated solutions more vulnerable than historically. That's the first question.

I don't think we had that specifically in mind, Daniel. Good morning. I just think there's an incredible opportunity to build not one, but two global leaders that are exceptionally focused on what they need to do.

Perfect. And if I may also, would it be fair to assume that you could do some kind of joint venture to create or secure the you know, common projects, customers in AI and other stuff that you have jointly?

Yeah, for sure. I mean, we would have very tight collaboration. That's already ongoing and that certainly would be very fruitful.

Thank you. And also on operations, can you comment a bit on the ATS 800 tracker? Can you just remind me about timing when they go to market? And if you should expect some support, as we have seen historically from new products also, from these new products, i.e. the ATS and also the ICS 2050.

uh yeah thank you for asking we we're all excited about that project and to be honest i believe that development hasn't been started in mi by me but my predecessor uh that's how much technology there is uh that went into that development um it's a it's basically a productivity uh tool right more than a measuring and positioning It's going to be, we think, accretive and non-cannibalizing. We've got a lot of positive reception during the beta testing, but also IMTS. Q4 is the quarter for us to build pipelines. Typically, these complex systems require a six-month sales process, and we're going to start shipping into Q1, and we think the APS 800 will be commercially significant into 2035.

Perfect and a super quick follow-up you mentioned BYD as a customer win obviously a follow-up order since a long time ago but can you comment if this if you do follow BYD into the new fabs they build in you know Brazil and Turkey or if this is still within China?

I mean, specifically, the opportunity that Ben has talked about was within China. But, yeah, we feel very good about the relationship with them and the partnership and the executive connectivity. And actually, one of the positions of strength that we are is the fact that locally, wherever they will go, we're going to have teams to be able to support them. At the end is one of the key elements of differentiation. rather than working with possibly local partners for them.

Perfect. Thank you. Thank you.

Thank you. As we will no longer be taking any questions, I would like to hand back to Paolo Guglielmini for any closing remarks.

Thank you very much for attending this Q3 review. I'm sure we're going to be talking soon again. Have a good weekend.

This concludes the conference call. Thank you for participating. You may now disconnect.