Hexagon AB (publ)

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

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

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