Hexagon AB (publ)

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.