Hexagon AB (publ)

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.