Hexagon AB (publ)

and thank you for standing by. Welcome to the Hexagon Q3 Report 2025 webcast and conference call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star 1 and 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 1 and 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, Anders Svensson, President and CEO of Hexagon. Please go ahead, sir.

Thank you, operator. Good morning and welcome to our third quarter 2025 earnings presentation. Today, we have an extended session with a bit of a different format. So I will take a moment now in the beginning just to walk you through how it will work. So in a moment, I will start by taking you through the third quarter performance, first from a group perspective, and then focus on Hexagon Core business performance in the third quarter. I will then hand over to Mattias Denberg, the CEO of our potential spin-off company, Octave, and he will talk about the Octave performance during the quarter. Mattias will then hand over to Norbert Hanke, our interim CFO, who will cover the financials for Hexagon Group in a bit more detail. Following this, I will take an additional roughly 20 minutes or so to discuss my initial thoughts for my first full quarter at Hexagon, including also immediate priorities, with a focus then also here on Hexagon Core. And we will then of course open up for questions and answers. But starting then with our third quarter performance, and I start directly on the highlights. So in the third quarter, we made solid progress in our financial metrics and delivered a great deal of operational progress. Organic growth was 4%, with growth driven strongly by a demand in autonomous solution, and also across some of the other customer segments, such as aerospace and defense, electronics, machine control, mining, and general manufacturing. Operating margins strengthened quarter on quarter, despite that Q3 is normally our seasonally weakest quarter, but it remained below our targeted levels. Across Hexagon Group, we have identified a cost efficiency program, which has been in action now, and will begin to benefit margins gradually from the coming quarter here, the fourth quarter, and will then have full effect by the end of 2026. Cash conversion in the quarter was good at 77%, considering that Q3 is normally the weakest quarter in the year. And we remained on course to achieve our analyzed targets of 80 to 90%. We also made some strategic operational moves during the quarter. We have previously announced the sale of our D&E business in manufacturing intelligence to Cadence for 2.7 billion euros. And we made some changes to the executive leadership team ahead of the potential separation of Octave. And this separation is still on track for the first half year of 2026. And I will talk more about these changes in a moment, but first I will walk you through the announcement where we are addressing our cost issue. So at my first call during the second quarter report, I committed to review the cost base of Hexagon to address the recent challenge in our operating margins. So across Hexagon Group, we have identified 110 million euros of potential savings with around 74 million being related to Hexagon Core and 36 million being related to Octave. And as I said, we expect to see these benefits gradually starting from the fourth quarter this year and then with full effect at the end of next year. The cost to achieve these efficiencies will be around 113 million euros. In Hexagon Core, we also conducted a review of our balance sheet, which we identified a charge of 186 million euros related to primarily innovation in history and also some other items like inventory and also discontinued products. These charges were also taken during the third quarter. And I'm very confident that these situations will be less likely in the future, as I expect our businesses to manage their profit and loss and balance sheet within normal operations. And key steps we are taking here is to give divisions full accountability for financial performance. It will also enable operational and product decisions to be taken closer to customers to ensure a market fit and also that customer needs are met. We're also strengthening our governance for approvals and review systems, and we are implementing a new performance management system to enable swift response. I now turn into recent changes to our executive team. So we have announced that David Mills is stepping down as CFO from Hexagon for personal reasons, and he will be replaced on an interim basis by Norbert Hanke until we find a permanent replacement. We didn't want to see David go, but I understand the reasons and he has my full support. But I'm very happy that David has agreed to remain available for us for the next six months as a financial advisor. And that we also have a very competent and knowledgeable interim replacement here with Norbert. We have also announced that on the separation of Octave, Ben Maslen and Tony Sana will transition to the Octave leadership team. where Ben will be the CFO and Tony will be chief legal officer and corporate secretary. Ben and Tony have been key members to the Hexagon executive team for many years and still are. And while I'm sorry to see them go, I'm also delighted to see them progress into these new roles with Octave. And I have no doubt that they will be instrumental in driving value for Octave and embrace the future that this company is going into as an independent listed company. And I'm pleased to announce that replacing Ben is Andreas Wenzel. Andreas joins us from ABB, where he has held a number of senior roles, including head of strategy in M&A. Replacing Tony will be Thomas de Munch, who joins us from Jones Day, when he was the head of the Brussels practice. Thomas joined us early in this month, and I'm very happy to welcome him on board to the team. Turning now to the next slide, I will talk briefly on the decision to sell our D&E business. In early September, we announced the sale of our D&E business to Cadence for 2.7 billion euros. The engineering simulation market has been consolidating rapidly, and electronic design and automation suppliers, EDA suppliers, have been increasingly taking a leading role in this consolidation. And we are then consolidating with physical simulation suppliers like our own D&E business. And we have seen this with other companies like Siemens Altair and Synopsys Ansys. And this is a trend which is very difficult for Hexagon to follow. It is therefore better that we dedicate our time and attention to our core, which is precision measurement, positioning, and autonomy technologies, where we can use our market leadership position to drive best in peer group growth and margin levels. And just to make it very clear for everyone, this is not an exit from software at Hexagon. Post the potential separation of Octave and the sale of D&E, Hexagon software and services revenue will still account for above 40% of revenues and 25% recurring revenues. And we expect these amounts to continue to grow also in the future. The funds released by the transaction, expected to be in the amounts of 1.4 billion euros, will help support us to build and develop our businesses, while also maintaining a very robust balance sheet. We expect the transaction to close during the first quarter of 2026. I'm now turning to the next section, and that's the financial performance of Hexagon Core in the third quarter. So I move directly into that. Exagon Core, that means exuding Octave business, grew by 5% organic in the third quarter with an adjusted operating margin of 27%. This is a solid financial performance in challenged end market environments. I will now turn into a focus on manufacturing intelligence. So, MY reported revenues of 445 million euros represented 3% organic growth versus 2024. There was a strength in general manufacturing and electronics, and it was somewhat offset by continued soft demand within automotive. There was growth across all geographies with good demand in the Americas and growth also in EMEA. where automotive weakness was offset by a strong demand in aerospace. China also grew with 3% in the quarter, strength within electronics and general manufacturing, but signs of weakness is also here within automotive. The division reported 112 million EBIT and an operating margin then of 25.1. And it was impacted by some negative currency effects. In fixed currency, if you compare the margin year on year, it was actually better in 2025 than in 2024. So turning now to geosystems, where we reported revenues of 353 million during the quarter. And I'm happy to say that that represented a 1% organic growth compared to last year. And it was really good to see a return to growth after six quarters of negative growth. Last time we had a positive growth was the fourth quarter of 2023. So good to see that we are back on positive numbers. We saw continued growth in the software portfolio and associated recurring revenues and a good contribution from a new product, Icon Trades, which continues to grow very well. This was, however, offset by continued weakness in hardware related to construction and heavy infrastructure, where the market remains very weak, especially in China. The Americas continued to grow, and there was a return to modest growth in EMEA. Asia remained challenged, of course, given the exposure to China heavy manufacturing or heavy infrastructure, particularly in high-speed railway, offsetting the continued good growth that we actually have in India. And here, maybe adding some interesting facts. that in average 2022 to 2024 china was building 3 600 kilometers of rail every year if you compare to the first half year of 2025 they only was building 301 kilometers so it's almost a drop of 85 percent and that is of course impacting their systems deliveries in china EBIT declined to 95 million with an operating margin of 26.9%, reflecting the combined effects of low volume in some product segments, the weaker product mix, because the product mix going into this heavy infrastructure is a really positive contributor, and also then we had negative currency impacts. Finally, I turn into autonomous solutions. And I'm happy to say, here we have the standard performer in the quarter. Delivered revenues of 178 million, representing 19% organic growth compared to the prior year. There was a very strong performance in aerospace and defense. Mining was also growing well. And end markets in agriculture actually remained challenging. So here's the problem child within this division currently. But it's market-related, and the agriculture is currently in a serious downturn, and we are seeing signs of improvement. But still, it's very low compared to where it should be. By geography, growth was strong in the Americas, which represented the majority of the aerospace and defense demand in the quarter. APAC also grew well, supported by a demand in the autonomous road trend project within Australia. And EMEA declined, but that was on tough comparables. EBIT came in at 65 million, represented an increased EBIT margin to 36.6%, driven by strong volume, positive product mix, but slightly offset by currency. So in summary, a very solid performance within Hexagon Core in general. And I will now hand over to Mattias, who will cover the Octave performance.

Yes. Thank you, Anders, and good morning, everyone. We'll start with, I thought, since this is the first time we report like this publicly for Octave, I thought we'd start with a short description on what the business is and what we do. So we are a market-leading provider of enterprise software that ultimately helps customers design, build, operate, and protect mission-critical industrial and infrastructure assets. In terms of numbers, we had about 1.5 billion euro revenue last year. As you can see also from the slide, we have high recurring revenue and high profitability. We have roughly 7,400 employees around the world. And we have a very strong, I would say, A-plus list of customers. As you can see, roughly 60% of the global Fortune 500 companies are customers of Octave today. And you can see some of the logos there on the slide, but of course, many, many more. So what do we do if we move to the next slide and talk about our core pillars? I think, first of all, it's important to say what makes us unique is that we connect all of these pillars together into one platform, one natively integrated data platform, right? All the way from design, build, operate, and protect. So you will see product names out to the right here on the slide. Some of the flagship products, obviously, SmartPlan 3D, Ecosys, EAM, ETQ, et cetera. But the way we go to market is really by selling a platform. We're selling solutions. We're delivering value, not selling individual products. I think an example of that is that you can also see that products like SDX2, which is our data platform, shows up in several of the different platforms. pillars here. Design is our biggest area, as you can see from the revenue contribution pie there. Build would be our smallest one. Operate, our second largest, and that's also been the fastest growing over the last couple of years. But moving into the co-worker, how did we do on the next slide? The headline number is that we grew organic growth 1%. And one has to remember first that we come from several years of good growth. I think that's one important thing to say. The other thing to say is that our recurring revenue grew 6%. So I feel confident that we're building momentum for the future. We're adding customers, adding seats, et cetera. the base is growing, and you can see that by our SAS revenue that grew strong double digits. However, our lease revenue was flattish, which obviously had a, what do you say, dampening effect on the recurring revenue compared to the SAS. To offset this growth, we did have a decline in perpetual licenses. This is a revenue that varies quite a lot by quarter. depends if you get a big deal in one quarter or the other. The other thing one has to say also is that it is an intentional strategy and has been for quite a while to transition this revenue into subscription revenue. So if you look at the slide there as well, we described that the license revenue is now 13% in this quarter of total revenue. And this is the the revenue that we will gradually, over time, transition to SAS. If you look at the profitability, we did 26% operating margin, which was lower than last year. And I think it's a combination of things. I mean, one, that the perpetual licenses were down. That has a high drop through. Also, that we've had some additional investments, partly due to making the company ready for being a standalone public company, and also to integrate the other business units, SIG, ETQ, and Bricsys that we have taken on recently. Important to say, however, that this is a temporary downturn in the margin. We are taking cost effects like Anders talked about, and my expectation is that this will put us back on a growing margin trajectory. If we move to the next slide, I wanted to highlight one very important strategic win we had in the quarter. We won a multi-year eight-figure deal, and I guess you could say also that it was very high eight figures. And I see this as proof that our strategy of selling a platform and our relatively new product, SDX2, is delivering value in the market and to customers. It really also sets a precedent, I think, for other owner operators that want to digitalize their assets. And it will clearly also influence and incentivize other players in the ecosystem, such as EPCs, suppliers, contractors, to adopt our platform as they see big owner operators adopting it. OK, on the next slide, I wanted to say a few words about some key initiatives that are going on right now. Like I mentioned, we are transitioning our business to a SaaS model. So you will see more of that going forward. I also mentioned that we are investing in making the company ready to be a standalone public company. Also wanted to highlight the strategic disposal that we did earlier this summer of some non-core assets in the HECS Fed business, which historically sat in the SIG division. It was around 90 million of revenue, and this will strengthen our margin profile and sharpen focus for us going forward. Like I also mentioned, we are in the midst of integrating these businesses into one. We are making very good progress on that and will soon complete that. We're also, like Anders mentioned, completing the cost saving program, which will, like I mentioned, put us back on a growing margin path. Finally, we are Also making improvements to our organizational structure. So if you go to the next slide, I want to highlight the management team that we have put together here over the last couple of quarters. I'm not going to read every resume here, but there's a press release in September where you can read more about this if you're interested. But I'd say it's a world-class management team that we put together that we think really will help us scale this business. It's a combination of Hexagon executives like Ben and Tony that Anders mentioned. And then we have some executives from the former ALI division, as well as two new recruits that I wanted to say a few more words about. So we've hired a chief product officer in Jay Allardyce. He's a recognized leader in the industry across AI. enterprise software he has had prior leadership roles at hp ge uptake and google so i think he would be a great addition to our strategy and product teams and we also have hired tamra adams or tammy as she goes by who is a strong cro with lots of experience in the industry she has had recent roles at honeywell oracle and most recently as chief revenue officer of a company called Dotmatics, which recently was acquired by Siemens. So in summary, I'm very happy with the team we put together, and I'm sure they will help us scale this going forward. Finally, on the next slide, I wanted to say a few words about the timeline and what you can expect there. So we are obviously well aware of that the us government shutdown which is impacting the fcc and the review process but we still feel that we are on track to complete the spin-off in the first half of next year also like we mentioned before octave will be listed on a u.s national securities exchange with the swedish depository receipt expected to run for approximately two years And also, like we mentioned in the report, we are planning to hold an Octave Investor Day sometime in the first quarter next year. And we will come back with an exact date when we have it. So, thank you very much. And then I'm handing over to Norbert.