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.

Yeah, thanks, Mattias. In the following financial update, I will take you through the Q3 performance for the Hexagon Group. Turning now to the next slide. Let us begin with the Q3 2025 income statement. Taking the sales pitch first, revenue were 1.3 billion, generating reported growth of 0%. Currency was a negative minus 4 on sales, and there was a positive plus 1 from structure, resulting in organic growth of 4%. Gross margin was stable at 67%. considering the impacts of FX. We continue to be confident in driving gross margin expansion as we will have positive impacts from new product releases. Operating earnings decreased by 7% to 349 million, corresponding to a margin of 26.8%. I will break this out further in the profit bridge. Interest expenses and financial costs decreased from 44 million to 32 million, given a delta on earnings before tax of minus 5%. Taxes being at 18% in line with prior years, bringing us down to an EPS of 9.6 euro cent, also declining by minus 5%. Just for reference, the EBIT-1, including PPA, includes 27 million of amortization, and so dilutes the EBIT-1 percentage to 24.7%. Next slide, please. Moving on to the gross margin development. As I mentioned on the previous slide, we saw stability in the gross margin once adjusting for currency. On a rolling 12-month basis, gross margin of 67% is broadly in line with the prior year. Turning now to the profit page, please. So during Q3, currency continued to be dilutive, reducing EBIT margin by 30 basis points. The structural element was equative with solid contribution from acquired companies such as Septemtio and Geometric, as well as by the sales of the dilutive assets in Octave. The organic impact was negative, diluting the margin by 240 basis bonds. This mainly reflects the cost base that is not yet fully aligned with the current level of demand. To address this, we have started a cost program to right-size the organization and mitigating this impact going forward. We expect the benefits to contribute or to start to contribute gradually from the fourth quarter of 2025 and beyond. Turning to the next slide, please. Moving on to the Q3 cash flow, which is a strong performance when taking seasonality into account. The adjusted EBITDA variance at minus 2% demonstrates the continued stronger cash leverage versus the EBIT1 variance at minus 7 due to the increase in DNA. The working capital represented a build of 32.4 million in the quarter, an improvement to working capital management last year that results in a 1% increase in the operating cash flow before tax and interest, which leads to a solid cash conversion of 77% versus 70% last year. Interest payments marginally decreased as expected, and cash taxes remained at a similar level to Q3 last year. The non-recurring items cash outflow of 38.8 million versus the prior year of 22.7 brings an operating cash flow of 139 million, decreasing by minus 3%. Next slide, please. Moving on to the working capital trap, the Q3 net working capital, being a build of 32.4 versus the prior year build of 56.2, decreased the proportion to rolling 12.1 sales to 5.3%, lower than the prior level of 8.3%, which is below the 10% threshold we aim to achieve. To conclude, The divisions have continued to mitigate an uncertain environment to deliver growth, solid cash conversion, and stable gross margin. Negative currency has been a headwind to EBIT1 margin development, and we are working to address the cost base through the announced cost program.

I will now hand back to Anders. Thank you, Norbert. And I will then start by summarizing the third quarter.

So to conclude, in Q3, we have seen solid development in our financial metrics. Organic growth of 4%, an improvement in margins quarter on quarter, and a good cash flow considering the usual seasonalities for the third quarter. While improved, our operating margins remain below our expectations and below our targets. And as a result, we then launched an efficiency program aiming to achieve cost savings of 110 million euros. And this, we expect to have gradual benefits from the fourth quarter this year to full effect the end of 2026. We do not see the immediate market environment that currently is characterized by delays in customer decisions, as Mattias mentioned, and also within the Hexagore core businesses. And we don't expect that to change in the near term. So we see a similar environment in the beginning here of the fourth quarter. But we have also released a lot of products in recent quarters. And we see that as we are set up in a good way when the positive environment returns. Operationally, we had a successful quarter. The sale of D&E, as I mentioned, as one of the key highlights. And the release of those funds with them further fund growth for both Octave and Hexagon Core. And finally then, the potential separation of Octave remains on track for completion in the first half of 2026. I now turn to my first quarter review slides. So in this section, unless I otherwise mention or it's otherwise stated in the slides, it would be relating to Hexagon Core businesses. And that means then the type of businesses that are left after the potential spin of Octave, of course. And this includes then our business areas, manufacturing intelligence, your system, autonomous solutions, and also the robotics division. So I will take you through my initial thoughts and observations after now almost exactly three months being at Hexagon. And I will then talk about actions we are taking to drive performance further and some more details about our upcoming C&D. So I turn into the first slide here. So Hexagon has created superior value for many decades now, or at least two plus decades. And we have the potential set up to continue to generate superior value creation for decades to come. And today we are at a very exciting inflection point in our company's history because our industrial customer base that value precision and quality more than ever, as they try to meet the increased quality demands of everything getting more tight, more small, and with less tolerances, and also the increased sustainability challenges. They're also driving towards full autonomy as a response to the shortage of skilled labor in the world. Our industry-leading technologies regarding sensors, software, and AI are allowing us to deliver ever more value-adding products and services to our customers. And we are well-placed to seize the opportunity for autonomous operations in many industry verticals going forward. Our new operating model will enable us to take full advantage of our profitable growth opportunities. But first, a little more on the opportunity ahead. So I turn to the next slide. So Hexagon is ideally positioned to enable autonomy in many industry verticals. And we will do this by combining our capabilities and offerings within various fields. We possess market-leading measurement and positioning technologies, combining multiple types of sensors. We utilize these to deliver sophisticated real-time digital twins, including reality-like full 3D environments of buildings and cities. And we leverage advanced analysis on AI to unlock the value of petabytes of data that we generate. The combination of these capabilities position Hexagon to be a clear leader in the emerging field of autonomous solutions. Many of our industrial customers have embarked on a journey towards these autonomous operations as they increasingly struggle to find skilled and qualified labor. And hence, they need to move towards so-called lifestyle production. And here, of course, our new humanoid robot, Aeon, is a prime example of enabling industry autonomy. Measurement and positioning technologies and industrial autonomy are only going to become more important as industrial customers face these significant challenges. So let's see how our products are helping. So turning to the next slide. Since late 2024, we have launched a number of important product innovations, which combine our most advanced sensor with latest technology on AI and digitalization. All of them also bring significant advances on autonomy. Taking some examples from this page, we have talked previously quite a lot about Aon and IconTrades, and also last quarter we talked about Maestro, our new coordinate measurement machine. So I will focus on the other one here. So in manufacturing intelligence, we have the ATS800, which is the first laser tracker ever to merge scanning and reflector tracking into one system. This portable metrology device is automation ready and uses AI to pinpoint the true center of each measurement. Detect features like holes and edges, et cetera. And this is usually speeding up the process and removing the need for human intervention. And also now in the beginning of October in Geosystems, we just launched the TS20. And that's the first new total station platform in, I would say, 20 years plus. And if the full hardware and software overhaul is the first total station with on-device AI, which enables it to recognize and lock into any prison without user input. And this drastically reduces errors, set up time, and operate the dependency. And this is a direct response from Hexagon to the shortage of skilled surveyors. So combining our skills in measurement and positioning technologies, digital twins, and advances in AI to deliver solutions for industrial autonomy is key for Hexagon, and we are in the middle of this journey. So the products you can see here on the page represent profitable growth opportunities ahead. And this potential is, of course, largely not reflected in Q3 financial performance and will also not be very much reflected in Q4. But going forward, these products will play a major role in Hexagon's delivery. So turning to the next slide. So we know that Hexagon historically demonstrated that we can generate strong organic growth with excellent operating margins. And on this slide, I try to demonstrate a bit the relationship between organic growth and profitability during the last two years. And we can see here in this recent history that we have two trends. One is that the organic growth has been impacted by the macro backdrop, and we can see it's been negative or at best flattish, while the operating margins have been subject to increasing cost levels internally, and hence a dislocation from our top-line alignment and the top-line development, which has been flat. So you can see we have dropped even more when it comes to profits. The recent quarter shows some signs of reversal of this trend, and with our increased cost focus going ahead here, combining this with our new operating model, we intend to generate a delivery model within Hexagon Core that supports profitable growth generation. So let's have a look at the steps we have taken, moving then to the next slide. During the third quarter, we have taken two really important steps. to enable us going forward to perform at our full potential. The first one is our new operating model, which embraces best practices of decentralization, but then applies them to the specific situation of Hexagon. So we have established 17 divisional P&Ls with our external reported businesses, with dedicated management team, And this would improve accountability within these organizations considerably. This would also improve our ability to quickly respond to end market changes and also to customer changes and make us generally faster to take decisions. It also means that product and operational decisions will move closer to customers, ensuring that we take the right decisions related to the different market dynamics. And ensuring we don't take decisions centrally where we don't have the input from markets and customers. The second step that we have taken is to realign our operational performance. And that was to do this restructure program that we communicated of 110 million euros. And this should be understood that this is in addition and completely unrelated to the operating model. If we would have kept the same model as we already had, we would have launched the same program. So it's not related. We already communicated that we are addressing the cost-based challenge to respond to the pressures on these margins. And alongside this, we have taken the decision to review the balance sheet as well. And in particular, related to historic R&D spend. This would help us to baseline performance so we can measure our divisional leaders properly on performance going forward. This baseline lining will only happen once. And we expect our divisional leaders to manage their P&Ls and balance sheet going forward as a part of normal operations. With adjustments only being taken for exceptional circumstances going forward. It could be such acquisitions with partly overlapping offerings. It could be a new COVID situation when we need to at the group react quickly, and it could be large restructure within the group, like the spin-off of Octave, for example. All other items needs to be handled within the business of day-to-day operations.

Turning now to some more details on R&D, where we have taken the decision to make these impairments. So innovation power is one of Hexagon's greatest skills and assets.

And it's something that we will nurture also going forward. However, in recent years, investments in R&D have spiked, as you can see in the graph there. And that's mainly due to somewhat delayed core product developments and cost overruns in some major innovation projects. And we have seen this not only in one division, it's been actually in several divisions where some of our key renewal projects has been fairly late to market. The positive thing is they're coming to market now. So that's really positive to see with the TS20, et cetera. But this has meant that we have seen a significantly increased R&D spend, while at the same time, the benefits of our organic growth and margins have not yet materialized to be seen. To be added here as well, there are some elements in this spike that related to software acquisitions that in relation has a generally higher R&D spend than our normal businesses. But with this new product launches across 25 and 26, we expect R&D to stabilize on an absolute basis and then to decrease on a ratio versus sales. However, as we reviewed our innovation and product portfolio, it also became clear that in some cases we have invested into innovation that turned not fully to meet customer requirements or the target end market situation has changed, or we have decided to exit a specific offering. This means that there are some product lines that are not performing and will not be able to generate a return. So we have therefore taken the decision to impair 186 million euros in hexagon core.

Most of this then is related to these R&D spends, but there's also some related to inventories.

And this will give our businesses the opportunity to reset and move forward from a more comparable basis. So we are also then able to performance manage on actual performance and not on historical effects. As I mentioned earlier, our new operating model will help us to avoid that we face the need to do such impairments again in the future.

I move to the next slide. So this is explaining a bit the new management structure.

So we will have 17 profit and loss accountable businesses, which are a part of, these are sort of the main part of our operating model. So I will explain a bit how it will work. So, Hexagon has always operated with decentralized structure, which has then entailed a lot of freedom for the divisional presidents to run their businesses, and it has kept the corporate cost levels quite low. However, within the former divisions, the organizational structures became quite overly complex sometimes, with slow decision making, and not always focused on end customers. So our new operating model establish clear and common management blueprint on a more granular level. And also we have historically called divisions. They will now be called business areas instead. And they will have divisions reporting into them. So the previous divisions, manufacturing intelligence, geosystems, autonomous solutions, will now be called business areas. And they will then have the dark boxes, the 17, or you can say 16 smaller dark boxes, reporting into them. But externally, we will still report on the business area level. And then you have the 17th dark blue box, which is robotics.

And that will then continue to report into the CEO. Division leaders and their teams

will then have mandate to deliver superior value creation within the businesses. And I move to the next slide to show how those mandates will be set up. So a division can have a mandate of stability, profitability or growth, depending on where they are in the current situation. So we refer to these three stages as strategic mandates. And that sets the overall direction for the business and how the management, the leadership of those divisions should basically think every morning when they wake up. If you are in stability, it does of course not mean that you need to restructure or sell parts of your business. You can also transform it organically. And if you are in growth, it doesn't mean that you need to buy everything. You can also grow organically. But we will allocate capital accordingly. So more capital allocated towards where you are in growth.

less when you are in profitability, and almost nothing when you are in stability. Moving then to the next slide.

So a decentralized management structure with full accountable divisions can only create value sustainably if it's combined with a strong governance and a clear performance management system. And here we are taking a major step forward at Hexagon with introduction of scorecards. At the core of the Scorecard system is a set of standardized financials and non-financial KPIs, which are closely tracked for all divisions in a fully consistent way. The Scorecard system will significantly improve transparency, accountability, and also speed of action taking to steer the division in the right direction and to pull the right levers to change direction or create more value.

I then turn into the next slide. And that's the summary. So Hexagon is a strong company with a bright future ahead.

Our fundamentals are very good. We are the market leader in precision measurement technologies. We have strong exposure to high growth end markets and emerging field markets like industrial autonomy. And these places are very well to capture the opportunities presented from several macro trends, including the main one, labor shortages and skills shortages, increasing quality demands, and also, of course, sustainability and safety demands. Our innovation and expertise is second to none. And that's reflected in several of the exciting new products that I showcased in an earlier slide. And as we have a clear plan to achieve superior value creation going forward, we are taking immediate actions to address our cost base. And in addition, we're implementing best practice decentralized operating model establishing these 17 divisions with full accountability. Operation decisions will then be taken faster and innovation will be anchored in markets and close to customer needs. And last, we will manage our division portfolio very closely for performance and value creation, applying proven tools like strategic mandates and the scorecard system. Turning then to the next slide, where we are inviting you all to Hexagon's Capital Markets Day in 2026. And that's on the 30th of April. It will be showcased in London. And on this event, we will discuss in much more detail business area strategies, including the divisional mandates that we have identified. And also, we will also discuss then new financial targets for Hexagon Core, 2026 and forward. So we are really looking forward to seeing you all there. And with that, I think that summarizes the presentation, and we will now move into the Q&A section.

Thank you. To ask a question, you will need to press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again.

Please stand by while we compile the Q&A roster. Thank you. We will now go to our first question.

One moment, please. And your first question today comes from the line of Johan Allison from SB1 Markets. Please go ahead.

Yes, good morning, Anders and Mattias. Thank you for taking my question. I was wondering a little bit, I mean, your new setup of the hexagon core looks excellent to me. One issue that's been high on the agenda for a couple of years has been the way you capitalize R&D, and now obviously you impair a lot of that. Will you change the strategy regarding R&D capitalization going forward?

So, thanks, Johan, for the question. We will not basically change the way we run capitalization. It's IAS 38. We will make sure, of course, that we are not capitalizing too early of any of the projects. We will manage our portfolio more like an insurance company if we believe that we take a larger risk in one project. We can't afford to take larger risks in all projects. So we can manage all that within the normal operational structure of the company. So what we're doing is more strengthening around how we do governance when we approve projects to be started, how we review projects during the way to make sure we don't continue to invest in something that we are aware of will be difficult in a go-to-market situation. So the answer to your question is we will not change the methodology of capitalization and by then restating all our history or something like that. So we will keep the current way of operating, but we will operate more carefully and more controlled and with a tiny governance.

Excellent. And then secondly, you will have a very strong balance sheet after the D&E divestment next year. How are you thinking about the balance sheets of the spin of Octave? Is that the business that should be run on a net cash position, or how should we think about how to split the balance sheet go forward? Thank you.

Yeah, so this is a decision that the board will take at the right stage in the process on how we divide assets, net debts, and the firepower within the company generated from the D&E sale. So that's a question we will need to come back to, Johan.

Okay, I guess that's topics on the capital market state. Then just finally a short question also for Mattias here. In Octave, you talk about lease revenue stable. I'm not sure I understand what lease revenues are. You have subscription license and services in your pie charts. How does this corroborate to each other?

Yeah, good question. first of all i should say we will break all of this down for you in more detail at the investor day right since we are in a public filing process and we're still a division of hexagon there's you know we're not going to give all of the details today but basically leases are it's also subscription revenue but it's uh you know month to month leases right of seats so think of it uh it uh fluctuates more than the SAS revenue. So that's why it's more, I guess, short-time volatile than the SAS, if that helps you.

OK. And I understand it. Thank you very much.

Thanks.

Thanks.

Thank you. We will now go to the next question. And your next question comes from the line of Eric Gorang from SEB. Please go ahead.

Yeah, thank you. I have a couple of questions. We start with geosystems and China, which was weaker. And you talked about the development of the high-speed rail side in China. Given you have some peers in China growing much faster, is that basically an end market split dynamic that means geosystems is growing so much lower?

Sorry, we had a little bit of a problem here with the sound in the beginning of the question. Would you mind to repeat it?

Sure, so on geosystems development in China and your commentary there that a lot of the weakness is related to your exposure towards high-speed rail and that development. So your take is basically that it's an end-market split that means that you are growing slower than particularly some of the local peers in China.

Yeah, I would say the end-market exposure that we have in China is related to where very high precision is required. and not in the general sort of market for our competitors. So we are in the top tier segment within China. And the top tier segment is not required everywhere, of course. It's required when you have sort of high-speed railway manufacturing and other very large infrastructure projects. So our exposure to that sector within construction is much higher than our competition. So when something happens to that sector, specific part of the market, we get hit very hard. And that's exactly what happened if you compare that to local competitors.

Okay. And then as a follow-up on that, was there ever a plan to do with geosystems similar to as you do with MI now, making China a separate unit within to make it operate a bit more autonomously given developments in China?

The question is good, but that option is actually not available because the reason why we can do that in MI is that we have been very good in history on localizing our products, and our innovation also is localized. So within MI, we have a good, better, and best offering. Best is basically the offering that we use globally, and the good and better offering is the offering we use within China for China. And it's fully manufactured, developed, et cetera, within China. If you look at geosystems, basically very little is localized in terms of supply chains, innovation, et cetera, to China. So it's mainly a global offering that we have. So a lot of the products are imported to China. And this is the reason also, of course, why we are only present in geosystems in the top tier segment and not in the general segment in the market. So completely different situations within those two businesses. So it wouldn't make any sense to do that within geosystems.

Okay, thank you. Then for Mattias on Octave, just if you can give some more perspective on the low growth rate. I get that you say that growth has been high for a few years, but I guess that depends a bit on the starting point you use, and you certainly have some peers that are growing quite a bit faster. So what I mean, what kind of growth rate would you like to get out of Octave in the midterm?

Yeah, I'm not going to give a forecast today, as you can imagine, since we are doing the investor day in Q1. But fair to say is that it needs to be higher, the growth, and it needs to be higher, the margin. And I feel confident when I see recurring revenue growing a lot faster than the headline number, the reported revenue. Yeah, I mean, I think that's... I'll stop there, I think, and then we'll discuss more in Q1.

Okay, thanks. Then just one quick at the end. You mentioned for Hexagon Core, Anders, peer-leading profit margins. What peers will you compare with?

We have different peers in the different businesses, of course. So if you look at first, maybe you start with AS. You have peers like... Sandvik, Epiroc, Metso, et cetera, right? And if you look at MI, you have Scythe, Siemens, to some extent Sandvik as well. You look at the systems, you have Trimble, Faro, Navis, Topcon. Do you want to add any?

No, I think that's ready for you. You mentioned it already. It's all good. Very good. Thank you.

Thank you. Thank you. We will now go to the next question, and the question comes from Sven Mert from Barclays.

Please go ahead.

Great. Good morning. Thank you for taking my question. Maybe first, following the R&D impairment, how should we think about R&D capitalization going forward? It looks like you're on track to capitalize around 500 million this year and amortize 300 million. So this gives you a net benefit of 200 million. Where is that heading going forward?

Yeah, it's over here. From our point of view, as we are managing now the cross, the R&D cross, and you have heard as well going forward on this, that we are very selective, right, in the sense on we will be very focused. It will be going down in the sense that overall, I think, from our point of view, it will slowly decrease the gap from our point of view.

Yeah, and maybe adding here, so let there be no mistake, we are not doing the right thing of the balance sheet to improve the results. And actually, if you would compare going forward with the new products being released and the impairments we are doing on the balance sheet, it's basically a wash from the performance and the gap within the third quarter this year. So there will be no sort of... big benefit in our reported result from this impairment. What this impairment does is to set up the new management of divisions and business areas on a right level so we can actually performance manage them on their operational performance and not performance manage them on historical mistakes that we have on the balance sheet that are not generating a return. So this is the reason why we do this. And that enables us then, us and the board, to make sure that we take portfolio decisions that are based on facts and not skewed by historical balance sheet issues. That's the reason.

Okay, got it. And of the capitalized R&D that you have on the balance sheet at the moment, how much is sitting within Hexagon Core versus Octave?

We will not give any further information. information on that, honestly speaking. We'll do it when we have the spin. You will see it then.

You will see it clearly when you have this potential spin executed.

Okay, fair enough. And final question just on the cost savings. How much of that should we expect really flow to profit and how much you might reinvest elsewhere?

So what you see on the 110 million of savings that we have communicated That is what we expect flowing to the bottom line at the end of 2026.

So that is net. That is not gross. Perfect. Thank you very much. Thank you. But I want to add one thing.

You should not calculate a big effect in Q4. That is important to understand. Because this is a process that will take time before you will see the effect. And you will see gradual effects. starting in Q4 this year, but then it will ramp up during 26 and give the full benefit at the end of the year.

Thank you.

We will now take our next question. And your next question comes from the line of Johannes Schaller from Deutsche Bank. Please go ahead.

Yeah, hi. Thanks for taking my questions. Three, if I could. I mean, firstly, on the impairments, you said, you know, there are certain kind of areas, products, initiatives that are now discontinued where maybe we didn't have the success you wanted to see. Could you give us a little bit more detail on what that is and which kind of areas are not part of the strategy and the growth profile of Hexagon anymore? And should we expect that this is it now in terms of impairments, maybe for the next one or two years, or is that more an ongoing process where maybe in six months' time you also find other areas? That would be my first question. The second was just coming back to China. I know you don't guide, but could you give us a bit of a sense kind of when you would expect that region to be back to growth? And then lastly, just on the cadence stake that you got as part of that sale, what's the strategy here and the plan with that stake? Thank you. Okay.

I counted at least four questions.

Apologies, you're right.

No worries. So starting with the impairment, I will give you a couple of examples of what I mean there. It could be related to market changes. We have, for example, one project that we have developed for autonomous driving mass production. And this, as you know, has been quite delayed coming to markets all over the world, maybe except China, where it has come to market a bit at least. So when the main producer of cars then decides to cancel the platform, we have nowhere to allocate money. to get in revenues for this. So this is something we need to write off, right? So that's market change. Then you have misalignment to customer needs. And this is also related to ourselves, but customer needs can also change over time, right? It could be, for example, we have developed a product and the expectation of operations from customer is four hours and we can operate for 20 minutes. We don't fulfill the sort of sound levels that are required by the customer, et cetera, which means that we basically can't offload this product even if we would discount it 90% because nobody would buy it. So this is something we need to write off. It's useless, won't generate any revenue for us. And then you have the third area then, and that is when we decide, as we now restructure our company, given the potential spin-off of Octave and we are refocusing Hexagon Core, we then have areas that we believe are not suitable for us to continue to invest in and continue to take part of. And they're not contributing positively either in growth or in profitability. And we have then decided to exit those areas and those products. And then we need to write those off.

I will, for competitive reasons, of course, not mention exactly which products these are in this call. And then if we go into, will this be an ongoing thing?

And I think I answered that question during my presentation. I hope at least twice, but I'm happy to do it again. So my expectation is that our divisions and business areas need going forward to manage this in their operational normal day-to-day business and the operational profit and loss and balance sheet. performance and they will be monitored closely to make sure that we achieve this. The decisions in those divisions will then be taken closer to customers so we are sure that we align to market needs, customer needs, market changes all the time. We will have a stronger governance also before we start projects and also during projects to ensure that that we stopped projects early on when we noticed that they are no longer aligned with market or customer expectations. And we will have a new performance management system to enable swift response when we see that some of the KPIs that we follow are getting off track. So this is not that some will come back on a regular basis. And I hope we won't do this at all going forward unless we have one of those big things that I mentioned, could be a potential spinoff like Octave that will of course make us do some things in terms of realignment structure, et cetera. It could be that we as a company need to react very quickly together, like a new sort of COVID situation or something like that. So those are the kinds of situations where we might have to do this again on a higher level, on a group level. But otherwise, it could also be that we buy a bigger company and there is product overlap and we need to make some impairments of some of that asset, of course. But those are the only examples. It should not be from normal operations and normal R&D development. That should be managed in the day-to-day business, in the day-to-day results. And then China guidance. We are not guiding forward on China, but there are areas in China that are performing very well. So if you look at the manufacturing intelligence, we are growing quite well in manufacturing intelligence on a constant basis in China. I think in Q2, we grew 10%. In Q3, we grew 3% organically. So we continue to grow. The different markets are strong there. Electronics, general manufacturing, we're doing very well. Then we have this construction and larger infrastructure project. which is very weak currently. And when that change into being more positive again, I mean, your guess is as good as mine, right? So we are all hoping that that will change quickly. But unless that change, we will not see a speed up or an improvement in geosystems performance. And geosystems is now, I would say, what is it? 20% negative growth year on year or so. That's correct. So that is affecting, of course, the full number for China for us. But when that business turns, of course, we will start seeing better numbers from China on the group level. But underlying, ALI is performing quite well in China. Manufacturing intelligence is performing well in China. And autonomous solutions, which is more bumpy given mining orders, etc., performing well from time to time in china as well so our china issue is related to large infrastructure and construction within china currently and then no but do you want to take the cadence uh sure so the question was on the cadence if i understood this correctly because it's a while ago that you asked the question here

was related regarding that gain, I assume, from my point of view.

I think it's the 810 million that we have as Cadence shares, right? Ben, you can maybe... Correct.

Yeah, you know, I think obviously the focus at the moment is to close the deal, Johannes, and that's still on track for the first quarter of next year. It's obviously a very nice stake to have. Cadence is a super strong company with a great outlook, so it's a nice stake to have. But I think we'll have to come back to you on what the plans for it are, because it's tied to the capital allocation discussion between Octave and Hexagon. And that's obviously a decision for the board. So I think we'll come back to you on that.

Understood. Thank you very much for all the column.

Thank you. We will now go to the next question. And the question comes from the line of Mikael Nassin from D&B Carnegie. Please go ahead.

All right. Thanks for taking my question. You stated here, sorry, that the division priorities will follow the sequence stability, profitability growth on theta-7. Could you give a sense of how hexagon core is distributed across these three categories and then Maybe give some examples from the 17 P&L accountable divisions on page 36.

Yeah, thanks, Mikael. We will give more clarity on how we rank the different businesses in the capital market state. We have just now launched a new organizational structure. It will be implemented basically from the 1st of January across the group, finally. So it's too early to give any input on that externally. But I would also like to say that if you are in stability, it doesn't mean that it's a bad business. Even a good business could be in stability. I would even say that our D&E business was in stability phase. It's a very good business, but we didn't really know what to do with it. It wasn't growing for us. We were not the right owner for it. So that's why the decision was basically to to offload it and reallocate those proceeds into where we are stronger and have a stronger market position. So it doesn't mean that if you are in stability that you're a bad business. But in general, of course, we would like to move all our businesses into the growth scenario or strategic mandate. But we have a range of different businesses also within the different divisions. So there is... There's a lot to go through here and to set up with the business areas and divisions themselves. So we have to come back to that on the capital market stage.

Okay, fair enough.

And just curious here about the book-to-bill ratios for the MI segment, if you can maybe comment on that, or other areas where you have bookings exceeding sales.

At the moment, we are... I don't have the information with me now, but we'll come back to you directly afterwards, in a sense.

So, Anton will come back to you afterwards and give you the facts.

Thanks.

Thank you. We'll now take the next question.

And your question comes from the line of Ben Castello Bernal from BNP Paribas. Please go ahead.

Hi, good morning. Yeah, thanks for taking my questions. I guess a couple for Matthias to start with on the Octave business. Obviously, some headwinds there from the transition from licenses to SaaS. I just wondered, what's your assumption on how long you expect that to take until you're sort of a mostly SaaS business? And then, I guess related to that, you know, the margin headwinds that we're seeing there at the moment, obviously there's some one-off costs going through there. I guess if you look out to 2026 and the sort of margin trajectory, what's your working assumption at this point in time? Thank you.

Yeah, good questions. But what is that? I have to be boring and answer. You will get to know in the investor day in Q1, right? I'm not prepared to give outlooks at this point, but

We will lay that all out in detail at Investor Day. Okay.

I'll try one maybe that can be answered. Just on autonomous solutions, obviously super strong performance there this quarter. How much of that was kind of anticipated and predicted, if you like? And was there any kind of one-off in there that we should think about just in that performance? Thank you.

Yeah. Thanks, Peter. If you look at autonomous solutions, I mean, we of course know our order intake, right? So our result was quite expected internally. Very strong order intake in aerospace and defense area. Also mining has been very strong, and you can see that also, I think, in related companies reporting mining numbers also on very, very good levels. So in general, the underlying markets in here are doing very well. And we have a good order intake in those markets that will also generate good performance going forward. So we expect Q4 to also perform well. Q4 has a bit tougher comparables, so it will not be on a similar level, but we expect a continued strong market demand within autonomous solutions. And as I mentioned, the weakness we see in autonomous solutions is agriculture, which is in a quite serious downturn. globally, and that weakness is also expected to continue during Q4.

So we see a relative similar business climate in the fourth quarter. Very helpful. Thank you. Thank you.

Thank you.

We will now go to our final question for today. And your final question comes from the line of Magnus Kovar from Nordea. Please go ahead.

Hi, Magnus. I just wanted to get back to the delta between impairments or amortization capitalizations in R&D. So it's the message that it will be relatively similar in the coming quarters, but gradually over time it will narrow. And if that's the case, do you expect your new strategy will be able to offset this headwind on the margin side in the coming, say, two, three years?

Yeah, thanks, Magnus. Yeah, that's correct. So Given that we are releasing lots of new products to the market, like the TS20 now here in October, for example, we see that amortization of those products released will then completely net the gain that we would get from this impairment. So this impairment by itself will not move basically the amortization capitalization gap. It would be on the same level in Q4 and in Q1 as it was in Q3. So that's correct. And then going forward, we expect, of course, these new products to generate higher sales numbers. And that is how we will compensate the shrinking gap between amortization and capitalization. And I want to make clear that to capitalize R&D is not dangerous. If you capitalize good R&D, then that's the way it should be done, right? And then you take the cost over the life cycle of the product. So that's completely right and how it should be done. The dangerous thing is to capitalize and then not release the product and try to fix it and further capitalize a product which is not good. And then when you release it, you don't get the sales and you only get the amortization. So that is the danger. And that is what The new management structure will make sure that we avoid it going forward.

Fantastic. That's very clear. And with respect to the 110 savings, could you characterize a little bit on how we should expect this to be filtering through 2026? It's more linear, back in low data. What's the character of the implementation?

I would say it's very linear. So you can model in linear with probably less in Q4 than going forward.

Perfect. And then just the final one, geosystems China. I think you said down 20 or something, if I read that right. How do you characterize that slowdown? How long it's been going on? And is there any element of that that's structural compared to cyclical?

I would say it's generally cyclical connected to this large infrastructure project like the rail. It's impacting very much for geosystems. In China, we don't have good sales of our whole offering portfolio. We have good sales of the top tier of our offerings, the most sort of precise measuring equipment. That is what we sell in China. On the mid-tier offering, we have very strong local competition. So we have a very little footprint given that we don't have local manufacturing, local R&D, et cetera, within your systems. So that's why we get so heavily impacted when there's an effect on those type of industries. And it's been going on for, what is it? Could it be something 12 months? 12 months, roundabout. Yeah, that we see this effect coming in for year systems. And of course, since this is our top offering, that also gives a weaker mix for year systems because we have best margins on these top tier systems. because we don't have any competition, basically. So that impacts geosystems mix negatively, and you can also see that in the year-on-year drop in geosystems in financial performance when it comes to operational margin.

You can see the effect there as well of the lack of sales of those top-tier products. Brilliant. Thank you so much.

Thank you. I will now hand the call back to Anders Svensson for closing remarks.

Thank you, operator. And thank you, everyone, for attending, listening and putting good questions for us. Our next report will be on January 13th. So 30th. Sorry. Thanks. Good correction. January 30th next year. So hoping to see you all then. And until then, be safe.

Thank you. This concludes today's conference call. Thanks for participating. You may now disconnect.