Hexagon AB (publ) (HEXAB) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to the Hexagon Q2 Report 2026 Webcast and Conference Call. [Operator Instructions] 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.

Thank you, operator. Good morning, everyone, and thank you for joining us here at the second quarter results review. I'm, as said, Anders Svensson, President and CEO of Hexagon. And I'm also pleased to have Enrique Patrickson, our new CFO, with me here today on the call. Some of you might have met Enrique already at the Capital Markets Day or on our road shows, but this is his first quarterly conference call with us. So welcome, Enrique.

Thank you.

So I will move to the next slide to show the standard cautionary statements. And then after that, we move to the next slide to go through the agenda. So I will begin with Hexagon's performance in the second quarter. Enrique will then present the business review and financials in more detail. And I will, at the end, conclude the presentation and then open up for Q&A. So on next slide. Let me then begin with an overview of our performance in the second quarter, and I will move into the highlights slide of the quarter. The second quarter was an excellent quarter for Hexagon. The momentum we saw at the start of the year continued and even increased in the second quarter, and we achieved our highest organic growth recorded in the last 5 years. And with a strong order intake, we still built backlog within all 3 of our business areas in the quarter. We delivered 12% organic growth, with growth across all 3 business areas. Our gross margin held stable around the 62% mark despite a currency headwind and very strong hardware sales, so the mix was not positive. And we demonstrated strong operational leverage by improving EBITAC to 24% in the quarter. Cash conversion was also fantastic at 149%. Alongside this stellar financial performance, we also were very active operationally. The separation of Octave completed our portfolio restructuring or refocusing on precision measurement and positioning technologies. We also launched our new Hexagon with updated strategies and new midterm targets at the Capital Markets Day in April. As a reminder, these targets are for the group, an organic growth of 4% to 6% between 2026 and 2030, EBITAC margins of 24% to 26% and a cash conversion of 90% to 100% of EBITAC. We also committed to reduce our Scope 1 and 2 emissions by 70% to 2030 from the 2022 baseline and also reaching net zero by 2050. We also began building our portfolio for long-term profitable growth. And with the acquisition of Waygate Technologies that we announced, we are expanding our offering into nondestructive testing. We completed the bolt-on acquisitions of Inertial Sense and ITRES during the quarter. Our cost restructuring program is now almost complete, and we are here quite a lot ahead of the initial schedule. So that's very positive. And last but not least, we are proud to be ranked by TIME as one of the world's most sustainable companies. So in summary, both financially strong and operationally active quarter, and let me take you through it now in a bit more details on the coming slides. So the first one here is the completion of the Octave separation. And I think this is an important milestone of the quarter, of course. Octave was separated from Hexagon effective 22nd of May. And Octave began trading on Nasdaq Stockholm on the 25th May and was then listed on Nasdaq New York on the 28th. With Octave now separate as a listed company, Hexagon is a more simple and more focused business going forward. I want to wish Mattias and the Octave team every success as they begin their journey as an independent company. And with that, I will move into our organic growth on the next slide. And the organic growth in the quarter was very strong at 12%, with growth in all of our business areas. Autonomous Solutions led the way, growing a fantastic 20% in the quarter. Manufacturing Intelligence, also very strong at 13% growth. And in Infrastructure & Geospatial, we grew 4% in challenged market conditions. By end market, we saw strong growth in aerospace & defense and in electronics, both in consumer electronics and semiconductors, but also in general manufacturing. And this more than offset the weaker market conditions we could see in automotive, especially in China, in agriculture, in the Americas and also construction within both China and Europe. And this is a reminder of the benefits of having the diversification we do both in terms of geography, but also industrial verticals. You will also see some movement in our software and service revenue and also in the recurring revenues, and that relates primarily to the sale of the design and engineering business. But also to a strong hardware sales quarter -- A strong hardware sales quarter, of course, takes down the recurring revenue numbers for the quarter, but it enables future sales of software and service solutions, of course. Positive was that the adoption of our new products like MAESTRO and TS20 is progressing very well. That is an important support for our future growth, but also our future gross margin development. On the next slide, I will now move into how the organic growth was spread across our regions and industries. So in -- Americas led the growth with 19% growth with construction, general manufacturing, aerospace & defense and mining, all growing strongly. The only weak spot in Americas is basically agriculture, and it has been cyclically weak for quite some time now. In EMEA, the growth was 7%, but the markets were more mixed here, with outperformance driven by general manufacturing and aerospace & defense. Construction, which is a key market for us in EMEA and especially for infrastructure & geospatial remains challenged. Markets in China were very healthy with the exception of automotive, which remains tough, just as in the first quarter. Construction grew for the first time in some quarters for us, but this is from a low base, following the destocking program that we had in the last 12 months. And the market outlook for construction in China remains subdued. The rest of Asia grew modestly, with 10% growth in India being offset by some weakness in Southeast Asia and Australia Pacific. If we now move into the next slide, we will look at the gross margin development. We maintained a strong level of gross margin at 62%. And if you then exclude design and engineering business that we have sold, the gross margin was flat year-on-year at 62.3%. But the underlying movement was even stronger than this because we had a 50 basis point negative currency impact, and as I mentioned, we saw strong hardware sales with sensor sales increasing 17% in the quarter, which, on average, carries a slightly lower margin than, for example, software sales. So the mix was not contributing positively. However, this is, of course, a good platform for us, as I mentioned, to grow our recurring revenue and software share over time as these sensors will then have pull-through opportunities of software and service sales. Then I turn into the profitability slide. And before I get into the analysis, a reminder of the EBITAC, which is our new profitability metric which we launched at the Capital Markets Day in April. And EBITAC is a conservative measure of profitability that basically expenses all R&D in the period. So it excludes the gap between amortization and capitalization in R&D expenses. In the second quarter, EBITAC improved materially of 330 basis points to 24.3% compared to 21% in the comparison period. And this excludes the D&E contribution in both periods. Around 100 basis points of that improvement came from currency tailwind, but more importantly, around 230 basis points came from operational drop-through from the strong organic growth. And it was also supported by early benefits of the new operating model, the Hexagon Way, and around EUR 14 million in the quarter savings from our cost restructuring program. And unless otherwise stated, as we defined in the Capital Markets Day, we exclude Robotics from this metric. And the reason for that is, of course, that this market is in a very early stage, and robotics needs to be able to focus on scaling and growth rather than a quarterly performance. In the quarter, the incurred cost for Robotics was EUR 10 million, and it is fully in line with the guidance we gave at Capital Markets Day of approximately EUR 50 million for the full year. I now move over to a short update on Robotics on the next slide. And the Robotics business is making great progress within both partnering with other companies and also attracting great interest from customers for humanoid factory trials. In the second quarter, we announced an expansion of the strategic partnership with Schaeffler, which will result in deployment across Schaeffler's factory network in the coming years of at least 1,000 humanoids. We also announced a new pilot with the company, FIL, where AEON will be working to achieve advanced manufacturing solutions for machine tending, machine inspection and other inspections and material handling. And this brings the total number of public partnerships now to 4, with additional pilots on the way. We continue to expect to reach commercialization by the end of this year. And we are excited about the potential of this business going forward. And as we previously communicated, we are evaluating partner arrangements, et cetera, if we believe that, that would be the best way to realize the opportunity ahead. And before I hand over to Enrique, I will move to the next slide and give an M&A update for the quarter. So also in the second quarter, we remain very active on M&As. The most significant one was the announcement of Waygate Technologies, which will be acquired by our Manufacturing Intelligence business area, and it takes us into the nondestructive testing markets. And this is a significant acquisition for us, which will expand our serviceable market within MI significantly. And I have discussed this acquisition at various market-facing events already. So I won't go into too much details here today, apart from saying that we still anticipate completion within the second half of 2026, and most likely in the fourth quarter. Alongside this, we also completed 2 bolt-on acquisitions. And the first one is Inertial Sense, which was acquired by Autonomous Solutions, and it strengthens our assured positioning, navigation and timing portfolio with tactical-grade ENSS and a [ natural ] systems technology and hence, expands our resilient positioning capabilities in GPS-challenged environments. And this has been a big growth area for us recently and was also in the second quarter. The second acquisition that we closed was ITRES. It was acquired by Infrastructure & Geospatial. It adds to our mapping capabilities with high-performance airborne hyperspectral and thermal imaging sensors that operate across a wide spectrum of wavelengths. It is enabling precise material identification and also temperature analysis that the existing visible and near infrared modalities cannot deliver. So we are excited about all these acquisitions, and we want to welcome these teams into the Hexagon team. And with that overview, let me hand you over to Enrique, who will take you through the business review and the financials in more details.

Thank you, Anders. It's a pleasure to be here today on my first Hexagon results call, and even more so to discuss this very strong set of results. A couple of reflections here to start. I've spent the past few months going around to some of our major sites and meeting the teams responsible for delivering this impressive second quarter performance. And I've been really impressed by the talent, dedication and expertise throughout Hexagon. And I feel excited about what has been achieved in the quarter, but also what we can do in the future. So now let's look at the results more in detail. This page talks of revenue and profitability year-over-year bridge really captures the performance and the story of the quarter really well. Starting with net sales bridge at the top. We added some EUR 40 million to our top line to reach EUR 1.05 billion. However, structure and the divestment of the D&E business accounted for a reduction of about EUR 70 million. So in reality, we grew our top line by about EUR 110 million, including a 1% of FX. So that equates to about 12% organic growth in the quarter. More importantly, our EBITAC, our new profitability metric, increased organically by almost double the rate of the growth of our organic top line growth. So that's a recurring theme when you look at our results and look at our various business areas. The operational leverage is great, especially when you get this type of growth. In the quarter, we had a bit of help of FX, or rather the negative impact we had last year was not repeated this year. So now let's turn into the business areas. Starting with Manufacturing Intelligence, which grew at an outstanding 13% and generated a strong improvement in margins. Growth was driven mainly by the stationary and portable metrology divisions, particularly within aerospace & defense, general manufacturing and electronics. Automotive remained structurally weak, particularly in China and EMEA. Growth was across geographies but remained strongest in the Americas, and China grew by high single-digit rates. Importantly, order intake also grew at the high level and growing our backlog. Profitability, if you exclude the divested design and engineering business, margins improved by about 380 basis points, which is a very good progress. This was driven by the strong organic growth and some currency benefits. Now moving to Infrastructure & Geospatial, the business area formerly known as Geosystems. This was another good performance with solid growth despite our exposure to EMEA construction markets, which remain challenging. By division, the growth was strongest in construction software and services, geomatics, radar & monitoring and in machine control. The Americas grew strongly and China grew from a low base as restocking came through, while EMEA remained challenging. Our new TS20 total station continued to sell very well, and that supported the growth in geomatics. In terms of margins, the improvement reflects the higher volumes and more favorable product mix, cost control and some help of currencies here as well. So another business area with great operational leverage. And then last but not least, Autonomous Solutions, which once again delivered a stellar growth and margin performance. This was driven by a significant increase in our positioning divisions, which benefited from continued strong demand in aerospace & defense and more than offset the weaker conditions we see in agriculture & marine. Both the Americas and EMEA delivered strong double-digit growth, with Asia being weaker. In terms of products, growth was led by our anti-jamming solutions, our high-precision GNSS and our correction services. Backlog continued also to grow here. Margins expanded on the back of those strong volumes, though that was partly offset by currency. Now let me mention a couple of things in our income statement and highlight a few things. EBIT1 moved in line with our EBITAC, but that was somewhat obscured by a reduction in the capitalization amortization gap of about 125 basis points. However, if you exclude the D&E business from last year, the delta is about 170 basis points. Our adjusted EPS was about [ EUR 0.078 ] a share, lower than the [ EUR 0.092 ] reported, and this was due to the gain of the Cadence shares that we sold in the quarter, and that was about EUR 71.5 million, which resulted in a positive financial net in the quarter. So you have to remove about EUR 71.5 million to land into our normalized net financial items in the quarter. Now on the restructuring program, we continue to make excellent progress. We targeted a savings of EUR 74 million as we announced at the Capital Markets Day, and we have now reached a run rate of EUR 73.5 million so we are essentially at the full run rate. In the second quarter alone, the program delivered EUR 14 million of cost savings. We now expect the program to complete by the end of the third quarter, which is ahead of our original schedule. Importantly, we are retaining these savings, as demonstrated by the profitability improvement. This is thanks to the early benefits of our new operating model, the Hexagon Way, which is improving the operational discipline. And that discipline is demonstrated in the results with great leadership in divisions showing hunger to deliver on enhanced shareholder value. Finally, from me on cash flow and net debt. Cash generation in the quarter was very strong, as Anders mentioned, with cash conversion at around 149%. That's the operating cash flow pretax of EUR 364 million compared to our EBITAC, including robotic costs of about EUR 245 million. As you can see from the waterfall, the driver here, it was a strong contribution from working capital, particularly driven by strong efforts in both accounts payable as well as in collections. In addition to the strong cash flow, the net debt bridge below here, I have a few highlights I want to draw your attention to. The Q2 impact from the Cadence share sales can be seen in the financial assets. And you can see the Octave transactions coming through on the line referred to as other. Those 2 together contributed with a bit more than EUR 800 million, and then we had dividends of about EUR 381 million in the quarter. The increase in cash generation and the additional proceeds from the Cadence shares helped to drive a material improvement in our net debt, which took our leverage down to 0.3x during the quarter, way below our target level of 2.5x. Even if we add the already announced Waygate acquisition, we retain a substantial firepower going forward. So in summary, for the quarter, one, fantastic growth; secondly, had true operational leverage on our EBITAC and that thoroughly converted into cash. And with that, I will hand over to Anders for some concluding remarks.

Thank you, Enrique. Yes, it must be a very good quarter to start reporting with Hexagon. Let me now bring this together with a short summary for the quarter before we open up for any questions. So operator, if we move to the Q2 summary slide. So first, we delivered excellent organic growth of 12%, while still building backlog in all of our business areas. We saw a particularly strong demand in aerospace & defense, electronics and general manufacturing. Secondly, we continue to reshape our portfolio, completing the Octave separation and announcing the acquisition of Waygate Technologies. Third, we improved our operating leverage, translating the fantastic growth into stronger margins, helped also by benefit of the restructuring program and the early benefits of the Hexagon Way operating model. The restructuring program is ahead of the schedule, as mentioned, and we will achieve full run rate at the end of the third quarter. We entered the third quarter with strong momentum and a high order intake from the second quarter in all our business areas, and also with strong end market trends that we expect to continue also in the third quarter. And with that, we would be happy to open up for questions.

[Operator Instructions] We will now take the first question. And your first question today comes from the line of Daniel Djurberg from Handelsbanken.

Congrats to really strong numbers here and strong market trends. A few questions from my side. Starting off, you write in the report about some quarterly help from a U.S. tariff refund. Can you give any more quantification on this, on the margin on EBITAC or something that gives a ballpark underlying?

Yes. So if you look at just tariffs, comparing year-on-year, we have got some refund in tariffs, both in Switzerland and in the U.S., and that amounted to a net positive of EUR 2.4 million if you compare to the previous year. However, that is completely netted with additional costs from Iran, in the Middle East due to increased freight costs, et cetera. So if you take Iran plus tariffs, it's actually at the net 0.

I see. Perfect. And if possible, you had talking about good order intake as well. Is it possible to give more comments on book-to-bill levels in the division's ballpark?

We actually don't go out with that number normally, and it's because a lot of our businesses don't really build a backlog. If you go to Infrastructure & Geospatial, for example, a lot is invoicing and sales at the same time -- or order intake and sales at the same time. So we don't really go out with that number, but we can say that there was good order intake in all businesses since we built the backlog in all areas. But of course, if you look monetary on the order intake, it contributed most from MI because that's the largest that operates mostly with backlog as well.

Yes. Perfect. And finally, from my side, you talked about expanding scope with Schaeffler, minimum 1,000 humanoids. But I believe that was a similar number that we had before as well or -- can you comment a little bit more on this expansion, what it means?

No, that is something we have already communicated during the quarter, but it happened during the second quarter. So it's a part of our summer, yes.

We'll now get to the next question, and the question comes from the line of Uma Samlin from Bank of America.

Two for me, please. The first, would you be able to talk about the moving parts in your EBITAC margin trajectory in H2 given your restructuring program is now almost completed, you're getting better operating leverage and maybe also some shifting between the software and hardware mix. How should we think about this trajectory going into the second half of the year, especially with Waygate also potentially starting to contribute towards the end of the year?

Yes. So if you look at EBITAC, so we have reported an improvement of 160 bps. And if you take then out D&E from both periods and your robotics, so the gain is 330 basis points. Roughly 100 bps is then from currency -- positive currency contribution. If you look at the restructuring program, we say that it contributed with EUR 14 million in the quarter. That's roughly then 130 bps. So if you look at the remaining 100 bps, then that's sort of operational leverage and other improvements in the group.

Okay. That's very clear. My second question is on the robotics partnerships. I guess 2 part of the question. So first, should we expect to see a significant increase in cost given the commercialization plans by the end of the year? What are the sort of investment you need for the mass commercialization of the robotics business? The second one is you talked about the partnership plans in the site. Would you be able to elaborate a bit more on that? What kind of partnership you're looking for? What would be the ideal kind of scenario for your robotics business going forward?

Yes. So there are basically 2 close partnership announced. One is the Schaeffler deployment of 1,000 units in the next, I think, 5 years up to 2032 across the Schaeffler manufacturing network. Then, of course, we have the BMW [ Leipzig ] production deployments that we discussed also previously, and that was with the first milestone in mid-June, a precedent on this. So that was -- those are the 2 big ones. But of course, we have more pilots ongoing. We have 4 communicated external pilots, and we also have non-communicated pilots with -- also with a pipeline of more potential panels going forward. But we want to move this now into commercialization. And hence, we have expanded the partnership with Schaeffler, for example, that from the end of this year, we can then deploy like a robot as a service or deployed directly and not only go through pilot sales going forward. Then what was your first question?

Yes. Just my -- would we see any significant increase in terms of cost? What are the investments you need for that?

Yes. So this is what we have communicated previously as well that we are looking for potential business partners where we can take a smaller ownership than 100%. We have not come to any conclusion on that. We will come back to you guys when we take that decision. So if we find it most beneficial for the business itself to be successful, then we are open to partnering with others as well. But this is -- we have, of course, not achieved the highest cost level now with EUR 50 million in this year. As this business goes into sales, that will, of course, push costs up further. Therefore, you start reaping all the benefits of the productization and commercialization and the pickup in the market of humanoids in general. And we also talked about this in the Capital Markets Day that pickup is expected somewhere in [ 32 ] roughly. So of course, we have not achieved the highest cost level here yet.

Your next question today comes from the line of Simon Granath from ABG Sundal Collier.

Are you eager to dive further into [ 30% ] organic growth for MI in this quarter? Have you seen anything you would assess as one-offs or nondurable tailwinds to growth like due to changes in the order patterns, due to the inflationary pressure we have noted for several input components? And also separately, how do you see the momentum in semis? Is the Q2 growth reflecting early cycle capacity additions? Or have you seen this momentum for a longer period?

Yes. Thank you. We have seen now good growth in MI on the last 3 quarters, right? So we believe that -- and it's actually increasing every quarter so far in the last 3 quarters. So we believe that the momentum that's in the market is strong. We were elaborating that it could be tariff connected, some sort of hold up of investments for some time. That might have some effect still, but I wouldn't say that, that is significantly contributing since we see this stable order growth or order intake growth all the time. I would say the underlying markets within both aerospace, and that's both in aero and space, and also in the defense side. Electronics, basically all over and strong in general manufacturing in many different segments. So we don't see that this is something that is getting weaker for us currently. So -- and we think that those strong markets will remain. But also you should take into account, not everything is going well. There's many verticals that are performing to a lesser extent. For example, marine business, which is impacted by the Middle East crisis; the agriculture business, which is in a very low level; and also, of course, construction, especially focused then on Europe and China has weaknesses. To some extent, those are also impacting MI, but the main sort of drag for MI currently is automotive and especially in China, which is down significantly on a year-on-year comparison. But we don't see that we are moving into a worse climate going forward. We see that it seems to be very stable for us.

Very clear and encouraging stuff. And I also have a follow-up on some of the comments you made there and that is relating to construction part in EMEA here in Q2 because given recent product launches like the TS20, which is selling really well. Why is it all that you move into negative territory? How would you describe the current landscape? And should we expect the negative trend to continue over the coming quarters?

Yes. Thanks. I wouldn't say that we're moving into negative territory. I would say that we have been, for quite some time in construction in Europe, in negative territory. I would rather say that it's slightly improving in Europe. And especially then we can see some effects of infrastructure projects in Germany, that is then starting to contribute positively. But we see a strong growth in construction when it comes to North America, which is also important for us within these new products launched. So MA, if you look at the Middle East, there is some impact of delays of investments due to the crisis that we are having currently in Middle East. But I would say if you look versus the previous quarter, there might be some small improvement in construction in Europe.

I was referring to the [ blue dots ] last quarter, but then I understand it's predominantly a timing effect. So slight improvement quarter-over-quarter.

Yes, slight improvement quarter-on-quarter.