Release Date: July 26, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Hexagon AB (HXGBF, Financial) achieved a new all-time high gross margin of 67.3% in Q2 2024, driven by pricing discipline, favorable mix, and operational improvements.
- Recurring revenues grew by 8% to EUR 560 million, supported by strong momentum in subscriptions and SaaS revenue.
- Operating margin improved to 29.5% from 28.9% in the previous year, aided by gains from the rationalization program.
- Cash management was robust with an 85% conversion rate, aligning with annual guidance and a 17% year-on-year growth in operational cash flow before NRIs.
- The company is set to introduce new products across divisions in Q3, positioning itself to capture market share as demand improves.
Negative Points
- Sales were impacted by weakness in the construction sector and slowing investments in the automotive industry, leading to a reported growth of minus 1%.
- Geosystems division recorded a sales decline of 5%, affected by interest rates and low confidence in the construction sector.
- Revenue in China declined by 4%, reflecting a softening order intake after several years of growth.
- The Autonomous Solutions division faced a degradation of confidence in the agriculture sector, impacting demand.
- The company anticipates continued challenges in demand for Q3, with uncertainty in the market affecting the closing time for commercial projects.
Q & A Highlights
Q: Can you comment on the impact of recent product launches and platforms on the company's growth?
A: Paolo Guglielmini, President, Chief Executive Officer: We've seen positive results from our innovation efforts, particularly in Manufacturing Intelligence and ALI divisions. Innovations in robotics and tracking solutions have supported growth in commercial aerospace. Our SDx platform in ALI has strengthened our data strategy, aiding cross-sell activities. Geosystems' recurring revenue growth is driven by HxDR adoption. Autonomous Solutions and SIG divisions also show strong recurring revenue growth due to innovative solutions.
Q: What is Hexagon's current position and growth potential in the Indian market?
A: Paolo Guglielmini, President, Chief Executive Officer: We're building our operations in India, which is still relatively small but growing at a good pace. We see strong growth in infrastructure and manufacturing support. We have around 2,500 people in India, focusing on localizing hardware and software to meet market requirements and cost structures.
Q: Can you provide more details on the growth outlook for Q3 and beyond?
A: Paolo Guglielmini, President, Chief Executive Officer: We expect Q3 to be similar to Q2 in terms of growth levels. Beyond that, the outlook depends on various factors, including market conditions and currency impacts. We have strong innovation pipelines to sustain market adoption and support future growth.
Q: How are the savings from the rationalization program impacting margins, and what should we expect for Q3 and Q4?
A: David Mills, Chief Financial Officer: We've moved significantly through the rationalization program, achieving close to the original EUR175 million savings target. The savings are primarily supporting gross margins and offsetting inflation and cost increases. We expect the program's impact to continue into Q3 and Q4.
Q: What are the key drivers behind the strong gross margin performance in Q2?
A: David Mills, Chief Financial Officer: The 170 basis points improvement in gross margin is driven by multiple factors, including pricing discipline, the rationalization program, product innovation, and favorable divisional and product mix. All divisions contributed to the margin improvement.
Q: How is the demand environment for Geosystems and Manufacturing Intelligence, and what are the expectations for Q3?
A: Benjamin Maslen, Chief Strategy Officer: Geosystems demand remains steady, while Manufacturing Intelligence has seen a slowdown over the last 12 months. We expect similar levels in Q3, with a potential slight decline in China. Overall, we see stable demand trends.
Q: Can you elaborate on the impact of geopolitical factors on investment decisions and market sentiment?
A: Benjamin Maslen, Chief Strategy Officer: Geopolitical uncertainty can lead to delays in purchasing decisions as customers adopt a wait-and-see approach. This top-down effect impacts overall market sentiment rather than specific products or areas of the business.
Q: What are the early indications of OpEx savings from the implementation of generative AI internally?
A: Paolo Guglielmini, President, Chief Executive Officer: We see substantial productivity improvements in software development and content creation using generative AI tools like GitHub Copilot. The early engagement and measurable adoption across the organization are promising, and we expect these tools to have a significant financial impact in the future.
Q: How are the various software platforms, such as Nexus and HxDR, developing?
A: Paolo Guglielmini, President, Chief Executive Officer: HxDR is performing well, with strong adoption for hosting and sharing scanning data. Nexus is driving cross-selling within our solution portfolio. Both platforms are progressing positively and have a bright future.
Q: What is the outlook for CapEx and R&D investments in the coming years?
A: David Mills, Chief Financial Officer: We are at the peak of our innovation cycle, and R&D investments are expected to flatten or decline gradually. CapEx levels will remain consistent with Q1 and Q2, with a general trend of reduction over time.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
