Hexagon AB

STO:HEXA B

Earnings Call Transcript 2023-Q2

[Operator]

Good day, ladies and gentlemen, and welcome to Hexagon's Q2 Report 2023. [Operator Instructions] I would now like to hand the conference over to the CEO, Paolo Guglielmini. Please go ahead, sir.

[Paolo Guglielmini, executive]

Thank you very much. Good morning, and welcome to our Q2 2023 conference call. I'm very pleased to confirm today another strong set of results. We're going to go through the detail of it.

Before I cover the highlights of the quarter in more detail, I want to spend a moment on the short attack and the related report last week. We fundamentally disagree with the reported conclusions. Hexagon has always conducted its business with integrity. And we are all committed to accurate communication and transparency towards the market. For the benefit of our existing and future stakeholders, we will certainly issue a response covering the key clients in due course. So my presentation today will focus on the business performance in Q2. But of course, I look forward in the Q&A to welcome any questions from analysts and investors.

So I suggest we start with Slide 4 and the highlights of the quarter. So we have posted a strong organic growth quarter. Growth came in at 8 percentage points with resilient demand across most of the divisions. We have very good momentum for new solutions. And recent acquisitions showed very good progress, which was great to see. We have closed out at 84 percentage points of cash conversion within our guidance range, 66 percentage points of adjusted gross margin and 29 percentage points of adjusted operating margin.

For us, June is the month of HxGN LIVE. We gathered in Las Vegas with a lot of customers and partners. We're going to talk about some of the highlights from the show. This morning, we have announced an efficiency plan to continuously progress towards delivering on our margin targets and fund incremental organic growth.

If we move on to Slide 5, further details from the income statement. We have posted in Q2 2023 EUR 1.366 billion of operating net sales at 8% organic growth delivery on Q2 2022. Structure accounted for 2 percentage points of growth with currency headwinds having an impact of minus 4 percentage points for total reported growth of 6%. We posted adjusted operating earnings of EUR 394 million for an adjusted margin of 28.9%.

As you can see from Slide 6, currency and FX have had a material impact in the quarter. We thought it would have been useful to add some color on it and bridge the gap between Q2 2022 and this quarter. On the basis of Q2 2022, we have added EUR 102 million of organic volume, which contributed to EUR 46 million of adjusted operating earnings.

Currency shaved EUR 45 million of top line and EUR 37 million of operated earnings, predominantly down to the movement in Chinese currency, appreciation of Swiss franc towards the euros and movement in USD versus euro. Structure added EUR 20 million of sales and EUR 6 million of operating earnings. So all in all, flushing out currency impacts, we would have delivered a 1 percentage point margin improvement versus Q2 2022.

In terms of cash flow, change in working capital delivered EUR 10 million. Cash flow from operations added up to EUR 364 million for an overall cash conversion as discussed of 84%. Working capital to sales ratio was at 7.6%.

Moving on to Slide #8. If we look at the pillars of growth within the quarter, we can say it's been the quarter of autonomy. As you can see on the right-hand side of the slide, the Autonomous & Positioning division delivered 31 percentage points of growth with very strong demand for our autonomous stack across multiple industries.

We're going to talk, together with Ben, later about another announcement that came in this morning. We were very pleased to see the conclusion of multiple quarters of work from our team. We're going to integrate our autonomous stack within the context of a mining application, the largest deal that the group has closed.

So autonomous stack delivers for us growth not only in automotive, defense, agriculture application but, of course, is also behind some of the growth that we have seen in Geosystems despite headwinds in the construction market. Geosystems grew 7% in the quarter.

Still within the Geospatial Enterprise Solutions part of the business, SIG, so our portfolio for Safety, Infrastructure & Government applications declined by 9 percentage points, along the lines of what we discussed already in Q1. We are addressing some of our areas of underperformance. And we are pulling back from particularly service engagements that are labor-intensive, that are dilutive to our operation and don't entail usage of IP from Hexagon.

When it comes to the Industrial Enterprise Solutions part of the business, it was great to see Manufacturing Intelligence up 11%, continued momentum both in bookings and in shipments with growth that came from both the devices and the software side of the business. And we'll talk about the growth in ALI. And this is a continuation of the good growth that we have experienced already in Q1 both in core and in the enterprise asset management newly acquired portfolio within ALI.

So moving on to Slide #9. A few words about HxGN LIVE. It was a great event. It's always an amazing opportunity to meet with customers, get their feedback, present innovation, launch new technologies. We had 2,800 people attending in between channel partners, strategic and technology partners and, of course, a lot of customers from around the world, tens of sessions and keynotes and a lot of attendance to our content stream online.

I also want to point your attention here to some of the partnerships and collaborations that we have announced within HxGN LIVE. You know that we've been working with Sony Semiconductors for a long time. If you look at our reality capture portfolio that probably got developed within 2017 and 2019, now accounts for a good percentage of the growth that we experienced in Geosystems. We've worked with Sony Semiconductors on some of those technologies. And we look forward to integrating their time-of-flight image sensor and software technologies to keep on enhancing the speed, the accuracy of those reality capture solutions.

We've doubled down on our partnership with AWS, one of our, of course, key partners when it comes to cloud deployment. Microsoft is, of course, a very important partner for us when it comes to artificial intelligence. We've got to do it in a way not only we offer new capabilities and new value to customers through our solutions, but also we use some of their technology to deliver more efficiency and embed automation in the way we operate internally.

If we move to Slide 10, I want to point out your attention particularly to the collaboration with NVIDIA. NVIDIA has been a partner of ours within Geosystems and the Autonomy & Positioning division already for a long time. What we have announced at HxGN LIVE is something new and exciting, we believe. We're going to connect our cloud platforms, HxDR, our digital reality platform, as well as Nexus with NVIDIA Omniverse.

What are we trying to achieve? I mean, Omniverse is a computing platform that enables development of 3D workflow. They've got very powerful AI-enhanced, physics-based simulation capabilities. So you can see how the handshake of HxDR, in which we've fused large quantities of 3D data with that simulation capability, can deliver value to customers. We are very active commercially already now with customers both in the industrial and geospatial space.

Moving on to an analysis of growth across divisions, Ben Maslen?

[Benjamin Maslen, executive]

Yes, good morning, everybody. If we go to Slide 12, just the breakdown of growth by geographic region and industry.

So if we start with surveying, we saw a bit of a slowdown in North America and Western Europe in the quarter. But that was offset by good growth in the rest of the world and very good growth in the reality capture portfolio. We also saw a stabilization in markets in China after the weakness we saw last year.

In power, energy and mining, we saw a strong development across the board. Mining continues to have a fantastic growth as a result of increased mine automations and demand for safety solutions. In power and energy, we continue to see an improvement in the underlying market and the benefit of diversification for ALI.

In discrete manufacturing, we see overall good momentum in manufacturing markets, although we did see some slowdown in North America. Electronics remained strong for us across the board. In infrastructure and construction, we see a slowdown in some European markets for machine control and China still remains slow. Otherwise, I'd say good growth in most other markets and strong demand across the board for our AEC software portfolio.

In automotive, we see very strong demand for our metrology and Manufacturing Intelligence software solutions. And we had several strong wins in the quarter, including for electric vehicles. And in aerospace, another strong quarter as that market continues to recover from COVID. And as Paolo already mentioned, very strong demand in A&P in defense for anti-jamming equipment.

If we go to Slide 13, Geospatial Enterprise Solutions. They had sales of EUR 679 million in the quarter so that was organic growth of 6% and EBIT of EUR 208.6 million. And that was an operating margin of 30.7%. That was down compared to last year due to the currency translation and transaction effects that Paolo mentioned earlier.

By subdivision, Geosystems had a 7% organic growth. There, we saw strong demand for mining solutions and reality capture. The stabilization in China, as I mentioned, probably too early to say a full recovery, but we do see some improvement in that market and a slowdown in developed economy construction markets that was offset by good growth in EM.

In SIG, public safety was flat, but organic growth ended up being 9% because of the exit of some low-margin contracts that we mentioned in Q1. And in A&P, 31% organic growth, obviously exceptional. Across-the-board strength, but I would highlight precision agriculture, where demand is very good and the defense-related contract, as I mentioned earlier, for anti-jamming solutions.

If we go to Slide 14, our first customer win, Mortenson. They're a U.S.-based top 20 builder and engineering service provider across a number of construction markets. As we described at HxGN LIVE, they're working with the citizenM hotel chain to try and disrupt the hospitality industry by introducing prefabricated or modular construction processes to accelerate the overall timeline of a construction job. Documenting project progress is obviously key to stay on time and budget. And it's great news that they're using our solutions, OxBlue, Multivista and Avvir progress tracking software to keep the project on track.

Slide 15, a customer win with Asia Air Survey. And they're one of the largest and leading geospatial firms in Japan. The Japanese government has a digital twin program to map its major cities. It's obviously a very difficult thing, given the tall buildings and complex shapes and the infrastructures that those cities have. So it can be a very labor-intensive process. They've been using Hexagon's world-leading imaging and LiDAR systems, such as the CityMapper, which is shown on the slide, and our related software to accelerate the process of capturing that data and creating digital twins of cities.

Next slide, 16, a product launch from HxGN LIVE, one of the highlights, I would say, HxDR Reality Cloud Studio. This is a cloud-based platform to host our reality capture data, so we can stream it from our sensors in the field and provide tools to automate the process of meshing together different point clouds into one vision as well as providing visualization, measurement and collaboration tools between field workers and the office, which obviously saves a lot of time for our customers. In terms of payment model, this will be a subscription-based payment model for our customers.

Next slide, please, 17. As Paolo mentioned and we put out in the press release today, we had a very large customer win, probably the largest in Hexagon's history, which was won across our mining and Autonomy & Positioning divisions. And it follows a proof of concept that we did with the customer a couple of years ago. In terms of the size of the contract, it has potential to be high tens of millions overall contract value delivered over 5 years starting next year.

The customer is Mineral Resources, which is a leading diversified resource company in Western Australia. And their mission is to automate 120 road trains in the Pilbara region of Western Australia to overcome labor shortages and improve safety at their operations and move 35 million tonnes of iron ore a year using this system. So we've worked with them to develop the world's first autonomous road train. What we've sold into the project is our Autonomy & Positioning hardware, position avoidance systems, fleet management and protection software to control the vehicles as well as drive-by-wire technology to manage them and steer them. And the result of that for the customer will be significant fuel and labor cost savings as well as improving efficiency and safety.

Next slide, 18, the final one on GES. The acquisition of HARD-LINE that we announced last week. And that extends our mining division's push into mine automation. HARD-LINE are a market leader in remote control technology based in Canada. And they sell the connectivity and control systems required for the tele-remote operation of heavy mining machinery. So in the slide, you can see this operator is controlling an underground mining loader a long way away from the mine, which is obviously great for safety and employee well-being.

So with that, I'll hand back to you, Paolo.

[Paolo Guglielmini, executive]

Yes, thank you. If we move on to the Industrial Enterprise Solutions part of the business in Slide 19. We posted sales of EUR 687 million in the quarter, an organic growth of 11% with good EBIT delivery as well.

Manufacturing Intelligence grew at 11 percentage points. It was great to see not only broad-based growth across regions but also a very good contribution from innovation and newly released products and solutions. I would say the devices business was predominantly driven by demand for quality control and new methodology embedded in production of e-vehicles and batteries. And then we've seen very good adoption for our software portfolio. China particularly grew by 12 percentage points, which is a continuation of good momentum. We have very good traction in that market as a result of localization, as a result of very effective key account management.

If we move on to the Asset Lifecycle Intelligence division, we grew by 11 percentage points with good underlying starter subscription adoption, good growth at the ARR level. The growth took place across both the core and the EAM portfolio. Something that we're going to talk about in a second, there was very good continuation of momentum in terms of adoption of these technologies in new industries to keep on fueling that organic growth.

In Slide #20, if we talk about Manufacturing Intelligence, it's clear that the increasing adoption of our technology is related to the introduction of new products, new vehicles, the expansion of these portfolios related to e-vehicles. In this case, I mean, in the quarter, we have expanded our commercial relationship with one of the leading global EV manufacturers in China.

When these companies standardize on our tools and methods and practices and technologies and then, of course, they grow their portfolio or they grow their volume, this is very good news for us. The challenge is how to double down on production and scale production so rapidly without encountering quality issues or safety issues. So in this case, we help them in terms of not only quality control but also managing all their quality data through their facilities, production lines and suppliers.

If we go to Slide 21, it was great to see a significant commercial win with one of the leading semiconductor manufacturers, a complex organization, a large portfolio, hundreds of thousands of employees, 50,000 external contractors and a difficult portfolio for them to manage and keep evolving on. They have an ongoing push to digital transformation. And we're going to work very tightly together. The relationship started with an adoption of our enterprise project management tool called EcoSys, an acquisition that we've made a couple of years ago within ALI. And then we have expanded the relationship to embed Smart Materials management technologies, design tools. So it was great to see that happening and driving ARR in ALI.

If we move to Slide 22, we have partnered and closed a significant opportunity in a global leading biotech and pharmaceutical company. This customer has the challenge of developing and producing on a massive scale medicines and vaccines. So of course, asset management has got a lot to do with it. This customer standardized on the enterprise asset management SaaS solution as their solution of choice as the key to unlock productivity as they roll out production. And of course, our EAM solution is deeply embedded in their software stack to maintain [indiscernible] their operations that is constantly up to date.

If we move to Slide 24. This morning, we have announced an operational efficiency program targeting annualized savings in the range of EUR 160 million to EUR 170 million, kicking in from the end of 2024, beginning of 2025. This program will require an investment of EUR 200 million that will take place within Q3. The implementation period for these rationalization and efficiency initiatives would be over the next 6 quarters, in between Q3 2023 and the end of 2024.

What are we planning to do? And how do we plan to unlock these efficiencies? They've got to do with synergies, so driving more cross-divisional cost savings via the creation of shared services centers and leveraging technology synergies between the divisions, something that we have been working on for the last several quarters within the leadership team. And now we are ready to pull off.

As you know, we've been on a push to reduce our offices and our manufacturing footprint already in the last quarter. We need to step up investment to continue and accelerate from that perspective. We think we can pull off another reduction of roughly 25 percentage points. This is also going to help not only rationalize the cost structure but also bring the teams together and help from a synergies perspective. We have a few areas of underperformance that were partly being flagged already in the past that we want to rationalize and rightsize from a cost perspective.

And then last but not least, there's a lot of opportunity to keep on embedding more and more physical and digital automation tools in the way we operate. It's got to do with technology development, R&D and using more AI within our operations. It's got to do with physical automation and robotics in manufacturing, in calibration of our devices. And it's got to do with, of course, back office and process automation from that perspective.

In conclusion, on Slide 25, it was a very good organic growth quarter. Despite the slowdown in construction and infrastructure, we have seen good momentum in terms of deal flow, in terms of booking and revenue. Cash conversion is back within target range. We think we have a very good plan behind the efficiency initiatives that have been just announced. And that's going to help us fund new growth initiatives as well as keep on delivering incremental margin to target our long-term goals.

We had a very successful HxGN LIVE Global event to set the foundation for tighter relationships with partners and customers. And then we are pleased to announce that we're going to have a Capital Markets Day towards the end of the year on the 7th of December in London. And I believe the team will follow up with more specifics within the next couple of days. Thank you. Operator, we go to Q&A. Thank you.

[Operator]

[Operator Instructions] We are now taking the first question. And the first question, from Joachim Gunell from DNB Markets.

[Joachim Gunell, analyst]

So can we start off by just talking a bit the timing of the efficiency program here? The last one was announced from 3 years ago and appeared to be more related to enduring changes in demand. So can you just comment a bit about how this program is different and how much of the targeted savings stem from what you owned prior to, say, 2020 versus the 34 acquisitions you've made since the last program and also perhaps the split between GES and IES when it comes to the cost savings that you see?

[Paolo Guglielmini, executive]

Yes. Well, I would say, I mean, the restructuring program that was announced in 2020 had to do with severe and sudden drop in demand. This is a much more long-term sort of strategic investment in efficiency. It is going to address most of our businesses and the two segments that you have just mentioned. And again, I mean, it's got to do with rightsizing our cost structure when it comes to some of the underperforming areas, areas that we perceive as being less core for us for the future.

We've done a lot of work with the divisional leaders and their technology leaders to identify areas of potential overlap when it comes to technology development. So we're going to try and increasingly reutilize technology components across divisions. We also have the opportunity of lowering the cost of serving the business by creating more shared functions within the divisions. And that's simply going to allow us to reinvest more aggressively in incremental organic growth and on delivering marginal profitability to drive the business up to the margin levels that we have committed to the market.

[Joachim Gunell, analyst]

And also, can you comment a bit about the pacing through the quarter when it comes to particularly Geosystems and how you -- of the growth that is and how you think, call it, incremental softness within construction/infrastructure can be more than offset by mining and reality capture also going forward?

[Paolo Guglielmini, executive]

Yes, thank you. I'm glad you mentioned the reality capture portfolio. And at the end of the day, we talk about innovation. And as you know, we are -- we have geared up R&D spend in the last couple of quarters. If you look at the reality capture portfolio, we started developing those tools back in 2017. And now the portfolio accounts for 10% to 15% of that portfolio. There's a lot of underlying growth.

And when you have a category that delivers so much value and it's got so much growth momentum, that helps softening the impact of a market backdrop that might not be just as positive. So I would say it's the bigger trend behind that 7% growth rather than what's macro per se. Mining has gotten very good momentum. I would say the sales motions of mining and those deals tend to be a little bit more longer term. So the underlying demand behind that market and the forces are much more long term. So we expect to see a continuation from that perspective.

When it comes to demand that is strictly related to the construction sector, we basically have seen the world at two speeds. I mean, we have seen a softening in demand in the U.S. as eagerly anticipated in the last couple of months and softening in demand in Central Europe as well, particularly in Germany. But we have a lot of momentum when it comes to China. We have a lot of momentum in Asia Pacific. We're doing very well in the Middle East. We're doing very well in South America. So we are capitalizing on all of those opportunities. And we have good market motions in those parts of the world.

[Operator]

We are now taking the next question. The next question, from Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, analyst]

First, a question on financial expenses. Can you just tell us a little bit on how much was impacted by currency effects and how much was the interest cost from your gross debt?

[Benjamin Maslen, executive]

No, the increase in financial net is coming from higher interest rates, not really currency.

[Daniel Djurberg, analyst]

Perfect. So we should expect similar level going forward?

[Benjamin Maslen, executive]

Yes, that's right. And I think we'll obviously have to see how interest rates go going forward. If they keep going up, then I guess, there'll be some pressure on that number.

[Daniel Djurberg, analyst]

Perfect. The question I had also on the deal you took with the Mineral Resources, that could be really nice going forward here. But the question is this company has built their own road to get this working, I guess. Do you see similar potential elsewhere in other parts of the world? Or is this really a unique company doing this?

[Benjamin Maslen, executive]

No, a good question. I think, obviously, we have to deliver this project. And it will go through a phase of gradual ramp-up before the real deliveries start over 4, 5 years. But I think this case study could prove one that opens up opportunities with other mining customers. And all of them have the same problem that the mines are a long way from the ports where they need to ship the ore from. They need to get it from A to B. Traditionally, they built railways, which is obviously expensive. And if they can use existing infrastructure and automate that, it can obviously reduce their costs without compromising on safety. So yes, I think if the project goes well, it could definitely hopefully lead to further project wins.

[Daniel Djurberg, analyst]

And my final question would be on cash conversion now back in the targeted range. But how to think of the second half of this year in terms of working capital changes?

[Paolo Guglielmini, executive]

Yes, I think we're going to see a continuation of good momentum there. We had a little bit of pressure in the last quarters coming from inventory, coming from still the long-term impact of building inventories on electronic components. That is dissolving. So yes, I think we're going to keep on staying within that 80% to 90% cash conversion range.

[Operator]

We are now taking the next question. And the next question, from Alexander Virgo from Bank of America.

[Alexander Virgo, analyst]

I guess, first question, just on your clients with respect to the short report. I understand the need to be measured and considered in response and without wishing to necessarily give too much credence to something you don't necessarily believe in or fundamentally disagree with. But do you not recognize the need to be more proactive here, particularly if there are factual inaccuracies that you can highlight? I guess, it's a question of optics in terms of corporate governance as well rather than necessarily technically if this is no issue as you in the Greenbridge statement point out. That would be the first question, please.

[Paolo Guglielmini, executive]

Yes, look, I mean, we're coming out of a silent period. We've looked deeply into the report. And for sure, we're going to come back. And we think for us to do so for the sake of analysts and investors that have followed the group for a long time. As I said, we deeply disagree. We think that there's factual inaccuracies and there's allegations that deserve being responded to. And we're going to do it over the next days and weeks for sure.

[Alexander Virgo, analyst]

Okay. Do you think there is a need for more significant changes in terms of corporate governance at Hexagon?

[Paolo Guglielmini, executive]

Look, what I would say is that we always have to look for opportunities for improvement. I think governance has already evolved over the last years as the group evolved. There have been changes in the Board a couple of months ago. So I think that's a question for the Board. That is something that everybody is looking into basically.

[Alexander Virgo, analyst]

Okay. Well, I look forward to hearing from you then in due course. A couple of questions then just on the operations in the quarter. I wondered if you could just dig a little bit into the dynamics around construction exposure for us. I noted your comments there on Western Europe being down a couple of percent organically.

So how much is construction actually down for you? What are the dynamics that you're seeing there with respect to the sort of the projects that people are doing and the specifications, I guess, that people are doing around that? And is that the reason why gross margins were down Q-on-Q in what's normally a traditionally stronger quarter in the year?

[Benjamin Maslen, executive]

Yes, I mean, in terms of gross margin, taking that one first, there's a couple of factors. One, you're right that it's a divisional mix. So if the Geosystems growth slows down, as a higher gross margin business, it has a drag. Plus in Q1, ALI has more perpetual deals than you have this quarter, which obviously boosts your gross margin on day 1. But they were the two dynamics that explains the sequential drop-off in gross margin. And FX -- some of the FX effects probably had a drag on the gross margin as well.

In terms of Geosystems, I mean, the way that I would cut it is probably 40% of Geosystems that's not really tied to construction, 20% is mining, 10% or so is reality capture, another 10% is geospatial imagery or AEC software. So that 40% has its own dynamic. The 60%, that is more construction-driven. And by that, I mean the surveying tools and machine control. Generally, that's weighted to larger projects, like that's where you use machine control, that's where surveyors would work.

But obviously, we don't have perfect visibility on which jobs the equipment is being used on. But that's our -- that's the kind of historical analysis. Of the 60% that's construction-driven, what we see is a slowdown in North America and Western Europe. And that's probably 2/3 of that 60%. And the other 1/3 is still very strong growth in Asia, Latin America and other developing economies.

[Alexander Virgo, analyst]

Got you. Okay. And just to clarify then, the machine control comment you made in your prepared remarks is referring to this business here, not machine control in factories?

[Benjamin Maslen, executive]

Yes, absolutely. Machine control is the automation that you'll put on dozers and excavators to just make construction processes more efficient.

[Operator]

We are now taking the next question. The next question, from Sven Merkt from Barclays.

[Sven Merkt, analyst]

First, can you provide some insight into what products drove the increase in capitalized R&D over the last year? And over which time period we should see these having impact on revenue? And when should we see amortization stepping up as a result of that?

And then my second question is stepping a bit back, you obviously delivered very strong -- still very strong organic growth. Capitalized R&D were up in the quarter significantly despite that you didn't really deliver any progress on the margin. So what is really happening in the underlying cost base? Normally, when you would deliver kind of 8% organic sales growth, we probably would expect to see some improvement on the margins. So can you help us reconcile this a bit?

[Paolo Guglielmini, executive]

I mean, what I would say without getting into detail of the individual innovation areas or the associated capitalization ranges, what I would tell you is that we are going through an R&D investment sort of cycle. The gross margin was up year-on-year. The mix has changed. I would say from a capitalization perspective, we are going through a particularly large sort of number of transformational activities and therefore capitalization follows as per IAS.

[Benjamin Maslen, executive]

And I would add to the comments we've made in previous quarters. Coming out of COVID, there was some catch-up on some R&D projects. On top of that, you have the normal investment in things like the BLK series. And then on top of that, the platforms like HxDR, like Nexus that we've spoken about previously. A lot of investment going into autonomy, right? I mean, you don't just turn up on day 1 and win a contract with a big mining company to automate their road trains.

There is a lot of investment upfront that you have to do to do that in autonomy, in agriculture, in on-highway. But it's not really something that you and I are buying yet but will come in the future. They're the kind of things that we're investing in on top of the kind of normal product cycles. So as you'd expect under the accounting standard, once those products are launched, then you start to amortize and it will catch up.

[Sven Merkt, analyst]

Okay. And on the underlying cost?

[Paolo Guglielmini, executive]

What I would say is that, as you know, we've done investment in Nexus that have seen the light of day over the last month. So that, of course, is an incremental sort of investment area. We are expanding the BLK series to keep innovating in the area that's giving good payback in terms of growth.

As Ben was alluding to, we are seeing good progress when it comes to autonomy. And the autonomous stack, both the software side and the drive-by-wire elements, will be able to be monetized in multiple industries. And then last but not least, I would say, FX has an impact. We have a cost structure and a cost base, specifically in Geosystems in the innovation hub, that is relatively high in Switzerland and in Swiss franc denomination and then, of course, has moved towards the euro, as you've seen in the bridge.

[Sven Merkt, analyst]

Okay, that's helpful. Can I follow up just on the cost development with the outlook for the second half? I mean, OpEx, we are up 4% sequentially in the second quarter. If you now think a bit about the second half, will the cost growth normalize before the impact of the cost savings program? Or will you continue to grow cost at this rate?

[Paolo Guglielmini, executive]

I think we have done the bulk of the investment as we discussed. So it's possible that we're going to see a year-on-year impact as these new investments continue to develop. But I would say we're going to see relatively shortly the impact of those savings program kicking in. So I don't think we need to make any step-up investment from this moment onwards. And we think we have good sales momentum as well, allowing us to keep on leveraging the business from an incremental margin perspective.

[Operator]

We are now taking the next question. And the next question, from Adam Wood from Morgan Stanley.

[Adam Wood, analyst]

I wonder, first of all, if I could just dig in more specifically on corporate governance. And obviously, one of the areas of focus was Greenbridge. Could you maybe just talk a little bit about how you think about that perception of conflict between Greenbridge and Hexagon investing either together or at different times and how you think about managing that perception risk in the future?

And then secondly, in the optimization plan, there's a talk of rationalization of non-core assets. Could you maybe give us a little bit of a feel of the size of the program here, whether it's in revenue terms or something else and give us an idea whether that's assets that you intend to sell or more businesses that you intend to wind down as we've seen in SIG?

[Paolo Guglielmini, executive]

So when it comes to Divergent, going first, it's very important that we also frame the investment for what is in terms of Hexagon and what that can do for shareholders, right? We have a long-term relationship with Divergent. We are technology partners. That is one of the very most advanced companies that we could work with in terms of advancing additive manufacturing, right? So if we want additive manufacturing to deliver on its promise, it's all about comparability of quality with traditional technologies. If Divergent is succeeding in what it's trying to do, it's going to be a sea change and a massive opportunity for ourselves. So I think that's very important to remark.

In terms of the specific transaction here, as has been already pointed out, from our perspective, there was no related party transaction involved. So we didn't feel the need to disclose anything specific besides the investment that we did leading the B investment round back in December. And again, when it comes to governance, I can only point you to the Board in terms of control and in terms of processes. I just know that there's a lot of focus from everybody in making sure that again we are as transparent as possible on these topics.

[Benjamin Maslen, executive]

And Adam, on the non-core side of things, I mean, there is a focus to -- in certain areas of the group to improve the revenue quality. And as Paolo mentioned and you saw at Q1, right, in SIG, we have walked away from some low-margin contracts that didn't really lever Hexagon's technology. And beyond that, there are a few more businesses that are dragging on the group at the moment. So we're going to take measures to restructure them. And then we'll decide whether they end up being core or non-core. We're not talking about a large part of the group. It's probably EUR 100 million of revenues, maybe a little more in line with what we've talked about.

[Operator]

We are now taking the next question. And the next question, from Johan Eliason from Kepler Cheuvreux.

[Johan Eliason, analyst]

This is Johan Eliason at Kepler Cheuvreux. I have a question coming back to Daniel's question about the cash flow. Obviously, good to see the cash conversion rate being strong in the second half as well. Now your cash conversion rate obviously excludes the cash impact from this restructuring program, as I understand how you define it, where you highlight the EUR 200 million outflow.

Now last year, you sort of increased your net working capital by almost that amount, EUR 170 million. And so far, we have seen a little bit of a release in Q2 of EUR 10 million. But how would you see this going forward? Do you think the net working capital release on the back of better sourcing and supply situation can sort of offset most of this headwind from the EUR 200 million outflow related to these programs?

[Benjamin Maslen, executive]

I think, Johan, we'll have to see in terms of the phasing of it. I mean, there's obviously going to be a little bit of an investment upfront in these programs. But as I say, the savings you get from the program ultimately more or less pay for it, right? The program pays for itself. So you will get the benefit in terms of the cash flow from the savings above the line. So they should net out. But there might be a little bit of investment upfront as we shift some of these measures up.

[Johan Eliason, analyst]

And specifically, the net working capital release, how do you see that playing out? Is it more limited?

[Benjamin Maslen, executive]

I mean, net working capital is not really related to the reorganization program. But I think for the second half of the year, as Paolo said, I think we can keep doing a good job on working capital. We're still with areas where we can release, I wouldn't say we're optimized in terms of where we'd like to be at the moment. And I think for the second half of the year, we would hope to be in 80% to 90% range, same as Q2.

[Operator]

We are now taking the next question. And the next question, from Nay Soe Naing from Berenberg.

[Nay Soe Naing, analyst]

I've got two if I may. First one is the strong performance in the A&P business unit. It grew 31% year-on-year. I was wondering if there are any one-off drivers in that number. Presumably, the large contract you won in the quarter, we haven't seen any revenue contribution from that. So if you could help me understand the underlying performance, excluding one-off factors, that would be super helpful. And I'll follow up the second question afterwards.

[Benjamin Maslen, executive]

Yes, sure. No, I mean, I think A&P, they did benefit from -- in Q2 from some large deliveries around the kind of anti-jamming technology that they have. And that probably will help Q3 as well. But I would say underlying that, there is strong double-digit growth across the board in agriculture and some of their other businesses. So yes, it helped a bit in Q2. It probably will help Q3. But the underlying growth rate is still very strong.

[Nay Soe Naing, analyst]

And then the large contract that you had won that you mentioned that will come through, is it starting from next year for the next 5 years?

[Benjamin Maslen, executive]

Yes, that's right, yes.

[Nay Soe Naing, analyst]

Perfect. And last question is on the cost program that you've announced today. So with that in mind, I know that we've got a Capital Markets Day coming up later in the year. But how should we think about the EBIT margin target, the mid-term EBIT margin target that you have set previously, over 31% by 2026, I believe? Are we likely see an upgrade on that number?

[Paolo Guglielmini, executive]

Yes, I mean, as we discussed, look, there's going to be a -- and in fact, in terms of margin improvement, there's going to be the opportunity to invest also a portion of those savings into innovation and growth, both technology and growth markets. We will see in December. So we have a good, strong set of targets that are already out there. And we'll discuss in London how do we look at the future and if we should think of any change.

[Operator]

We are now taking the next question. And the next question, from Erik Golrang from SEB.

[Erik Golrang, analyst]

I have three questions. First one on the savings program, any reason to expect that you don't keep more or less all of that? Or do you think you'd have to give some of that away to customers or if there's a meaningful area that you could see costs offsetting it? And then secondly, on the -- I didn't fully get you on the Mineral Resources contract. What was the support to second quarter organic sales growth from that to the extent there was any? Or is that all to come?

And then thirdly, and maybe I'm repeating a question already asked here, but on the critique and the Divergent transaction specifically, [indiscernible] by the book in terms of disclosure and everything, should Greenbridge and Hexagon really be invested in the same assets?

[Benjamin Maslen, executive]

I'll take the Mineral Resources one just because it follows on from the last question. So there was no contribution to second quarter revenues from that project. This project will run for 5 years starting in early 2024, so no contribution as yet.

[Paolo Guglielmini, executive]

And then what I would say on the savings program, Erik, we plan to keep as much as possible the value that we're going to create through these initiatives. And we have very strong line of sight. And we're going to get cracking with the program already in August.

And then yes, when it comes to Divergent, again once more, I mean, the timeline of our involvement with Divergent is relatively clear. So we've invested in December 2022. We thought that EUR 100 million was an appropriate level of investment that gives us sort of skin in the game, that gives us the opportunity also to have an influence on the innovation road map of Divergent and possibly look at opportunities to monetize some of the technologies that we might be able to jointly create.

Again, Greenbridge is -- has decided to make an investment for potentially different reasons. But as a shareholder, I would think that having more skin in the game from the Chairman in this transaction can only be seen as positively. If there's a governance aspect to this, I'm sure the Board will come back and clarify further.

[Operator]

We are now taking the next question. And the next question, from Toby Ogg from JPMorgan.

[Toby Ogg, analyst]

So just following up on the prior questions around the short report. Appreciate comments at the beginning, and you stated there that you fundamentally disagree with the conclusions. Just more broadly though, could you just give us a little bit of a sense for what some of the factual inaccuracies are? Any additional color there would be really helpful. And then just on the analysis around the organic growth, the report obviously suggests that organic growth is overstated. So again, kind of any thoughts on this specific topic would be really helpful.

[Benjamin Maslen, executive]

This is probably not the forum to go through in detail. So we are going to come back with a detailed answer on the report. From our perspective, the analysis of organic growth is an analysis of M&A basically, right, in terms of the bridge. And there, I think we report the contribution to growth from M&A every quarter. We report a structure for 12 months. And then it becomes organic. And that's for all acquisitions, the same as every other company. And we've reported the revenues for every acquisition that we've made that we see as material. And for us, that is any acquisition with revenues over EUR 15 million. That's been either in the press release or in the annual report for the last 6, 7 years and beyond.

And for bigger deals, for things like EAM and ETQ, we've given you more information. We've given you the valuation, the purchase price of the acquisition. We've given you revenues. We've given you profitability that you can work out the multiples. So I think we've actually given quite a lot of information around that. That doesn't seem to be reflected in the short report. Now I'm not going to go into the kind of factual inaccuracies, we'll come back for that. But in our view, we fundamentally disagree with the report both in terms of the way it's been put together and its conclusions.

[Operator]

There are no further question at the moment. I will hand back to the management for closing remarks.

[Paolo Guglielmini, executive]

Yes. Thank you very much for spending the last hour with us. Again, we have very good momentum, and we want to -- and we think that the efficiency plan and the innovation initiatives that we have in motion will keep that going. So thank you very much. And we also look forward to seeing you, as many of you as possible, later in the year in London. So have a great summer. Thank you.

[Benjamin Maslen, executive]

Thank you.

[Operator]

And that concludes the conference for today. Thank you.