Hexagon AB

STO:HEXA B

Earnings Call Transcript 2019-Q2

[Operator]

Hello and welcome to the Q2 Report of Hexagon 2019. [Operator Instructions]. Today, I am pleased to present Ola Rollén. Please go ahead with your meeting.

[Ola Rollén, CEO, President & Director]

Thank you. And welcome, everyone, to this interim report for the second quarter of 2019. And if we start on Slide #4, the overview of the second quarter 2019. As previously reported early in July, we see organic growth of minus 1% in this quarter. Our recorded net sales growth is 4%, thanks to structure and FX. We saw solid growth in the quarter in most areas actually: Geosystems, 6% organic growth; PP&M, 3% on the back of very tough comps in the Q2 of 2018. But Manufacturing Intelligence recorded minus 7% organic growth, reflecting the weaker demand environment in China and especially in the electronics segment. Manufacturing Intelligence without China actually grew year-on-year organic growth, so the rest of the world was fine for Manufacturing Intelligence. And as expected and previously communicated, Safety & Infrastructure began to stabilize and we saw improvement in that division. Earnings and margins. Gross margin, excluding nonrecurring items, in the report, you have nonrecurring items in the gross margin amounting to EUR 9 million. But excluding those nonrecurring items, the margin was 63% versus 62% last year. And the EBIT margin was 24.5%. If we now move to Slide 5, overview continued, China in the second quarter. We saw a decline in the Chinese demand and it's on the back of geopolitical uncertainties on global trade, especially within the electronics or mobile phone segment in China. Electronics accounted for 4% of Hexagon Group sales in the second quarter of 2018 and it's now declined to below 1% in the second quarter of 2019. China accounted for 17% of sales in the second quarter of '18 and it's now down to 12% of sales in the second quarter of '19. And what's happening in the electronics segment is several factors impacting demand. We see customers restructuring their supply chain, moving capacity out of China. And we also see some suppliers faced with restricted access to foreign technology, which is hurting their overseas phase.The financial impact from this and savings is that we launched a restructuring program with proactive restructuring actions across the world to ensure that the company remains on track to meet the 2021 financial targets. We are reducing our global workforce by approximately 700 employees. We're charging the second quarter P&L with EUR 44.4 million, and this is expected to result in annualized savings of EUR 51 million with the full run rate achieved as from 2020. Slide 6, seasonality in profit. In spite of this weak Chinese development, Q2 was, as you can see from this graph, a strong quarter and Q2 should be a strong quarter. Moving onto Slide 7, key figures in the P&L statement. Sales amounted to EUR 976 million, which is 4% recorded minus 1% organic growth. Operating earnings EBIT1 amounted to EUR 239 million, which is 5% better than the corresponding period last year. And in spite of this Chinese decline, we managed to improve our EBIT margin slightly in the quarter. If we move to slide -- I think if we skip the 6-month numbers and go straight to Slide 9, cash flow. Cash flow from operations before changes in working capital and excluding taxes and interest grew by some 10%. And we see a pretty good cash flow throughout the quarter. And we had a cash conversion of 97%. And just to remind you, our target is 80% to 90%, but we're going to be above our target if the organic growth is negative. Working capital to sales, Slide 10. Working capital to sales was 12.5%. So we saw a continuous reduction in working capital to sales in the quarter, reflecting the changed business structure of Hexagon. Market development finally, if we move to Slide 12. The sales mix is actually pretty dramatic. This is usually a picture where we have various stable relationships. But as you can see, China drops from 17% in Q2 of '18 to 12% of global sales in Q2 of '19. If we look at contributors to growth, we saw strong growth, and I'm on Page 13, strong growth in South America, strong growth in Asia, excluding China, and we see a trend where manufacturers are starting to build capacity in countries like Vietnam, Indonesia and Malaysia and that is benefiting Asia, excluding China. Eastern Europe, Middle East and Africa grew well as well. And we have pretty decent growth in Western Europe. All major countries but for U.K. grew. North America is on the back of very tough comps for PP&M. PP&M had a perpetual software order amounting to EUR 12 million in Canada and United States this quarter last year, and they did not have the similar perpetual order this year, and that's why North America is down. The rest of the business is actually performing quite well in North America. And then we have China with minus 25% organic growth in the quarter. Moving on to Slide 14. This gives you an overview of the situation for various segments and geographic regions. I am not going to spend time on it now but you can review it and come back with questions later on. Moving to EMEA, Slide 15. As previously stated, Western Europe, decent growth, 5% organic growth, primarily driven by France and Germany, and we saw weakness in the construction sector in the U.K. in the second quarter. Double-digit growth in Russia and high single-digit growth in Eastern Europe, Middle East, mid-single-digit growth. Americas, Slide 16. North America, minus 1%, and this was on the back of this perpetual one-off order of EUR 12 million in Canada and United States for PP&M in the second quarter of last year but continued solid demand in infrastructure and construction. Geosystems had a good quarter in North America. And South America is growing very strongly in the quarter, strong double-digit growth. And it's 2 things that we see in the quarter in South America: we see strong growth for our solutions in the mining-related countries, the Andean countries. And we also see a continued recovery in the Brazilian economy. Asia finally, Slide 17. As previously stated, China recorded minus 25% organic growth, it's impacted by the increased geopolitical uncertainty on global trade, and it was felt most heavily within the electronics mobile phone business within the Manufacturing Intelligence division. Demand in automotive, infrastructure and construction, positioning solutions also declined somewhat. Power and energy grew, strong growth reported in China for power and energy. And as I commented before, we do see, well, right now it's small, but we do see a positive trend in countries like Vietnam, Malaysia and Indonesia, where a large handset manufacturer built out its capacity in Vietnam in the quarter. So all these countries, neighboring or being close to China in the Asia region, are benefiting from investments due to this geopolitical uncertainty. Japan and South Korea continue to record double-digit growth. Reporting segments, Slide 19, Industrial Enterprise Solutions. An organic growth of minus 4%, where MI had minus 7% but PP&M recorded plus 3% on the back of a very strong quarter in '18. Sales amounted to EUR 479 million and EBIT came in at roughly EUR 120 million and this is an EBIT margin of 24.9% compared to 25.2% this time last year. And the negative impact has obviously to do with MI and China. Geospatial Enterprise Solutions, Slide 20. Organic growth of 3%. Geosystems, very strong growth, 6% on the back of newly released products and technologies. And I think it's worthwhile mentioning the RTC360, our new scanner, which had record sales in the quarter. SI is stabilizing and improving, so for SI we saw minus 4% organic growth, and we believe it's going to recover further, and we are expecting growth in the second half of this year for that business. Positioning, 0% organic growth, where we saw a weaker demand in the surveying market, primarily in China. Sales amounted to EUR 497 million and EBIT EUR 127 million, which corresponds to an operating margin improvement of 0.5%. Moving on to Slide 21. The gross margin, excluding the EUR 9 million charged in NRI in the quarter is now 63% on a 12-month rolling basis and the operating margin came in at 25%, on Page 22. And if we move on to orders and product releases in the quarter, we start on Slide 24. AMendate is an acquisition of a German-based provider of simulation software solutions and it supports the generation and optimization of designs for additive manufacturing and engineering simulation. This can be consolidated into the software division of MI. Slide 25. We're speeding the transition from document-based workflows to digital workflows by finding a partnership with Aspen Technology, a U.S.-based technology company. And we align AspenTech’s conceptual, basic engineering and cost estimations with Hexagon's detailed engineering suite. And the result would be a data driven centric -- data-centric workflow that supports the flow of digital project information from the conceptual phase into what's called front-end engineering design. Slide 26. In connection to HxGN LIVE, we introduced the second member of the new BLK family from Leica, the Leica BLK2GO. And this takes the Leica 3D that we launched a couple of years ago and makes it moveable so that you can actually walk through an object, a construction site or whatever it is you want to capture in 3D scans. So it allows you to have motion but still get really good quality point clouds and we see a wide range of applications for this new product, like visual effects in media and entertainment, the design of industries or 3D documentation of already existing plants and architecture and so on. So this is a little revolution but it doesn't end there. So on Slide 27, we can provide -- we can present the third member of the new BLK family and that is 247 and it's a continuous 3D reality capture, stationary that eliminates the need for constant human monitoring of screens because here you're measuring with lasers and not with images, which is typical for, for example, security cameras. You can now geosense objects, you can look at objects that appear that wasn't there before. And combining this technology, this LiDAR-based technology with artificial intelligence, you can teach the camera to look for certain events or objects that it should react and send alarms to someone that reacts to that alarm. Both these 2 products will be commercially available as from -- no, sorry, the BLK2GO will be available as from the fourth quarter and BLK247 as from Q1 2020. Slide 28. Leica also launched the Leica DSX ground penetrating radar solution. And this will enable you to easily detect, map and visualize underground utilities. And you can combine that with your map so that you get a 3D representation, both above ground and below ground. Slide 29. We introduce the next-generation public safety software, which will help driving the growth for the SI division. It's -- HxGN OnCall is the name of the new suite of products that helps public safety agents of all sizes to achieve more agility and resilience through modernized capabilities and a modernized structure. Now OnCall can be deployed on-premise or in the cloud, so it's really up to the customer to configure and decide what modules and how large of an application they want. And this will enable Hexagon to address not only the really large police forces or rescue forces around the world but also smaller-sized forces. Slide 30. We launched a new advanced positioning system for automated 3D optical measurement on the factory floor. It's called LightRunner, and it's transforming the 3D optical measurement process by speeding up surface data capture while simplifying setup and operation. You don't need object identification tags anymore, you can just shoot and project your optics. And it's a patented solution, and we're launching it in the fourth quarter. Slide 31. Open autonomy pilot in Peoria. This is a new level of research for autonomous vehicles where we have created a route through downtown Peoria in United States to refine autonomous capabilities for partners and other research organizations in connection to autonomous driving. We're bringing several cross-divisional technologies together in this test flight in Peoria. Slide 32. We're launching GAJT-410ML and this is the latest addition to the gadget portfolio of Anti-Jam Technology. It was space-constrained module, which worked very well on military land applications where space is an issue and it protects, again, both intentional jamming and accidental interference of your communications and positioning systems.Slide 33. We've merged our technologies from surveying with our mining technologies in the new HxGN GeoMonitoring Hub, which provides an integrated visualization and analysis platform for mining, bringing together the total positioning station sensors, the scanning sensors with our mining software. And we've created one integrated solution for the mining world. Slide 34. We got an order from Deutsche Bahn, the German railway, and they choose Hexagon's Data-as-a-Service solution to deliver a Germany-wide cadastral map to support planning and operations in connection to their rail operations.Slide 35. Iowa, Department of Transportation in United States, selected Hexagon's documentation services for full-service documentation of 180 existing facilities with some 90-plus additional facilities scheduled for 2020. And what we're doing here is, we're offering services -- scanning services through our distribution channel, Multivista, using the BLK3D to scan. We're also using our drain -- our drone capabilities to do area mapping of those facilities. So we've reached the end of my presentation. In summary, on the final slide, we report 4% recorded growth, 1% negative organic growth. And despite a more uncertain global trade environment impacting parts of the business, we saw solid growth in Geosystems and PP&M on the back of tough comps. But Manufacturing Intelligence record a minus 7% organic growth, reflecting the weaker demand environment for MI in China. Hexagon also announced a proactive restructuring program to ensure that the company remains on track to meet its 2021 financial targets. And in spite of this, we continued our margin expansion and our profit growth. So with that, operator, I think we're ready to answer any questions there might be on the call.

[Operator]

[Operator Instructions] Our first question is from Adam Wood from Morgan Stanley.

[Adam Dennis Wood, European Technology Equity Analyst]

I've got 2, if I could. The first one is obviously around the handset business in China. It feels like this was kind of a very one-off geopolitical shock. And that -- you're suggesting in the rest of Asia, you're already seeing kind of build-out for orders coming through that you might think would compensate. So what's your view around this being relatively one-off and short lived and with the demand you start to see coming back in other regions? The fact that you're restructuring regions aggressively suggests that maybe you don't think that or maybe there are other areas in the business that you're nervous about. So if you just give a few thoughts around how quickly things could bounce back? Why you're doing the restructuring now rather than waiting to see how things evolve? That would be really useful. And then maybe just secondly, and again, it kind of comes to performance if things are a little bit tougher. I think in November last year one of the launches you spoke in quite a bit of detail around how the portfolio is much more based today around value selling and it wasn't really volume linked. Again, is there any reason to change that view today? Is there any kind of metrics you can give us around the recurring software revenue percentages just to help us understand how much of that portfolio is tied to value that would be more protected if things were little bit slower in the macro?

[Ola Rollén, CEO, President & Director]

Well, I need to [ chop it up ] in probably 2 questions. So if we start with China, no one really knows how long this is going to take. But as you pointed out, we do see a trend where manufacturers are moving out of China that are [indiscernible] operations in neighboring countries. For China and for electronics, we don't see any sequential worsening because frankly speaking, it was worth enough of the work in the second quarter. So we don't think sequentially, it's going to be any worse in the third quarter. Year-on-year though, you're going to have a similar impact in the third quarter as in the second quarter, so that's important to remember. Why we're doing the restructuring? I mean I think what we're doing is what you -- we do see a worsening general situation in the global economy on the back of these failing trade talks. So with China in the second quarter, and no one knows really what's going to happen in the second half of this year. But I don't think any single end market is getting any better, if I put it like that, except for maybe public safety. So I don't know if that's enough for you on your first question?

[Adam Dennis Wood, European Technology Equity Analyst]

Absolutely. That's very helpful.

[Ola Rollén, CEO, President & Director]

So could you take the second half of your question again?

[Adam Dennis Wood, European Technology Equity Analyst]

Yes, sure. I mean it was just -- I remember a lunch we had in London last year, you were going through the portfolio and showing how the sales were much more linked to product quality. And basically the value that you deliver to customers is much less focused on the volumes that they are selling, so much less likely to be canceled through a recession. I wonder if -- what's happening in the minutes in that business in particular, but more generally would it made you change your view at all on that? And then if there's any metrics you can give us in terms of percentage of revenues that's more linked to that? I don't know whether it's giving us recurring software helps, just things like that. So just give us more of a feel as things slow, how protected the portfolio is given it's very different than where you were going into the last cycle, if this is a cycle, and as you say, who knows.

[Ola Rollén, CEO, President & Director]

No. I mean we haven't changed our view. So it's still linked to new design and new products. But I mean now where we're talking a political event, where the OEMs were seeing their volumes drop significantly overnight. And that, of course, makes them have to take on product development as well and they cut dual expenses. So it's hard to see how this is going to play out. But it was a bit of a hard-on stop in June.

[Operator]

And our next question is from Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, Research Analyst]

Coming back to China, you also mentioned this restricted technology access as an obstacle. Can you comment if this is related only to one customer like Huawei and that can this potentially be sold in short notice? I think we see in delays in affordable handset, et cetera, from Huawei and also question on your 700 employees cut down here in '19 to be on the safe side for 2021 financial targets. How should we consider the impact on the net sales from these measures?

[Ola Rollén, CEO, President & Director]

I don't think it's going to impact net sales. I think the net sales impact is already seen. And as I stated before, it's a very fluid situation out there and no one knows what's going to happen in the second half and how this prolonged stalemate between the 2 largest economies in the world, it's going to play out on certain sectors of the global economy. You have to talk someone smarter than me to answer that. But yes. I don't know what I should answer you really. But I can't comment on individual accounts. It's a more complicated situation than just Chinese manufacturers getting access to U.S. technology. It's actually a bit the other way around as well on certain components. So everyone is getting out right now no matter what nationality they have.

[Daniel Djurberg, Research Analyst]

Okay. May I just have a follow-up on the Process, Power & Marine and obviously very strong underlying growth in the quarter given the very strong Q2 '18. You mentioned the LNG Canada and the -- of the EUR 12 million order in last year. What -- can you say anything about the pipeline for similar orders? Or is this a huge challenge in Canada potential behind us?

[Ola Rollén, CEO, President & Director]

I think that we're fairly optimistic about PP&M going forward into the second half. So I think the most geopolitical sensitive business we got [indiscernible] in manufacturing where people tend to pull the brakes very early on, and then you have political decisions around infrastructure decisions as well, which later on could have an impact on our surveying construction business. But it's still early days, and we don't know. But if you look at the PP&M and the SI businesses, I think, right now, we're probably a bit more comfortable with growth in those areas.

[Operator]

And our next question is from Stacy Pollard from JPMorgan.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

I was hoping to dig in a little bit on North America. You talked about weakness in energy and power as well as automotive. Maybe you could talk about which product sets are being hit there. And of course, you talked about the EUR 12 million perpetual order on PP&M but of course, overall PP&M grew. But yes, just trying to dig in to understand the minus 1% for the region? Second question, maybe I'll follow-up after.

[Ola Rollén, CEO, President & Director]

Yes, it makes this much easier to answer. No. I mean North America isn't very weak if you back out the EUR 12 million perpetual order that we had this time last year. So then it's actually growing. And I think it's not weakness in the petrochemical segment, it's just that we couldn't beat a very tough comp in that region this year around.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

And the automotive?

[Ola Rollén, CEO, President & Director]

Automotive, I think, is a global phenomenon, where we do see slower growth rates, both in Europe, North America and Asia outside China.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

And then the follow-up was on restructuring, again, sorry to be the third person asking, but just the 700 employees, how many came from China and what other divisions were affected?

[Ola Rollén, CEO, President & Director]

That was across the board. So we're just safeguarding our margins. And I don't know if you should use layman terminology but if you're out on the ocean and you reach your top sails because you don't know what's going to happen. So that's how you should view this restructuring.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

So not particularly focused on China, just completely across the board?

[Ola Rollén, CEO, President & Director]

No. 1/3, a bit less than 1/3 came from China. But China is a fairly well-run organization or ready assets with a really good EBIT margin. So we were restructuring other regions as well.

[Operator]

And our next question is from Mikael Laséen from Carnegie.

[Mikael Laséen]

Yes, I have a question regarding Asia and Geospatial development and it was a decline of 6%, I think. Can you explain this decline? Because Asia seems to be growing. So how much was China down for that segment?

[Ola Rollén, CEO, President & Director]

It's more or less all linked to China. And we've seen, it's not that great as the electronics' decline but we've seen reduced activity in these large infrastructural projects like the Silk Road, for example, that has impacted our infrastructure and surveying business adversely in the quarter.

[Mikael Laséen]

And how much -- so how is the exposure there? How much of Asia is China and how much is rest of Asia?

[Ola Rollén, CEO, President & Director]

Oh, I don't know from top of my head. I mean it's not like MI. The Geospatial have a much more diversified exposure, where Japan, Korea, Australia are large markets as well. Can we come back on that because I don't know, from top of my head, how big China is.

[Mikael Laséen]

Yes, of course. But I was a bit surprised by the weakness in China because it must be down quite a lot because it's more broad based, it's 17% of GES segment?

[Ola Rollén, CEO, President & Director]

No, absolutely. And it's hard to speculate. I mean I don't know for sure what the Chinese government's balance sheet looked like. But it's a huge commitment these large infrastructural projects, and maybe they've been cutting back on that. I don't know.

[Mikael Laséen]

Okay. So in total, do you expect -- you mentioned that you expect the same or similar decline in Q3, maybe Q4 in China. Is that the same type of weakness across all end markets? So it's not only electronics, it's infrastructure?

[Ola Rollén, CEO, President & Director]

No. It's primarily electronics but the -- most of our end markets have weakened in the quarter, not just dramatically as electronics. So we do see a broader weakening in China and the best forecast we can do really is that sequentially, we don't expect it to get worse but year-on-year, we think a similar trend in Q3. And then Q4 maybe slightly easier comps and the earliest we could return to growth would be the first half of 2020 in China. And that's what we're working on.

[Mikael Laséen]

Yes, okay. But do you expect the total group to grow year-on-year in Q3, Q4?

[Ola Rollén, CEO, President & Director]

We'll see. I think right now, we -- China is such a big impact on the group. It depends on how the demand develops in the other regions, really.

[Operator]

And our next question is from Mattias Holmberg from DNB Markets.

[Mattias Holmberg, Analyst]

Sorry to get back to China again. And my question was partially answered right now but could you still again please help us understand a bit because from how I read your report now compared to what was written in the press release with the profit warning, it seems like the slowdown in China is a bit more broad based, i.e., not just impacting the electronics business. So if you could just help us understand a bit how much of the 25% decline was related to electronics and how much was driven, sort of, by these other verticals, where you saw some softer demand? And also, as a follow-up on that, could you just help us between how big is China of the total MI division?

[Ola Rollén, CEO, President & Director]

I mean we said mostly China electronics. So mostly for me would be 80%, 90% of the total decline. So that is the segment that dramatically has changed. But you do see an impact in other regions. And as I pointed out, in infrastructure we do see a slowdown in spending in connection to large-scale projects.

[Mattias Holmberg, Analyst]

And do you have an indication of how big China is of MI?

[Ola Rollén, CEO, President & Director]

Of MI? I don't know if we've disclosed that but it's by far the largest market for MI. Some quarters, it's been up to 40% of sales.

[Operator]

And our next question is from Sven Merkt from Barclays.

[Sven Denis Merkt, Equity Research Analyst]

Just one quick follow-up on China. Obviously, some of the manufacturer are now looking to relocate outside China. Are you actively working with this customer? And then secondly, could you give us an update on SMART Build? When do you expect the product to come out of beta and how big could this product be for you in a couple of years?

[Ola Rollén, CEO, President & Director]

No, we are actively working. It's the same customers that we encounter in China as in Vietnam, for example. So we are actively working in their relocation of capacity. So we'll see how that will pan out in the quarters to come. And Smart Build will -- was planned to be released in the third quarter from its beta mode. But we've now had requests from our beta customer to add things to this scope, which means that we're going to keep it in beta until year-end and then release it in -- by the end of the fourth quarter. We believe that this could be a really good product. And if you combine it with the development that you're beginning to see in Geosystems with the BLK series, where you will have portable scanners that can report back to this platform software on updates. We think that ecosystem could be one of the largest products for Hexagon in a few years' time, not being specific on years.

[Sven Denis Merkt, Equity Research Analyst]

And maybe just quick follow-up. Who do you see as your closest competitor for Smart Build?

[Ola Rollén, CEO, President & Director]

We don't see a competitor because you have software competitors just focusing on BIM or creating a software model. And then you have competitors making sensors, scanners and layout tool. But we haven't really seen anyone combining the 2 and create a workflow solution.

[Operator]

And our next question is from Erik Golrang from SEB.

[Erik Golrang, Analyst]

My question's been answered actually. So thank you.

[Operator]

And the next question is from Alexander Virgo from Bank of America.

[Alexander Stuart Virgo, Director]

I wonder if you could talk a little bit about 2 things: On the first one, and it's a slightly esoteric question, but obviously, the scale of the decline in June took you a little bit by surprise but cutting headcount by that much must have been at least in the back of your mind. So would you've done the savings initiative anyway exclusive of this deterioration in electronics, just as a function of how you see the next, kind of 12 months or the prognosis for the next 12 to 18 months and the -- in the context of the 2021 targets?

[Ola Rollén, CEO, President & Director]

I guess that's a fair question. And we've seen -- and we've, of course, we have been expecting weakening in the global economy for 2 years. So I would be lying if I didn't say that we had prepared the cut back already a year ago. This economy has been very strong indeed, as we all know. We've seen 10 years of unprecedented growth in the global economy. And all great things come to an end. So the Chinese decline took us by surprise because it was so distinct and it was one segment where orders that we were expecting simply didn't materialize in June. The cutbacks would probably have happened anyway.

[Alexander Stuart Virgo, Director]

Right, right. Okay, that's helpful. And then the second one, just on, I know you don't always quantify this explicitly, but product contribution -- new product contribution to organic growth, I guess, particularly in GES or as a mitigant in the context of IES. Normally, it's a much bigger thing for Q3 and even Q4, I suppose, is when you typically see the biggest impact because when you launch the new product portfolio. But RTC360 has obviously been around for a little bit longer than that. So I just wondered, if you could talk a little bit about the contribution from new products to organic growth in this current quarter, and obviously, as we look forward to the next couple.

[Ola Rollén, CEO, President & Director]

It's a bit more than 2% in the quarter. And RTC360 is really sticky product. And you're absolutely right, it's not brand new but it's gaining traction everywhere. And I think it's the first product in a family of products where you can move around, capture data, ask the product itself, navigate in the geospatial space you want to capture. So it's a very clever development.

[Alexander Stuart Virgo, Director]

And so that's 2% at the group level or 2% in GES?

[Ola Rollén, CEO, President & Director]

2% on group level.

[Alexander Stuart Virgo, Director]

Great, okay. And that's something that you'd expect to carry on through the rest of the year, notwithstanding the underlying market development, of course?

[Ola Rollén, CEO, President & Director]

I think that we're going to see continuous traction in the third quarter. The third quarter is going to be a tough quarter for new product because we really don't launch this year's new product until Q4. And RTC360 is not a new product in the third quarter.

[Operator]

And our next question is from Markus Almerud from Kepler Cheuvreux.

[Markus A. Almerud, Senior Research Analyst]

A couple of questions. Just a follow-up on China electronics. Could you just help us with what is the product -- what is the customer mix here? So how much is foreign producers and how much is it domestic roughly? If you can help us with that, that will be very helpful.

[Ola Rollén, CEO, President & Director]

I can't say that. We are very restricted on commenting on these accounts. So -- but I can only state that it's both foreign and domestic brands that we work with. There isn't a single OEM in the mobile phone market that we don't work with so.

[Markus A. Almerud, Senior Research Analyst]

Okay. Okay, fair enough. Then my second question is on the BLK family. So first of all, just a little bit of the -- what kind of response have you got on new product? Have you launched that HxGN LIVE? And then also, is it possible to say what kind of annual sales you have at the moment for the family as a whole, for the BLK family? And also, what is the price for BLK2GO?

[Ola Rollén, CEO, President & Director]

I don't think we've -- did we announce the price? I can't remember. It's slightly more expensive than the BLK360, which is $16,000 because it's got a bit more technology in it since you can move around. But I -- now I don't -- should say your question because I might be wrong if you want to go out and want one. We don't disclose how much the sales are annualized for this new family but it's been a success. And the reception on the BLK2GO and also the BLK247 has been fantastic. I mean it's what people have been looking for because you have a lot of setup time with the traditional scanners, which needs to be stationary. And same compared that too that you can walk through a plant or a premises that you want to document in a normal walking pace and you capture all aspects about it. So it's a small revolution really, and people are really excited. I have to say though since business and earning correlate, don't expect deliveries in Q3, we'll start delivering in Q4.

[Markus A. Almerud, Senior Research Analyst]

And so just one follow-up on the BLK2GO and also I guess, the BLK247. So who is the typical customer of this product?

[Ola Rollén, CEO, President & Director]

The BLK2GO will have anything from construction companies, foreman, layout managers, architects. We also have discussions with the media industry, where you have entertainment, gaming, film productions and so on. The BLK247 is installation, large industrial sites where -- or large offices where -- or even subway stations and things where you want public safety and you want constant monitoring of what's going on.

[Markus A. Almerud, Senior Research Analyst]

Okay. Okay, perfect. And then finally, if I can just ask on SI, which is now recovering. So if you can just shortly say what kind of steps you've taken to get back on SI?

[Ola Rollén, CEO, President & Director]

We've worked really hard in the first and the second quarter to erase all complaints in previous installations in the product that we launched last year. And now with the new launch of OnCall, we have a much easier installation process where we can remotely install software at the customers' premises. So the cost and the -- the complication of installing a large-scale system is going to go down. I think we have time for one final question, if there is one.

[Operator]

And the next question is from Gal Munda from Berenberg.

[Unknown Analyst]

This is Francois on for Gal. We were wondering is it possible for you to give us a little bit more color on what the driver of the weakness was in the electronics business in China? Was it just a few key customers being restricted or was it more of a broad-based slowdown among many of your Chinese customers?

[Ola Rollén, CEO, President & Director]

Well, if you count the number of hands that manufactures globally, it's, of course, a small number of companies. So without disclosing any names, I think that's the best answer I can give you.

[Unknown Analyst]

And just one follow-up. Could you give us an indication on what your software business is growing out versus hardware? Is it possible to give us a split? And do you find the software as more defensive in terms of growth and not just in terms of total revenues?

[Ola Rollén, CEO, President & Director]

No, not really. I mean in the industrial business, our software is obviously growing faster than the hardware this quarter. But having said that, if you look at the BLK family that we're now launching with Geosystems, it's outgrowing all our other products.

[Operator]

Okay. I'll now hand over it back to the speakers.

[Ola Rollén, CEO, President & Director]

Thank you, everyone, for listening in. And we do this again next quarter. Bye.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.