Thank you. Welcome to this second quarter interim report for 2020. If we turn to slide four in the presentation. Overview of the second quarter. Recorded sales decreased by 8% in the quarter, and organic growth was -10%. We saw our software business developing well with solid organic growth across the software portfolios. Safety and Infrastructure and PPM recorded 14% and 1% organic growth respectively. Geosystems and Manufacturing Intelligence were hit hard by the shutdowns in primarily North America and Europe, and recorded -16% and -14% organic growth. We still post a record second quarter EBIT margin of 21.3%, up against 24.5% in the second quarter of 2019. This was supported by continuous growth in software, which gave us a richer mix and a strong focus on cost control throughout the quarter.
The gross margin, the reported gross margin, that should be, is 61.4% in the quarter versus 62.1% for the corresponding quarter of last year. We've booked EUR 13 million in NRI in the gross margin or gross profit and EUR 9 million last year. The gross numbers or the real operational numbers should really be 62.9% gross margin versus 63% the same quarter of last year. As previously announced, we implement our long-term cost-saving measures to ensure continued stability of the company's financial performance, and they are expected to offset any reversal of the short-term savings that we've seen throughout the second quarter. If we go to slide five, just a reminder of the seasonal patterns in the Hexagon earnings. Q2 is a strong quarter, Q4 is our strongest quarter, and Q1, Q3 are weaker than Q2 and Q4. Slide six, looking at the P&L statement.
Net sales amounted to EUR 896.6 million, and operating earnings, EBIT1 amounted to EUR 226.5 million, which is a 5% decrease over the same period last year. As previously stated, the operating margin is improved by 0.8%. Slide seven is just the six months numbers, we're now at EUR 1,787 million in sales for the first half year. Looking at cash flow. Cash flow from operations before changes in working capital were roughly the same as in the second quarter of 2019. We do see a huge release in working capital, EUR 55.9 million, bringing cash flow from operations to EUR 344.2 million, which actually is an increase of 15% over the same period last year, in spite of weaker profits. We can also see that we pulled the brakes on investments in both tangible and intangible assets, why the operating cash flow before non-recurring items is even stronger.
It's an increase by roughly 34% over the same period last year. The cash conversion is 127%. Normally, the target should be a cash conversion of 80%-90% when the company is growing. Slide nine, working capital to sales. We report 9.6% working capital to sales. It's the first time we have a working capital which amounts to less than 10% of sales. Market development. If we go to slide 11, we can see the sales mix, and the comparison to the corresponding quarter of last year. I think it's two things that stick out, and that is the recovery of China. China was 12% this time last year. It's now back to 15%. We also see a decline, a sharp decline in Western Europe, 27% versus 31% the same period last year. Moving to slide 12, an overview, growth region.
China, 16% organic growth over the same period last year. South America is reporting growth. North America, Western Europe, and Asia, excluding China and Eastern Europe, Middle East, Africa, all decline in the quarter. I leave slide 13 for your reference, but it's the growth and the trend per business segment, per geographic region across the world in the second quarter. Now moving to EMEA, we record 19% negative organic growth in EMEA in the quarter, and it's heavily impacted by the COVID-19 related lockdowns that we saw in large markets from March and onwards. Germany, France, U.K., Spain, Italy, parts of Scandinavia were all hit hard by these lockdowns. Solid growth in spite of the lockdowns in the software portfolios, and we also saw growth in safety and infrastructure in Western Europe. Americas, slide 15.
Similar pattern, not as hard hit as Western Europe, but we record -19% organic growth, and it's related to, once again, lockdowns in societies. We saw favorable growth in our power and energy and positioning segments. South America, in spite of lockdowns in many countries, we saw single-digit organic growth, and it's the mining and the public safety segments that are growing in South America. Moving on to slide 16, Asia. China recovered with a bang, 16% organic growth, strong recovery across all segments. We see a go back to work trend, which is very powerful and very strong in China. South Korea and Japan recorded low single-digit growth in spite of the COVID-19 related slowdown in the respective economies of the two countries. The rest of Asia and Southeast Asia declined. India was hit hard by lockdowns as well. Reporting segments.
If we move to slide 18, Geospatial Enterprise Solutions, organic growth -9%. Geosystems was hit hardest, especially in Europe and the U.S. SI recorded 14% organic growth, and it's supported by the recent new products that we've launched, like OnCall and GEP. Autonomy and Positioning, -8% organic growth, was positively impacted by solid demand in defense and agriculture. Sales amount to EUR 457.6 million, which corresponds to an operating margin of 26%, half a percent improvement over the same period last year. Moving to Industrial Enterprise Solutions, slide 19. Reports an organic growth of -10%. MI hit hardest, largely driven by the lockdowns across Europe and North American manufacturing industries. China reported solid organic growth and mainly driven by a recovery in the electronics segment. PP&M, 1% organic growth. Good development primarily in the AEC markets.
Finally, the segment reports EUR 439 million in sales and an operating margin of 25.3%. Moving on to slide 20. The gross margin is on a rolling 12-month average and cleaned out for any NRI items, 63%, which is the same as this time last year. The EBIT margin is making a recovery thanks to the very strong margin we report in this quarter, and it's at 25% for the rolling 12-month period. If we move to orders and product releases on slide 23, we announced the acquisition of COWI, and we've acquired and carved out their mapping business, which is being merged with the HxGN Content Program. It's going to strengthen our content services in Europe. Slide 24, we also announced the acquisition of Romax Technology, which is a computer-aided engineering software company that does simulation for rotating and electric machinery.
This is going to be important for electric vehicles, wind turbine powertrains, and increasing the battery range, basically, for electric vehicles. Hexagon and Proudfoot on slide 25 aim at zero harm in mining. We are combining our resources to create a safety-driven solution for mining that will avoid and minimize to a minimum the harm that employees in mining are experiencing. Slide 26, also a mining-related novelty. We now connect our slope stability monitoring with our mine operations, which means that if there is a risk for landslide in a mine, the system will report to all vehicles nearby and then create no-go zones. Slide 27, leveraging artificial intelligence with library of high accuracy airborne data. We are now using artificial intelligence to automatically extract features in the data and automate the workflows. We can now detect buildings, roads, railways, and so on, by using these machine learning algorithms.
Slide 28, we're also using AI to identify and measure rail structures, and we're deploying this with major rail networks across the world. Slide 29. One of these networks is German Rail. Deutsche Bahn has selected our mapping software to create a platform for asset management. Slide 30. BLK2GO was launched earlier this year, and we're now teaming up with several service providers that build their business around BLK2GO. In this case, it's Zibber B.V., which is servicing real estate agents providing house dimensions in Holland. They use the BLK2GO to document houses. They issue hundreds of reports per week and have seen a huge improvement in productivity using the BLK2GO. Slide 31, more about the BLK series. We've earned multiple awards, product and design awards in the quarter for our two new solutions, the security camera, BLK247, and the said platform, BLK2GO.
Slide 32, we have a series of public safety orders that we were awarded in the quarter. Rhineland, Santa Clara County in California, and Alberta in Canada have standardized on Hexagon's dispatch solutions. Slide 33. We are also looking at expanding the market for so-called precision agriculture technology, where our new product, HxGN AgrOn autosteering, has been deployed in Brazil. Slide 34, we are looking at helping SOCAR in Turkey, streamlining their petrochemical operations in their Turkey sites by using Smart Materials, and other products from the SmartPlant suite of software products. Slide 35. We also have seen a lot of digital transformation in China's process industry. We have delivered our Hexagon or PPM, Smart 3D and SmartPlant products to Shandong, to Zhongke in Guangdong, and in Inner Mongolia as well, to another chemical processing plant.
Finally, if we summarize Q2 reports, record earnings of 25.3% in spite of the 10% organic decline in top line. Solid growth for our software businesses in the quarter, and our hardware businesses were more harmed by the shutdowns that we saw primarily in Western Europe and North America. We're now full speed implementing our long-term cost savings measures that we previously announced to ensure continued stability and profitability improvement. With that, we've come to the end of the presentation, and we're now ready to start our Q&A session.
Operator, if there are any questions, we are ready to answer.
Yes. If you do wish to ask a question, please press zero and one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. There will be a brief pause now while questions are being registered. The first question is from Stacy Pollard of JP Morgan. Your line is now open.
Thank you for taking my questions. Ola, a big-picture question first, sort of for the group, how was June versus April? How did the Q2 progress, and how do you view developments as we go into H2? I know that can be difficult, but just kind of seeing what your pattern might be. Then two specific ones, maybe demand environment in automotive, both for metrology and for the automated driving, how that's progressing. Then secondly, second sub-question, I guess. You've spoken of BLK247 and BLK2GO. Do you think those new products are enough to push that division back into growth into the second half? Is there just still an overlay of macroeconomic conservatism that might offset that?
June was better than April. June must be better than April simply because in April, most major markets in Western Europe and North America were in lockdown, whilst some of them were actually unlocked in June. Technically, you can't deliver products to a company that is in lockdown. That wasn't the case in June. It's too early to say that it's a recovery. June technically should be stronger than April. Moving on to automotive, we've seen weak demand throughout the quarter in automotive, but as the automotive plants went back to starting producing cars, of course, our activity picked up as well. In China, we saw a strong recovery for automotive in the quarter, primarily in the electric segment.
When it comes to autonomous vehicles, yes, most of the R&D-related activities were shut down and put on hold. We hope they will gradually now come back. BLK is definitely going to be a driver for Geosystems in the second half. If it's enough to return to growth, that's too early to answer, really.
Maybe just a quick follow-up. I probably didn't ask that first question very well. Can you give us more color on June specifically? In the sense of, I don't even know if you have a number for June, but were there any divisions that grew in June on a year-on-year basis that didn't grow for the quarter on a year-on-year basis? Does that make sense?
It does, but it's not very meaningful, because you're comparing two months with complete lockdown to a month where you actually saw customers opening up.
Sorry, I meant June this year versus last year, let's say.
We definitely saw growth in China. We saw growth in South America. We definitely saw growth in certain parts of the world, June-on-June.
Okay, no, that's useful. Thanks.
The next question is from Adam Wood of Morgan Stanley. Your line is now open.
Hi, good morning. Thanks so much for taking the question. I've got two, if I could, please. Maybe first of all, Ola, you're normally quite reticent to kind of call out what's going to happen in the future, but you're quite clear in the release this morning that you think you've seen the trough. Could you maybe just talk a little bit about what you're seeing in the business, whether it's pipeline recoveries in certain regions that give you the confidence to make that statement in the release? Then maybe just secondly, specifically on free cash flow. It was a very impressive performance in the quarter. I think a lot of investors were nervous that customers would want longer payment terms, and that would hurt your working capital.
Is there any concerns as you go through the rest of the year that that working capital could reverse, or do you feel that's banked and we go back to a kind of more normal working capital cycle from here? Thank you.
First of all, the trough is, I mean, it's simply that we do not expect our organic growth to get worse. We might be wrong, but this is the view we got right now. Now it's all about the road to recovery and how quickly the global economy can recover from where we're at right now. We believe our organic growth to improve quarter-on-quarter when we do return to growth. That is still a question that we have to come back to in the third quarter when we report that. Regarding the free cash flow, I really don't see any abnormal behavior in the payments of goods. I think this is just a function of more software and a combination of a harsh slowdown in the hardware business, the cash flow.
It might moderate a little bit then as hardware comes back as a mix in the portfolio?
It could. I mean, you typically give longer credit terms while you have an upfront payment for software. Is it dramatic? I don't know, but maybe we can't keep 9.8% working capital to save as we're seeing growth coming back.
Okay. That's helpful. Thank you.
Thank you.
The next question is from Mikael Laséen of Carnegie. Your line is now open.
Yes, here, Carnegie. Just wondering about the short-term savings effect you have in Q2. Is it possible to quantify that in any way?
It is. We believe the short-term savings are around EUR 25 million-EUR 35 million.
Great. Can you please explain what you mean by long-term cost savings, offsetting this? How much short-term savings can you have now continuing to have in the short term? How much long-term cost effect can you extract in the second half?
That's a very difficult question. We've saved an enormous amount of money on reducing travel. That has been extraordinary in this quarter. We haven't saved that much on the announced layoffs, reduction in personnel. We think that from now on, we're going to travel a bit more, but we're also going to see reduced payroll, which we might not have seen in the second quarter. That's what's going to happen.
Got it. The second question is about the seasonal pattern. You highlighted again here, as usual, that Q3 is typically weaker than Q2, but do you expect this also this year? Q2 is a bit special with lockdowns and just that should mean that Q3 should be better than Q2, right?
Yeah. I predict that we will know that on the 25th of October, which I believe is our Q3 release.
Okay. Will see. Thanks.
Thanks.
The next question is from Sven Merkt of 4Cast. Please go ahead.
Yeah, good morning. Thank you for taking my questions. Maybe if I could start with the software side. You obviously had a very good and resilient quarter. Could you remind us what your current mix of software deployment models is? I think OnCall is a SaaS solution, so that's probably recurring, but what about the overall division and what about in PPM? I just want to get a sense of what is recurring and what was recognized up front. I have a follow-up question.
We got 3 types of products at Hexagon. We got pure industrial software, which is SI, PPM, geospatial products, and so on. We have a combined offering where we embed software products into hardware, and then we have pure hardware. The pure software business amounted to EUR 337 million out of the EUR 897 million. Pure-pure was almost 40%. That grew in the quarter, and I would say that, this is just my guess from top of my head, but I would say 80% of that was recurring revenue.
Okay. The rest was up front. A second question just on the AEC design software. You had obviously good growth in there again. Could you comment where this demand is coming from, i.e., which region, if it was residential or infrastructure, and maybe also who you're winning again from a competitive perspective?
We acquired a company called Bricsys that makes design software, CAD, for the construction industry in 2018. We're now launching that product offering through our PPM distribution channel across the world. We actually see an uptick in the sales all over the world, in all regions for this software. That is now being prepared to be linked and connected to our costing and our project management software ecosystem and our Smart Build software that is about to be launched.
Is it probably fair that it's mainly coming from the infrastructure side rather than residential?
No, we don't know because if you sell to an architect, for example, we don't get to see what that architectural firm is working on. I don't think we have a view on what they're working on.
Okay. Thank you.
Thanks.
The next question is from Mohammed Moawalla of Goldman Sachs. Your line is now open.
Great. I have two questions. First, Ola, just circling back on the software growth. Could you give us a bit more color around that? Is that positive growth more in line with PPM for the aggregate group? Or was it a bit faster than that? Secondly, just on the shorter-term savings. Can you give us a sense of how much of those sort of EUR 25 million -EUR 35 million do you expect to spend back in the second half? To that extent, are you also looking to potentially start sort of reinvesting back in the business to stimulate growth above and beyond the macro? Thank you.
We start with the software growth, recorded growth in the pure software portfolio was around 5%. I think organic it was slightly lower because we had some small acquisitions, but it was stronger than the 1% we report in PPM. Regarding the second half, as I've previously stated, we're going to start traveling a bit more in the second half. It's a global company, and you need to travel to meet customers and colleagues. As we do that, we're going to see these more longer-term payroll-related savings kick in. I think it's a wash. We've previously stated that we're going to save in the range of EUR 125 million once the program is fully implemented, and that would correspond to EUR 31 million per quarter. Let's say we've saved EUR 25 million-EUR 30 million in Q2 on short-term issues.
Obviously, the long-term program is going to bridge that.
Great. Maybe if I can just come back to that low single-digit growth in software. Were there any particular product categories within the kind of non-PPM software portfolio that you would call out that are perhaps proving to be quite resilient and could sustain that growth?
Absolutely. I think our own core product, the new Dispatch software, is having a small success in the quarter. I also think MSC did well given the market performance, and I think that in our AEC segment, which is reported under PPM, we see solid growth.
Okay. That's very helpful. Thank you.
Thanks.
The next question is from Daniel Djurberg of Handelsbanken. Your line is now open.
Thank you for taking my question. Most questions answered. I missed the beginning. Out of the cost saving, you mentioned EUR 25 million-EUR 35 million seen in Q2. Was this in full due to COVID-19, or was it also including the cost savings? How much of it was temporary, so to say?
Most of it was temporary. We haven't seen much impact from the long-term savings program in the second quarter. That wasn't expected. It takes longer time to implement it.
Yeah.
Short-term savings was actually the consequence of people working from home, not traveling, saving on all normal expenses.
Perfect. If I may, another question on COVID-19 impact, perhaps a bit longer on sales and marketing. I guess, of course, it's tough to make HxGN LIVE. Will we see any impact of product launches for late 2020 or early 2021? We still, of course, have good traction with the BLK2GO and BLK247, RockSpot, et cetera. Should we be worried about next generation due to COVID-19?
No, we're a brave organization. We're actually kicked off the planning for HxGN LIVE 21. We're planning to physically hold HxGN LIVE in June of 2021. That's the plan at the moment, and hopefully the world will return to a more normal situation next year. That's the plan.
Yeah, let's hope for that. I have a last question, a bit hypothetical also. We have this increased tension between U.S. and China, and you obviously sell the software, Smart 3D to Shandong Petro, et cetera, and seems to go quite well in China. Do you see any risk, given how Europe and U.S. treat Huawei, for example, and any risk for retaliation, or that could hit also you and not only the network equipment providers? It's a bit hypothetical.
We haven't seen any retributions to our business yet. In a fluid political situation, you never know what's going to happen. Of course, we don't have a crystal ball on how this will evolve. We just have to mitigate and plan, perhaps. That's what we're doing.
Yeah. Okay. Thank you. Have a continuous great summer and good Q3, et cetera.
Thank you. You too.
The next question is from Bhavin Vithlani of RBC Capital Markets. Your line is now open.
Hi. Morning, and thanks for taking my questions. Three from me, if I could. Firstly, just on the new products pipeline, how are you thinking about new products? Do you think you'll delay? Do you think that's the right environment to be launching new products? I guess you could talk a bit about how the new BLK products are doing. The second one's on Geosystems specifically. I think that's a business where you use distributors a bit more than the rest of the business. How do you think they're feeling about the world and the confidence in the economy? I guess it feels like there's some infrastructure and construction spend coming. Do you think they're confident enough to start spending and stocking up yet? The last one is a slightly broader one on the kind of AEC and construction market.
It sounds like you're working towards a more complete offering combining Bricsys, EcoSys, and SMART Build, and it's probably a good time to be pushing efficiency in the construction industry, if we think infrastructure and construction's going to lead the recovery. What's the competitive landscape like there? Who do you think are your competitors? We've seen RIB being acquired by Schneider, and maybe more complete solutions. Do you think most of your sales and your competitors are going to be selling broad solutions, or is it still in pockets of somebody selling CAD, somebody selling project management? Do you think you can make the complete full solution a bigger part of the market?
Let's see. If we start with question number one, new product launches, we've delayed most of our product launches till after summer. The reason was because we canceled HxGN LIVE in Las Vegas in June. We decided that we're going to launch the new products when people come back after their summer holidays. That's the plan for new products. When it comes to Geosystems distributors, it's fair to say that, of course, they were all shut down, especially in Western Europe and North America, and we've begun to see a trend where they start restocking again. Early days, but one has to remember that the peak season for construction is the third quarter. If you want to catch that demand, you have to have products in stock in the third quarter.
Yeah, it's true that we are stitching together our offering in the AEC market for the long term. I think that that industry is so undigitalized that we don't need to worry about competition. There is several players looking into this. I think we have a slightly different strategy where we focus on productivity and quality improvement and not just design. That's it.
Okay. That's helpful. Will the foreseeable future still be people buying Bricsys separately or EcoSys separately, or do you think you can very quickly move to selling kind of the complete solution? Is that kind of something that you need to educate the market on over time?
Our platform product is called Smart Build, and that will be integrated. Bricsys is a design CAD, and it will always be a CAD. Smart Build is something different. It's more like an MRP system for the construction industry.
Right. Got it.
The next question is from Viktor Trollsten of Swedbank. Your line is now open.
Okay, good morning. Yes, a brief question on the BLK2GO, which you commented on some service providers that you've teamed up with. Could you say if it contributed in any material extent to Q2? Also within PPM, what to expect going forward with what we are seeing currently with the oil price and the crisis in that sector. What do you expect in terms of a mix within the PPM going forward?
PP&M, if we start with that, PP&M is a software business, so we expect to have a similar mix going forward as we've seen for the first six months this year. Regarding BLK2GO, it obviously contributed to the growth in the quarter, but it was less than 1% on group level, so it wasn't material in the second quarter.
Okay. Thank you.
Thanks.
The next question is from Supriya Subramanian of UBS. Your line is now open.
Yes, good morning. Thank you for taking my question. I just have one remaining question. This is around the sort of slight differentiating growth trends in North America and India. Since you mentioned that these were the two markets that were the most impacted by the COVID-19 restrictions in Q2. Could you explain why there is such a big difference in the growth trends? Yes, both declining, but still the magnitude was quite different. I think this pattern was similar in Q1 as well. Could you explain what was driving this in the quarter? Thank you.
No, it's very simple. If you take the major countries in Western Europe, throughout a great deal of March, April, and May, people were locked into their homes, and they didn't go to work. If you now think about a large automotive plant like Wolfsburg for Volkswagen. It's empty. There is no product acceptance department there to accept your deliveries. There is no one there to take your phone calls. How do you do business?
Right. Would you say that the lockdowns in North America weren't as stringent maybe?
No, I would say that they were probably not as coordinated as the major countries in Western Europe, because certain states in North America kept business going.
You had less of an impact in North America.
Okay. Got it. Thank you very much.
Thank you.
The next question is a follow-up of Daniel Djurberg of Handelsbanken. The line is now open again.
Thank you. Just a follow-up on the balance sheet. Accounts receivable down 10%, which we can understand, of course, and prepaid expenses and accrued income is quite flat year-over-year. Can you give perhaps the mix of the prepaid expenses versus accrued income, and if accrued income, if you should read this positively into the coming growth in the course?
I'm going to see if I can do that. The software business is more stable, and it grew in the quarter.
Yeah.
Obviously you have an increase on the liability side because of that.
Yeah. Fair enough.
Good.
As there are now no further questions, I hand back to the speakers for the conclusion.
Right. The conclusion is I hope you all have a great summer, and we'll talk again in October. Thank you, everyone, for listening.