Good day, ladies and gentlemen, welcome to Hexagon Q2 Report 2023. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and an answer session. To ask a question, you will need to press star one one on your telephone. I would now like to hand the conference over to the CEO, Paolo Guglielmini. Please go ahead, sir.
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 gonna go through the detail of it. Before I cover the highlights of the quarter in more detail, I wanna spend a moment on the short attack and the related report last week. We fundamentally disagree with the report and its 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 claims in due course. 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.
I suggest we start with slide four and the highlights of the quarter. Growth came in at 8 percentage points, with resilient demand across most of the divisions. We had 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 Hexagon LIVE. We are gathered in Las Vegas with a lot of customers and partners. We're gonna 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 target and fund incremental organic growth.
If we move on to slide five, further detail from the income statement. We have posted in Q2 2023, EUR 1,366 million 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 -4 percentage point, for total reported growth of 6%. We posted adjusting operating earnings of EUR 394 million for an adjusted margin of 28.9%. As you can see from slide six, currency and effects that 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 off top line and EUR 37 million off operating earnings, predominantly down to the movement in Chinese currency, appreciation of Swiss franc towards the euros, and movement in USD versus EUR. Structure added EUR 20 million of sales and EUR 6 of operating earnings. All in all, flushing out currency impacts, we would have delivered a one percentage point margin improvement versus Q2 2022. In terms of cash flow, change in working capital delivered EUR 10 million. Cash flow from operation added up to EUR 364 million, for an overall cash conversion, as discussed, of 84%. Working capital to sales ratio was at set 7.6%.
Moving on to slide number eight, 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 Autonomy & Positioning division delivered 31 percentage point of growth, with very strong demand for our autonomous stack across multiple industries. We're gonna talk together with Ben later about another announcement that came in this morning. We're very pleased to see the conclusion of multiple quarters of work from our team. We're gonna integrate our autonomous stack within the context of a mining application, the largest deal that the group has ever closed.
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, and 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 IT from Hexagon.
When it comes to the Industrial Enterprise Solutions side 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. We'll talk about the growth in ALI. This is a continuation on the good growth that we have experienced already in Q1, both in core and in the enterprise asset management newly acquired portfolio within ALI. Moving on to slide number 9, a few words about Hexagon 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 wanna point your attention here to some of the partnerships and collaborations that we have announced within Hexagon 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 % of the growth that we experience 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. It's got to do with the 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 in that automation, in the way we operate internally. If we move to slide 10, I wanna point out your attention, particularly to the collaboration with NVIDIA. NVIDIA has been a partner of ours within Geosystems and the Autonomy and Positioning division already for a long time. What we have announced at Hexagon 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, as you know, is a computing platform that enables development of 3D workflows. It's got very powerful AI-enhanced, physics-based simulation capabilities. You can see how the handshake of HxDR, in which we fuse 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.
Yeah, good morning, everybody. If we go to slide 12, just the breakdown of growth by geographic region and industry. If we start with surveying, you know, we saw a bit of a slowdown in North America and Western Europe, in the quarter, but that was, 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 automation, and demand for safety solutions. In power and energy, we continue to see an improvement in the underlying market, and the benefits 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 remains 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. In aerospace, another strong quarter, as that market continues to recover from COVID. 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, 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, they had 7% organic growth. There we saw a strong demand for mining solutions and reality capture. With stabilization in China, as I mentioned, probably too early to say a full recovery, 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 at Q1. 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 that I mentioned earlier for anti-jamming solutions. If we go to slide 14, 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 Hexagon 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's progress tracking software to keep the project on track. Slide 15, a customer win with Asia Air Survey, 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 infrastructures that those cities have. 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 Visual Twins of cities. Next slide, 16.
A product launch from Hexagon 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, we put out in a 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. This 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 EUR 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.
Their mission is to automate 120 road trains in the Pilbara region of Western Australia to overcome labor shortages and improve safety of their operations and move 35 million tons of iron ore a year using this system. 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, collision avoidance systems, fleet management, perception software to control the vehicles, as well as drive-by-wire technology to manage them and steer them. 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. In the slide, you can see this operator is controlling an underground mining loader, a way away from the mine, which is obviously great for safety and employee well-being. With that, back to you, Paolo.
Yeah, 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, 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. We've seen very good adoption for our software portfolio. China particularly grew by 12% at this point, is a continuation of good momentum.
We have very good factory 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 sort of SaaS and subscription adoption, good growth at the ARR level. The growth took place across both the core and the EAM portfolio, something that we're gonna 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 number 20, if we talk about Manufacturing Intelligence, it's clear that there's increasing adoption of our technologies 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. 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, we're gonna work very tightly together. The relationship started with an adoption of our enterprise project management tool called EcoSys, an acquisition that has been made a couple of years ago within ALI. Then we have expanded the relationship to embed smart materials management technologies, design tools. 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.
Of course, asset management has got a lot to do with it. This customer has standardized on the enterprise asset management SaaS solution as their solution of choice, as the key to unlock productivity as they roll out production. Of course, our EAM solution is deeply embedded in their software stack to maintain sort of a digital twin of 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-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 will be over the next 6 quarters, in between Q3 2023 and the end of 2024. What do we plan to do and how do we plan to unlock these efficiencies? It's got to do with synergies. 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're ready to pull off. As you know, we've been on a push to reduce our offices and manufacturing footprint already in the last quarter. We need a 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 gonna 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 underperformed, that have partly been flagged already in the past that we want to rationalize and rightsize from a cost perspective. Last but not least, there's a lot of opportunities 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, in slide 25, it was a very good organic growth quarter despite the slowdown in construction and infrastructure. We're seeing 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 gonna 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 Hexagon Live global event to set the foundation for tighter relationships with partners and customers.
We are pleased to announce that we're gonna have a capital market day towards the end of the year on the 7th of December in London. I believe the team will follow up with more specifics within the next couple of days. Thank you. Operator, we can go to Q&A? Thank you.
Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star one one on your telephone. We are now taking the first question. The first question from Joakim Gunnell from DNB Markets. Please go ahead. Your line is open.
Thank you very much. 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. 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? Also perhaps the split between GES and IES when it comes to the cost savings that you see.
Yeah. What I would say, I mean, is 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 gonna address most of our businesses and the two segments that you have just mentioned. Again, I mean, it's got to do with rightsizing our cost structure when it comes to some of the underperforming 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 gonna 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. That's simply gonna allow us to reinvest more aggressively in incremental organic growth and keep on delivering marginal profitability to drive the business up to the margin levels that we have committed to the market.
Thank you, Paolo. 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?
Yes. Thank you, Joakim. I'm glad that you mentioned the reality capture portfolio. I mean, at the end of the day, we talk about innovation, and as you know, 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%-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. I would say the bigger trend behind that 7% growth, rather than the what's macro per se.
Mining has got very good momentum. I would say the sales motions of mining and those deals tend to be a little bit more longer term. The underlying demand behind that market and the forces are much more long term, 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've seen softening in demand in the US as eagerly anticipated in the last couple of months and softening in demand in Central Europe as well, particularly in Germany. 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 Middle East.
We're doing very well in South America. We are capitalizing on all of those opportunities, and we have good market motions in those parts of the world.
Thank you.
Thank you for your question. We are now taking the next question. Please stand by. The next question from Daniel Djuberg from SEB Bank. Please go ahead. Your line is open.
Thank you, operator. Good morning, gentlemen. First question on financial expenses, can you just tell us a bit on how much was impacted by current effects and how much was the interest cost from your gross debt?
Hi, Daniel. No, the increase in financial net is coming from higher interest rates, not really currency.
Perfect. We should expect similar level going forward or lower?
Yeah, that's right. You know, and I think we'll obviously have to see how interest rates go going forward.
Yeah.
Um, it's, uh-
Obviously.
If they keep going up, then I guess there'll be some upward pressure on that number.
Perfect. The question I had also on the deal you took with the Mineral Resources, that could be really nice going forward here. 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?
Good question. You know, I think obviously we have to deliver this project. It'll go through a phase of gradual ramp up before the real deliveries start over 4, 5 years. I think, you know, this case study could prove one that opens up opportunities with other mining customers. 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. Yeah, I think if the project goes well, it could definitely hopefully lead to further project wins.
Thank you. My final question would be on cash conversion, now back in the targeted range, but, how to think on the second half for this year in terms of working capital, changes?
Yeah, I think we're gonna 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 inventory on electronic components that is dissolving. Yeah, I think we're gonna keep on staying within that 80%-90% cash conversion range.
That's good. Thank you very much, and have a great summer.
Thank you.
Thank you for your question. We are now taking the next question. Please stand by. The next question from Alexander Virgo from Bank of America. Please go ahead.
Thanks very much, and good morning, Paolo and Tom. I guess first question, just on your comments with respect to the short report. I understand the need to be measured and considered in response, and without wishing to necessarily to give too much credence to something you don't necessarily believe in or fundamentally disagree with. 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 necessary technically, if there's no issue, as you in the Greenbridge statement point out. That would be the first question, please.
Alex, hi. Good morning. I mean, we're coming out of a silent period. We've looked deeply into the report, and for sure we're gonna come back. We think it's important for us to do so for the sake of, you know, 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 gonna do it over the next days and weeks for sure.
Okay. Do you think there is a need for more significant changes in terms of corporate governance at Hexagon?
I mean, look, what I would say is that we, you always have to look for opportunities for improvement. I think governance has already evolved over the last year as the group evolved. There have been changes in the board, a couple of months ago. I think that's a question for the board, but this is something that, everybody is looking into very deeply.
Okay, thank you. 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. 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? Is that the reason why gross margins were down Q-on-Q in what's normally a traditionally stronger quarter in the year? Thank you.
Yeah. Hi, Alex. Yeah, I mean, in terms of gross margin, taking that one first, I think there's a couple of factors. One, you're right, there's a divisional mix, so if Geosystems growth slows down, it's a higher gross margin business, it has a drag. In Q1, ALI had, you know, a more perpetual deal than it had this quarter, which obviously boosts your gross margin on day one. They were the two dynamics that explain the sequential drop-off in the 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 is not really tied to construction.
20% is mining, 10% or so is reality capture, another 10% is geospatial imagery, or AEC software. 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, right? That's where you use machine control. That's where surveyors will work. Obviously, we don't have perfect visibility on which jobs the equipment is being used on, but that's our 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 two-thirds of that 60%, and the other third is still very strong growth in Asia, Latin America and other developing economies.
Got you. Okay, 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.
Yeah, absolutely. Machine control.
Yeah.
You know, the automation that you'll put on dozers and excavators to just make construction processes more efficient.
Gotcha. Very clear. Thank you, Ben.
Thank you for your question. We are now taking the next question. Please stand by. The next question from Sven Merkt from Barclays. Please go ahead. Your line is open.
Great. Good morning. Thank you for taking my question. 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 an impact on revenue? When should we see amortization stepping up as a result of that? 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. 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 margin. Can you help us reconcile this a bit?
I mean, what I would say, without getting into the detail of the individual, sort of innovation areas or the associated capitalization ranges. What I would say is that we are going through an R&D investment, sort of cycle. The gross margin was up year-over-year. The mix have 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. You know, I would add comments we've made in previous quarters. You know, the 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.
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. You know, there's a lot of investment upfront that you have to do to do that. Autonomy in agriculture, on highways, that it's not really something that you and I are buying yet, but will come in the future. You know, they're the kind of things that we're investing in on top of the kind of normal product cycles. As you'd expect under the accounting standard, once those products are launched, then you start to amortize and it will catch up.
Okay. On the, on the underlying cost?
What I would say is that, as you know, we've done, sorry.
in Nexus that have seen the light of day over the last month. That, of course, is an incremental sort of investment area. We are expanding the BLK series to keep innovating in an area that is giving good payback in terms of growth. As Ben was alluding to, we are seeing good progress when it comes to autonomy, and that autonomous stack, both the software side and the drive-by-wire elements, will be able to be monetized in multiple industries. Last but not least, I would say effects 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.
Great. That's helpful. Can I follow up just on the cost development and with the outlook for the second half? In OpEx, we are up 4% sequentially in the second quarter. If you now think a bit about the second half, will the cost curve normalize before the impact of the cost savings program, or will you continue to grow cost at this rate?
I think we have done the bulk of the investment as we discussed, so it's possible that we're gonna see year-on-year impact as these new investments continue to develop. I would say we're gonna 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.
Okay, great. Thank you.
Thank you for your question. We are now taking the next question. Please stand by. The next question from Adam Wood for Morgan Stanley. Please go ahead. Your line is open.
Hi. Thanks for taking the question. I wonder, first of all, if I could just dig in more specifically on corporate governance, 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 future? 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? Thank you.
Yeah. Hi, Adam. Good morning. When it comes to Divergent, I mean, for us, it's very important that we also frame the investment for what it 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, it's one of the very most advanced companies that we could work with in terms of advancing additive manufacturing, right? If we want additive manufacturing to deliver on its promise, it's all about compatibility of quality with traditional technologies. If Divergent succeed in what it's trying to do, it's gonna be a key change and a massive opportunity for ourselves. 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 investment round back in December. Again, when it comes to governance, I can only point you to the board, in terms of controls and in terms of processes. I just know that there's a lot of focus from everybody on making sure that, again, we are as transparent as possible on these topics.
Adam, on the non-core side of things, I mean, you know, there is a focus to, you know, in certain areas of the group, improve the revenue quality, and as Paolo mentioned, and you saw it in Q1, right? In SIG, we have walked away from some low-margin contracts that didn't really lever Hexagon's technology. Beyond that, there are a few more businesses that are dragging on the group at the moment, so we're gonna take measures to sort of structure 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 talked about before.
Perfect. That's very helpful. Thank you.
Thank you for your question. We are now taking the next question. The next question from Johan Eliason from Cathay Shipbrokers. Please go ahead. Your line is open.
Yes, good morning. This is Johan Eliason at Kepler Cheuvreux. I have a question coming back to Daniel's question about the cash flow. Obviously good that you see the cash conversion rate being strong in the second half as well. Your cash conversion rate obviously exclude the cash impact from this restructuring program, as I understand how you define it, where you highlight the EUR 200 million outflow. 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. How would you see this going forward?
Do you think the net working capital release on the back of, or better sourcing and supply situation can sort of offset most of this headwind from the, EUR 200 million outflow, related to these programs?
I think, Johan, we'll have to see in terms of the phasing of it. I mean, there's obviously gonna be a little bit of an investment up front in these programs, but as I say, the savings you get from the program ultimately more or less pay for it, right? The pay program pays for itself. You will get the benefit in terms of the cash flow from the savings above the line, so they should net out. There might be a little bit of investment up front as we kick some of these measures off.
specifically the net working capital release, how do you see that playing out? Is it more limited?
Net working capital is not really related to the reorganization program. I think for the second half of the year, as Paolo said, you know, I think we can keep doing a good job on working capital. You know, we've still got areas where we can release. I wouldn't say we're optimized in terms of where we'd like to be at the moment. I think for the second half of the year, we would hope to be in the 80%-90% range, same as Q2.
Okay. Thank you.
Thank you.
Thank you for your question. We are now taking the next question. Please stand by. The next question from Nay Soe Naing from Berenberg. Please go ahead. Your line is open.
Hi. Hi, good morning. Thank you for taking my questions. I've got two, if I may. First one is the strong performance in the A&P business unit, including 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. If you could help me understand the underlying performance, excluding one-off factors, that would be super helpful. I'll follow up the second question afterwards.
Yeah, sure. No, I mean, I, you know, I think at A&P, they did benefit from in Q2, from some large deliveries around the GAJT anti-jamming technology that they have, and that probably will help Q3 as well. I would say underlying that, there is strong double-digit growth across the board in agriculture and some of their other businesses. That, yeah, helped a bit in Q2. It probably will help Q3, but the underlying growth rate is still very strong.
Thank you. Then the large contract you had won, that you mentioned that will come through, with it starting from next year for the next 5 years?
Yeah. That's right. Yeah.
Perfect. Thank you. Last question is on the cost program that you've announced today. With that in mind, I know that we've got 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 to see an upgrade on that number?
Yeah, I mean, as we discussed, look, there's gonna be an impact in terms of margin improvement, and there's gonna be the opportunity to invest also a portion of those savings into innovation and growth, both technology and growth market. We will see in December. 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.
That makes sense. I look forward to the event. Thank you very much.
Thank you.
Thank you for your question. We are now taking the next question. Please stand by. The next question from Erik Golrang from SEB. Please go ahead.
Thank you. I have a few 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? 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? Thirdly, and maybe I'm repeating a question already asked here, but on the critique and the Divergent transaction specifically, I mean, by the book, in terms of disclosure and everything, should Greenbridge and Hexagon really be invested in the same assets? Thank you.
Hi. Hi, Erik. I'll take the min res one just because it follows on from the last question. 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 this year.
What I would say on the savings program, Eddie, you know, we plan to keep as much as possible of the value that we're gonna create through these initiatives. We have, you know, very strong line of sight, and we're gonna get cracking with the program already in August. Yeah, when it comes to Divergent, again, once more, I mean, the timeline of our involvement with Divergent is relatively clear. 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 roadmap of Divergent and possibly look at opportunities to monetize some of the technologies that we might be able to jointly create. Again, Greenbridge is, you know, has decided to make an investment for potentially different reasons, as a shareholder, I would simply 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.
Thank you.
Thank you for your question. We are now taking the next question. Please stand by. The next question Toby O'Brien from J.P. Morgan. Please go ahead. Your line is open.
Yes. Hi, good morning, and thanks for the questions. 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. Then just on the analysis around the organic growth, the report obviously suggests that, you know, organic growth is overstated. Again, kind of any thoughts on this specific topic would be really helpful. Thank you.
Yeah. I mean, hi, Toby. You know, as Paolo said, you know, this is probably not the forum to go through this in detail, we are gonna 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 a bridge. There, I think, you know, we report the contribution to growth from M&A every quarter. You know, we report it as structure for 12 months, then it becomes organic, and that's for all acquisitions, the same as every other company. We've reported the revenues for every acquisition that we've made, that we see as material. 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 six, seven years and beyond. 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, so you can work out the multiples. I think we've actually given quite a lot of information around that. That doesn't seem to be reflected in the short seller reports. Now, I'm not gonna go into the kind of factual inaccuracies. We'll come back to that. In our view, you know, we firmly disagree with the reports, both in terms of the way it's been put together and its conclusions.
Much appreciated. Thank you.
Thank you for your question. There are no further question at the moment. I will hand back to the management for closing remarks.
Yeah, thank you very much for spending the last hour with us. Again, we have very good momentum, and we think that the efficiency plan and the innovation initiatives that we have in motion will keep that going. Thank you very much, and we also look forward to seeing you, as many of you as possible, later in the year in London. Have a great summer. Thank you. Thank you.
That concludes the conference for today. Thank you.