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Edited Transcript of HEXA B.ST earnings conference call or presentation 5-Feb-20 9:00am GMT

Q4 2019 Hexagon AB Earnings Call

NACKA STRAND Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Hexagon AB earnings conference call or presentation Wednesday, February 5, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Ola Rollén

Hexagon AB (publ) - CEO, President & Director

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Conference Call Participants

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* Adam Dennis Wood

Morgan Stanley, Research Division - European Technology Equity Analyst

* Alexander Stuart Virgo

BofA Merrill Lynch, Research Division - Director

* Alexander William Tout

Deutsche Bank AG, Research Division - Research Analyst

* Daniel Djurberg

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Erik Golrang

Skandinaviska Enskilda Banken AB (publ.) - Analyst

* James Arthur Goodman

Barclays Bank PLC, Research Division - Research Analyst

* Mikael Laséen

Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst

* Toby Ogg

JP Morgan Chase & Co, Research Division - Analyst

* Viktor Högberg

Danske Bank Markets Equity Research - Analyst

* Wasi Rizvi

RBC Capital Markets, Research Division - Analyst

* Philip Ramqvist;Sveriges Radio;Media

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Presentation

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Operator [1]

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Hello, and welcome to the Hexagon Q4 Report 2019. (Operator Instructions)

Today, I'm pleased to present Ola Rollén. Please go ahead with your meeting.

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [2]

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Thank you, and good morning, good afternoon, everyone, and welcome to this Q4 2019 interim report call.

So if we start on Slide #4, overview of the fourth quarter 2019, we report an organic growth of minus 2%, but a recorded growth of plus 2%. And we had 2 strong winners in the quarter; PP&M, with 13% organic growth; and SI, that came back to a good 7% organic growth. Geosystems recorded minus 2% organic growth and was negatively impacted by a general slowdown in some construction markets. Manufacturing Intelligence recorded minus 8% growth on the back of a slowdown in automotive and general manufacturing in China. And one should also remember that it was a very strong finish for MI in the fourth quarter of 2018.

It's record earnings and margins this quarter. Our gross margin is now 63.3%, up 1.1% over the corresponding period of last year. And our EBIT margin is 26.2%, which is 0.2% better than the fourth quarter of '18. We benefited in the quarter in spite of negative organic growth, we benefited from a favorable product mix and cost savings.

Looking at Slide 5. It's just a reminder that the seasonality of the Hexagon Group prevails. The fourth quarter is, by far, the strongest quarter in the year, and that happened this year as well.

So moving on to Slide 6, that is an overview of the profit and loss statement for the fourth quarter, and we can see that we invoiced EUR 1.059 billion in the quarter. And that corresponds to an EBIT margin at 26.2% and an earnings per share of EUR 0.54.

So on Slide 7, you have the full year. We are now close to EUR 4 billion in sales and 25% EBIT margin.

Looking at the cash flow for the quarter, the cash conversion in the fourth quarter was 99%, and we had a cash conversion of 93% for the full year. So a very good cash flow year indeed.

And if you look at Slide 9, working capital to sales is now 12.1%.

Moving on to the market development. And if we stay at Slide 11 for a bit, this is usually quite rigid patterns, but we can see the impact of the slowdown in China, where China today represent 12% of group sales, whilst a year ago, it represented 15%. On the other hand, North America, led by United States, is now representing 32% of group sales, whilst last year, it was 30%. And just comparing United States to China, you can see that Hexagon's business is now significantly larger in United States than it was a year ago, and we see a significant contraction in China.

Slide 12, just an overview of the various regions. Eastern Europe, Middle East and Africa grew above 8%, whilst at the bottom, we see Western Europe and China with negative growth in the quarter. And for your review later, we have Slide 13, the so-called arrow slide, where you can see detailed trends in various segments and geographic regions.

Moving on to EMEA, Slide 14. As we stated, Western Europe recorded minus 2% organic growth. And it was the automotive and engineering sector in Germany that slowed down. U.K. was weak in general in the fourth quarter, but it was primarily the construction sector that suffered, and it was probably to do with the Brexit process. Spain saw a weak quarter whilst positives were Russia, Middle East and Africa, France and the construction sector in Germany.

Americas market trends, Slide 15. We saw good growth from the construction sector from our Geospatial business and from public safety in the United States. Brazil and South America grew -- had strong growth in the quarter as well. And negative areas were Canada where the natural resources sector, oil and gas, mining, had tough comparatives to a fairly strong Q4 in '18. We also saw a slowdown in the automotive sector in Mexico in the quarter.

Slide 16, Asia market trends. Positive markets, India came back to growth, and we have a good outlook for 2020. Korea had a good quarter as well, and so did Malaysia whilst China continued to report negative growth. We saw an improvement in the electronics sector in China in the quarter. But we saw a weakening auto sector in the quarter. Southeast Asia was relatively weak in the quarter, but it's due to very strong comparatives in the fourth quarter of 2018. So that was the markets.

And if we then move to the reporting segments, we start on Slide 18 with Industrial Enterprise Solutions. We saw organic growth of minus 4%, sales of EUR 544 million, with an EBIT margin of 27.2%, which is slightly better than the fourth quarter of last year. Within Industrial Enterprise Solution, we see MI contracting by 8%, and it's to do with the Chinese decline in automotive and general manufacturing. PP&M, on the other hand, saw a turn back to growth for its design and asset management software products, especially EMEA was strong in the quarter.

Moving to Geospatial Enterprise Solutions, Slide 19. We report an organic growth of minus 1%, where we see minus 2% from Geosystems, and it's the weakness in certain construction markets in Europe and Asia. But we also saw accelerated growth from SI, where SI has come back from its restructuring and our new product, the OnCall platform, is gaining traction and building a solid pipeline in the market. Autonomy & Positioning, previously called Positioning Intelligence, report minus 9% organic growth, and that is weaker demand in automotive as well. As a group, we report EUR 515 million with 26.1% EBIT margin in Geospatial.

Slide 20. Gross margin for the group improved to 63% for the rolling 12 months, 63.3% for the quarter. And operating margin on Slide 21 is now 25%. It was 26.2% for the quarter. Orders and product releases and acquisitions in the quarter, Slide 23. We announced that we've acquired a company called Volume Graphics. Volume Graphics is the leader in the development of high-end analysis and visualization, computer tomography software. And as more and more industries embrace additive manufacturing, this is the future for metrology software and our smart factory solutions.

We're proud to announce that London Police and Metropolitan Police selected Hexagon OnCall, our new product within the public safety field, as their standard platform for dispatch solutions. Metropolitan Police is a huge organization, you must be able to cope with 7 million calls annually in 250 languages. And it keeps more than 8 million residents in Central London safe.

Slide 25. We're also proud that we're partnering with TetraPak and expand our PP&M product offering into the food service sector where they're going to use our virtual design visualization tools throughout their entire plants.

Slide 26. We also got an order from the Bay Area Rapid Transit company, and that is the public transportation company of the San Francisco Peninsula. And they're going to start using EcoSys for managing project portfolios and maintain project controls.

Slide 27. We're now launching a new hardware platform called Leitz Reference BX, and this is a platform that is designed to be able to cope with the curvature of measurement -- of measured components like smartphone screens or intricate components such as fan and turbine blades and blisks for the aerospace industry.

Slide 28. We have an interesting project with HOK, which is a global architecture firm. It's between Geosystems and PP&M, where we're going to do a seamless integration between BIM and Scan, so that you can scan axis or brownfield structures and automatically import them into your BIM model.

Slide 39 (sic) [29]. We're also working with European Space Agency to create an autonomous space observation program used for Earth observation capacities. And we're going to use our computer-aided engineering, i.e., simulation solutions, to do so.

Slide 30. An interesting collaboration with General Motors, where General Motors is developing autonomous driving, and we're going to do a combination of our sensor and scanning capabilities and then merging that into our VTD simulation software where you can simulate autonomous driving from live sensors on a real car.

Slide 31. Grande Prairie Fire is going to implement the Hexagon OnCall dispatch solution. And Grande Prairie is located in Northwestern Alberta, Canada, and it's the largest city in this area. So a good reference for us launching the new product.

Slide 32. Bundeswehr is going to use Hexagon software, Geospatial Information Technology software portfolio, to provide geospatial information to the German Defense Organization. It's the Army, the Air Force, the Navy and the Medical Services.

Slide 33. Smart water infrastructure using our Geospatial solutions. AQUASIS is a Portuguese company and they are implementing our software portfolio to run ongoing and future projects to improve the efficiency and reduce the cost for water distribution, sewage and wastewater treatment.

Slide 34. It's becoming more and more important with mine safety. And this quarter, we got several orders around mining safety. And you can see the problem within the mine from that picture. Anglo American at 2 locations used our safety, mine safety system, and they installed it. And then Bengalla Mining Company, New South Wales, Australia, also installed our MineProtect Collision Avoidance System into more than 180 vehicles in their mine.

Slide 35. Finally, Mueller Water is now using our IoT platform, Xalt, to connect machines and sensors in their system to monitor their water facilities.

Finally, Slide 37. The Board of Directors are proposing a dividend of EUR 0.62 for the year 2019, and that is an increase of 5%. The dividend will be paid in euro or Swedish kroner.

Summary, if we summarize the quarter, we report 2% recorded growth and minus 2% organic growth. We've seen solid return to growth for PP&M, 13% in the quarter; and SI, 7% in the quarter; Manufacturing Intelligence, minus 8%; and Geosystems, minus 2%. All in all, it's still a record earnings quarter and a record profitability quarter with a strong product mix and strong cash flow to back it up.

And with that, I'm finished with my presentation, and we're now ready to answer any questions there might be on the call. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions)

Now the first question we have is from the line of Mr. Adam Wood from Morgan Stanley.

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Adam Dennis Wood, Morgan Stanley, Research Division - European Technology Equity Analyst [2]

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I've got 2, please. Just first of all, on the management change that was announced during the quarter, could you maybe just give us a little bit of insight into why those changes were made? And what benefit do you hope to come from that? And maybe, for you personally, whether that involves any changes in terms of the role that you have in the company and your responsibilities? And then secondly, obviously, with the Coronavirus ongoing in China. Could you maybe just talk a little bit about the actual impact on the business on the ground, in terms of travel restrictions? How it makes business harder to do with people coming in and out of the country? Or whether there's less disruption because most of the business is more domestic anyway? Just some insight into what's happening would be very helpful.

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [3]

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If we start with the management change, it's 2 things we wanted to accomplish. We need to do more coordination because we see a greater emphasis to combine various products and technologies from various divisions. And with this reorganization, we achieved that. It's also fair to say that it's rejuvenation of the divisional management within Hexagon, where, if you so wish, the next-generation of general managers is taking another step on the career ladder. Regarding the coronavirus, as you know, they've prolonged the Chinese New Year till the 10th of February, and that is what we know now. We have 2,700 employees in China, and there are travel restrictions, and there might be restrictions in the logistics systems in China going forward. Now for Hexagon, March is the most important month in the quarter where we will see whether we have restrictions in logistics, i.e., delivering products to customers or not. But it's definitely a more difficult trading environment than without the virus, obviously.

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Operator [4]

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And the next question we have is from the line of Daniel from Handelsbanken.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [5]

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Daniel Djurberg, Handelsbanken. Congratulations. Good mix, good cash flow. I would like to just continue on China. If you still see any -- except for the domestic issues and the logistics system impact, et cetera, do you -- or should we be afraid of any indirect effects from components into other products that you have that will impacting component constraints or something? Have you seen anything of that?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [6]

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Yes. There is the risk of an indirect impact. We try to address it. So we are typically quite regionalized in our supply chain. So we're not expecting a big impact. But we're looking for certain components for alternate solutions. And it's way too early in the quarter to say if this is going to have any impact or not.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [7]

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Perfect. And also if I may ask you on the BLK2GO and BLK247. You're right that you expect a gradual uptick quarter-by-quarter. So we have seen some initial months here of the market that we have. To compare this with the RTC360 or previous product in the market, would you expect a similar ramp as you have seen before on these?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [8]

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BLK2GO is fairly similar to BLK360 or RTC360, similar ramp up. When it comes to the BLK247, that's completely new market where we are collaborating with the security and safety specialists to find applications where it's a benefit to the end user to use the BLK247. So that's going to be a slower penetration into, as I said, a completely new market for Hexagon.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [9]

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And finally if I may, on Western Europe, it was down year-over-year in all segments except for power, energy and mining, and due to, I think, U.K. and Germany and Spain and so on. Have you had any view on the potential uptick here in 2020? Or should we expect this to continue to be weak 12%, 5% of sales.

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [10]

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It's hard to describe what we believe. But I mean, in sitting in the beginning of the year, but we do think that we're going to see a gradual improvement in our organic growth over the coming quarters of 2020. And that goes for more or less all regions.

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Operator [11]

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The next question we have is from Alexander Virgo from Bank of America.

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division - Director [12]

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Ola, I wondered if you could do a couple of little detailed answers, I suppose. In China, you called out general engineering and auto as the drag. Obviously, last year, it was more about electronics. So I wondered if you could talk a little bit more around the color and the trends. Because I think that if we put coronavirus to one side for a second, some of your peers and some of the other companies that we cover have at least sounded a little bit more positive into the end of the year. So I'm just trying to understand a little bit more about the dynamics in China. And then I wondered also if you could talk a little bit about what's driving the 13% in PP&M, and a little bit more detail you mentioned EcoSys a couple of times, and I know that that's been gaining a lot of traction as you enter new markets there. Obviously, the big part of that business historically has been oil and gas, and that's the bit that you've been diversifying away from. But I wondered if you could just help us understand that 13% a little bit more detail as well?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [13]

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Yes. No, China, we're cautiously optimistic about China as well. The fourth quarter was a very negative quarter for us in China. And this time around, it wasn't electronics that shrunk, but we saw a significant slowdown in the general engineering and auto sector. Looking forward, Q1 is probably the last tough quarter where it's hard to say what's going to happen due to the coronavirus. But going into mid-2020, we actually expect the China market to look significantly better for us than it has over the past 3 quarters.

So moving on to PP&M. What we saw in the fourth quarter, we saw a continuous growth from the initiatives that we've initiated branching out from oil and gas, but we also saw a strong return to growth for our designed portfolio, i.e., the core product, which is targeting oil and gas.

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Operator [14]

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The next question we have is from Erik Golrang from SEB.

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Erik Golrang, Skandinaviska Enskilda Banken AB (publ.) - Analyst [15]

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I have 3 questions. The first 1 is on -- another 1 on PP&M, and if there is anything in terms of sort of major contracts there that would be difficult to lap in Q4 of this year or if it's a reasonably clean quarter? And then the second question on continuing on BLK2GO and the potential there. What should we think about as the user base here? Is that the sort of RTC360 or BLK360? Or what's the potential buyers here? Is the price point a limiting factor in any way? And then the third question on customer or sort of energy mix in Manufacturing Intelligence on the auto side. Is there a difference for you in terms of manufacturing of EVs as compared to an R&D of EVs as compared to combustion engine vehicles?

Hello?

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Operator [16]

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Ladies and gentlemen, please stand by. It appears that the speaker's line has disconnected.

(technical difficulty)

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [17]

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Sorry, Erik. I think I got your question, but I didn't mean to hang up.

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Erik Golrang, Skandinaviska Enskilda Banken AB (publ.) - Analyst [18]

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I didn't get your answers.

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [19]

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No, no, no. I didn't mean to hang up on you. So sorry, but the first question was PP&M. And it's a very clean quarter. We don't have any major contracts, which actually makes the growth even more impressive. And then if we go back to the target audience for the BLK2GO, the user base, you could say, is overlapping with BLK360, where we're targeting similar clients. But longer term, BLK360 is a stationary product whilst this is a mobile product, and you're going to be able to acquire data much faster and much more efficient with the BLK2GO technology. So it should have a much, much bigger target audience than the BLK360 over time. You could say from new...

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Erik Golrang, Skandinaviska Enskilda Banken AB (publ.) - Analyst [20]

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And at a higher price point as well? Or?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [21]

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Yes, it's a slightly higher price point. So I mean you could say the 360 will be the entry version. And most applications might be able to make do with 360, but we're going to find several customers that are willing to upgrade to the BLK2GO. And then finally, electric vehicles, it doesn't really matter that much for Hexagon MI, whether the manufacturer is choosing electric power over combustion.

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Operator [22]

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The next question we have is from Mikael Laséen, I think, from Carnegie.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [23]

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I've got a question regarding S&I and the Hexagon OnCall products. Can you talk about the pipeline and demand for that and revenue recognition from the London contract that you got?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [24]

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No. We -- if we start with the pipeline, and this is a cloud-based product as opposed to a physical installation with the previous -- the predecessor of OnCall. So it's a significant improvement from an installation and cost point of view and also maintenance point of view. And the pipeline is building up. I can't give you an exact number on the pipeline, but we are looking at some good growth in the quarters to come for SI. Could you repeat your question on Metropolitan Police because I couldn't hear you?

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [25]

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Okay, sorry. Yes, it's how much revenue you got from that contract already now. And how much is remaining in 2020?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [26]

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It's only EUR 70,000 in Q4. So it's a very long project and a long contract, and it's a big contract, but I don't think we disclosed the size of the contract.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [27]

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Okay. So it's an OnCall product?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [28]

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Yes, it's OnCall.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [29]

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Okay. And just the Scan-to-BIM projects looks interesting. Is this a product solution that is ready to market right now? Or do you need to do more work on it?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [30]

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It is a project with the customer where we invoice the work we do, and where it's not 100% complete, but it's a fairly complete solution where we're going to be able to use it and recycle it in new contracts going forward.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [31]

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Okay. Good. Got it. And a final one, if I may. Just curious about the IoT Xalt customer, Mueller, that you announced. Is that the first external Xalt framework customer that you have? And so that we can expect this, I mean, to continue, can you just explain that in some more in detail, please?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [32]

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No. They -- we have a small external customer base for Xalt. It's not material for the Hexagon Group and it's not our key focus either. But some of our customers have been intrigued by the capability of Xalt and then we've sold them Xalt and they've used it not in combination with our product but as a standard IoT platform. So it's not something we're pushing. But if we can sell it, we will.

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Operator [33]

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And the next question we have is from James Goodman from Barclays.

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James Arthur Goodman, Barclays Bank PLC, Research Division - Research Analyst [34]

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Just a follow-up quickly to PPM. I mean, did you characterize that primarily as the market growth improvement there? Or is there some meaningful competitive elements or improvements, I think, in the products that you think that's causing the acceleration? And just -- I mean, just interested in any commentary you're seeing in the customer base around the current oil price trend depreciate. It's all too early to see any actual sort of CapEx impact from that, but just given a bit of the volatility there. And then just secondly, thinking back to when the electronics issues hit, you very quickly bought out a cost program there, and that's benefited your margins. It just feels like now that, that issue is becoming behind you, but you've seen some broader weakness, that you've explained. And I wondered if you're considering any further cost action or if there's potential for that?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [35]

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We start with the cost program. No, we have no further plans to do any programs right now. You never know, of course, what's going to happen in the global economy. And there might be a need to revisit our cost structure. I think with the new organization we've launched, where we're also going to focus from the newly installed COO, one of his talks is going to be to revisit and look at our legal structure and try to cut costs in administration and general management, and back-office activities. So I think it's going to be more of an ongoing process to cut costs going forward but over the next 12 months. Regarding PP&M, we've signed contracts with, for us, new markets. So it's not exactly market share gain. It's just that we're introducing the PP&M technology to new markets and TetraPak is a good example of that. But it's also fair to say that our core customer base had more demand in the fourth quarter. And there is a need to reinvest in capacity in the oil and gas industry. And that is really regardless of where the oil price is.

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Operator [36]

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The next question we have is from Toby Ogg from JPMorgan.

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Toby Ogg, JP Morgan Chase & Co, Research Division - Analyst [37]

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Just firstly, on Geosystems specifically. I remember, at Q3, you were calling out construction weakness and you clearly had the full impacts of the product headwind there. If we look at Q4 specifically, any indication on the product contribution? And have you seen any incremental weakness or improvement in the construction sector, specifically since Q3? And then just secondly, on China again, have you seen any change versus sort of 6 months ago in the behavior or the interaction that you're having with these OEM clients in the region? Just any kind of indication around visibility on perhaps that kind of return to growth would be helpful.

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [38]

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Geosystems, we don't have much product contribution from new products, which I assume is what you're alluding to in the fourth quarter because BLK2GO, which was launched in the fourth quarter had very little impact on the numbers in Q4. So that's probably something to look forward to and watch out for in Q1 and onwards.

Regarding China, I would characterize it like this, that the OEMs are probably more happy about 2020 than they were with 2019.

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Operator [39]

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And the next question we have is from Viktor Högberg from Danske Bank.

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Viktor Högberg, Danske Bank Markets Equity Research - Analyst [40]

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Two questions for me. Given the aerospace segment for you has been quite good in Q4. What do you see? Any implications from Boeing or fallout from Boeing in the U.S., maybe closing down or halting production?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [41]

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It's fairly flattish. We haven't really seen any detrimental effects from the 737 MAX situation. But yes, we have to watch it quarter-by-quarter, I assume.

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Viktor Högberg, Danske Bank Markets Equity Research - Analyst [42]

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And I guess, you're talking about -- you didn't see it in Q4?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [43]

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No, we did not see anything in Q4.

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Viktor Högberg, Danske Bank Markets Equity Research - Analyst [44]

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Okay. And given the backdrop of a slowdown in construction and a new product in Geosystems, the BLK2G0, do you think that launch could offset the slowdown already in Q1? Or is it gradually throughout the year?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [45]

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I think there are several reasons, and you need to be quite market-specific when you talk about the construction slowdown. We have certain reasons for the Chinese slowdown. We've seen a slowdown in the U.K. related to our rental business. And I think that is something that very quickly could come back given the new certainty that the Brexit situation is giving the U.K. construction market. So -- and new products obviously always helps growing.

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Viktor Högberg, Danske Bank Markets Equity Research - Analyst [46]

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Okay. And 1 last question. On automotive, I think I recall that you said in the Q3 call that you were hoping or that you were guessing for, you could see a turn in automotive already this -- by the end of this year, 2020, or mid almost. Do you still see that? Or what do you see in terms of automotive, which was slow in Q4?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [47]

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Yes, we see somewhat more positive, a somewhat more positive outlook for the automotive sector going into 2020.

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Viktor Högberg, Danske Bank Markets Equity Research - Analyst [48]

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And is that in China or globally or?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [49]

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Automotive, it's a global segment. So they usually interact, one trend is spread throughout the system, so to say.

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Operator [50]

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And the next question we have is from Wasi Rizvi from RBC Capital Markets.

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Wasi Rizvi, RBC Capital Markets, Research Division - Analyst [51]

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Just a couple for me. If I could start on Autonomy & Positioning, so the name change. Just to be clear on that, and so how much of that division is now auto? I mean, can you help us understand the revenue drivers from the auto side? So how much is subscriptions or one-off sales of software and hardware, just help me understand the dynamics in that segment? And then the last one I had left was just -- can we have an update on SMART Build? And is that ready for commercial launch? Or was that launched already? And how is that going?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [52]

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If we start with Autonomy & Positioning, I would say, around 30% is auto. And why it's down is simply that we've seen a cutback in funding around certain autonomous driving projects. And it's starting to look a little better in that sector as well now going into 2020. And yes, 2020 is the year when we launch SMART Build. We're slightly delayed with that launch.

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Wasi Rizvi, RBC Capital Markets, Research Division - Analyst [53]

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Okay. So it hasn't launched yet, but it will be some time during this year?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [54]

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Yes.

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Wasi Rizvi, RBC Capital Markets, Research Division - Analyst [55]

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And have you got launch customers lined up? Because I know you -- it was a trial with Scans provisionally. Have you got more customers lined up for the launch? Or will it be your launch and then see where you are with customers?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [56]

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We will see. We hopefully have some customers that are willing to jump on the bandwagon.

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Operator [57]

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The next question we have is from Alex Tout from Deutsche Bank.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [58]

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Just on construction. I didn't hear commentary specifically on the U.S. market so far. So if you could just talk about the U.S. market, the dynamics in infrastructure versus nonresidential, whether those are divergent at all? And whether you see -- if you have seen a slowdown there, whether do you think that's due to the election coming up, early signs of that or just a low -- and you've seen signs of pickup since the end of the quarter? And a follow-up, but if you could just go for that one first.

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [59]

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No, we haven't seen any impact from the upcoming election and the year with construction market was actually -- was all right. What we saw in infrastructure and construction, if you go to Slide 13 in our presentation pack, is we also include other adjacent industries in Canada and Mexico. So our pure construction exposure in United States was not affected by any pre-election turbulence, if you so wish.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [60]

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Great. And then just thinking of the FY '21 margin target of 27%. I think that implies, if we assume a normalization of growth over the next couple of years. So the 40% plus incremental margins from here to get to that. I think the 5-year average is about 32%. So what would need to happen to see that real spike in incremental margins over the next couple of years at this point?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [61]

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You need to see a continuous improvement in the gross margin.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [62]

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And I mean, is there much further to go? We had a strong year or a relatively strong year in PPM and Safety & Infrastructure. Certainly the latter half of the year, if we assume that the lower-margin businesses come back a bit in the next couple of years, I guess, that would be something of a gross margin headwind?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [63]

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No, not necessarily. It depends on the product mix. So for example, within SI, we have a much greater gross margin with OnCall than the predecessor.

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Alexander William Tout, Deutsche Bank AG, Research Division - Research Analyst [64]

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Right. Interesting. I mean, what sort of proportion of your installed base around SI do you think could realistically migrate on a 2-year view?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [65]

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I don't think it's the installed base. I think it's new and upcoming projects like Metropolitan Police in London, for example. It takes time to move an installed base of that nature. But there is always new projects, and we're focusing on the new projects.

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Operator [66]

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(Operator Instructions) The next question we have is from the line of Philip Ramqvist from Sveriges Radio.

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Philip Ramqvist;Sveriges Radio;Media, [67]

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You mentioned that the coronavirus might impact your supply chain. What alternative measures are you looking at?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [68]

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The only thing we can look for is other suppliers outside of China and that's exactly what we do. But we have a significant business in China as well, and therefore, that's going to be affected if this continues.

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Philip Ramqvist;Sveriges Radio;Media, [69]

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You aren't looking at taking production back home to Sweden?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [70]

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We don't have any production in Sweden. So it's going to be hard to take it there.

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Operator [71]

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We have a final follow-up question from Daniel from Handelsbanken.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [72]

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Just a follow-up. A question on the one-off charges of EUR 26.2 million. Can you give a ballpark of how much was overlapping technologies, transaction costs and integration costs of that number?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [73]

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I'm sorry, your line is very weak. Could you repeat your...

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [74]

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Okay. Yes, of course. Can you hear me now?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [75]

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Yes, much better.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [76]

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Perfect. You have the one-off cost in the quarter, EUR 26.2 million. I just wonder if you could give a ballpark number or percentage, how much is overlapping technologies, transaction cost and integration cost of all that?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [77]

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Yes, the lion's share is overlapping technologies. And the second largest is integration costs.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [78]

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And also, do I need to wait for the annual report to know the net impact from the -- in the P&L on the capitalized development expenses minus the amortization of the same? If you compare it with 2018, for example, the net effect, if you have that or?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [79]

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Yes. No, you'll have to wait for the annual report.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [80]

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I will look forward to that.

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [81]

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It's a great report.

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Operator [82]

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Ladies and gentlemen, I'd like to hand back to your chairperson for today Ola Rollén for any final comments.

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [83]

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No, there are no more comments from our side, and we thank you for calling in, and we'll do this again next quarter. Thanks.

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Operator [84]

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Thank you. Ladies and gentlemen, that concludes your call for today. We thank you very much for joining, and ask that you disconnect your lines. Have a great morning or afternoon ahead.