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Edited Transcript of HEXA B.ST earnings conference call or presentation 6-Feb-19 9:00am GMT

Q4 2018 Hexagon AB Earnings Call

NACKA STRAND Feb 8, 2019 (Thomson StreetEvents) -- Edited Transcript of Hexagon AB earnings conference call or presentation Wednesday, February 6, 2019 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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* Alexander Stuart Virgo

BofA Merrill Lynch, Research Division - Director

* Daniel Djurberg

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Erik Golrang

* Gautam Pillai

Goldman Sachs Group Inc., Research Division - Equity Analyst

* Guillermo Peigneux-Lojo

UBS Investment Bank, Research Division - Executive Director and Industrials Analyst

* Markus A. Almerud

Kepler Cheuvreux, Research Division - Senior 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

* Wasi Rizvi

RBC Capital Markets, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Hello, and welcome to the Hexagon Q4 Report 2018. (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 welcome, everyone, to this Q4 earnings call. So if we start at Slide #4, overview of the fourth quarter 2018. We reported an organic growth of 5% in the quarter and recorded growth of 9% and very little FX impact in this quarter, as you can see from the report. So it's mostly organic and acquired growth.

Solid organic growth in Geosystems continues at double-digit 10% growth; MI comparison to very strong numbers in the fourth quarter of last year, 6% growth; and PP&M is continuing its recovery, 8%; PI grew by 8% as well. And since the overall growth is 5%, we have negative growth in Safety & Infrastructure, and actions have been taken to ensure improvements in our growth in Safety & Infrastructure for 2019.

We have record earnings and profitability in the quarter. Our gross margin came in at 62.2% and our EBIT margin was bang-on 26%. We benefited from organic growth as well as good product mix in the quarter but were adversely affected, as you can see from the report, from currency movements. We had a negative impact on EBIT, but a positive impact on the sales.

Slide 5, seasonality in profitability. Q4 is our strongest quarter. It was the strongest quarter this time around as well. And we're first time above EUR 1 billion in sales in a single quarter. Slide 6, the quarter in numbers. EUR 1,043 million in net sales, EBITDA of 33.4%, EBIT margin of 26% and then earnings per share of EUR 0.60 for the quarter. Moving on to -- I think I skipped Slide 7. That's just a summary for the full year. And as you can see, we're -- our top line grew by 8% organic growth for the year, 3% above our long-term financial target of 5%.

But if we move to Slide 8, cash flow. The net operating cash flow amounted to EUR 262.5 million and that is 46% stronger than the corresponding period of last year where we posted EUR 179.7 million. But cash conversion in the quarter was 115%, and it was 80% for the full year, but we -- if we exclude the extraordinary investments that we did in Calgary and our ongoing investment in our campus in China, the conversion would've been roughly at 90%. And our target is 80% to 90% cash conversion. Positive was the change in working capital in the quarter, and we highlighted that already in Q3, where we had a negative impact on working capital. But we were expecting a relief, and it finally came in working capital in the quarter.

Slide 9. We're now -- working capital to sales is 13% in the fourth quarter. We had a good improvement compared to Q3 in working capital to sales. We'll see if it's sustainable, but the long-term trend is still there, that we're reducing working capital to sales as we change our business model.

Market development. If we move to Slide 11, sales mix. Not much has changed. South America has gained 1% of sales, and the rest of EMEA, excluding Western Europe, has lost 1%. Otherwise, it's fairly static and we can see that we got 3 strong regions geographically.

Slide 12. Asia grew strongly as well as South America and Eastern Europe, Russia, Middle East and Africa. Western Europe reported and recorded good growth, China as well, and North America single-digit growth as well.

I'm not going to spend much time on Slide 13. It's simply too busy for an earnings call, but it's for your review later on and with follow-up questions.

So if we move to Slide 14, EMEA. EMEA grew by 6% in the quarter, organic growth; Geospatial, 7%; and Industrial, 4%. And in Western Europe, which is the lion's share of our business in EMEA, we grew by 5%.

We recorded strong growth in United Kingdom, Germany, Spain and the Nordics; a bit sluggish in Italy and France; and the growth was mainly driven by the construction side of our business, infrastructure and construction projects, Central Europe.

Power and energy had a good quarter and so did positioning solutions. We saw a continuous recovery in our Russian business that grew at double-digit rates, so did Eastern Europe.

Middle East contracted whilst Africa grew on the back of large mining investments in the region.

Moving on to Americas. North America recorded 1% organic growth, but it's not a fair representation of the situation in North America. Canada is doing fine, and United States grew by 1%. But if we exclude our public safety business that hampered growth, it's concentrated to the U.S. market, all other businesses within Hexagon grew at an aggregate 5% organic growth in the quarter, which means that construction, the industrial applications, manufacturing and so on did well in North America.

South America continued to recover. We do see a continuous recovery in our Brazilian business, which represents roughly 70% of South America. We also had strong activity in the Andean countries, where mining activity right now is high for us.

Asia, Slide 16. China recorded 5% organic growth. It was a weak quarter for electronics due to tough comps in Q4 of '17, but we have favorable development in automotive and aerospace, infrastructure and construction.

Power and energy and public safety declined on the back of very strong numbers in Q4 of '17.

Japan is doing really well, and India finally recorded double-digit growth. So we've had some sluggish growth in India in the past, and we can now see the end to that.

Reporting segments. If we go to Slide 18, Industrial Enterprise Solutions. Organic growth was 6%; MI reported 6% organic growth; and we had a very, very strong growth in the fourth quarter of '17. So it's record numbers that we're beating with these 6%. PP&M accelerated and recorded 8% organic growth. It was mostly driven by AEC and information life cycle management solutions, i.e., sales to owner operators. The design piece of the business is still growing somewhat slower than these new areas for PP&M. Sales amounted to EUR 946 million (sic) [EUR 546 million], and operating margin improved almost by 1%.

Geospatial Enterprise Solutions on Slide 19. Organic growth of 5%, and this is where we have our troubled business within security and infrastructure, that contracted by 13%. But Geosystems grew by 10%, and it was strong growth already in the fourth quarter of '17. So we're quite happy with this 10% growth. And it was fueled by good demand from Western European infrastructure and construction, North American infrastructure and construction as well as our content program and the launch and the good reception of several new products from Geosystems.

Positioning, 8% organic growth. That was driven by a continued strong demand in the agricultural sector and the automotive sector. And we do see a recovery in positioning vessels in offshore oil fields. So marine is improving.

Sales amounted to EUR 497 million, and the EBIT margin improved from 25.6% to 26.1%.

Gross margin, Slide 20, is now at 62% for the past 12 months, 1% up compared to the previous period.

And on Slide 21, we can see that the 12-month rolling operating margin is now at 25%, which is 1% up as well.

Orders and product releases. If we go to Slide 23, things that happened in the quarter. We acquired a company called Bricsys. Bricsys is a fast-growing developer of computer-aided design software for the AEC or construction market. It's a CAD platform software that supports 2D and 3D general, mechanical, and sheet metal designs as well as BIM, building information modeling. Our plans for this acquisition is to connect it with our AEC platform, SMART Build, and our laser scanners like the RTC360, the BLK360 that we've launched through like Geosystems. And now we're beginning to see an ecosystem for the construction industry where we can create end-to-end solutions to improve productivity.

Slide 24 is another new product and features similar to the RTC360, where we simplify the usage of our instruments. This time, it's the FlexLine, the new-generation FlexLine, which is the midrange total station that has the first AutoHeight feature, where you simply don't need to calibrate. The system will do it for you. It's also seamlessly connecting the office, the design office or the architectural office or the surveying office to the instrument in the field. And it's able to seamlessly send data flows back and forth.

Slide 25, we've now launched the next-generation TerrainMapper, which is an airborne sensor to cover 3D environments from air and -- sorry, just from air. And we got some unique features in this next-generation airborne sensor. It's very, very high performing.

Slide 26, Hexagon's Multivista got its first orders in the U.K. after we established the service in the U.K. And we have contracted services, which include live-streaming of remote site management on construction projects, and also photo documentation for site survey and other functionalities.

Slide 27, we modernized the map production in Ecuador, collaborating with IGM, which is the national mapping agency of Ecuador. They selected the Hexagon Power Portfolio software for auto photo analysis.

Slide 28, the Mexican Aeronautical Academy, Daedalus, they are now developing a command center and -- for the aeronautical industry in Mexico. And they have standardized on the Luciad portfolio to doing real-time visual information in the command center for the air traffic flows over Mexico.

Slide 29. The Kazakh space monitoring program continues to invest in Hexagon software. We've delivered the map enterprise solution in the past, and now we got another order. And this is for water management, disaster management, forest fire monitoring and agricultural crop monitoring throughout Kazakhstan.

Slide 30. We are enhancing and we're launching a new product in our CAD/CAM portfolio for additive manufacturing or 3D printing. It's EDGECAM 2019 R1 that was released. And this reduces the processing time for machining algorithm by between 15% and 60%, depending on the complexity of the component you want to 3D print.

Slide 31. BAE Systems is a multinational British-based defense and aerospace company. And they've bought Simufact Additive, which is stimulating 3D-printed components before the part is actually printed to find inclusions and defects before you spend the money in the process, so to say. And this is a growing area for Hexagon, simulations before you actually do the physical activity.

Slide 32. This is an interesting application. We now introduce civil anti-jam GPS antennas for offshore positioning of oil rigs and drillships and other things. Civil applications in the oil and gas areas around Eastern Mediterranean and even in Southeast Asia is experiencing higher and higher activity from jammers that try to shut down operations. So interference and jamming are growing threats for all these locations, and the antenna has been tested in military applications in the past, and that's where we first launched this product.

Slide 33. AutonomouStuff has partnered with Great Wall Motor Company in China. It's China's largest SUV and pickup manufacturer. And this is 1 step towards Hexagon's strategy to expand the footprint of AutonomouStuff in China. Autonomous vehicles is a huge industry, and it's led by the tech companies in China, and we're signing collaboration agreements with them, and we're building up our presence for autonomous driving in China as we speak.

Slide 34. We introduced Hexagon's Connected Worker solution through the PP&M division in this quarter. It improves workforce effectiveness in the field. The Connected Worker delivers a consolidated view so that you can connect front-line workers with different information systems that you have in use in your company and in your organization. And you don't have to store or duplicate the data. So it's a very powerful IoT tool that is connected to our software platforms.

Slide 35, HGC is a leading Hong Kong-based fixed-line telecommunications service provider, and they bought our telecommunications solution to simplify the process of generating facility maps and aligning fiber cables throughout their network. And that was it for the quarter.

We also need to disclose our dividend, and the board proposed in the board meeting held earlier a dividend of EUR 0.59, which is an 11% increase over last year. And this will be decided at the upcoming AGM. The dividend can be paid in euros or Swedish kroner, depending on what you prefer.

So in summary, Slide 39. Solid development, 8% organic growth in 9/10 of the group, and 5% organic growth for the group total, 9% recorded growth. We see continuous strong growth in the AEC industry as well as in the manufacturing and engineering industries. We do see a continuous recovery for power through PP&M. Growth was hampered by the decline in sales in Safety & Infrastructure. Continued margin expansion, strong cash flow, and we proposed a dividend of EUR 0.59.

And with that, we're now ready to answer any questions that we can answer. So operator, the Q&A session can start.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of Guillermo Peigneux from UBS.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [2]

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I just basically limit to 1 at this point in time. I guess, it's just related to the consumers -- consumer electronic industry, specifically in China, but I guess, elsewhere as well. Do you see any potential impact from the 5G launch on your business, i.e., is there any reason for -- or reason to believe that some of this spending that some of these consumer electronics players in the industry will be putting in place is being delayed for the implementation of 5G into 2020 and onwards, and hence, you should expect actually that spending to recover at some point during 2019 or early '20?

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

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Well, one can only speculate, and of course, it's going to mean a lot to the telecommunications industry. And we are benefiting from that in 2 ways. First of all, of course, the handset manufacturers are going to launch new models with 5G. So that's a direct impact on our MI business. And then secondly, we do see that solutions in relation to the smart factory applications that we are developing are going to be easier to roll out as you have 5G. Because with 5G, you have Wi-Fi quality and speed. And that's going to mean a lot for us. So we'll see later in 2019 what the impact is going to be, the direct impact selling to handset manufacturers and the indirect impact from having access to the speeds that 5G can deliver.

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [4]

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And maybe a follow-up on automotive CapEx. Your clients, do you see spending patterns holding or probably accelerating into 2019, again the same question into 2020?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [5]

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Well, we have to...

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Guillermo Peigneux-Lojo, UBS Investment Bank, Research Division - Executive Director and Industrials Analyst [6]

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Related to the EV content -- sorry, the electric vehicle content -- sorry, to interrupt you, the EV content, yes?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [7]

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Yes. I mean, we have 3 businesses into automotive. We have our quality systems, the metrology business, the traditional, and that is growing at low single-digit growth in the fourth quarter. So we did see a slowdown in that. But we saw an acceleration in our design and simulation software business, where we see a much greater uptake from our simulation software in the fourth quarter. And of course, autonomous vehicle development is on fire and growing at very, very strong rates. And I -- we expect that to continue into 2019, similar trends.

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Operator [8]

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Our next question comes from the line of Markus Almerud from Kepler Cheuvreux.

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Markus A. Almerud, Kepler Cheuvreux, Research Division - Senior Research Analyst [9]

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My first question is regarding the Geosystems. So what is the contribution that we're seeing here from RTC360? I mean, this is very nice to have a sixth consecutive quarter with double-digit growth. So the RTC360, how much is it contributing? And also the BLK360, has the growth in that leveled out or is it -- is that a big contributor as well? And then what was the last time you saw this long a streak of this kind of growth in that segment?

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

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Wow. I think, on group level, Geosystems has -- you're absolutely right, new products is a significant contribution to Geosystems' 10% growth in the quarter. It's not only RTC360. RTC360 is a great success, but BLK360 is continuing to grow. And now we're launching BLK3D, but we also have a lot of success with these -- I gave an example in the earnings call with the total station that auto adjusts the height. We've launched similar products with a tilt adjustment in our GPS product portfolio, and this is the new trend. You don't need as much education to calibrate and use these instruments in the field, and that is pushing growth. So I -- the honest answer is that it's a significant portion that is driving Geosystems' growth coming from new products.

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Markus A. Almerud, Kepler Cheuvreux, Research Division - Senior Research Analyst [11]

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Okay, okay, interesting. And then, if I can just ask, so how much of the margin improvement in Industrial Solutions is driven by margin improvement in PPM? That is, when -- are you seeing that -- are you seeing the margin in PPM come back significantly now that growth is back? Or are we still waiting for that?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [12]

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We're still waiting for that. It was actually MI, through its very strong development of its simulation software business, that pushed margins up in Industrial.

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Operator [13]

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Our next question comes from the line of Alexander Virgo from Bank of America.

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division - Director [14]

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Ola, couple of ones, if I could. Could you talk a little bit about the moving parts in China? 5% organic growth is very solid against a very difficult comparison. But I'd be curious if you could split out maybe the drag from public safety, so the underlying ex public safety would be super helpful. And then secondly, if you could just talk a little bit about free cash flow? Clearly, your guidance around Q3 and the changing customer and the implication for working capital has been proven to be true, of course, and free cash flow delivery in the quarter is very solid. So I wonder if you could just make a comment around how we should think about that going forward? Are we likely to see any potential changes as we saw in Q3? And whether or not it's something we need to think about for 2019?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [15]

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Thanks. We will start with China and moving parts. The -- I think we can use slide number -- where is the famous arrow slide, Slide 13. So in general, the construction industry was not -- it was slowing down in China, as you can see from the surveying arrow. That is also impacted by one-offs in the fourth quarter of '17, where we delivered a set of airborne sensors, and that doesn't happen every year. Power, energy and mining is doing fine in China, but it was tough comps in Q4 of '17 that makes that arrow brownish-orange or whatever the color is. Electronics and manufacturing, if we dissect that, manufacturing was super strong and we see a trend -- continuous trend towards manufacturing 2025, where the Chinese manufacturing industry wants to automate and improve quality. We talked about the negative trend in electronics, but the matter of the fact is that manufacturing outgrew the decline that we saw in electronics. Automotive is super interesting in China. You have a lot of new electrical vehicle manufacturers that are investing. The traditional ones that we mentioned like Great Wall are investing as well, and we also see a huge investment effort into autonomous, where both the tech people and the traditional auto guys want their fair share of the action. Aerospace and defense was strong. Aerospace, civil aviation is the focal point in China, and they're investing in state-of-the-art technologies to produce civil aircraft. But public safety was hampered, and we're still late and delayed in the Smart City rollout in China. That was China, and then if we move on to working capital, I think, unfortunately, one has to expect our working capital to be lumpy and hard to predict. Over time, working capital to sales should go down. And as you see from the graph in the presentation, we've come a long way since the early 2000's working capital to sales. As we tend to have more and more subscription-based business, it's going to reduce further because you get upfront prepayments. But I think we'll have a similar situation in '19 as we saw in '18, neutral to slightly negative working capital buildup.

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Operator [16]

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Our next question comes from the line of Daniel Djurberg from Handelsbanken.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [17]

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And my question would be coming back to Geosystems. You launched quite recently the BLK3D after some delays. My first question would be on -- the market has received this as of yet? And have you considered the [application] and how many do you plan to manufacture in 2019?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [18]

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Yes. We had good reception, but you can't really say that BLK3D had any impact on the fourth quarter. So that has yet to come in '19. And we have great expectations for it. We'll see how many we'll sell.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [19]

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Okay, fair enough. And it was launched, I guess, in January or was it in December?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [20]

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We shipped a few late December.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [21]

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Okay. And then on the Safety & Infrastructure, you have some problem projects in the U.S. government, I think it was. Can you give us some more clarity or visibility perhaps on your thoughts on the recovery? How you expect it to pan out here in '19, if it's a specific quarter or if it will be gradual or something?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [22]

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I think we expect to return to growth as of Q2. But Q1 will still be negative, but as from Q2, we think we have our ship in order.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [23]

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That's perfect. And my...

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

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And it's 2 areas. It's defense-related, where we have a structural issue. It's a generational shift where we're moving from static maps to dynamic maps like the ones Luciad produce. And then it's a new product for civil public safety, where we have some teething problems in a few installations. So by Q2, we hope that we can report some positive news.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [25]

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That's great. And the third would be a little bit on accounting, if it would be possible to give us the level of the quarterly and annual investments in material assets, the EUR 465 million and EUR 227 million, respectively, that is not referring to capitalized development expenses?

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

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You mean the material investment?

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [27]

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Yes, you have [of course] the cash flow in...

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

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That is -- the reason why that is growing is our ongoing investment in China.

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Daniel Djurberg, Handelsbanken Capital Markets AB, Research Division - Research Analyst [29]

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Yes, I understand that, but if you look at the immaterial assets investments, you have the EUR 65 million in the quarter. I was only wondering how much of that is -- refers to capitalized development expenses?

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

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It's the lion's share.

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Operator [31]

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Our next question comes from the line of Mikael Laséen from Carnegie.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [32]

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Couple of questions. In your statement in report, you say that you are confident in your ability to grow despite uncertainties in the world economy. Can you elaborate a bit on what this means? Is it possible to grow in line with your financial target of 5%? Or is this not possible given the uncertainties that you mentioned? Can you just comment a bit more on this?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [33]

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It's very hard to say. We're early, we're in the start of a brand new year. The year has started well, pretty much in line with what we've seen in the second half of '18. But we do know that there are some global macro uncertainties, and we're not immune to those. So it's -- it would be something that you could -- if you were to state what you think, you could have to eat it up later in the year. But I think we're -- it's nothing different from what you see from other companies. If you're not concerned about the political situation between United States and China, and the turmoil we do see from Italy, France and the Brexit talks and so on, and the impact from that on global businesses, you would be naïve and stupid.

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Mikael Laséen, Carnegie Investment Bank AB, Research Division - Head of Software & Services and Financial Analyst [34]

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Yes, I agree. And the second part here is if you can update us on the software side and recurring revenue as a percent of total sales and how those grew in 2018?

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

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I don't have it yet, but we're going to come back to it later when we issue the annual report. But I think it's fair to say that our software business has outgrown our hardware business in '18.

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Operator [36]

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Our next question comes from the line of Erik Golrang from SEB.

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Erik Golrang, [37]

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I've two questions. The first one on working capital, I guess a follow-up. You said it's going to be volatile, but if you would relate it to the 27%, 28% margin target you have, where would you expect working capital to sales to be if you hit that level on margins, given what mix that implies, I guess?

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

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It's going to be at or below 15% of sales. That's the best guess I can give you.

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Erik Golrang, [39]

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Okay. Then the second one, also a follow-up. You talked about continued very strong growth on -- within autonomous investments on the auto side. I saw, I think, it was an interview with some of the AutonomouStuff team talking about around 50% expected growth in '19. Is that something you can confirm that you expect to target?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [40]

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No, but I'm quite happy if they said that. I hadn't [heard] that.

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Erik Golrang, [41]

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I see. Then the third one, on the oil and gas side of PPM, which doesn't seem to have sort of returned to growth. Is that something you still -- or still, but do you see that happening at some point during 2019 based on the positive tendering activity you've talked about previously? Or has the oil price contraction sort of capped that potential recovery we saw?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [42]

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No, it's -- you shouldn't say firmly, but it has to recover simply because the current activity in the oil and gas industry is not sustainable. With the demand growth of fossil fuels, i.e., gas and oil, and the current demand levels in the global economy, if you continue to run the oil and gas industry on the levels of investment that we've seen over the past few years, you're simply not going to have enough supply. So we do see a funnel and a pipeline of large-scale projects that are going to mean meaningful business for our design software. So I think one just needs patience. And what's interesting is that we have very low growth in that core business, but still we reported 8% growth for the division, which means that the AEC and the other industries that we've entered with our product are growing very fast indeed.

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Erik Golrang, [43]

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And is it the oil and gas part that needs to grow as well for the margin recovery or pickup in PPM to happen? Or can we start to see that at some point even without oil and gas joining AEC?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [44]

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No. I think it's as simple as this, that we've seen a top line drop in the division. We've trimmed our cost. We've invested to cater for new industries. And as the top line continues to grow, we're going to see better and better incremental margins.

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Operator [45]

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Our next question comes from the line of Toby Ogg from JPMorgan.

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Toby Ogg, JP Morgan Chase & Co, Research Division - Analyst [46]

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Ola, just looking out to the 2021 targets, particularly on the margin side, the base scenario of a 27% EBIT margin would sort of imply 75 to 80 bps improvement each year on the margin, which is just slightly ahead of the sort of 60 to 70 basis points you've been delivering over the last few years. To what extent do you still think this is achievable? And I guess, how much M&A do you think is needed to get there?

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

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I think it's not a linear development. You can't use a ruler and say, okay, this is what we need to do every year. Of course, it's going to be steps, and certain events are going to have more impact on the EBIT margin expansion than other. So it's product mix in combination with acquisitions and new product launches.

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Operator [48]

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The next question comes from the line of Gautam Pillai from Goldman Sachs.

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Gautam Pillai, Goldman Sachs Group Inc., Research Division - Equity Analyst [49]

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Ola, first, I wanted to come back on your comments on the general business environment. So while you engaged with customers in Q4 and year-to-date, did you observe any change in demand or buying patterns at all?

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [50]

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No, we don't. But of course, there is concerns and discussions around what's happening in the global economy. And I mean, it's people you deal with, and obviously, everyone is discussing the trade talks that are ongoing and so on, which -- I mean, it's the two largest economies on this planet, and obviously, you have to follow very closely what's happening in the relationship between these 2 countries.

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Gautam Pillai, Goldman Sachs Group Inc., Research Division - Equity Analyst [51]

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Sure. And can I also follow up on the Geosystems growth? Clearly, there is strong momentum in this segment. And you alluded, too, that part of this was driven by some new products. Historically, the segment has had cyclical characteristics, and you have a new product launch in 2019 or already launched in 2019, but once the ramp-up of these products cool down, how should we think about growth in the segment in 2019 and 2020?

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

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I think -- you can't think like that. What's needed, what's a prerequisite for growth in the economy that we're going to face, all of us in the next few years, is development. So you can't stand still. We're going to launch new products in '19, but we're going to launch new products in '20 and '21 as well. And I think the future belongs to the ones that innovate.

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Gautam Pillai, Goldman Sachs Group Inc., Research Division - Equity Analyst [53]

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Would you say that the segment is becoming less cyclical and more structural from [advanced] standpoint?

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

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No. If you don't develop, it's going to be super-cyclical. But if you develop and if you continue to have good ideas for productivity improvement, yes, then you can achieve growth even in a bad economy.

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Gautam Pillai, Goldman Sachs Group Inc., Research Division - Equity Analyst [55]

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Sure. And lastly, on the electronic segment within Manufacturing Intelligence, can you comment on the prospects given a weaker outlook from Apple? And obviously, you touched upon on the 5G opportunity. Is that -- will that offset any weakness from the Apple supply chain?

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

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We'll see. We don't know yet. It's early days.

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Operator [57]

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Our next question comes from the line of Wasi Rizvi from RBC.

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Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [58]

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A couple are left for me. Just firstly on MSC, I was trying to get an idea of how big that is now within IES. I think you mentioned that design and simulation has been having good acceleration and growth recently in auto, in particular. I was trying to get a feel for how big that might be and what the trajectory of that business had looked like in recent quarters. And then my second was on AutonomouStuff. I was wondering how that -- the rollout -- I think you were saying you're expanding in China and Germany. I was wondering how that was going, and then whether in the context of the bigger addressable market, whether that 50% growth target that was mentioned earlier, whether that's actually conservative if you think about how much the size of the addressable market might grow.

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

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If we start with MSC, we acquired MSC in 2017. We've been working hard on refreshing and modernizing the product portfolio and also integrating it with our other solutions within the MI. And that is now paying off. So we saw good growth, double digit in the fourth quarter, 9% for the full year from MSC. And this is definitely an application for the future, especially in combination with autonomous vehicles where it's impossible to simulate an autonomous system by driving on the road, specifically. You need simulation models where you can download roads from our Imagery Program in Geosystems into MSC's products and actually simulate an autonomous system. So that is one area which is super interesting for the automotive industry. Then we also see a good growth from the aerospace industry within MSC. And I think that to simplify things, simulating metallic applications like cars and planes and so on, that is the sweet spot for MSC. And we're seeing good traction with our new products. Moving on to AutonomouStuff, we've -- we're investing heavily in our Chinese operation to localize our capabilities for AutonomouStuff in China. We're also looking at building out our correction services in China, which is something you do need to have autonomous traffic in autonomous cars. And that is going to be something we're going to talk more about for 2019, 2020. Europe is probably the third area in terms of activity. It's slightly behind China and the Americas for autonomous, but we are investing in Germany as well. And Germany will be the center for autonomous development. I don't know if that's enough of an answer.

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Wasi Rizvi, RBC Capital Markets, LLC, Research Division - Analyst [60]

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Yes. So I was just wondering on the time scale of that expansion, and then by how much that increases your addressable market for AutonomouStuff given, I think, maybe it was historically just mainly North American business.

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

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Yes, it's going to grow significantly. As I said, I think China is right now second to none when it comes to developing and deploying algorithms to drive cars autonomously. So not having had a local organization in China before, but now having it, is a huge change for AutonomouStuff.

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Operator [62]

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(Operator Instructions) And our next question is a follow-up question from the line of Alexander Virgo from the Bank of America.

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division - Director [63]

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Ola, just a couple of quick follow-ups. I wondered if you could give us the growth in China of MI as -- or an indication of growth in China of MI should be helpful. And then the last one just on the SI impact. Just wondering if you can talk a little bit about the impact on margins that has.

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [64]

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We'll start with the first one. It's actually stronger than the overall number for China, the 5% for MI. But we don't disclose divisions in individual markets. And what was your second question?

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division - Director [65]

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Just wondering if you can characterize the headwinds that we're seeing from SI on the margins. Or what [drag could] happen on the margins.

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Ola Rollén, Hexagon AB (publ) - CEO, President & Director [66]

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Yes, it's not good for margins, obviously, when you're contracting a business. So it hasn't been helpful to expand the overall margin.

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Alexander Stuart Virgo, BofA Merrill Lynch, Research Division - Director [67]

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But no indication of basis points or something that we -- if you're going to see an improvement from sort of Q2 on, just wondering what sort of tailwind for margin we can expect.

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

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You can expect an improvement because right now, they're hampering growth and margins, and just neutralizing it and having it at neutral development will make a significant change for the overall group numbers.

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Operator [69]

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And as we have no more questions registered, I now hand back to our speakers for any closing comments.

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

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Yes, and we're completely exhausted. So there are no follow-up comments. Thank you for listening in. And we'll do this again in a quarter's time. Thanks.

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Operator [71]

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