Thank you, welcome everyone to this year-end report for 2017. If we go to Slide 4 in the deck, overview the fourth quarter of 2017. As you've seen from the report, we report organic growth of 10% an operating sales growth, i.e., before revenue haircuts of 13%. We saw strong growth in Geosystems, MI, and Positioning Intelligence. China recorded a solid 23% organic growth, we saw demand increase across all divisions. PP&M returned to growth reported 2% organic growth in the quarter, we post a growth margin of 61.8% as compared to 60.5% for the fourth quarter previous year. The EBIT margin is 25.8% versus 24.6% for the previous year. We post MRI, so-called revenue haircuts of EUR 6.3 million in the quarter, it's related to the acquisition of MSC.
We also have already issued a press release on the one-off positive tax income, which is about the revaluation of accruals in the U.S. due to the U.S. tax reform in December. Slide 5, seasonality and profit. Q4 is our strongest quarter, along with the second quarter, this pattern has repeated itself in 2017 as well. Slide 6. Key figures for the fourth quarter. We report operating at sales of EUR 959.3 million, we post an operating earnings, i.e., EBIT1, of EUR 247.1 million, that corresponds to an EBIT margin of 25.8%. Earnings per share, excluding non-recurring items, is EUR 54.20 up against the corresponding period of last year. On Slide 7, we see the full year numbers, I'm not going to go through them since we've been through all quarters of the year, you can review them later. Cash flow.
If you look at the fourth quarter, we have a strong cash flow from operations, EUR 300 million versus EUR 260 million in the fourth quarter. We have an extraordinarily high tax payment related to tax paid in the U.S. in the fourth quarter. If we look at the full year, we see that the tax paid is in line with what we paid in 2016. It's pleasing to see that in spite of the 10% organic growth, we report flat EUR 5.2 million in change in working capital. That is, of course, due to the subscription model that we introduce more and more on a broader base through the organization through the various divisions, which, of course, is working capital positive. Investments are roughly in line, we continued with our restructuring program in the fourth quarter reduced personnel, thus the non-recurring cash flow of EUR 8.1 million.
A super good quarter a super good year for cash flow. Looking at working capital to sales on Slide 9, we can see the development how this prepayment model is kicking in on working capital to sales. The consolidation of MFC has, of course, helped us to bring it down further in the year. Market development. If we go to Slide 11, we can see the sales mix per geographic region in the fourth quarter compared to the fourth quarter of last year. Not much has changed. We see a bit growth in Europe, China, Asia Pac. If we move to Slide 12, the arrow picture, China with 23% organic growth is the shining star in this quarter like the previous two quarters, before Q4. North America has turned a corner is delivering strong growth. So is Eastern Europe, Middle East, Africa.
South America, finally, we see the light at the end of a very long tunnel in Brazil. Brazil is growing double digits in the quarter. Western Europe, good growth, but single-digit growth. Asia, ex China, same picture. Slide 13 is an overview where you can review yourselves after this call, the various segments and geographic regions, how they performed in the quarter. EMEA. Slide 14. Western Europe recorded 4% organic growth. We saw good growth from Germany, France, and Italy, but we saw weak growth or negative growth in U.K. and Spain. Growth was mainly driven by infrastructure and construction-related businesses, as well as gaining new markets through the launch of our new product, the BLK360. We saw strong development in Russia, which has turned a corner and is improving again for us across all business units.
Double-digit growth in the Middle East driven by Geospatial Solutions. GES is reporting 10% and IES 5% organic growth from this region. We move to Americas. Slide 15. North America recorded 9% organic growth. We actually saw strong growth from all three countries making up North America, Mexico, United States, and Canada. Segments that grew exceptionally well in the quarter were infrastructure and construction, as well as the new products we launched that are gaining traction. We saw a recovery in PP&M in the North American market, and they reported solid growth, especially in project control solutions. South America, as I've already commented, is recovering and is recording double-digit organic growth in the quarter, driven by the recovery in Brazil. GES 10% and IES 10% in this region as well. Moving on to Asia. Slide 16.
China recorded 23% organic growth, stellar results. It was strong demand across all industries. If we are to highlight two applications, it would be electronics in China as well as smart city solutions. We saw weaker development in India due to tough comparatives where we delivered a smart city solution in Q4 of 2016. GES is growing at 13% in this region and IES at 14%. Reporting segments. If we go to Industrial Enterprise Solutions, slide 18, we record 10% organic growth for Industrial Enterprise Solutions, MI 13% organic growth. It's the strong demand from the electronics industry in China, as well as good recovery in all other regions and a robust growth in our software business. Automotive and aerospace improved from previous quarters. We saw a bit weakness in aerospace. We don't think it has an impact for the long-term view of that industry.
PP&M, 2% organic growth, strong growth in project control solutions and the United States. The EBIT margin came in at 26.5%. That is almost 1% stronger than the corresponding period of last year. We move to Geospatial Enterprise Solutions. Slide 19. Organic growth, 10% even here. Geos ystems is reporting 13% organic growth. This is driven by solid development in infrastructure across several geographic regions. We see a more broad-based recovery this quarter than we've seen in previous quarters of 2017. Not to forget the launch of new products that have had a really successful reception in the market in the second half of 2017. SI reports 0% organic growth. It's difficult comparatives from last year's smart city project in Middle East and India, but we do see a solid development in smart city solutions in China.
Headwind from the defense-related business that we got in SI in the quarter as well. Positioning, on the other hand, reports 18% organic growth. That is driven by continued strong demand from the defense-related sector as well as agriculture. The EBIT margin came in at 25.7%, which is 1.5% stronger than the corresponding quarter of 2016, a really good performance EBIT-wise. We move to the growth margin, 12 months rolling on slide 20, we can see that it's 61% rolling 12 months, 1% up against last year. The trend continues. We also see that on the operating margin, slide 21, where we in the fourth quarter report 26%, but for the full 12 months, 24%.
Talking a little of moving parts and what was going on in our markets and inside the organization, slide 23, we acquired a small but highly critical business called IDS in the quarter. IDS core product fills the gap in the newly launched product SDA, Smart Digital Assets in Hexagon PPM. It's adding completions and commissioning capabilities to our product suite. We move to slide 24, we talked a lot about the electronics industry, but what are we actually delivering? On the picture you see a complete inline measurement solution. It's a state-of-the-art automated solution to inspect electronic products. We cannot, unfortunately, mention who it is. We're continuously developing solutions to move from the quality lab to the production line, from offline measurements to inline measurements. We have a feedback using our software into the general reporting system of this very large factory. Slide 25.
Powering safe and efficient air travel. We got an order from Lufthansa that has a system called LIDO, which basically is about flight path planning. It's a 4D solution where we've used our newly acquired technology, Luciad, to incorporate that with our technologies to be able to display movements in air from commercial carriers across the globe. Slide 26. Swedish Armed Forces depend on Hexagon technology. We signed a three-year agreement with the Swedish Armed Forces to deliver image processing and cartography solutions. Slide 27. We launched, through MSC, a new product called Actran 18. It's basically about offering new capabilities to determine acoustic, vibroacoustic, and aeroacoustic simulations to improve products. Primary end markets for this product will be automotive, aerospace, railway, defense, and consumer goods. Slide 28. This is another inline development that we've installed in the quarter.
WLS400A is a white light scanning solution that we put on top of an industrial robot. Then we connected to our measurement software. It's a robust solution for real-time shop floor metrology. This time it's not about inspecting finished products. Here we inspect components and assembly processes. Slide 29. Positioning Intelligence had a great quarter. Some of the highlights were that we were involved in trying out Canada's first autonomous vehicle on-street test, where we're becoming quickly the de facto standard in GPS or GNSS for autonomous cars. We partnered with Esterline CMC Electronics to develop a new certified receiver for the aviation industry. We see more and more success with our anti-jam technology GAJT.
This time it was the Royal Navy that selected GAJT for its Type 26 frigates as part of the protected navigation system that more and more deploy on their vessels and vehicles. Slide 30. New Delhi infrastructure projects. A company called True Earth Surveys has bought our 3D reality LIDAR, they have a project where they're going to rebuild 200 km of roads and highways around New Delhi. Slide 31. Vietnam was, and is, an interesting market for Hexagon. We've struck two deals in the quarter. The first deal was with the Department of Survey and Mapping in Vietnam that choose Hexagon to build a so-called GNSS reference station network around its capital, Hanoi. This network will be deployed in the development of the regional infrastructure around Hanoi, i.e., roadworks, tunnels, bridges, large infrastructure, utilities, and so forth.
Vietnam Natural Resources and Environment Corporation has also chosen our technology. This time it was a LIDAR airborne system to map the country and create a digital elevation model of the country. Slide 32. T2 Utilities in Canada is a company that is providing subsurface utility engineering services. They choose our ground-penetrating radar to be able to do 3D underground mapping of underground utilities, such as electric, water, and sewage utilities. Rega is a Swiss air rescue organization. They choose our computer-aided dispatch solution to dispatch their more than 10,000 missions that they do annually in Switzerland. Slide 32. The Italian railways, responsible for the management and safety of more than 16,000 km of rail network, choose Hexagon dispatch solutions. It's going to be deployed in the operation center in Rome and in 15 regional control rooms around the country. Slide 35.
Now we're moving on to mining, this time we got three orders in Australia, on Slide 36, we had three more orders from Turkey. It was a really good mining quarter, we can see that our digitalization solutions for the mining industry are gaining traction. Slide 37. Mitsubishi Heavy Industries select Hexagon's project control solutions for deployment in large-scale projects. Mitsubishi is an EPC that builds chemical and petrochemical plants, they are deploying our project control solution as its dashboard to follow up on these mega multibillion-dollar projects. China, Slide 38. We had a fantastic quarter in China, we've had fantastic quarters throughout 2017 in China. We can see parts of the business we do in China. CNNC, which is the Nuclear Corporation of China, has chosen Hexagon's CAD solutions to improve the design process.
Acre Coking Refractory engineering company is choosing SmartPlant to improve its engineering capabilities. Tianjin Bohua Chemical Development Company has a relocation project where they want to digitalize the plant before they move it so they can recreate it in another place and hand over the so-called digital twin. Slide 39. We've launched new product in our agricultural business. We partnered with Raízen, which is the leading Brazilian energy company growing sugarcane, they choose HxGN AgrOn Logistics, which is a new product that reports a map in real time, what's going on with the crop and on the field, and can basically work as a decision tool for the operators. In studies with Raízen, we believe that we can reduce operational costs and increase soil preparation productivity by roughly 30%. That was this quarter's events that we wanted to highlight.
We now move on to the dividend, Slide 41. The board of directors proposed a dividend payout of EUR 0.53, that is 10% better than what we paid out last year. This dividend can be paid in EUR or in Swedish krona. Summary of this quarter, another record quarter, 10% organic growth driven by strong development across most of our divisions, but especially in Geosystems and Manufacturing Intelligence, Positioning Intelligence. Continuous robust organic growth in China, 23%, and PP&M finally returned to growth. The positive momentum was really outside of the oil and gas business. Strong profit development and cash flow and a proposed dividend of EUR 0.53. I think it's in place after a result like this to thank our 18,000 employees that have done a stellar job in spite of the headwind we have encountered in 2017.
I'm really proud to be the CEO of such a great company. Thank you, everyone. Operator, we are ready to answer any questions there might be.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure that the mute function is switched off to allow your signal to reach our equipment. Again, to ask a question, please press star one. We will take our first question from Daniel Djurberg from Handelsbanken. Please go ahead.
Thank you very much, a big congratulations, Ola, to a stellar report. Quite an achievement this quarter. I would start with your last summary comment there on the oil and gas, that the business outside oil and gas supports the expectation of continued growth in 2018. Looking back here in PP&M and so on, haven't you seen any recovery in the oil and gas sector as well, given the oil price and so on? A comment on the oil and gas and PP&M would be grateful for 2018.
Yeah, I hear you, but I didn't understand your question. Sorry.
Sorry. The question was really about the oil and gas recovery, if you see anything of that in the Q4 and the outlook, especially, of course, for the process, power, and marine segment or division.
Well, we've got two businesses in the oil and gas field. We have positioning of drill ships and service ships around the world, and we've seen that activity improve, which means that there is more activity offshore today than one year ago. That's positive, and typically, PP&M is six to nine months behind that. You don't start designing new projects before you have hit the capacity ceiling in the assets you already have deployed in an oil field. There is hope for better and a stabilization in the oil and gas market compared to what we've seen in the last few years. We shouldn't expect, and we are not planning for oil and gas to grow at double-digit levels again.
Yeah, fair enough. May I also ask you about, given this strong organic growth, 10%, and then MI at 13%, it seems like you're taking market share in many places. Can you also comment if what you see, and also if you did go to market change ambition to go more with solution sales, key accounts, and so on a couple of years back, if that is starting to help out as well? Any comments would be helpful. Thanks.
I think so. Now I'm commenting on my business. We see a shift in the manufacturing industry where you decouple a lot of processes. For example, the traditional manufacturing company has had component manufacturing, assembly, and design. We see the decoupling happening where companies like Tesla and Apple, for example, they only focus on assembly and design, and they leave the components manufacturing with sub-suppliers. In this process, partners that can help them understand what's going on in this manufacturing workflow becomes increasingly important. I think we positioned ourselves so that we can capture a lot of that new-grown interest for following up on quality and productivity across the manufacturing workflow, whether it's in-house or outsourced. Yes, I think that we.
I will go back to the queue. Thanks.
Okay. Thanks.
We will now take our next question. Please go ahead, Adam Wood of Morgan Stanley.
Hi, good morning, and thanks for taking the question. Also congratulations from me on a very strong end to 2017. Just looking into 2018, clearly you're running well ahead of the organic growth target you've given for the midterm of 5%, and it looks as if that growth is very broad-based across the business and across the geographies. It's not one thing driving it, and the macro looks pretty supportive. It's really just if you could help us understand those positive factors which might suggest we should be expecting something better than the midterm guidance of 5% in 2018 against the tougher comps that you're going to have in the second half of the year. Should that maybe make us a little bit cautious? Any help you can give us on that would be great. Secondly, just on the solutions portfolio.
We've seen Smart Cities come in and be a nice driver for you over the last 12, 18 months. As we look into this year and maybe the next 18 months, is there another solution in that portfolio that you're starting to see build nicely from a pipeline perspective that you think could do a similar thing? Thank you.
We have a few more white rabbits up our sleeve, but you have to come to Las Vegas in June to see them. That's the answer on that. Smart Cities is continuing to gain traction, and I think we're going to have another good year in Smart Cities. Giving guidance on organic growth for a full year is not something we do, but we've stated that the average growth should be 5% organic growth between 2017 and up to 2021. I think we need to over-perform in good years in order to reach an average growth of 5%, given that there might be a slowdown in the economy between now and 2021. That's how you should look upon our average target of 5%.
Perfect. Thank you very much.
Thanks.
We will now take our next question from Gerardus Vos from Barclays. Please go ahead.
Hi, good morning. Thanks for taking my questions. Three, if I may. Just first of all, on the kind of tax, could you help us what the impact will be of the tax reform in the U.S. on the kind of tax rate for you in 2018? Secondly, coming back on Adam's question on Smart Solutions, what was the kind of contribution from Smart Solutions during 2017, where do you expect this to trend over the coming years? Finally, clearly you've had a couple of great quarters in China. We're getting into tough comp territory. Is this something of a more multi-year kind of upgrade cycle, what we've seen in the past? Should we temper our expectations into 2018? Thank you.
First, if we start with tax impact, we expect a neutral tax impact. It's true that United States has dropped its income taxes significantly, but we have taxed our income in other lower tax countries as well. We believe that we will maintain the 18% tax rate for 2018, that's the best guess we can do sitting here early February. Regarding Smart Solutions, 50% of the growth, if we disregard acquisitions, is generated by new solutions, new projects. We expect that to continue. As a matter of fact, that's our bet. We're banking the company on the transition from a product-based portfolio to a solution-based portfolio over the next five years. China was your third question, we had indeed a great year in China in 2017. China for engineering, for example, aerospace, auto, electronics, that's our best market and our most sophisticated market.
We see a great and healthy appetite for new technologies being deployed in China. As a matter of fact, we're deploying more sophisticated technologies in China today than any other market in the world for manufacturing. We think that's set to continue. The Smart 50 project in China is more of a long-term bet, which will continue into 2018. I think all in all, if you summarize China, I think we're going to have another strong year in China. Will it be as good as 2017, will we grow at 20+%? No, I think that's a far stretch, but it's definitely going to be a good year.
Okay, perfect. Thank you, and congrats on the quarter. Thanks.
We will now take our next question from Max Frydén, Danske Bank. Please go ahead.
Yes, hi. I got disconnected from the call, so I'm not sure if this question has been answered, but I wonder what the contribution were from new products, in the quarter in terms of the year-over-year organic growth, and also if you can possibly quantify what that number was in Q3 as well.
Yeah. No new product is accelerating, and we just said that half of the organic growth is new products.
Okay. In Q3, was it similar or was it less, you think?
No, I think it was more because we saw more contribution from, let's call it, the general economy and the recovery across the world in the fourth quarter.
Okay. Another question from me on the inline measurement technology and electronics. Is this driven by customers changing their measurement equipment? Will it continue to be driven by capital spending in new equipment from your customers, or is it more volume driven by the strong end markets, you think?
It's capital driven, and it's actually driven by the consumer. More and more smartphones have glass inlays and very sophisticated shapes and forms, and they use brushed metal and so on. The feel factor, if we could call it that, is becoming increasingly important. How does it feel when you touch a phone? That means that we need to measure the casings and the covers in a different way. The machine on the picture is actually capturing more than 200 measurement points in less than two seconds.
All right. Thank you very much. That's all for me.
Thanks.
We will now take our next question from Mohammed Moawalla from Goldman Sachs. Please go ahead.
Great. Thank you. Congratulations on a very good quarter. Ola, my question was on sort of the newer products. I know in the past we have seen some of the sprouts of success with smart solutions, but you've also had perhaps the execution has not been a bit more as consistent and followed through. Can you give us a reminder on where you are, given you've now seen a couple of quarters, but to see the consistency in this execution from new products, how ready the sales organization and the broader go-to market is, and whether you need to do any more in order to ensure that this consistency continues? The second question was just on some of these products and essentially sort of product cycles. How should we think about them?
Traditionally with software companies, when they go into platform selling or solution selling, these are multi-year, very long product cycles, whereas you seem to be making bets on many of them. Will these be maybe slightly more shorter term in duration, meaning a year or two rather than three to five years? If you could just help us understand some of those bigger moving parts on the new products, that'd be great.
Wow. That wasn't an easy question. I don't think it's wrong with the execution of launching new product, but the reception has varied, to be fair to our organization. The maturity among the customers has varied, and I think that is more the issue rather than the execution of the new product. I think our internal organization is in shape, but sometimes it just takes longer to penetrate a new market than one would wish for. What was your second question again?
Just the duration of some of these product cycles. Do you expect some of them to be very longer duration and others more shorter duration, and therefore you need to keep getting more product in the tank in order to ensure this new product mix continues to be healthy?
I think it's like everything in this world, we need to change more often to attract new things. It goes for almost any industry you're in right now, that the changeover costs have dropped so dramatically in most industries, that you can actually afford to do changes more often than you could in the past. Systems are much quicker. We've automated a lot of design features and so on. Thus, we can develop and deploy new technologies in a much more rapid way. I think we should expect not only Hexagon, but all companies to have to change their product portfolio and refresh them more often than in the past.
Okay, that's great. Thank you very much.
That doesn't mean that cost needs to go up. I think what I'm trying to say is that changeover costs have dropped so dramatically that you're almost forced to do changes on a constant basis. Change is the new norm.
Okay, great.
Thanks.
Our next question comes from Mikael Laséen from Carnegie. Please go ahead.
Yes, thank you. I have a few questions regarding the industrial sector and the improvement that you report in that area. First of all, if you can comment on the PP&M segment, did you book any large orders this quarter in Q4, and what is the outlook and performance for the non-oil and gas segments and customer areas?
No, we did not book any large orders. We saw a interest in our project control product from EcoSys, an acquisition we did two years ago. We're finally gaining traction in our marketing channel for that product. We saw a surge of non-oil and gas project-related software, i.e. project control.
Okay. The oil and gas side, did that continue to decline and the other segments grew? On top of that, you had project controls, or how did it look like?
You could say oil and gas was flat, and then all the other segments, including project control, grew.
Okay. Excellent. I also have a question regarding the MI segment. You highlight electronics and software. The electronic side is well-known, I guess. The software side, if you can talk about that, what happened this quarter? It was significantly better in Q4 than in Q3 and Q2 and so on.
We're integrating an acquisition we did in 2014, Vero Software, which is a CAM-based software. We're now selling it more and more in combination with our other solutions. People are starting to realize that this feedback loop that we've talked about is something that is quite useful. We've had one great order in China where we deployed the so-called feedback link, i.e. the measuring software is telling the production machine that you're out of tolerance, recalibrate automatically.
Okay.
We had a good quarter for our CAM software. MSC had a good quarter, our quality software, Q-DAS, had a really good quarter as well.
Okay. Regarding MSC, that's actually my third question. How much was the growth in this quarter, and what is the approximate margins for that type of business?
We had good growth in line with the plan when we acquired MSC. We have to remember that we've acquired it to sharpen and restructure the product portfolio. It was under group average in growth. The margins are okay. They're software margins, where you expect a software company to be.
Okay. They are still well above your group margins, I guess.
Yeah.
Yeah.
The group margins are catching up.
Yeah. Okay. If I may, can you comment on the automotive and aerospace outlook? In Q3, I got the impression that you saw a risk for weakness in those verticals. Now you report quite a healthy development.
Yeah. Automotive is challenged short term with a lot of restructuring. For example, diesel cars are not selling as well as they used only nine months ago, and this is due to the so-called Dieselgate. There is a lot of changeover happening in the automotive industry. Short term, it's not necessarily a good thing for us, but longer term, it's definitely a good thing for us. We don't expect automotive to long term do anything differently than they've done this year, which is sort of our average organic growth target of 5%-6% growth. Aerospace had a breather, you could say, in Q4. Q4 was slightly weaker than what we've seen previous quarters in 2017. Is there a risk for a slowdown in aerospace?
Well, we think not, because the backlogs are so big, and there is a need to rejuvenate fleets across the globe and expand commercial airline capacity in Asia. We believe that the forecast, which I think is we're going to double the number of commercial airliners in the world in the next six, seven years, that is still valid.
Okay, thank you.
Thanks.
Ladies and gentlemen, we will now take our next question from Alexander Virgo, Merrill Lynch. Please go ahead.
Thanks very much. Morning, Ola. I wondered if you could comment a little bit on the infrastructure and construction trends that you called out in the Americas business. Maybe give us just a little bit of color around that, because I think we've heard some fairly mixed messages from various different suppliers or participants in that market. Any color you can give on that, where you are in Q4, and how you see things developing over the next 12 to 18 months. I wondered if perhaps, again, perhaps I missed it, but can you give us the % of the business that's subscription now, and perhaps an indication of the growth in a year, and presumably that's accelerating. Thank you.
Well, the construction market for us, we service the construction market with tools and systems for on-the-ground applications like excavators and large construction sites. We saw an increase in that business. We also saw an increase on the back of the launch of our new scanner, BLK360, in North America. We launched it first in North America, that had a great impact. That's not necessarily construction. It's typically architects and remodeling projects where you would use the BLK360. We have another business altogether, that is the airborne business where we fly North America and capture 3D data models. We saw a good recovery in that business in the fourth quarter that will continue into 2018. It's not necessarily traditional construction that is improving.
Okay. It's more about the traction you're getting with your new products rather than necessarily a broader market comment, I suppose.
I guess so. I haven't read the stats for the fourth quarter in North America, I think there is a slight recovery, I also know that our new products addressing new market segments have outgrown the market in the quarter.
Okay.
I wouldn't necessarily draw the conclusion that it's a construction recovery.
Understood. Thank you. The subscription business?
I don't know from top of my head. We have to come back on that number.
Okay, sure.
It's growing, I can't give you the numbers.
Well, maybe I can ask it a different way. How much of the mix now would you say is software versus hardware?
Software and software-related services is north of 55%. I think we're approaching 60, but we're going to close the books now and do all those key ratios so that we can communicate them to you.
Okay, great. Thanks very much, Ola.
Our next question comes from Mattias Holmberg from DNB Markets. Please go ahead.
Thank you very much. I read in a news article earlier this morning, quoted you saying that Q1 development was in line with Q4 so far. I was just wondering if you please could expand on this a bit and if I'm misinterpreting this by assuming that you are still seeing close to double-digit organic growth so far in 2018, please.
Well, one has to remember that the only thing I can comment on is January. January doesn't make a quarter, you have to be very careful. I answered that question from the journalist. In January, we are growing in line with the fourth quarter for organic growth.
Perfect. Thank you very much.
Yeah.
Ladies and gentlemen, we will now take our next question from Alex Tout from Deutsche Bank.
Hi. Morning. Congratulations on good results.
Thanks.
Just wanted to know if you could give us an update on BIM, so building information modeling, the Smart Build and related products. Was that a strong contributor in FY 2017, or do you expect much from it going into FY 2018? Secondly, on the Smart Convergence IoT platform, just how that's proceeding. I think when we spoke about this earlier in the year, you thought that you could achieve a reasonable penetration of the customer base even by the end of FY 2017. How has that proceeded in practice, and is it yet meaningful from a revenue perspective, and when might it be? Finally, on margin drivers for FY 2018, could you just talk about what we can really expect there, and whether there's any incremental benefit from the first quarter restructuring that you did still to come in 2018? Thanks.
Thanks. Wow. Let's see. Let's start with Smart Build. First of all, we do not call our product BIM, because BIM is design related, and we're addressing the workflow on a construction work site, and that's not what the BIM suppliers do. Just to make some marketing for our product. We saw growth in the fourth quarter, but still, we're talking about a million in sales, so it's very little contribution to the overall group. This is a long-term project, and by the end of this financial plan, I expect Smart Build to be a great contributor to growth for Hexagon, but not already in 2017. If we move to Smart Convergence, where we finalized our product offering with the acquisition of Catavolt.
For you that don't know, Smart Convergence is our IoT platform. We're now rolling it out into our divisions. It's becoming standard in more and more product offerings throughout Hexagon. In the fourth quarter, we saw PP&M including Smart Convergence. We saw it becoming standard features for more and more products within Geosystems and MI. It will continue through 2018. Probably by the end of 2018, we will have deployed our IoT platform in enough applications that we can start building a business around it. Talking about margin drivers going into 2018, I think it's the same drivers as always. New products with better margins replacing older products, thus enhancing the margin. Whether FX is going to be a margin contributor or creating margin pressure, that's too early to say.
It was neutral in the fourth quarter, so we have to come back on that.
Sorry. The question was actually whether there's any incremental benefit from the restructuring that you did in FY 2017 still to come in 2018.
No. We will have the full effect in 2018. I think on a full year, you should be more interested in the product mix than that cost restructuring program. It will help, but I think products will lift the margin even more.
Okay. In the same way that in a good year, you should be overachieving on the revenue side, do you expect similar on the margin side, especially now that we're starting to see a bit of a recovery in PP&M?
No, not necessarily, because our margins have never been volume driven. Our margins are driven more by new products than the product mix, not volume itself. You have to remember that the largest fixed cost item. Sorry. In the U.K., it's 10:00 P.M., and our alarm goes off every Wednesday at 10:00 P.M. Anyway, where were we? No, product mix is more important to margin enhancement than volume. Volume is not a great contributor to margin expansion for us.
Great. Many thanks.
Ladies and gentlemen, we will now take our next question from Alexander Frankovic from Berenberg. Please go ahead.
Hi. Thanks for taking my call, and congrats on the great quarter and end of the year. I just had two questions. The first one is pretty quick. I don't know if it's been asked yet, but on the effective tax rate for 2018 and 2019, how should we think about that when you take into account U.S. tax reform? The second question is on construction. We see companies like Trimble acquiring e-Builder and building out their construction offering outside of process industries. Right now you have EcoSys, if I'm not mistaken, that does construction outside of the process industries. Are you planning on building out that at all? How should we think about M&A in that segment going forward?
Well, if we start with construction, we launched a product called HxGN SMART Build, that is addressing construction and the AEC sector. Through Geosystems, we've addressed that sector for a very long time indeed. I think we're not new to the sector. Long-term, in order to succeed, our belief is that you need a platform software. You can't just buy bits and pieces of software. HxGN SMART Build is built on the structure that we acquired through Intergraph PPM. It's a true database with a platform structure, that is essential if you're going to succeed entering a new market. Regarding the tax rate, we discussed that earlier on, we do believe that we're maintaining 18% tax rate for
Okay, thanks. Just on M&A more broadly, how should we think about that moving forward?
Please go ahead.
Hello, everyone. We're back again. Let's put it like this. It's a great report, it's a disastrous Q&A session. I don't know what's happening to the phone system, please go ahead.
just my last question was on M&A more broadly. Where would you be looking to add if you're going to do M&A, and would it be more transformative deals or just more roll-ups or tuck-ins?
That's not something we can comment on because then it wouldn't be a secret, and that would destroy our ability to acquire company. Let's put it like this, we're trying to fill gaps in our big solution-based projects that we're running over the next five years. We're looking for technologies that can fill gaps and solve problems that we encounter today in those solutions. Then beyond that, transformative acquisitions, well, this is not the time to do it when companies are trading way north of 30 times the EBITDA in our sector. We just have to be patient and wait.
Thank you.
Thanks.
We will now take our next question. Please go ahead, Erik Pettersson-Golrang, SEB. Please go ahead.
Thank you. I have only one question left. The others have been asked. It's a follow-up on the question of share of software and services in sales. Could you say anything about the organic growth rate in 2017, absolute number or in relation to the group average of 5%?
In software?
Yes, software and services. Obviously the
No.
thing was mostly through acquisition.
It's outgrown the average growth rate since we're increasing the share of software and software-related services. It goes without saying, it was greater than the average growth rate for the group.
Yeah, I guess a lot of the growth comes from acquisition. Also on an organic basis, is it growing faster?
No, I'm only talking organic growth.
Okay. Thank you.
Thanks.
That's it.
Pretty good.
Our next question comes from Wajid Rizvi from Royal Bank of Canada.
Hi, good morning. Just a couple left from me. Just going back to the electronics growth. I think if I remember at Q3, you mentioned you'd had the benefit of the iPhone X launch, and it might soften from there. Clearly it looks like it's carried on. Could you help us with where that's coming from, whether you've been able to get some more customers, whether it's major Chinese manufacturers or one of the other two major OEMs, and how much more room there is to run for you to gain new major customers in that segment? The second one was just a bit more on the margin. I guess in IES, there are a few moving parts.
If you could help me with what you saw in Q4, maybe how we think about 2018 with respect to PPM recovering the MSC contribution at a higher level, and then also what happens at operating leverage, just to help me understand how to think about those moving parts in your margin.
First of all, I don't think we commented on iPhone X in Q3 because we can't comment on our customers.
Okay. There was a major launch in Q3, right?
There was a major launch in Q3, but I don't think I ever said who it was.
Right.
That wasn't I. It must have come from Royal Bank of Canada. It's more broad-based than that. We have the top 10 suppliers of smartphones in our customer list today. I think in the fourth quarter, we saw continuous activity, especially in China, but also from Vietnam, in this segment. Regarding the margin, as I stated before, Hexagon is not as volume sensitive as other companies you might follow when it comes to margin expansion. It's more important for us to get the product mix right, i.e., larger content of software and solutions and less content of hardware. That's more of a long-term trend over the next coming few years and over the past 10, 15 years that we've seen.
Right. Are you able to help me with just how much of the (RDS) margin improvement in Q4 was from MSC's contribution, and how much was maybe from PPM returning to growth?
It was actually broader than that. We saw contribution from all areas. We didn't see much contribution from PP&M in the fourth quarter when it comes to margin. As a matter of fact, that was on par with the Q4 '16 margin. The improvement actually stems from MI. Within MI, it was all product lines that improved its margin.
Great. That helps. Thank you.
Thanks.
We will now take our next question from Tellez Marinakis from (Analyst Research). Please go ahead.
Hi. Congratulations on the strong performance again. Just wondering which part of the business you see as the strongest contributor for the next year. Is there any pocket for out-beating expectations this time again?
No, we just have to wait and see. Then I will answer.
Okay, thank you.
about following listed companies. You will see it next quarter.
Mm-hmm. That's great. Thank you.
Thanks.
We will now take our next question from Jawahir Hingorani. Please go ahead.
Hi. Thanks for taking my question. Just a quick one on the new product. Do you measure or have you ever provided what the incremental sales or margin contributions are from new products, either quarterly or for the full year? Can we get some color on that?
I just stated that 50% of the organic growth in the quarter, and I believe also for the year, stems from new products. The margin improvement, I would say, is 100% related to new products or acquisitions if we've done a high-margin acquisition, like MSC.
Okay, great. Thanks for that color.
Ladies and gentlemen, that was our last question.
Thank you, everyone, for listening in. We can repeat this in May for the Q1 report. Thank you, everyone, and have a good day.