Earnings Call: Q4 2016

Feb 6, 2017

Good day, ladies and gentlemen, and welcome to the Year End Report 2016 Conference Call. Today's conference is being recorded. And at this time, I would like to turn the conference over to Mr. Ola Rollen. Please go ahead, sir. Thank you, Ola. Our operator's name is Ola today as well, so no confusion. Welcome to this Q4 year end report. And I suggest that we start on Slide 4, which is an overview of the 4th quarter. Organic growth of 2% and recorded growth of 4% in the quarter. Growth was driven by strong demand in China across all divisions within Hexagon. We report 12% organic growth in China for the quarter. Growth was hampered by a weak oil and gas sector. Currency impact of minus 1% and acquisitions added 3% in the quarter. Gross margin amounted to 60% in the quarter and the EBIT margin 25%. We saw profit improvements regarding margins from all businesses apart from the PP and M division that was suffering from the continuous weak oil and gas sectors. Slide 5, seasonality. We can clearly see the pattern being repeated in 2016 with a very strong Q4 compared to the previous 3 quarters in the year. Slide 6, the profit and loss statement. Net sales amounted to $849,500,000 and that is 4% recorded and 2% organic growth over the corresponding period last year. Operating margin, 24.6 percent, which is 0.4% above previous year, and net earnings amounted to €164,100,000 which is 6% above the corresponding quarter last year. If we move to Slide 7, we have the full year numbers. And we can see that we reached €3,150,000,000 which is short of the target, and we saw a slowdown in the second half that we reported on in December. We also see that the EBIT margin is 23.4% for the full year, and net earnings amount to €579,000,000 which is 15% better than 2015. If we move to cash flow, Slide 8, The cash conversion in the quarter was 105% 86% for the full year. Our target cash conversion is 80% to 90%. And there's really not much to comment on in this cash flow statement. Maybe you want to highlight tangible assets where we sold a property in Huntsville, Alabama in Q4 2015. We did not have that sale in corresponding sale in Q4 of 2016, while the net number is higher. Working capital to sales, Slide 9, we are significantly below 20%, and we're still moving towards the target of 15%. Having said that, in the quarter, when the PP and M business has an adverse development on its top line that will work against this target. Important to remember when you sell subscriptions. Market Development, moving to Slide 11. Western Europe and North America is now growing their respective shares of total sales, 1% increase over the same quarter last year. South America has stabilized at 3%. Couple of quarters or maybe years ago, South America represented 5% of sales, and this shows the deep recession we see primarily in Brazil. And Europe has contracted 1% and it's primarily attributed to the very weak growth we have in Middle East and Russia in the quarter. China, well, it's rounding. If we should get this table to 100 percent, we could almost say it's 15% of sales in this quarter, but an improvement. And Asia Pac, 12% versus 13%, corresponding period last year. Slide 12 give you same message and other overview. China is the region that is growing fastest in the quarter, followed by Western Europe and North America. And then we have contracting regions, South America, Asia excluding China, Eastern Europe, Middle East and Africa. And we include Russia in Eastern Europe in this case. Slide 13 is for you to study after this call. You can see what's changed for the various segments per region. Slide 14, EMEA. Western Europe recorded 5% organic growth. We saw strong growth in the UK, which is unharmed by the Brexit worries. Italy and France are recovering and the Nordics continue to grow strongly for us. Shipbuilding, positioning services, public safety related businesses recorded solid growth in Western Europe. In the Middle East, we saw negative organic growth due to the weak oil related economy. And the funny thing is actually that the oil industry is still investing in the Middle East, but it's all other sectors of the economy that are suffering. Russia declined after several sequential quarters of good growth in the quarter. If we then move to Americas, Slide 15. North America recorded 1 percent organic growth, strong growth in manufacturing related businesses and private construction, Weak public infrastructure market and a decline in oil and gas sector in the U. S. Hampered the overall growth from United States. So Canada and Mexico were actually reporting strong growth, but United States reported 1% organic growth. South America improved from previous quarters, but is still in negative territory. All other countries, but for Brazil are growing at quite rapid rates for us, 16% organic growth, excluding Brazil. But Brazil was, of course, negative, and it's the largest market for us in the region. Slide 16, Asia market trends. China, as previously stated, 12% organic growth, strong demand across all industries. We saw solid growth in Australia driven by infrastructure and construction and a slight comeback for the mining sector. South Korea negative growth. So, you could say what's going well in China is making Korea suffer at the moment. Reporting segments, if we turn to Slide 18, Industrial Enterprise Solutions grew by 1% organic growth. Mi, Manufacturing Intelligence, report 5% organic growth. Strong demand in automotive, electronics and continuous good demand from aerospace. China, North America, Japan and South Korea were all strong markets for Mi. PP and M, minus 8% organic growth. And this is, of course, connected to the reduced activity that we've seen for a while now in the overall oil and gas market. But we had strong performance in China, driven by customer wins in the quarter. Sales amounted to 4 29,000,000 dollars EBIT 1, dollars 110,000,000 and this is where we see a pressure on the operating margin stemming from the mix, where in spite of seeing a strong performance in MI with strengthening margins, Of course, the PP and M decline hits the overall margin for the segment. Slide 19, Geospatial Enterprise Solutions, organic growth of 2%. Geosystems reported 1% organic growth. We saw strong growth in China and Australia for the first time in a long time. It's increased demand in infrastructure and construction related businesses. We saw weak public construction in North America. So North America and specifically United States was weak for us. As I 2% organic growth, We see lots of demand for public safety and smart city solutions in most regions right now, but we have poor order conversion in United States in the Q4. So the backlog is good, which speaks in favor of improved organic growth, but we need to resolve our commercial. Positioning 12% organic growth and this was driven by strong development in the GNSS business in agriculture and defense. Sales, EUR 420,000,000 EBIT margin improved from 22.5% to 24%, and all businesses improved their margins in geospatial. Slide 20, gross margin is now at 60%. If we move to Slide 21, EBIT margin reported 24.6 percent in the quarter. Rolling 12 months, we're at 23%. And our new target is 27% or 28%, respectively in 2021. Orders and product releases. If we go to Slide 23, this is really exciting. And we launched the Leica Black 360 in the quarter in a joint launch with Autodesk. This is the world's smallest imaging laser scanner shooting full color panoramic 360 images. And then you overlay those images on a high accuracy point cloud, so you get the 3 d image of whatever you want to do. So this thing rotates and captures a room or an environment 360 degrees in minutes. It's got only one button and you run it off your tablet computer, your iPad or whatever, and it's very easy to use. So we believe that we'll have great traction when it's launched. Sales begin in March. So we see little impact in our Q1 numbers from the Leica Black 360. But as of Q2 and onwards, both Autodesk and Hexagon will push sales for this product. Slide 24, we got several orders for our rail laser scanners and robotic total station to the or from the 42nd engineer regiment here in the UK. And it's for terrain analysis, exploitation of raw data that they collect to visualize scenes and theaters. Slide 26, building and maintaining roads in South America. We got several orders to rebuild roads in Colombia, Uruguay, Brazil and onwards. Slide 27. The mining industry has been in a recession for a long time now, but we do see a lot of activity and interest in our productivity enhancing solutions. So we got a set of orders from across the world in our mining division in the quarter, good growth. Slide 28, we talked about the continued growth in China. But as you can see, it's a broad based growth. CPECC is a design company buying software, smart plant solutions for refining and chemical projects. SAVI Volkswagen is the Volkswagen joint venture in China, and they continue to invest. CRRC Corporation is a rail transit equipment company that use our GPS or GNSS receivers. And then we see Guangxi Road and Bridge Group that used our Paversmart 3 d machine control system for road projects. So you can't pinpoint one segment. It's actually across the board. Slide 29, we got more wins in the quarter for our smart city solutions, which is the partnership with Huawei. And this time, it's coming from South America and Indonesia. Slide 30, we also got an order from the U. S. Naval Observatory, and they are responsible for something called DODIN, Defense Information Network. And what we do here is we install anti jam technologies. We call it gadget. And this is to protect the GPS signal from the enemy basically. Slide 31, we're installing 360 sims, which is a fully automated in line quality control system in manufacturing processes in BMW's joint venture in China. We also received orders from BMW in Mexico in the quarter. Slide 32, Fennovoima is an energy coalition that is building a nuclear power plant in Finland. And they have purchased our software solutions to design and build this new plant power plant. Subsequent events, if we talk a bit about the acquisition of MSC and I would like you to look at Slide 34, please. This is our vision for the smart connected factory. We started in 2,000 and 1 by investing in metrology technologies. In 2014, we invested in TAM, computer aided manufacturing. And since then, we worked on what we call AutoCorrect to use metrology data to steer production lines via CAM software and enhance quality and productivity in production. With our acquisition of MSC, we now take one step further, this vision one step further. It's a game changer for Hexagon, where we will now connect CAM data and metrology data, real live data into the imaginary world of CAE and CAD, so that you have live results when you do design alterations. And we believe that this is going to be a huge productivity improvement for all sorts of industries ranging from mobile phone manufacturers to aerospace manufacturers. Beyond that, we also see that MSC has the capability to connect to our smart plant CAD software in the fluids world. And then we could do simulations, design simulations in our smart plant product using parts of the MSC offering. Very exciting indeed. Slide 35. MSC is a leading provider CAE, computer aided engineering software used for simulation. It's headquartered in Newport Beach, California, got 1200 employees in 20 countries and primarily serving Automotive, Aerospace and Electronics. We're paying €834,000,000 on a cash and debt free basis, Pro form a, because MSC is in turn acquiring a company in Japan, So including the Japanese acquisition, the pro form a sales last year amounted to 230,000,000 dollars above group average profitability with 70% recurring revenue and fully financed, our net debt to EBITDA target will not be exceeded. We are guesstimating that we will be trading pro form a at 2.1, 2.3 net debt to EBITDA. So we've got plenty of ammunition left in our balance for more accretive acquisitions. Closing is expected in April. And then if we look at Slide 36, this is what you have to consider in your Excel sheet going forward. Impairment of overlapping technologies is approximately €10,000,000 This is not cash, but it's going to impact the profit in Q1. And we're going to record it or report it as NRI. Deferred revenue, this is a bit more complicated. When you buy a subscription based business on a cash and debt free basis, in theory, you lose the cash that you have reserved as a balance to the deferred revenue in your balance sheet. And when you now lose the cash, you have to reduce the deferred revenue accordingly. And we believe this impact is €20,000,000 to €30,000,000 in 20 17. That will have an accounting impact that will have an accounting impact on profits, but it will also have an adverse impact on the cash flow, which we learned about when we acquired Intergraph. It takes if you run subscription businesses, it takes up to 12 months to restore your deferred revenue. So this is just a heads up that you need to account for this impact going forward. We're also quite proud that the cash transaction cost is €2,000,000 which is 0 0.2% of the purchase price. So we're highly efficient when we're acquiring companies. If we look at the cost savings program and we go to Slide 38, this is the slide we introduced at the Capital Markets Day last December. We talked about continuous investment in R and D and higher sales and marketing costs due to our move towards a more solution centric transaction model. We do know that we have slightly too high administrative costs. I would say world class is 6%, and we are running at 9%. There is room for improving our administration cost group wide. This program is focusing on exactly that. So if we turn to Slide 39, the focus is to reduce the administration costs in line with the plan that we launched in December, where the ultimate target is to reach 27% to 28% EBIT margin. And this is one vital piece to continue to improve the EBIT margin for Hexagon. The program will approximately 280 employees and is expected to drive cash cost savings of $24,000,000 in 2017, but on a 12 month rolling basis, dollars 43,000,000 The total cost of the program and the cash impact is €34,000,000 We will book the cost in Q1, but the cash flow will, of course, be impacted in the quarters to follow. Slide 40, we've tried to summarize the impacts in Q1 and onwards from the MSC consolidation and the cost saving program. The MSC consolidation would then be transaction cost and overlapping technologies in Q1 of minus €12,000,000 The cost savings program will be booked, and it will be minus €34,000,000 So the total financial impact in Q1 is minus €46,000,000 If we then look at the quarters going forward, you have the haircut on MSC that we need to take from closing up till the Q4 of 2017. So Q2, Q3, Q4 will have a total haircut impact of minus €25,000,000 The cost savings program will start generate savings as from Q2, and we expect that to be $24,000,000 in the 3 quarters to come, but then $43,000,000 for the full year of 2018. If we then look at 2018, we will not have any impact from MSC because the haircut is really about restoring the cash deferred revenue balance in the acquired entity. The cost savings program will, of course, have full impact next year. And what we do not have in this table is, of course, the MSC EBIT itself, what the company itself generates. So it will be a highly accretive program, both the cost program and the acquisition of MSC. Dividend. If we turn to Slide 42, the Board of Directors proposed a dividend of €48 And this is an increase of 12%, reflecting the very strong cash flow and the belief that the business is doing fine and will do fine going forward. And the dividend can be paid in euro to shareholders who wish to receive it in euros. Other shareholders will receive the dividend payment in Swedish kronor. So in summary, if we summarize this quarter, eventful quarter, growth driven by strong demand in China across all business units and solid demand in Manufacturing Intelligence. It was hampered by reduced activities in the overall oil and gas sector. And we're taking actions to enable future growth in that business. Improved profitability in all businesses apart from PP and M. The Board of Directors proposes a dividend of €0.48 which is an increase of 12%. And on the 2nd February, we signed an agreement to acquire MSC Software, leading provider of simulation software. And we have already launched a company wide cost savings program to reduce administration costs in order to continue to improve the EBIT margin towards the target of 27%, 28% in 2021. And with that, I think we're ready for the Q and A session. So operator, any questions, we're ready to try to answer them now. Thank you, sir. We take first question from Erik Golrang from Nordea. Please go ahead. Your line is open. Thank you. I have three questions. The first one on PPNM and hello? Apologies, but it appears that they moved away from the microphone. We take the next question from Daniel Schmidt from NIVEB. Yes, exactly. I don't think it was me. But anyway, could I ask you just could you say anything about sort of how we should view the cost saving program from a net perspective? It's very clear that this is addressed to admin and it's a total effect of €43,000,000 But you're also reinvesting, as I get it, some of that into sales force and R and D. What's going to be the net effect, you think? Well, the net effect is really the plan that you have in the material, which slide was it, it's Slide 38. We do still believe that the OpEx will grow because we do need to invest in sales, marketing and R and D. But this reduction will, to some extent, finance this investment in sales force and continuous R and D. But short term, one has to remember this plan is between February of 2017 where we're sitting today and December 2021. So the investment in sales and R and D is of course, a continuous process, while this is sort of a cut that will happen immediately. Yes. So the net effect is going to be sort of front end loaded. Is that what you're saying that you'll see more of the savings and then some of that will come back into costs as we go along basically into R and D and Salesforce. Is that correct? That is correct. I mean, the plan is basically you will have an improved EBIT margin stemming from this program. Some of it is forever like the savings. We're changing our organization in PP and M, and that is a part of this. That is going to be lasting up to 2021. The other savings in pure admin are of course over time going to be eaten up by R and D and sales. But at the same time, the gross margin should continue to improve to lift the overall EBIT margin. Yes. All right. And you don't want to really sort of say how much sales force people you're going to hire or sort of in any sort of numbers give us I see your call the sort of the graph you're alluding to, but you don't have any more specifics? No, because honestly, I don't know. I don't know how many salespeople we're going to hire between now December 2021. I understand. No. So short term, it's definitely going to get a positive impact on OpEx and EBIT. Longer term plan to replace this with a higher gross margin and an even higher EBIT. So you could even regard it as an investment. Got it. Thank you. And then just a second question. And you touched upon poor order conversion in the U. S. When it comes to S and I. Could you just tell us what the book to bill was in Manufacturing Intelligence and S and I and how we should view this for order conversion in the U. S. Going forward? And also when it comes to Manufacturing Intelligence, what we should expect? The book to bill was positive, but not that positive in Q4 and that's now referring to SI. That stems from the fact that we have huge contracts and these contracts have gates. And it's a bit of politics when we've reached those gates or not. So we sit in a conference room with a customer and we go through all items that you should deliver in that gate. And it could be really large sums of money where the customer finds a tiny detail and they manage to push the payment and I. E. The revenue recognition to the other side of New Year's. And we have a bit of that in the Q4. That's all going to come back, of course, but that is what we mean when we refer to poor order conversion. Yes. Because you've been having sort of a fairly steady growth in that business. You had troubles a couple of years ago. And then if you look back at the past year, year and a half, it's been fairly steady at 5%, 6%, 7%, 8%. Is that what we should expect going forward as well if you sort of if you look into the future? We definitely expect that there is no reason why this business shouldn't be able to grow in line with the overall group target, which is 5% organic growth. All right. And when you look at the order intake leaving Q4 when it comes to metrology, what do you see? Well, I see good things happening. And any sort of specific area that you want to highlight? No. We see good demand, and we see a lot of activity in the first half in the electronics segment for metrology. I'm not allowed to call it metrology. It should be MI. Yes, sorry. All right. Thank you so much. Thank you. We take next question now from Erik Golrang from Nordea. Please go ahead. Your line is open. Okay. Let's try again. Can you hear me now? We can hear you. Welcome back. Thank you. First question then on Process Power and Marine, minus 8%. I think at the start of the year, you expected a positive reading there. You talked about oil and gas, obviously, but could you give a bit more color here on the development of PPNM during the course of the year? We've seen some investments in oil and gas come up recently, but you seem to have moved in the other direction? Yes, but it's a lag. So even if someone announces investments in the sector, you have to remember that it takes maybe 9 to 12 months before you actually start working on the projects. So it's not an instant process. But the Q4 was a disappointment for us as well in PP and M, and we were significantly below the target and the forecast we had set for ourselves. And the primary deviation to our own forecast was we were expecting to land significant orders for Ecosys, the product Ecosys, but they slipped and they moved into Q1, Q2 of this year. Are they still in tendering mode then? Or are they after the books completely? No, no. They're still live and kicking, but we need to get a signature on the contract. And what's the hold up? Well, that I don't know. There are several reasons. We're talking about 3, 4 different orders, and there are different reasons in the various contracts. Okay. Two more questions. The first one is on geospatial. You've had a quite strong margin development a number of years now. You just outlined the key drivers for that margin improvement, let's say, compared to 2 years back. And then the second question is on depreciation and amortization. I think there was a decline year on year. It's been coming up pretty consistently early in the year. What's behind that reversal in Q4? Thank you. Sorry, can you take the log cut? And what did you mean by that? Well, the depreciation, amortization and impairment, I believe, dropped year on year in Q4. It's been coming up in the previous quarters and now it was a lower level compared to Q4 2015. Okay. Geospatial definitely improved mix, improved more software, but also we're presenting the new product Black 360 in the Q4. And that product has a fantastic margin and we found new ways of manufacturing the next generation hardware products as well. So both hardware and software are improving the overall margin for geospatial. And when we come to the depreciation and amortization, it's really the FX impact between the two. It's not that you should expect it to drop. So you're saying the underlying development is still up? Correct. Thank you. We take next question now from Adam Wood from Morgan Stanley. Please go ahead. Your line is open. Hi, good morning and thanks for taking the question. Maybe a couple from me. Just first of all on the cost cutting plan and the timing of that, was that something that you'd plan to do anyway or was the slight weakness on the organic growth a factor that led you to accelerate that? And then maybe thinking about the organic growth, you're expecting 5% growth midterm in the market for 2017. Is it 4%? Can you maybe help us with how confident you are that we can see that acceleration in 2017? And what the drivers are that would need that would be needed to get us there? So what the risks are around that? Then maybe finally, just one on MSC. Could you go into a little bit more detail helping us understand how simulation gets you to where you need to be on the factory floor? Is it that the changes that get suggested by the metrology tools back into the CAM can now be simulated? And how well do you think you're positioned against the Siemens and Dassault's of the world that would want that to be more linked with the design and virtual factory floor? Thank you. Wow. I think we need to dissect that a bit. So It was 1 in multiple parts. Sorry, Let's start with your first question again. If we take one at the time. So that was What was your first question? It was around the cost cutting plan. Was that already scheduled to be done or was the organic growth profile of the business something that pushed you to do that more quickly? Fair enough. No, this was already planned. We bought 150 companies over the past 15 years. And now we're looking at our back office infrastructure and we're merging functions such as finance, HR, logistics, payroll and so on. So this was planned, but it's fair to say that the PP and M restructuring, which is roughly 150 people out of the 480, That has, of course, links to the fact that PP and M is not growing. And then your second question? It was just around the organic growth of the business and kind of expectations. I think Street expectations are for around 4%, you're guiding to 5% mid term growth. And obviously, we're below that now. I mean, should we be expecting an acceleration in 2017? And your confidence on that and the key drivers to get us there basically? I think we're confident about reaching 5% as an average organic growth between December 2016 December of 2021, which is what we've communicated. Because we do actually believe that, for example, the oil sector between those two dates, the oil sector is going to recover from where it is today. Regarding 2017, it's of course a question whether we'll reach 5% or if it's going to be 3% or 4%. But we do think the trend is going to be for an accelerated organic growth over the quarters of this coming year. Okay. And then the final one was just on MSA. And I see clearly from the chart where you see that asset fitting in. But could you maybe just help us understand a little is it the changes that get proposed by the metrology system back into the CAM that this can help you simulate? And how do you see MSC's competitive position against the offerings from, for example, Dassault and Siemens in the space? No, no, you're absolutely right. I mean, if you look at that picture, the first time you get, let's say, a real live check on all your designs and products is when metrology starts reporting back into your information system what is actually going on with the product launch or continuous production on your truth, if you so wish. And what we do is we simply take the systems before that system 1 by 1 and connect them with that data. So we started with a CAM and we can now correct robots, NC machines, stamping tools and so on through this link. And now we want to take it one step further and also give the CAE industry or the CAE engineers feedback from the real world about their design assumptions. So that's how it's going to work. Just on the EBIT for MSC, can you give us an idea around this? You did say it would be accretive overall, but is this at group margin above or maybe a range that you might be able to give us? Secondly, can you explain the increase in DSOs or higher accounts receivables? I know you mentioned FX on some other areas. Maybe how much of an influence was that? And then just out of curiosity, how many SENS 360 clients do you have now? Wait, I need to write down DSO, SINs 360 and MSC margin. That's the 3, right? It is. I should have asked it shorter. MSC margin, I mean, I think the analyst society has guesstimated the margin to be between 25% 30%, and I see no reason why you should change that. So, we say it's above group margin. A well run software company should be between 25.30 or even higher. So that's MSC. DSO is 2 things, it's FX. And then it's a lot of orders being shipped very, very late in the quarter. And it's an alarming trend where we see more and more of our deliveries or sales being pushed to the 2 last weeks of the quarter. This business is not for faint hearted because I think in certain divisions, we have up to 60% of our sales in the quarter in the 2 last weeks of the quarter. So that's why DSO was slightly higher this year compared to Q4 of last year. This trend is continuing. Since 360, I think that we have 8 customers right now, but I will check that for you and we might come back. So your trends on Sims 360, you're pleased with that development? Or you think it's a little slower than you might have expected? It's a little slower than I was hoping for. Okay, fair enough. Thanks. We take next question now from Vasi Rizvi from RBC Capital Markets. Please go ahead. Your line is open. Hi, good morning. A couple from me. Just on PP and M, you've talked about the impact of ECOSYS on growth. But could you give us some guidance on what the rest of the business has done? Because I guess in the Q3 organic growth number, we didn't have ECOSYS in there, and that was a minus 10%. So do you I mean, I don't know whether you'd have it or not, but what would the number be on a comparable basis to that minus 10% in Q3? What does that look like in Q4? I mean, if you don't have the number, maybe some qualitative comments on what you're seeing there? I think it was minus 8%, because I think we expected ECOSYS to grow significantly Q4 2016 over Q4 2015 and the lion's share of the growth would stem from the fact that Ecosys accelerated its growth. So, I think the rest of the business, since Ecosys roughly ended up at the same level as last year, I would say it's a fair assumption that PP and M, the smart plant and the other businesses, were doing what we report for the division, I. E. Minus 8. Right. Okay. And then maybe some qualitative comments on what you're seeing or hearing from customers because I guess some of the engineering firms are at the earlier part of the cycle of the pickup in spending and what you're hearing from them? We're hearing a lot of complaints, but I think that this might be the bottom. It's very difficult to know when you're at the bottom, but their backlogs, I mean, they're still eating into their backlog, but they're discussing new projects, which they did not do this time last year. Okay. And can I just have one follow-up on MSC? I'd just be interested to hear what the growth of that business will look like in recent years? And then how you expect that to look on the Hexagon ownership in the near to medium term? It's been single digit organic growth in the past few years. What's happening within MSC is that you have dying product lines that have negative growth. And then you have a new product that is growing very rapidly, and that's the one we were looking at for the future. So you have this adjustment from the owned to the new within the business. And then, of course, with our distribution, we hope that we can improve that slightly. But I would say, it's fair to hope for same organic growth as for the rest of the group around 5%. Okay. Thank you. Thanks. We take next question now from Mikael Larsen from Carnegie. Please go ahead. Your line is open. Thanks. Good morning. I had a question about the PPNM. Do you think and expect that segment to grow in 2017 given what you hear from the customers and the pipeline that you have? It's very hard to say. I think the first half is going to be very difficult to grow over the same period last year. The second half, maybe we're starting to see single digit growth. Okay. And what you hear from the different end markets, the oil, gas, power, petrochem side? It's still I mean, it's still depressed. It's 2 things driving that market. Of course, it's the oil price, which gives the theoretical payback on new projects and developments. But then it's the consumption itself. And we must never forget that the world is moving away from its oil dependence and is becoming less and less oil dependent. So the share consumption of oil, the growth is not as dramatic as it was maybe some years ago. So it's going to come back, but it's very difficult to say when the market is in balance again and when we see I mean the oil price is just we're not directly impacted by the oil price, but indirectly because it sets the payback on new projects. And what we need to see is the launch of new projects and then we can expect PPNM to turn around. Okay. Can you say something about the Smart City Solutions pipeline, how that looks and in China maybe? It looks good and not just in China. In this call, we announced several orders from Indonesia and South America. And our Smart SIT solution is built on our collaboration with Huawei. So the pipeline is good. Okay. Thanks. Thanks. We take next question now from Alexander Virgo from BAML. Please go ahead. Your line is open. Just a quick couple of follow ups, I suppose, please. 1, just wondering on your comments on U. S. Public infrastructure weakness. How much of that do you think was related to election perhaps or budgetary into the end of the year, budgetary issues and whether or not that can come back in 2017? And the second question just on GES. Your comment that margins were helped by new products, and yet your organic growth is obviously a bit slower. So I'm just wondering if you can reconcile that for us in terms of the moving parts. Thank you. They're actually linked. If we generalize and say U. S. Public infrastructure and we include safety and security systems from FI, FI. We saw slow growth from the U. S. For GES. But we saw strong growth from new products in other areas of the world. And regarding the U. S. Public infrastructure, I guess you have to call Donald. I don't have no one. Okay. Fair enough. Thank you. Thanks. We take next question now from Guillermo Peigneux from UBS. Please go ahead. Your line is open. Hi, good morning. It's Guillermo Peigneux from UBS. Actually, one question regarding MCS and to your previous comment that some products are in decline and some good products actually increasing a lot. Is that actually now denting the margins or impacting the margins of SCS when you think or when you see the margins that you just talked about? Our hope and our belief is obviously that we've passed the bottom. So the new products should have a greater positive impact going forward than the negative or adverse impact that the declining product have had. Yes. Okay. Thank you. And can I refer to those products? Those are Nastron and Patron and the one that is growing is Apex? Correct. Then second, would you act as a consolidator within the industry now in simulation, I mean? No, we will not do anything more in this sector. Okay. Thank you. And last question from my side. PP and M, could you comment anything regarding quoting activity Q3 or Q4 on Q3 or book to bill? Or anything that can help us understand what kind of where we are in the cycle maybe from an order intake perspective? It doesn't work like that. It's very, very slow processes. First of all, you must remember that 70 plus percent of the business is already booked under long term contracts. So the only thing that is impacted quarter on quarter is perpetual licenses, I. E, project sales to large installations and so on, very lumpy business. And then it's services that could be impacted by a slowdown. Longer term, of course, if the EPCs and our other customers are laying off engineers and shutting down licenses, then over a longer period of time, even our subscription business will be impacted. But it's really the 30% that is not under a subscription license that are hit. And when they come back, it's difficult to say. It could be a shipyard that decides to convert and we get to 10,000,000 dollars order in Q1 or something. I mean, you never know about those 30%. Okay. Thank you very much. Thank you. There's no further questions at this moment. Right. Then I think we conclude this call. And thank you everyone for dialing and listening in and we'll do this again next quarter. Thank you. Bye. This concludes today's call. Ladies and gentlemen, thank you for your participation. You may now all disconnect.