Good day, ladies and gentlemen, welcome to the year-end report 2016 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Ola Rollén. 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. I suggest that we start on slide four, which is an overview of the fourth 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%. 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&M division that was suffering from the continuous weak oil and gas sectors. Slide five, seasonality.
We can clearly see the pattern being repeated in 2016 with a very strong fourth quarter compared to the previous three quarters in the year. Slide six, the profit and loss statement. Net sales amounted to EUR 849.5 million. That is 4% recorded and 2% organic growth over the corresponding period last year. Operating margin 24.6%, which is 0.4% above the previous year. Net earnings amounted to EUR 164.1 million, which is 6% above the corresponding quarter last year. If we move to slide seven, we have the full-year numbers. We can see that we reached EUR 3.15 billion, which is short of the target. 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. Net earnings amount to EUR 579 million, which is 15% better than 2015.
If we move to cash flow, slide eight. The cash conversion in the quarter was 105% and 86% for the full year. Our target cash conversion is 80%-90%. 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 corresponding sale in Q4 of 2016, why the net number is higher. Working capital to sales, slide nine. We are significantly below 20%. We're still moving towards the target of 15%. Having said that, in the quarter, when the PP&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%. A couple of quarters or maybe years ago, South America represented 5% of sales, and this shows the deep recession we see primarily in Brazil. EMEA, excluding Western 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%, we could almost say it's 15% of sales in this quarter, but an improvement. Asia PAC, 12% versus 13% corresponding period last year. Slide 12 give you same message, another overview. China is the region that is growing fastest in the quarter, followed by Western Europe and North America.
Then we have contracting regions, South America, Asia, excluding China, Eastern Europe, Middle East, and Africa. 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 U.K., 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. 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. Then we move to Americas, slide 15. North America recorded 1% 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. 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. 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. 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&M, minus 8% organic growth, this is, of course, connected to the reduced activities that we've seen for a while now in the overall oil and gas market. We had strong performance in China, driven by customer wins in the quarter.
Sales amounted to EUR 429 million, EBIT, EUR 110 million. 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&M decline hits the overall margin for the segment. Slide 19, Geospatial Enterprise Solutions, organic growth of 2%. Geosystems report 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. North America and specifically U.S. was weak for us. SI, 2% organic growth. We see lots of demand for public safety and smart city solutions, in most regions right now. We have poor order conversion in U.S. in the fourth quarter.
The backlog is good, which speaks in favor of an improved organic growth. We need to resolve our conversion. Positioning, 12% organic growth. This was driven by strong development in the GNSS business in agriculture and defense. Sales EUR 420 million, EBIT margin improved from 22.5% to 24%. 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% in the quarter. Rolling 12 months, we're at 23%. Our new target is 27% or 28%, respectively, in 2021. Orders and product releases. If we go to slide 23, this is really exciting. We launched the Leica BLK360 in the quarter, in a joint launch with Autodesk. This is the world's smallest imaging laser scanner, shooting full-color, panoramic 360 images.
You overlay those images on a high-accuracy point cloud, so you get the 3D image of whatever you want to do. This thing rotates and captures a room or an environment 360 degrees in minutes. It's got only one button. You run it off your tablet computer, your iPad or whatever. It's very easy to use. We believe that we'll have great traction when it's launched. Sales begin in March. We see little impact in our Q1 numbers from the Leica BLK360. As of Q2 and onwards, both Autodesk and Hexagon will push sales for this product. Slide 24, we got several orders for our rail solutions in Europe in the quarter. Slide 25, we got an order for laser scanners and robotic total station from the 42 Engineer Regiment here in the U.K.
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. We do see a lot of activity and interest in our productivity-enhancing solutions. 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. As you can see, it's a broad-based growth. CPECC is a design company buying software, SmartPlant solutions for refining and chemical projects. FAW-Volkswagen is the Volkswagen joint venture in China. They continue to invest. CRRC Corporation is a rail transit equipment company that use our GPS or GNSS receivers.
We see Guangxi Road and Bridge Group that used our PaveSmart 3D machine control system for road projects. 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. What we do here is we install anti-jam technologies. We call it GAJT, and this is to protect the GPS signal from the enemy, basically. Slide 31, we're installing 360° SIMS, which is the 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, They have purchased our software solutions to design and build this new planned power plant. Subsequent events, if we talk a bit about the acquisition of MSC, I would like you to look at slide 34, please. This is our vision for the Smart Connected Factory. We started in 2001 by investing in metrology technologies. In 2014, we invested in CAM, computer-aided manufacturing. Since then, we've 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 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. 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 SmartPlant CAD software in the fluids world. We could do design simulations in our SmartPlant product using parts of the MSC offering. Very exciting indeed. Slide 35. MSC is a leading provider of CAE, computer-aided engineering software, used for simulation. It's headquartered in Newport Beach, California. Got 1,200 employees in 20 countries, and primarily serving automotive, aerospace, and electronics.
We're paying EUR 834 million on a cash and debt-free basis pro forma, because MSC is in turn acquiring a company in Japan. Including the Japanese acquisition, the pro forma sales last year amounted to $230 million. Above group average profitability with 70% recurring revenue. Fully financed, our net debt to EBITDA target will not be exceeded. We are guesstimating that we will be trading pro forma at 2.1-2.3 net debt to EBITDA. We got plenty of ammunition left in our balance sheet for more accretive acquisitions. Closing is expected in April. If we look at slide 36, this is what you have to consider in your Excel sheets going forward. Impairment of overlapping technologies is approximately EUR 10 million. 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. When you now lose the cash, you have to reduce the deferred revenue accordingly. We believe this impact is 20 to 30 million in 2017. 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. If you run subscription businesses, it takes up to 12 months to restore your deferred revenue. 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 EUR 2 million, which is 0.2% of the purchase price.
We're highly efficient when we're acquiring companies. If we look at the cost savings program, we go to slide 38. This is a slide we introduced at the Capital Markets Day last December. We talked about continuous investment in R&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're running at 9%. There is room for improving our administration cost group wide. This program is focusing on exactly that. 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%-28% EBIT margin.
This is one vital piece to continue to improve the EBIT margin for Hexagon. The program will affect approximately 280 employees and is expected to drive cash cost savings of EUR 24 million in 2017, but on a 12-month rolling basis, EUR 43 million. The total cost of the program and the cash impact is EUR 34 million. 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 -EUR 12 million. The cost savings program will be booked, and it will be -EUR 34 million. The total financial impact in Q1 is -EUR 46 million.
If we look at the quarters going forward, you have the haircut on MSC that we need to take from closing up till the fourth quarter of 2017. Q2, Q3, Q4 will have a total haircut impact of -EUR 25 million. The cost savings program will start generate savings as from Q2, and we expect that to be EUR 24 million in the three quarters to come, but then EUR 43 million for the full year of 2018. If we 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. What we do not have in this table is, of course, the MSC EBIT itself, what the company itself generates.
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 propose a dividend of EUR 0.48, 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. The dividend can be paid in EUR to shareholders who wish to receive it in EUR. Other shareholders will receive the dividend payment in SEK. In summary, if we summarize this 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. We're taking actions to enable future growth in that business. Improved profitability in all businesses apart from PP&M.
The board of directors proposes a dividend of EUR 0.48, which is an increase of 12%. On the 2nd of February, we signed an agreement to acquire MSC Software, leading provider of simulation software. 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. With that, I think we're ready for the Q&A session. Operator, any questions, we're ready to try to answer them now.
Thank you, sir. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We'll pause just for a moment to allow everyone an opportunity to signal for questions. We take first question from Erik Golrang from Nordea. Please go ahead, your line is open.
Thank you. I have 3 questions. The first one on PP&M.
It appears-
Hello?
Apologies, but it appears that they moved away from the microphone. We take the next question from Daniel Djurberg-
Yes
from SEB. Please go ahead.
Yeah. Do you hear me better?
Yeah. How did you do that? Just kicking out Nordea.
Yeah, exactly. I don't think it was me. Anyway, could I ask you just, and good morning, Ola and everyone. Could you say anything about 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 EUR 43 million, you're also reinvesting, as I get it, some of that into sales force and R&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&D. This reduction will, to some extent, finance this investment in sales force and continuous R&D. Short term, one has to remember this plan is between February of 2017, where we're sitting today, and December 2021. The investment in sales and R&D is, of course, a continuous process. While this is sort of a cut that will happen immediately.
Yeah. The net effect is going to be 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&D and sales force. Is that correct?
That is correct. 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&M, and that is the part of this. That is going to be lasting up till 2021. The other savings in pure admin are, of course, over time, going to be eaten up by R&D and sales. At the same time, the growth margin should continue to improve to lift the overall EBIT margin.
Yeah. All right. You don't want to really say how much sales force people you're going to hire or in any sort of numbers give us. I see your call, the graph you're alluding to, 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 and December 2021.
I understand.
No. Short term, it's definitely going to get a positive impact on OpEx and EBIT.
Yeah.
Longer term, the plan to replace this with a higher growth margin and an even higher EBIT. You could even regard it as an investment.
Got it. Thank you. Just a second question, you touched upon poor order conversion in the U.S. when it comes to SI. Could you just tell us what the book-to-bill was in Manufacturing Intelligence and SI, and how we should view this poor 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. Now I'm referring to SI.
Yeah.
That stems from the fact that we have huge contracts, and these contracts have gates. It's a bit of politics when we've reached those gates or not. We sit in a conference room with a customer, and we go through all items that you should deliver in that gate. 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. We have a bit of that in the fourth quarter. That's all going to come back, of course. That is what we mean when we refer to poor order conversion.
Yeah. 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 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 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.
Right. When you look at the order intake leaving Q4 when it comes to metrology, what do you see?
Well, I see good things happening.
Any sort of specific area that you want to highlight?
We see good demand, and we see a lot of activity in the first half in the electronic segment for metrology. I'm not allowed to call it metrology. It should be MI.
Sorry. All right. Thank you so much. Thank you.
Thanks.
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 on Process, Power & Marine, minus 8%. I think at the start of the year, you expected a positive reading there. You talk about oil and gas, obviously, but could you give a bit more color here on the development of PP&M 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.
Yeah, it's a lag. Even if someone announces investments in the sector, you have to remember that it takes maybe 9-12 months before you actually start working on the projects. It's not an instant process. The fourth quarter was a disappointment for us as well in PP&M, and we were significantly below the target and the forecast we had set for ourselves. The primary deviation to our own forecast was we were expecting to land significant orders for 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 out of the books completely?
No, they're still live and kicking, but we need to get a signature on the contracts.
What's the hold-up?
That I don't know. There are several reasons. We're talking about three, four different orders, and there are different reasons in the various contracts.
Two more questions. The first one is on Geospatial. You've had a quite strong margin development for a number of years now. If you just could outline the key drivers for that margin improvement, let's say, compared to two years back. The second question is on depreciation amortization. I think there was a decline year-over-year. It's been coming up pretty consistently earlier in the year. What's behind that reversal in Q4? Thank you.
Sorry, can you take the last question? What did you mean by that?
Well, the depreciation and amortization 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, Leica BLK360, in the fourth quarter. That product has a fantastic margin, we found new ways of manufacturing the next generation hardware products as well. Both hardware and software are improving the overall margin for Geospatial. 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.
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, thanks for taking the question. Maybe a couple from me. First of all, on the cost-cutting plan and the timing of that, was that something that you'd planned to do anyway, or was the slight weakness on the organic growth a factor that led you to accelerate that? Then maybe thinking about the organic growth, you're expecting 5% growth midterm. I think the market for 2017 is at 4%. Can you maybe help us with how confident you are that we can see that acceleration in 2017, what the drivers are 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? How well do you think you're positioned against the Siemens and Dassaults 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.
It was one in multiple parts. Sorry about that.
Let's start with your first question again, if we take one at a time. 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. This was planned, but it's fair to say that the PP&M restructuring, which is roughly 150 people out of the 480, that has, of course, links to the fact that PP&M is not growing. 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% midterm growth, obviously we're below that now. 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 and December of 2021, which is what we've communicated. 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%. We do think the trend is going to be for an accelerated organic growth over the quarters of this coming year.
Perfect, thanks. The final one was just on MSC, I see clearly from the chart where you see that asset fitting in. Could you maybe just help us understand a little bit, is it the changes that get proposed by the metrology system back into the CAM that this can help you simulate? How do you see MSC's competitive position against the offerings from, for example, Dassault and Siemens in the space?
You're absolutely right. 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 shop floor. That's what metrology does. It's the single source of truth, if you so wish. What we do is we simply take the systems before that system one by one and connect them with that data. We started with a CAM, we can now correct robots, NC machines, stamping tools, and so on through this link. 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. That's how it's going to work.
We take the next question now from Stacy Pollard from J.P. Morgan. Please go ahead. Your line is open.
Hi. Thank you. Some quick follow-up questions maybe. 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? 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? Just out of curiosity, how many 360° SIMS clients do you have now?
Wait. I need to write down. DSO, SIM 360, and MSC margin. That's the three, right?
It is. I should have asked it shorter.
No. It's fine. MSC margin, I think the analyst society has guesstimated the margin to be between 25% and 30%, and I see no reason why you should change that. We say it's above group margin. A well-run software company should be between 25% and 30% or even higher. That's MSC. DSO is two things. It's FX, and then it's a lot of orders being shipped 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 two 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 two last weeks of the quarter. That's why DSO was slightly higher this year compared to Q4 of last year. This trend is continuing.
360° SIMS, I think that we have eight customers right now, but I will check that for you, and we might come back.
Your trends on 360° SIMS, 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 Wasi Rizvi from RBC Capital Markets. Please go ahead. Your line is open.
Hi. Good morning. A couple from me. Just on PP&M, you've talked about the impact of EcoSys on growth, Could you give us some guidance on what the rest of the business has done? I guess in the Q3 organic growth number, we didn't have EcoSys in there, and that was a -10%. I don't know whether you'd have it or not, What would the number be on a comparable basis at -10% in Q3? What does that look like in Q4? If you don't have the number, maybe some qualitative comments on what you're seeing there.
I think it was -8%. I think we expected EcoSys to grow significantly Q4 2016 over Q4 2015, The lion's share of the growth would stem from the fact that EcoSys accelerated its growth. 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&M, the SmartPlant, and the other businesses were doing what we report for the division, i.e., -8%.
Right. Okay. 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 are you hearing from them?
I think we're hearing a lot of complaints, I think that this might be the bottom. It's very difficult to know when you're at the bottom, but their backlogs, they're still eating into their backlog, but they're discussing new projects, which they did not do this time last year.
Okay. Could I just have one follow-up on MSC? I'd just be interested to hear what the growth of that business had looked like in recent years, then how you expect that to look under 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, then you have a new product that is growing very rapidly, and that's the one we were looking at for the future. You have this adjustment from the old to the new within the business. Then, of course, with our distribution, we hope that we can improve that slightly. 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 Laséen from Carnegie. Please go ahead, your line is open.
Yeah. Thanks. Good morning. I had a question about the PP&M. 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. What do you hear from the different end markets, the oil, gas, power, petroleum side?
It's still depressed. It's two things driving that market. Of course, it's the oil price, which gives the theoretical payback on new projects and developments. 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. The sheer consumption of oil, the growth is not as dramatic as it was maybe some years ago.
Okay.
It's going to come back, but it's very difficult to say when the market is in balance again. We're not directly impacted by the oil price, but indirectly because it sets the payback on new projects. What we need to see is the launch of new projects, and then we can expect PP&M to turn around.
Okay. Can you say something about the smart city solutions pipeline, how that looks? In China, maybe?
It looks good. Not just in China. In this call, we announced several orders from Indonesia and South America. Our smart city solution is built on our collaboration with Huawei. The pipeline is good.
Okay, thanks.
Thanks.
We take next question now from Alexander Virgo from BAML. Please go ahead, your line is open.
Thanks very much. Morning, Ola. Just a quick couple of follow-ups, I suppose, please. One, just wondering on your comments on U.S. public infrastructure weakness. How much of that do you think was related to the election, perhaps, or budgetary into the end of the year, budgetary issues, and whether or not that can come back in 2017? The second question, just on GES. Your comment that margins were helped by new products, yet your organic growth is obviously a bit slower. 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 SI, we saw slow growth from the U.S. for GES. We saw strong growth from new products in other areas of the world. Regarding the U.S. public infrastructure, I guess you have to call Donald. I don't have an answer.
Okay, fair enough. Thank you.
Thanks.
We take next question now from Guillermo Pena from UBS. Please go ahead, your line is open.
Hi. Good morning. It's Guillermo Pena from UBS. Actually, one question regarding MSC. To your previous comment that some products are in decline and some good products are actually increasing a lot. Is that actually now denting the margins or impacting the margins of MSC 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. The new products should have a greater positive impact going forward than the negative or adverse impact that the declining products have had.
Yeah. Okay, thank you. Can I refer to those products? Those are Nastran and Patran, and the one that is growing is Apex?
Correct.
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. Last question from my side, PP&M, could you comment anything regarding quoting activity Q3 or Q4 on Q3, or book-to-bill, or anything that can help us understand where we are in the cycle, maybe from an order intake perspective?
It doesn't work like that. It's very slow processes. First of all, you must remember that 70-plus% of the business is already booked under long-term contracts. 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. 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. It's really the 30% that is not under a subscription license that are hit. When they come back, it's difficult to say. It could be a shipyard that decides to convert, and we get a EUR 10 million order in Q1 or something. You never know about those 30%.
Okay. Thank you very much.
Thank you.
There's no further questions at this moment.
Right. I think we conclude this call. Thank you everyone for dialing and listening in. 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.