Earnings Call: Q4 2015

Feb 5, 2016

Good day, and welcome to the Year End Report 2015 Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ola Rolland, President and CEO. Please go ahead, sir. Thank you, and good morning, good afternoon, everyone listening in, and welcome to this Q4 2015 Interim Report. If we go to slide number 4, I'm going to give you a quick overview of the quarter. Organic growth in the quarter amounted to 3% and the recorded growth amounted to 10%. The difference lies with foreign exchange rate and structural growth, I. E. Acquisitions. We report solid growth for Geosystems SI and Manufacturing Intelligence in the quarter, and a significant part of the growth in the quarter stems from recently launched products in the autumn. EMEA was the fastest growing region where we saw Western Europe excel in the quarter. PP and M and positioning are impacted by the weak demand in the oil and gas sector, where PP and M reports minus 1% organic growth. EBIT margin was 24% in the quarter, the gross margin 59% and the operating cash flow improved by 48% in the quarter. If we turn to Slide 5, it's just an overview and a reminder that our seasonal pattern has changed slightly. Q1 is now our weakest quarter followed by Q3. And Q2 and Q4 are the strongest quarter. And indeed so, the Q4 is usually the strongest quarter and that was the situation in 2015 as well. If we move to Slide 6, the key numbers for the P and L statement in the Q4, we can see that net sales amounted to €815,700,000 which is a 10% recorded increase, a 3% organic increase in operating earnings, I. E. EBITDA, which increased by 19% and reports a 32.5% margin, whilst the EBIT is reported at 197.8% or 13% increase, which corresponds to a 24.2% EBIT margin. Now there is a substantial difference, and that is because we had unseasonally low expenses in R and D in the quarter, but we had high depreciation in the R and D in the quarter. So you will see D and A slightly higher than normal in the quarter and operating expenses slightly lower. And that's the explanation to the high EBITDA margin. If we move to Slide 7, we have an overview of the full fiscal year of 2015. We reached SEK 3,043,800,000 in sales, which is a 5% organic increase over 2014. Operating earnings, EBITDA amounted to 30% of sales and the operating margin 22.8% of sales. We report nonrecurring items, which were the restructuring program we implemented in the first quarter in connection to the strengthening Swiss franc. Net earnings are recorded at $505,100,000 which is a 24% increase over 2014. And this corresponds to an earnings per share of €1.39 and €1.47 respectively, if you include or exclude the nonrecurring items. Slide 8, cash flow. Cash flow from operations before changes in capital grew by 17% to EUR 220,000,000. We had a positive impact from working capital amounting to SEK 33,400,000. And thus, the cash flow from operations before investments and restructuring grew by 27 percent to €253,000,000 We do see investments in tangible assets coming down compared to last year, and this has to do with the investment in the new campus facility in Huntsville, Alabama last year, and that is now concluded. Thus, investments as a total are lower than the corresponding period of last year. Operating cash flow amounted to SEK 196,000,000 which is a 50% growth over last year. And if we include nonrecurring items in the cash flow, The cash flow amounted to CHF 193,300,000, which is a 48% increase. If we turn to Slide 9, we saw the strong cash flow in relation to EBIT1, where the cash conversion in the quarter and in the year amounted to 91%. As a rule of thumb, as Hexagon expands organically, one should consider a cash conversion of between 80% to 90%. That's reasonable. We just want to remind you that the cash flow is weak in the first half and strong in the second half, and that's the annual fluctuation. One explanation of that fluctuation you will see on Slide 10, where typically we build working capital in the first half in order to reduce it in the second half. And that happened this quarter as well. So we report working capital to sales in the range of 16.5% in the quarter. The cost savings program that we launched in connection to the appreciation of the Swiss franc was introduced in the first quarter. We had a positive impact from this program €8,000,000 in the Q4 of 2015, and we've recorded a savings of €19,900,000 for the full year. The full impact of the program is approximated to EUR 35,000,000 and we expect full impact to be reached next quarter as previously communicated. Now this program was launched as a consequence of the strengthening Swiss francs. So if we look at FX impact for the full year, we can see that we have a significant positive impact from U. S. Dollars and Chinese renminbi, whilst the Swiss franc, as previously commented, had a significant negative impact on cost and margin. And all in all, if we weigh this together, the negative impact from these currency movements is estimated to a negative 0.3 percent on the operating margin for the full year. Market development. If we move to Slide 13, the share, the sales mix in the 4th quarter. We can now see that North America is the same size as Western Europe, 1 third of the company each. South America has contracted on the back of significant recession in countries like Venezuela and Brazil, and it's lost 2 points in the total mix. EMEA as a consequence of the negative development in Russia, 8% versus 9% previous year China, 14% versus 15%, but Asia Pacific has gained 1% and represent 13% this quarter. But all in all, one can see that we're fairly evenly spread in the 3 major regions around the world. Slide 14. If we look at the growth per geographic region, we can see that Western Europe, Asia, excluding China, are growing at strong double digit growth. North America and Eastern Europe, Middle East and Africa, single digit growth. And we see contraction from China and South America in the quarter. Slide 15 give you an overview of the various segments and geographic regions, and this is really for you to study after the conference. It's a lot of detailed information. Some highlights, though, is that we, for the first time see double digit growth from the Western Europe region, and it's driven by both industrial applications as well as geospatial applications. Slide 16 gives you an overview of how these regions have fared since the recession in 2,008. And you see the size of the various regions within Hexagon. But if we move to Slide 17 and comment on EMEA in the quarter, Western Europe recorded 10% as previously stated. Within Western Europe, we saw 12% organic growth from the combined big five and the Nordics. The big five are Italy, Spain, Germany, France and U. K. And it's good to see all of those countries turning to growth where some of them have strong double digit growth. Segments such as surveying, infrastructure, construction, but also industrial activities as automotive and aerospace recorded very strong growth and demand in Western Europe. Another positive was that it's the 2nd consecutive quarter where Russia reports organic growth. And in this quarter, Russia grew by 10% organic growth. If we move to America, Slide 18, we can see single digit growth in United States. Once again, very different development for the different industries, Surveying, construction, infrastructure and public safety showed strong demand, whilst we saw weak demand from the energy sector. The manufacturing sector, however, in United States grew by roughly 4% organic growth. Canada continued to decline as a consequence of the weak demand we see from the oil and minerals sector in Canada. South America declined by 13% organic growth year on year, and it's several driven by several key markets where Brazil is the largest market. But also Venezuela sees strong decline, and it's driven by the weak oil demand from Venezuela. If we move to Asia, Slide 19, China faced tough comparison numbers, and we recorded a negative organic growth of 5%. Our judgment though is that the underlying trend in demand from China is stable and that we're going to see China return to organic growth in 2016. We saw a decline in the surveying business, but we did see growth from industrial applications such as automotive, aerospace and general Australia continued to record weak demand due to the oil sector. Reporting segments, if we move to Slide 21, Industrial Enterprise Solutions. This segment grew by 3% organic growth And within the segment, Manufacturing Intelligence, I. E, the old metrology, grew by 5% organic growth. And PP and M contracted by 1% in the quarter. The EBIT grew by 17%, and we now record an EBIT margin of 27.4% for the segment, and that is 1.2% stronger than the corresponding number Q4 'fourteen. If we move to Geospatial Enterprise Solutions, the organic growth for the segment was 4%. Geosystems and Safety and Infrastructure both report strong growth with 6% 7% organic growth, respectively. The negative growth is stemming from positioning and Hexagon Geospatial, our small software business within Geospatial Enterprise Solutions. And the negative growth is due to the weaker off shore market where our positioning services are suffering as a consequence. However, EBIT1 increased by 10% to $88,800,000 which corresponds to an EBIT margin of 22.5% compared to 21.9 percent the same quarter a year ago. 23, the 12 month rolling graph for the gross margin, and we ended at 60% for the year, 2% stronger than 2014. The EBIT margin on Slide 24 is now 23% on a 12 month rolling basis. Orders and product releases in the quarter. Slide 26. We've signed a partnership with Huawei, the Chinese telecom giant. And what we're launching is a combined solution that integrates Huawei Communications hardware with Hexagon Safety and infrastructure software solutions. And we're targeting large and midsized cities with populations of between 2,200,000 inhabitants. And what we deploy is connected command centers and integration systems that basically maximize the efficiency and the response resources that those cities might have. And this is the first of 4 strategic alliances that we've struck over the past 3 years with large Chinese International Technology Groups. Metrology, Slide 27, becomes Manufacturing Intelligence. Why do we change name? Well, it's a reflection of the product scope and the services we want to offer our target customers. Manufacturing Intelligence embodies what we call STA, and that is that we want to go away from just sensing, I. E, measuring components on the shop floor into thinking, which means that we're going to launch MMS, which is an overarching platform software for productivity and quality in shop floor applications. The next step that we're working on is acting where with the acquisition of actions to improve productivity and quality for our customers in real time in the shop floor. Slide 28. We reinforced our foothold in China's shipbuilding industry by landing an order with CSIC, which is based in Wuhan. And we also got another order from COSCO shipyard for Intergraph Smart Marine and Intergraph Smart 3 d. So the marine industry, if you remember, we got an order from Fincantieri last quarter, is definitely an industry where we see that we're gaining traction and momentum with our new technologies. Slide 29. We got 2 orders from 2 railway companies in North America, Canadian Pacific Railway and Amtrak safety, security around the rail infrastructure. Slide 30. We received 2 orders in United States for public safety solutions. The city of San Diego was an important reference order on the West Coast in United States. San Diego is the 2nd largest city in California with a population of more than 1,300,000 inhabitants. And we sold our computer aided dispatch system to that We also received an order from the New York State Thruway, which is basically a system connecting the cities of New York, the state of New York, and they purchased iCAD Mobile and EdgeFrontier, which is our IoT platform software. Slide 31. We received a large order from the CAR Consortium of Australia. This is a breakdown services again, they are purchasing our computer aided dispatch system in combination with our new IoT platform Edgefrontier. Slide 32. We got the 1st large order where we will deploy our new enterprise geospatial software Smart Map. And this order was received from NGA, the National Geospatial Agency of United States, and it's the largest global organization for Geospatial Intelligence. So a first win for Smart Map in the quarter. Slide 33, it was a strong quarter for portable sensors. And this is another strategic alliance that we've been working on for years. The company is called COMAC, and it's one of the largest manufacturers of aircraft in the world. It's the Challenger of Airbus and Boeing, and they recently launched a midsized commercial airliner, which you see on the picture. They will standardize their assembly operation quarter from Hyundai Motors in Korea, which will also use the new track technology in their assembly lines to inspect cars. Slide 34. EI City is a new development in the city of Busan in South Korea. EI City is a resort made up with 3 skyscrapers, one that will be 101 storeys high and then 285 storeys high buildings. And they are using multi stations, total stations and our new software to monitor that the construction of these facilities is indeed according to plan. Slide 35, we read about the crisis in the mining sector. But in the quarter, we made a sort of turnaround, and we grew by 10% organic growth in our mining business. We received several large orders among others from Acelor Mittal in Mexico, And we had our first collaboration around collision avoidance systems and fatigue systems in the vehicles in a mine in Mexico. And Codelco of Chile also purchased a full collision avoidance system. And this is becoming more and more of a standard and a trend that large miners deploy these collision avoidance systems in their vehicles that are operating within the mines. So in summary, Slide 37, the proposed dividend from the board is €0.43 which is a 23% increase over 2015 dividend. And on Slide 38, I'd like to summarize the quarter. It's the best quarter ever for us with a record EBIT margin and a record strong cash flow. 3% organic growth is basically driven by continuous strong demand in the mature markets, but weakness in the emerging markets. And the operating margin was positively impacted by organic growth, but even more so new high value applications that we launched in the quarter, acquisitions and cost reductions. And with that, my presentation is done, and I'm now ready to answer any questions there might be from the listeners. So operator, let's go into Q and A mode. Thank you, Mr. Rolland. We will now take our first question from Erik Golrang of Nordea. Please go ahead. Thank you. I have a few questions regarding the growth trend here. 3% organically is quite a bit below your ambitions and the drag is clearly from the oil and gas side and PPM is challenged. What's your thinking there on on the current level of oil prices in terms of growth for that business in 2016? And to what extent can you offset that with growth in other parts of PPNM? We don't think much about oil prices because there are so many other people that are doing that. We simply state that if this oil price continues, we will indeed see less CapEx in the so called upstream market within the oil and gas sector. However, we do see increased demand from the downstream sector where you have refineries, you have LNG gas, which is growing and so on. So we don't expect any dramatic development. We believe in weak single digit negative growth for our oil and gas business in 2016. And to offset this, we've launched a series of new activities where, amongst others, we believe that we will have new products that will target new markets for our platform software. Okay. Thank you. And then on the do you plan any specific cost initiatives at this stage to offset that low single digit decline? Or are you happy with the cost base? And can you allocate those resources elsewhere? At this moment, we're happy with the cost base as such in this business. What we're doing is to reallocating resources into other segments of the market. Okay. Thank you. Then the last question is on metrology and the slowdown on order trends. You spoke specifically about in the Q3 in North America, I think. What's been the development there in the Q4? First of all, it's called Manufacturing Intelligence. Sorry about that. Perfect. We make the same mistake internally. Or a more stable outlook, it's too early to say. Okay. Thank you. Thanks. Thank you. We will now take our next question from Daniel Schmidt of SEB. Please go ahead. Yes. Hello. Good morning, Ola. Just a question on SG and I, which has been sort of a quite slow growing business for a number of quarters and you've been suffering a bit in terms of profitability. Seems to be coming back nicely now on the order backlog that you've stated being sort of quite good. And how should we think about this business in 2016 with the fact given the fact that you have quite reasonable visibility in this business? Well, I'm sorry. I have my corporate communications director next to me and she's looking very angry. So it's not SG and I, it's SI. But let me comment. No, you're absolutely right. We you should never be bullish, but I think we have a very good position in Hexagon Si going into 2016. We have a record backlog. We have increased traction with the collaboration with Huawei. We have new products waiting in the wing. So yes, we think that we finally might have seen the light at the end of the tunnel for this segment of the business. All right. And if you look at that backlog, what is your view on the profitability in this business, which has been I know you've said historically, at least, it's been quite a bit below the group average. Could you give us any sort of shed some light on that? We had a 6% increase in the EBIT margin in this business. So we are definitely making a lot of progress towards reaching the group average. It's still below group average in terms of EBIT margins, but the gap is shrinking. And we believe that the business has potential to have a EBIT margin that starts with a 2% and is double digit. Okay, good. And then a completely different question. If you look at 2015, you were quite sort of fairly low activity on M and A. I think we talked about it at the CMD. And could you give us any sort of hint on what we should expect going forward in the sort of coming quarters? Are you having is there a lot of sort of targets that are being finalized terms of deals and so on? We're definitely active on the M and A side. And let's say, the visible activity that you could see in 2015 sitting on the outside looking in at Hexagon, it's probably not representative of the activity that we see from the M and A department. So I believe that it could result in, I wouldn't say a catch up effect, but we do believe that we have a string of potential acquisitions. All right. Thank you so much. Thanks. Thank you. We will now take our next question from Sead Mehra of Morgan Stanley. Please go ahead. Hi, thanks a lot for taking the question. Just two ones on the guidance. In the release, I didn't see, let's say, an explicit reiteration of the ranges you gave at the Capital Markets Day in December. But if we think about the commentary around PPNM and the oil price, would you be more comfortable guiding or talking about the low end of the range, the 4% to to reach the low end, the 24%, is it okay if you do to reach the low end, the 24%, is it okay if you do only 4% organic growth? Or would you need to be above that level? And basically, how much does your EBIT margin guidance rely on organic growth? Thank you. Well, it's always more comfortable to be on the low end, isn't it? So I mean, our guidance is still there, and it's a fairly complicated situation that we see with several large economists underperforming in terms of growth in general. So it's a difficult situation to give a very precise outlook on the next 12 months, but we stick to our guidance and that is EUR 3,300,000,000 to EUR 3,600,000,000 sales, 24% to 25 percent EBIT margin. However, we are not very dependent on volume to improve our EBIT margins, because we rely much more on mix shifts and acquisitions when it comes to EBIT margin boosts. All right. That's very clear. Thank you very much. Thank you. Thank you. We will now take our next question from Stacy Pollard of JPMorgan. Please go ahead. Hi, thank you. Just a quick follow-up on the M and A question earlier and then 2 others. On M and A, can you perhaps discuss your leverage and comfort ranges if you were to make further acquisitions? And then the 2 sort of more detailed follow ups would be the electronics contracts that you had, the 2 big ones, are they now at run rate year on year as in the year on year comp is level? Or are you still seeing a large uptick on a year on year basis? And then thirdly, does Captivate get people to buy new machines? Or do they just upgrade the software that they have and then run it to the existing machine? Just to understand how that works. If we start to see the Just to understand how that works. If we start talking about M and A, I just need to find a number here. Our net debt was EUR 1.7 44,000,000 and when we end this quarter. And that corresponds to a EUR 1.89 net up to EBITDA ratio. So I mean, the underlying EBITDA is approaching €1,000,000,000 And if you take that times 3.5, we could basically borrow €3,500,000,000 without being in breach with our covenants. And if you take $3,500,000,000 less than net debt that you will find in the annual report. It gives you a headroom of 1,756,000, and that's roughly our headroom for M and A. Moving on to your electronics question. Yes, it's getting increasingly difficult to beat the growth and the numbers that we've seen. It's not that we see our electronics business going down, but to continue with the fantastic growth that we've seen over the 2 past years, of course, that's getting increasingly challenging. However, we do have some new customers coming online within the next few months. So we will see how this pans out. And then when it comes to captive weight, you can do 2 things. But I would primarily say that it's actually stimulating sales of new sensors as well. Our customers tend to upgrade and purchase new sensors as they embrace is the best part to use Captivate. Captivate is one of the great successes in the Q4. Can you give us on Captivate, can you give us an idea of the price differential between how much more valuable is a machine with Captivate or the sensor with a Captivate in terms of price and margin? Difficult to say. Of course, we make more than the previous offering we had, and it's a significant improvement to our gross margins. But we also see that it's a step in productivity for people working with infrastructure and construction. If you've ever seen one tutorial for Captivate, you can see how easy you can use that software, where even if you're a layman to find spots where you're supposed to drill, make holes and so on. So it's a true productivity tool in the construction and infrastructure industry, and we see great benefits for our users switching to Captivate. So we believe we're only at the beginning seeing the conversion from more traditional field softwares to Captivate. That's great. Thanks. Thanks. Thank you. Our next question comes from Alexander Virgo of Nomura. Please go ahead. Thanks very much. Good morning, Ola. A couple of ones, if I may. I wondered if you could dig into the organic growth rate in Q4 just in terms of the split between new products and M revenue? And then just talk about the implications of that with respect to pricing this year and upgrades of licenses, etcetera and what that means for this sort of down 5%, I think you said, or down low single digit in terms of what's built into your guidance for 2016? New and old product mix in the quarter, I think we actually have a we haven't done the detailed numbers on this yet, but do see that we had a significant number in our sales numbers for new products. So whether it's another 1% out of the 3%, 1.5% is very difficult to say, but it would have been challenging to grow in this market without new products. I think that's a fair statement. Regarding PPNM's recurring revenue, it's above 75%. And the consequence is a bit more complicated than just taking the 75%. You have to look at our oil and gas exposure, and oil and gas represent roughly 50% of the total business, where gas is actually larger than oil. And then you need to divide it into downstream applications and upstream applications. And it's really the upstream oil applications that are under pressure. So that's another calculation you have to do, which the divisional manager, Gerhard Salinger, explained during the Capital Markets Day. And you can listen to his speech and get a better feel for the split. But that's how you arrive at weak single digit decline. Okay, great. And would you mind just giving us as a follow-up where we are in terms of run rate on hip and in terms of what sort of growth rates we might expect for 2016? What's hip? The imagery program, I beg your pardon. Sorry. There are too many you've got too many names running around here, Ole. I hate these acronyms stories. All right. No, the hip or HXIP, I think we say. We ended slightly below. I think we came in at €38,000,000 for the year and the forecast was €40,000,000 We however, we and we think we have a fairly good outlook because we've got a new demand. We are currently supplying 30 centimeter accuracy in urban areas. And there is a new demand for 15 centimeter accuracy in urban areas, which means that we need to fly all the large cities on the Eastern seaboard of United States, the West Coast and Central Europe again. And there might be a demand to update this twice per year. And this might be linked to the research around autonomous traffic and autonomous vehicles, we will see. So it's quite exciting actually. Okay. Thank you very much. Thank you. Thank you. Our next question comes from Per Lindbergh of ABG Sundal Collier. Please go ahead. Good morning. Thanks so much for taking my question. The first one relates to the profit and loss statement and the item labeled other income and expenses net, which in this quarter surprisingly contributes positively to the tune of 12 point €4,000,000 compared with a negative of €3,600,000 in the preceding quarter. That's for a delta of about €16,000,000 I understand that that item contains amortization of surplus values, a negative of 8 point €6,000,000 in this quarter. That would mean that there ought to be another net contributor there in the region of €20,000,000 Could you please elaborate on the nature of that and particularly whether that is recurring or non recurrent in nature? Thank you. That was a very long question. But I guess the question was other income in the P and L statement, the positive, and that is currency and rental income in our Hamsfield facility. And how much of that would be recurrent? The currency is difficult because you have currency fluctuations. So let's say you booked an invoice in your accounts receivables the previous quarter and then it fluctuates. So you actually receive more money than you booked in Q3. That would appear on that line. So it's very difficult to say. On the full year, as you can see for the 2 years, it's insignificant. The rental income, however, will be a continuous income. But we should judge this and on a 12 month rolling basis to roughly neutral? Is that the thinking? That's correct. Okay. Thank you. Can I then turn to the organic growth metrics? If we simply sum the components, I. E. The structure, the FX and the organic, Then the sum of these tallies amounts to 11% compared with your reported growth of 9 point 7. That's a delta of approximately 130 basis points. That begs for perhaps a finer definition of the growth components. There seems to be a rounding error up between 1% 2% for 1% or 2% or 3% of the components. So my simple question is basically, would you be able to give us the one decimal to the FX structure and organic growth rates in this quarter? No. Just rounding. You're absolutely correct. Okay. Okay. Thank you. So but you do have the 1 decimal points behind the metric, I assume? I don't have them at hand here, but of course I have them. Okay, okay. Good. And then very finally reverting to the Capital Market Day of the 4th December, I think you at that time hinted that 2016 will be a year of negative free cash flow generation. If you were to invest as much in M and A as you then anticipated. Is that still the thinking for the next 12 months? I don't understand how you what do you mean by negative cash flow generation? After operating free cash flow after acquisition. So basically that what you generate from existing businesses will be more than offset by your cash outlays for M and A in 2016? That depends on how much we pay. Of course, of course, and how much? I would say January or February, if we're going to spend more or less. Yes, yes. The but do you believe you have the muscles to do that, I. E, to end calendar 2016 with less cash on hand and now also taking into account the €1,500,000,000 for the dividend. Do you believe you have sufficient muscles and sufficient flexibility to end 2016 with less cash, net cash or more net debt more correctly on hand than currently? I think that's more a balance sheet question. I mean and then we're coming back to what Stacy asked, what is our headroom in the balance sheet. And it's more than 1 point €7,000,000,000 So I think that answers your question. We definitely have muscles at this stage to do large scale acquisitions, pay dividend and still stay below our financial covenants in 2016. Okay. Thank you. Thanks. Thank you. Our next question comes from Alex Todt of Deutsche Bank. Please go ahead. Hi, Ulla. Thanks for taking the question. Just when we think about organic growth going back to this in 2016, you've outlined that the situation in PP and M seems to have turned. It has been a strong growth area for you for most of 2015, but now you're expecting that to go to sort of mid single digit decline. I think it's fair to say you had a strong year also in most of the other areas of the IES business division. So I mean, you're still saying that organic growth is going to increase, but all the trends sort of suggest that will be very challenging. What gives you any confidence that the increase is in fact likely? That's the first question. And just secondly, could you point to the specific drivers for margin expansion in 2016? I guess you have the restructuring on the one hand that might give you another 40, 50 basis points. But if we do see the kind of degrowth in PPNM that we're looking to, which is a very high margin part of the business, that could well offset the benefits from a mix perspective. So where does the 100 basis points come from? I can see that some could come from M and A, but even 100 bps coming entirely from M and A looks like it would be a challenge. Thanks. That's a tough question to answer because it was more of a statement than a question. But let me put it like this. If we start with PP and M, it's true that we believe the organic growth for the core PPNM business will shrink in 2016. However, we did the recent acquisition of a company called Ecosys, and we see huge synergies between Ecosys and the current PPNM business, where we can roll out the Ecosys product offering to existing PPNM customers in other regions of the world than North America. So it's one thing to say that the organic growth will contract in PP and M, but the recorded growth, including structure, will in fact grow or would be positive in 2016, and that is our belief right now. So you will have positive impact from PP and M as a group in 2016 as well. If we then move to Manufacturing Intelligence, they are at record levels when it comes to sales and EBIT margin. We do, however, believe that our new automation systems in 360 is gaining traction. We don't see the automotive industry slowing down in their demands for this productivity tool. And in combination with that, we're launching our MMS software. So we think it's going to be a slightly different mix going into 2016 where automotive might be a bigger contributor to growth than electronics in the Safety and Infrastructure business is seeing Safety and Infrastructure business is seeing a better situation compared to 2015 2014. Okay. Thanks. And then just on the margin question, obviously, you're still getting some of the benefit from the 2015 restructuring coming through, but it could be offset by mix shift potentially from the decline in PP and M. So then where do we get our net 100 to 100 basis points from what specific drivers could you point to in addition to restructuring and mix? It's the same answer as a previous question on this call. Hexagon is not very volume dependent to drive margin growth, and that's something which is quite important when you analyze the group to understand and realize. It's more important that we are successful with the next generation technologies. Take like Captivate, for example, where we have a significant margin improvement over previous products. And that is then bundled with significant productivity improvement for the user, so that we can make a payback for that user of maybe 12 months. And then it's a proposition that, that user really need to take to stay competitive in his or her industry. So it's very much driven by product development and enhancing the product portfolio. It's not so much driven by volume. Okay. Thanks. Thanks. Thank you. Our next question comes from Wasi Rizvi of RBC Capital Markets. Please go ahead. Hi, good morning. Yes, thanks for the question. Just a couple for me. Another one on PP and M, I'm afraid. On the recurring portion of the revenue, can you just talk us through again how sticky that recurring revenue is and what you're hearing from customers about renewing that recurring revenue? And then the second question was on China and surveying. So I think you've said that that's still declining, but do you have a view as to where you are in terms of approaching the bottom? So are the declines still accelerating or decelerating or are we kind of troughing at the moment? I think we're troughing. If we start with China, I think this is the trough. And we believe Q1 might still see negative growth in the infrastructure surveying. But from there on, our comps are getting more easy to beat. So we're in China. If we then turn to PPNM and the recurring revenue, it's always difficult to say how sticky it is. Typically, we sign 3 to 5 year contracts with a built in price adjustment clause every fiscal year. And those contracts are allowing the user to use a span between a minimum usage and a maximum usage of seats, and that's how it works. The stickiness the crux of the stickiness is, of course, that you could get into a situation where you're squeezed by your customer and they are desperate to get out. And we'll see how sticky it is then. Then it's more of a business judgment than a legal judgment. Right. And then in terms of moving between the bands of min to max, are you seeing in conversation with customers then moving lower down that volume? No, we haven't seen that actually. And we believe the reason for that is that the engineering teams that these EPCs have are probably the most valuable asset they do got. And if you're an engineer in an EPC and you don't have any CAD software, what are you supposed to do? So we see them cutting back on all sorts of expenses. They are, for example, not attending our user conferences the way they used to, but they seem to stick to the subscriptions and maybe that's the last thing they give up on. This is speculation, but Great. Thank you. Thanks. The next question comes from Guillermo Peigneau of UBS. Please go ahead. Hi, good morning, everyone. Guillermo Peignol from UBS. A lot of questions asked, so I'll try to maybe a big picture one. In terms of new product launches 2016, can you give us an indication of overall size compared to 2015? And then I'll continue with another 2 questions if you don't mind. Thank you. When it comes to size, are you trying to gauge size of total sales or growth or? I think total sales. That would be helpful. Thank you. Well, new launches are always a small portion of total sales for the group as they're being launched, but they could be a large share of organic growth. And what we've seen is Yes, if we look at the past year, it's fair say that new product launches probably contributed to more than 1% over the past 12 months. We recorded 5% organic growth and a gut feeling would be that maybe 3.5% were from old products and 1.5% from new. And I think it's going to be a similar distribution between new and old. Maybe that new is actually going to contribute a bit more in 2016 than 2015. Helpful. Thank you. One more regarding research and development kind of budgets going forward. Would you say that, again, maybe relative to sales, how would you think that cost line is going to progress? Sorry, I missed that. What cost line? R and D. R and D is going to be fairly stable. We're going to see a continuous move where amortization is going to accelerate. But I think the total expense is going to be around 11% of sales. Okay. And then one question regarding working capital to sales. Obviously, a very good trend you're showing and I wonder how much of that is driven by mix. And if I go one step further, is that basically software or new software related product launches being a bigger portion of your revenues that is more working capital efficient? Or I'm reading too much? I think that you're reading a bit too much, but there is definitely an element of shift to software within the working capital mix. But it's also the Q4, which is our best quarter when it comes to working capital, and one shouldn't forget that because we're going to have it back in Q1. Thank you. And my last one, and sorry for the question in advance, is equity or equity issuance out of the question when it comes to acquisitions? No. If you look at the history of Hexagon, nothing is out of the question. We've tried it all. I suspected that much. Thank you very much, Oliver. Have a nice day. Thank you. Thank you. The next question comes from Bhutan Pillai of Goldman Sachs. Please go ahead. Yes, thanks. Two quick ones, if I may. Firstly, on the good traction you're seeing in the shipbuilding industry, can you comment if the deal wins here come against competitive bids? And are you gaining market share here? And how do you see opportunities in this vertical progressing in 2016? And a quick follow-up on M and A. Would you just on the size of the deals you're pursuing, are you will you be open for large transformation of deals? Or still be bolt on ones like you had done over the last couple of years? Let's start with M and A because that's the shortest answer. We're open for large M and A, and the market situation is much better for large scale M and A than it was 12 months ago, given pricing and where the large scale M and A candidates are heading price wise. The most likely The most likely though is that we continue with the string of bolt on small acquisitions in 2016. If we then turn to the shipbuilding industry, it's definitely so that we're gaining market share in the shipbuilding industry. But I also think that we have very little competition with the product that we're offering. What we're introducing is a comprehensive system where we try to introduce something we've talked about over the past few years called virtual assembly. And if you think about a large shipyard, it's all about large building blocks that are supposed to fit together. And before you spend money moving these building blocks along the yard, you want to know that they actually will fit together. So we're selling smart Plant Marine into this application with the intention to then further develop the product offering into this virtual assembly system where we combine Geosystems Technologies with PPNM and metrology Technologies, which gives us a unique advantage in that segment. Understood. Thanks, Oliver. Thank you. Thank you. As there are no further questions, that will conclude today's Q and A session. And now I would like to turn the call back to our host, Mr. Ola Rollen for any closing remarks. Please go ahead, sir. Thank you, everyone, for listening, and thank you for the interest in our company and all good questions. Talk to you next quarter. Bye. Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.