Earnings Call: Q4 2013

Feb 11, 2014

Ladies and gentlemen, welcome to Hexagon's Year End Report 2013. Today, I am pleased to present Ulla Rolian, President and CEO. Mr. Rolian, please begin. Thank you very much. Good morning or good afternoon, everyone, and welcome to this earnings call for the final quarter of 2013. If we start on Slide 4, overview Q4, 2013. We report 5% organic growth in the group as well as in the core business for the 4th quarter. And the underlying trends were that we continue to see solid growth in the Americas, particularly fueled by strong demand in South America. EMEA continued to recover and grew largely due to increased demand from reported strong organic growth fueled by the improving European construction and infrastructure markets. Metrology saw reduced capital spending primarily in the automotive sector, but sales are at record levels and order intake is now growing faster than sales once again. PP and M continues to expand despite tough comparison numbers from Q4 2012. Organic growth was 7%. And SG and I and Novotel suffered in the quarter from the continuous downturn in the defense segment, the U. S. Defense segment, and they report negative growth. Gross margins came in at 57% and the EBIT margin for our core business, Measurement Technologies, was at 23%. If we turn to slide 5, it's just a reminder of the seasonality in earnings and sales quarter over quarter where Q4 is our strongest quarter of the year. And that was the case this year as well. €400,000 and that's 6% growth recorded growth over the same period last year. And that corresponds to an earnings per share of €0.29 for the period. For the full year, Slide 7, net sales came in and amounted to 2,430,000,000 euros and that's consistently with the 4th quarter of 5% organic growth throughout the year. The operating margin for the group is now almost 21%. We record 20.9 for the year. Earnings per share including non recurring items grew by 5% to €1,000,000,000 4 euros and excluding another €0.04 per share, 9% growth in earnings per share for the year. Cash flow. Cash flow for the year from operations before changes in working capital and excluding taxes and interest grew to 629,000,000. Paid taxes increased from 57,000,000 to 62,000,000 and interest received and paid shrunk from €45,000,000 to €29,000,000 And that's, of course, reflective of our continuous amortization of our net debt throughout the year. Cash flow from operations thus amounted to CHF 538,000,000 for the year. Changes in working capital amounted to negative €31,000,000 for the full year in comparison to a very good year in 20 12 where we recorded positive €3,000,000 And that's the biggest difference year over year in the cash flow statement, the operational cash flow statement. Ordinary investing activities, we continue to invest money. And in the second half of the year, we paid significant amounts against the project to construe a new headquarters in Huntsville, Alabama. And total investing activities amounted to CHF 216,300,000. Euros If we look at the working capital to sales development on slide 9, we can see that we have our ups and downs, but the trend line is still positive. And for the year, we report 17% working capital against sales. Slide 10, currency has been the theme throughout the year and we've had significant headwind from primarily the emerging market currencies, but also the Japanese yen. And the 4th quarter was significant in terms of currency. The EBIT was adversely affected by stems from the smaller currencies Japanese gen, Brazilian reais and Indian rupees. Looking ahead, we currently see a negative FX effect in the Q1 of 2014 of approximately 3% to 4%. And we think thereafter, it will ease off if currency stay where they are today. If we go to slide 11, you can see the impact that currency had on the group for the 4th quarter and for the full year. So it actually shaved 1 percentage point of the 4th quarter operating margin. We have a 40% incremental margin from currencies in the 4th quarter. So it was a significant FX impact in the Q4. For the full year, it's had a negative impact of €75,000,000 for sales and €22,000,000 for earnings. Market Development, slide 13. Sales mix for the full year, this is not the Q4, this is the full year of 2013. For the full year, North America now represent 28% of sales and Western Europe 31%. We continuously grew faster outside of the mature markets in 2013. And we saw growth primarily in EMEA excluding Western Europe, South America and China. Currencies made Asia Pac excluding China shrink from 13% in 2012 to 12%. And I'm thinking primarily of the Indian rupee. Slide 14, if we look at trends per geographic region, we can see that South America is strong contributor to growth in the Q4. North America is growing at 8% if we exclude U. S. Defense. Western Europe is also growing. East Asia and Middle East are strong growth regions for us. China is now returning to growth once again, but we talk about weak single digit growth instead of strong double digit growth that we've been used to over the past 10 years. And 2 areas dampening the growth are continuously the U. S. Defense and the connected sequestration activities in the U. S. Expense budget as well as Australia where the mining sector hasn't bottomed out yet in the Q4. An overview, slide 15, segment and region. We can see that Power and Energy is now positive again and growing above 8% in Western Europe and Middle East. We see a negative trend in China, but we believe it's temporary and it was postponed order in the Q4 that was pushed out to Q1. Surveying is now starting to grow again in China after a downturn in 3rd quarter. If we move to slide 16 and some comments around the EMEA development in the Q4 and what we saw. Customer demand in EMEA improved and it's particularly stemming from an increased activity in construction and infrastructure, but we also see the major key accounts in engineering large companies starting to invest again in metrology equipment. Geographically, we saw increased activity in Western Europe in particular from the so called DACH region, I. E. Germany, Austria, Switzerland. Italy recovered and U. K. Has over the past 2 consecutive quarters shown strong growth. We continue to see a weak market in France and Spain. Automotive and Manufacturing sectors as I commented, the large key accounts are now starting to invest again. But it's the so called as you say in German Mittelstand that is still weak for us in terms of activity. Other regions in EMEA, Middle East was strong and we had a fantastic quarter in Russia, especially related to infrastructural activities in connection to the Winter Olympics among other things. Africa reported flat growth in the quarter. Americas, slide 17. Solid growth, organic growth in the U. S. Market and Canada, 8% organic growth, if you exclude Defence. The majority of growth came once again from Infrastructure and Construction, where the coming from Power and Energy segments in North America. Defense business, and when we say defense business here, we mean Novotel and Intergraph SG and I. It contracted by 21% in the quarter. The automotive sector recorded negative growth, but Aerospace in North America continues to grow. In South America, we saw Brazil growing at strong double digit numbers, but we also saw countries on the West Coast of South America, Venezuela, Chile and so forth growing at very strong double digit growth rates. Asia, finally, Slide 18, China recorded a mixed quarter. Automotive Aerospace and Surveying are seeing an increased demand from local customers. Power and Energy related business had one large deal pushed out into Q1, which hampered their growth in the quarter. This is not a trend we expected to come back in the Q1 of this year. The growth was also held back by the fact that the so called project related business had a strong quarter in the Q4 of 20 12. We sell so called airborne sensors and we concluded a mining project in China last year. And that makes the comparisons difficult for this quarter. But all in all, we are cautiously optimistic about the Chinese development going into 2014. And we believe that we might not see strong double digit numbers in 2014, but we will definitely see growth in the year to come. Southeast Asia and India recorded strong growth. And India, in particular, helped us growing our sales in Asia in the quarter. Australia and New Zealand continues to record declining sales even though it seems that we're very close to the trough of the cycle in the Australian mining business. Overall, slide 19, we can see the long term trends where Asia continue to grow after the peak in the Q4 of 2008. And we can now see Americas accelerating growth, EMEA in the 4th quarter continue to grow at a slower rate than the 2 other regions. Segment information, slide 21. In the Q4, we report SEK 141,300,000 in EBIT for Measurement Technologies and this corresponds to an EBIT margin of 22.8%. If you exclude the currency impact in Measurement Technologies, we would have reported a 23.7% EBIT margin in the Q4. Organic growth by application area, slide 22. After 2 years of virtually no growth, Geosystems is now back to pre crisis levels in organic growth. Technology had a weak quarter and that was primarily driven by negative growth at Novotel in the quarter. Metrology has come down to weak single digit growth rates, but order intake was stronger than organic growth in sales for the first time in 3 quarters. Looking at margins on Slide 23, the gross margin continued to improve in 2013 and we added 1 percentage points to the gross margin. EBIT margin, quarterly data. No, sorry, this is 12 month rolling data. And we're as we said, we're for Measurement Technologies, we ended the year at 22%. Mergers and Acquisitions, Orders and Product Releases, Slide 26. We acquired Pyxis, a Chilean company specialized in servicing the metals and mining industry in Chile on the 3rd December. It had no impact to our earnings for last year since it was consolidated too late in the year. We also expanded our analysis solutions portfolio by acquiring a technology that we call GT Strudel, where GT stands for Georgia Tech Research Corporation of Atlanta, which is connected to the university in Atlanta. Slide 28, just an update. We've seen the impact in the cash flow and this is the actual building. We hope that we can inaugurate our new head office in Huntsville, Alabama in the autumn of 2014. We're going to host 1,000 employees in the new building. Slide 29, Geosystems got an order from SNCF, the French rail network where they acquired Leica Pegasus 1 which is a 3 d laser scanner mounted on a car on a railroad car. And what you do is basically you create 3 d visualization of your railroad network in order to improve maintenance activities. Geosystems, it was a rail heavy quarter where Geosystems also got significant orders from Southern Africa where they're planning to build a 900 kilometer railway 4 50 kilometer long high speed rail link. Slide 31. Geosystems also received an order from Costa Rica, the Costa Rica National Electric Company that is building a new hydroelectric dam. Slide 32, Intergraph launched a new product where we merge several products into one product. The new product is called Smart 3 d and was launched in the Q4. Chevron, Slide 33, will use our SmartPlan suite of products for the so called Gorgon project in Australia, which is one of the world's largest natural gas projects. Slide 34, BHP Billiton, choose Intergraph for the Olympic Dam project. Slide 35. Intergraph is also improving the public safety and productivity for the Calgary Police. Around a large metropolitan area. Slide 36. We also got new orders for our smart H2O solution. It's gaining traction in China. Slide 37. We're proud to support the World Cup in 2014 by building, as we put it here, the Brazilian Dreams. It's 2 arenas for the FIFA World Cup, the summer of 2014. Slide 38, mobile ground mapping in China. Autunavi Holdings Limited is the leading provider of digital map content and navigation solutions in China. It's now building a fleet of what I guess we would call so called Google cars even though it's not Google to perform mobile ground mapping utilizing our Novotel positioning technologies. Finally, update on Veeripot. Last of the 7th February, we now own 90 7.7% of the shares outstanding in Viripos. We have initiated the so called squeeze out process of the remaining 2.3%. And communicate the PP and A effects that will affect the Q1 of 2014. And just to remind you what we believe we can do with this acquisition, we can provide VIA Riposte with state of the art positioning technology via our GNSS technologies in Novotel and GEO systems. But in turn, VIA Ripost can give us world class infrastructure for our customer base in technology as well as geosystems. So in summary, if we summarize the quarter, we can finally state a bit about the dividend. The Board proposed a dividend payout of €0.31 which is an increase of 11% over 2012. And it can be paid in euros or in Swedish kroners, if you would choose to receive it in Swedish kroners rather than euros. Slide 42 to summarize the quarter. We reported another strong quarter with 5% organic growth. We've added 1% points to the sewing, very important gross margin, came in at 57%, 23 percent EBIT margin in MT despite currency headwinds shaving off 1 percentage point to the EBIT in the quarter. Strong cash flow generation is rapidly strengthening our balance sheet. We have good covenants right now in our balance sheet and this will open up opportunities for expansion going forward into 2014. Finally, Slide 43, it's time to update our financial targets and host a Capital Markets Day. We will do that in June, 2nd through 3rd June in connection to Hexagon Live, which is our user conference in Las Vegas. We expect to attract more than 3,500 attendees this year and it will be held at the MGM Grand in Las Vegas. If you're interested in participating in this Capital Markets Day and the user conference, you can contact us at irhexagon.com. Thank you very much for listening. And I think we've come to the Q and A session. Our first comes from Mr. Lars Brorson from DNB. Please go ahead. Thanks very much. Good morning. All I had three questions. I'll take them 1 by 1. Just on the margin impact from currency, it was a little greater than I anticipated in Q4. I wonder whether you could give us a sense for the key emerging markets exposures as they break down by segment. I'm particularly interested in your Brazilian real exposure. If that's about sort of 3% of group in terms of sales exposure, how does that split down by segment? And how big is it specifically for PP and M? What I'm trying to get at is whether we should model in the same incremental margin impact in Q1 and indeed in the first half of twenty fourteen as we saw from FX in Q4? It's a difficult question since it relates to currency, but you're absolutely right. We have a very good margin, local margin in South America. And the Brazilian reais was, as you know, hit quite hard. What can you do to mitigate it? Well, you can increase prices in local currency, and we're doing that. At the same time, we've seen the reais continue to weaken against the average rate for the Q4. So there will be an impact from currency in the Q1 as well. Stating how this will pan out for the full year of 2014 is risky business indeed. I'm not sure if I can do it. That's clear. But as you see it now the incremental margin impact from FX in Q1 should be largely on a par with what we saw in Q4. Would that be a fair assumption? Yes, I think so. Okay, great. Secondly, if I could on metrology, I wonder whether you can give us a little granularity about how the book to bill has trended since Q2 last year. We've talked about a book to bill above Q1 sorry above 1 since Q2 2013. I wonder whether we are moving meaningfully above 1 and accelerating towards sort of 1.2, 1.3 times or we're seeing a more sort of steady above 1 book to bill ratio in that business? It was 1.02 in the Q4, the book to bill ratio. So that was a deceleration, was it from Q3? No, It was an acceleration. That's great. Secondly, just on metrology, I wonder whether you can elaborate a little more on the product pipeline here for 2014. We obviously saw in GEO Systems, the LICA Nova have a quite a meaningful impact in the second half of twenty thirteen. How should we think about the product launches for twenty fourteen coming through on metrology in terms of the order of magnitude that might have in that business? That my dear lovers I can't disclose to you unless you buy an air ticket and go to Las Vegas. I thought you might say that, but fine, okay, which I will. Certainly, just if I could on the smart solutions and synergy projects, Can you give us a number for what the sales was from that in Q4 and what the expectations are here for 2014? The expectations are as always great. But in the Q4, I'd say it was probably around 2,000,000. Euros and it's a very lumpy business since it's mostly projects. And we think that we will see a gradual acceleration throughout the quarters to come in 2014. 14. And what we're doing right now is we have 2 solutions activities. We have the division we've incorporated, which is called Solutions, but then we have ongoing solutions activities within the current divisions. And what we internally are debating is how we're going to report that number as from Q1. And you have to give me another couple of months to figure that one out. But for now the sales the €2,000,000 sales you saw in Q4 are primarily I assume on your 820 solution and perhaps smart assembly. Would that be? Correct. That's fair. All right. Okay. Great. Thanks. Our next question comes from Mr. Michael Lasser from Carnegie. Please go ahead. Yes. Hi. I have a question regarding PPNM and if you could maybe talk about the outlook there from an end customer perspective, oil and gas, power, etcetera and also on a regional basis, why you had a delay in 1 project in China? Thanks. The outlook, I mean, overall, you could say that the CapEx activity is not at the level as we saw, let's say, if you go back to 2011. There has been a slowdown in CapEx activity in oil and gas. But I think you're aware of that. If we look at the outlook for PPNM going into 2014, we obviously have expectation for our cloud based solutions that will kick in beginning with the summer of 2014. So it's very much a second half of the year story for the cloud business. But all in all, we do see strong activity in the Americas, in Asia. And now in this quarter, EMEA actually recovered quite a bit. The delay in China was simply bureaucracy and administration that we didn't manage to ship the product in the 4th I don't see it as a sign of the slowdown in the Chinese market. We have good growth for the full year in China. Okay. And when it comes to visibility on larger projects and so on, is that okay right now? And is it fair to assume growth roughly at 5%, 6%, 7% in 2014 from previously around 10% historically? Is that what you experienced there? I mean we did 7% in the 4th quarter. Is that also a reasonable level given the Shell contract and Gorgon project etcetera also ahead? We'll see. I think you're going to see gradual recovery in growth rates throughout the year since we have the ordinary business and then on top of that, we have the cloud based business. But the way the cloud based business is structured is you don't receive revenue until the users actually start using the software in the cloud. And we basically count the number of hours used. So the project needs to kick off before you can have any revenue from the project. And the first project is scheduled to be launched in the cloud, so to say, in the summer of 2014. Okay. And if you split demand and growth in Q4 into design and management solutions and supplies as that's developing? And I'm not sure I follow your question. What do you mean by Well, you have an enterprise solution, right? And you have a design software also if you have looked at that on a total overview. The owner operators, they're growing much faster. If you segment it by user and you say EPC and owner operator, right now, the owner operator segment is growing much faster than the EPC segment. Okay. Thank you. Thanks. Our next question comes from Mr. Erik Kigoldra from ABG Sundal Collier. Please go ahead. I have few questions. First one, as you say, quite a bit of headwind on the margin there from FX in the quarter. How much supply from Novotel in the Q4. It's very difficult to say what's going to happen to the defense markets going forward. But I guess an educated guess is that we don't expect another 25% drop in 2014. As a matter of fact, we actually believe that the market might have stabilized. And then you should see growth from civil activities in SG and I, PP and M and civil activities in Novotel coming through in the technology numbers. Do you think PPNM and metrology can actually move towards that 8% sort of average trend that you're looking for? We'll see. Okay. And then a quick one on the EBIT margin. Can you just talk a little bit more about where the EBIT margin improvements are coming from? So obviously some from the gross margin mix and then also lower expenses and what the plans are there? It's primarily gross margin in combination with the currencies that don't continue to fall. If we have currency headwind in the way that we've seen in the Q4, it's obviously going to be difficult to significantly improve EBIT margins. I don't believe however that that's going to continue with a 30% reduction in value for currencies around the world year in year out. So if you assume that you have a diminishing effect from currency headwind throughout the year, then it's primarily mix and new product launches that are going to drive the gross margin towards around 60%. That's going to lift the EBIT margin. Okay. And then the last one is just your M and A strategy going forward, large or lots of small deals mostly for technology or customer base? What's your focus this year? Focus is the same as always. We're going to buy technology companies. Verepos is a good example. We're paying net around $185,000,000 for ViriPos. But what we gain access to is that we can immediately launch the ViriPos correction services in agriculture, construction, surveying and other land based markets where we have good opportunities for growth. Had we developed this ourselves, we wouldn't have had to spend $185,000,000 but we would probably lose out 5 years in market development. And we believe this was the better route. And those kind of acquisitions will continue where we see an opportunity to grow our core business by acquiring technologies rather than developing. Other acquisitions will be pure distribution acquisitions where we reach new end markets with our technologies, the acquisitions. Okay. Thanks. It's a very political answer, but that's the best you will get. That's fine. Thanks. Our next question comes from Mr. Jan Andersson of Danske Bank. Please go ahead. Yes. Thank you. I had some questions on the defense market. You had some answers in the previous question here. But I take that you have quite limited visibility from your answer from the previous question? So is it not a lot of backlog driven business in the defense market? Can you shed some light on that please? We have 2 defense businesses. We have the defense business we conduct via Integral of SG and I and that has a backlog and we have a better visibility there. The Novotel business which is primarily selling positioning systems for drones has less visibility. And what hit us in the Q4 was primarily the drone business rather than the continuous sequestration that we've seen from the Intergraph SG and I business. And I think that we have a better visibility into the SG and I business going into 2014. And our best guess is that we've hit the bottom when it comes to reduction in spending for defense related activities. Having said that, as you say, we don't have the forecast or indeed a promise from the customer that they will spend X next year or this year. Regarding the drone business, it's a lumpy business and it's difficult to say. It seems that drones are gaining in popularity over jet fighters. And therefore, over the longer term, we believe that the drone business is a growth business and it's not just United States. It's more countries that are investing in these programs now. But it's very difficult to give a forecast what the immediate outlook is for that business. So if that is development, I guess, for SG and I and perhaps a little bit of tough comps for the drone business in at least the first half of twenty fourteen, I guess, is what you're saying? That could be a good guesstimate. Is it possible to get some clarification on what kind of earnings headwind this has been in 2013, both the drone business and perhaps mainly the SG and I part? It's significant because, I mean, we try to shed and reduce fixed cost overheads as sales are shrinking. But if you're faced with a 25% reduction in sales and you have gross margins above 50%, then obviously it's going to hit your bottom line quite a bit. Yes, that's very clear. Thank you. Then to our question on cash flow. I guess CapEx will remain at an elevated level through Q3 or good part of Q3. That's one question. And second question related to that is if you can say something about the underlying CapEx without the building in proportion to sales or in absolute amount? Thanks. I think in proportion to sales, the underlying long term CapEx has peaked. And we're now moving into a situation where we're going to spend significant amounts on R and D, but the largest programs are now in the launch phase where we see new products hitting the market so to say. And so we're going to see a bit of lower activity on the R and D side. The building you're absolutely right. You should expect a bit EO CapEx for Q1 through Q3. And as of the Q4, we hopefully we've moved in our employees into the building and it's operational. Thank you so much. Thanks. Thanks. Our next question comes from Mr. Basav Borah from Goldman Sachs. Please go ahead. Mr. Bassaboura, your line is open. Please go ahead. Hi, this is Prasav here. Hi, Ola. Firstly, on the EM FX impact, you mentioned that you're trying to increase prices for some of your products in emerging markets. What has been the customer response to that? And secondly, with regards to China, you mentioned you will see some growth. Are you indicating to low single digit growth or high single digit growth? And with regards to demand in China, is it more of a financing issue, which has changed? Or is it spending in general has been on the weaker end? I think if we start by I didn't quite hear your question on emerging markets and product launches. Maybe you could repeat the first question and then we could take China. Sure. So I just mentioned that with regards to emerging markets, obviously, FX impact seems to be quite high. And you were mentioning that you're trying to increase prices for the products. What has been the customer response to And do you think that that will have a negative impact in terms of demand coming from emerging markets? Okay. Now I got you. No, I don't think so because the emerging markets where we've had most of the currency turbulence are actually so called import markets where we compete against other suppliers that have their cost base elsewhere. So when you have an import market, that market will be used to local price increases when you do have FX impacts. So it's sort of business as usual in those markets. But of course, there is a delay and we should expect that it takes some time to adjust price lists in local currencies and so forth. Customer response as a consequence is neutral because the customer base is typically used to this. Customers. We have local customers with a local business and they see their cost in local currencies going up and they have to adjust their prices as well. But of course, then you have increased inflation in that society and that could be Brazilian and Indian customers. But then you have international transplants or companies that are selling their products in U. S. Dollars or something. And for them, this is typically a positive impact because all the local cost is devalued while their revenues stay the same. So they have no objections to the imported goods part of their P and L statement increase in value. And then if we move to China, I think we indicate single digit growth. To give you an exact number, it's too early sitting here in February. And with regards to China as well, is the impact largely related to CapEx spending or infrastructure related spending being weak? Or is it more a case of financing, which should probably ease out in the second half or more into 2015? I'd say it's not financing as such. I mean, China is undergoing significant change right now. It's changing from an export led, foreign direct investment led economy into an economy that has to rely on consumption. And this is bad and good, but in the transition, of course, you have a lot of turbulence. But what it means for Hexagon is that they need to continue to invest in infrastructure. You're going to see significant flows of people from the countryside moving into cities, which is the prioritized activity for the Chinese government since it stimulates consumption and growth in the economy. And that will be good for technology and geosystems. Coupled with that, we see auto sales. And going into 2014, we also see increased activity in Aerospace in China. And this is going to be good for our metrology business. And probably just last one from my end. If you look at your 2015 goals compared to what you mentioned during your last Capital Markets Day, the FX impact seems to be a lot more than what you would have expected for. And the Smart Solutions, the sales cycles are definitely much longer than your regular products. So accounting for FX impact and for the Smart Solutions, do you think you'll have to account for more M and A or will have to do more acquisitions to meet your 2015 goals? Well, that's the exciting part of the next coming 2 years. We'll see how it pans out. Okay. Thanks, Helane. Thank you. Our next question comes Mr. Guillermo Peigneux from UBS. Please go ahead. Hi, Ola. It's Guillermo from UBS. Thanks I was wondering again on the currency moves in some of these emerging markets, whether you actually seen quite the contrary. So a pre buy effect, I. E. Your customers can only go to importers or exporters. And actually, they see prices going up. Therefore, in order to anticipate price increases, they're actually pre buy ahead of the potential price increase? No. I don't think we see that because we've seen most of the growth from large projects. I mean, for example, in Fiat is building a huge automotive power plant in Pernambuco in Brazil. That's been scheduled since years. And they don't look at how the reais is moving when they place the orders to the sub suppliers for that plant. If you take the Olympics and the World Cup, which is the SG and I business in Brazil, that's been scheduled for several years as well. And whether you build a football arena or not or renovate it, that has nothing to do with currency. So it's not small customers looking at the exchange rate day in, day out to time it perfectly. Thank you. And then can you spot any differences between the mining activity levels in Australia and the mining activity levels in Latin America? Absolutely. We have a much better demand from South America than we do from Australia at the moment. Can you quantify that if I may ask in terms of how much is down Australia, how much the others are holding up? Australia is down by from top of my head, I'd say around 5%, 6% in the quarter and it was double digit decline double digit rates. Mining for us is growing at strong double digit rates. When you discuss mining, it's important to remember what Hexagon does. We do safety and navigation equipment for the vehicles that are used in mines. So it's more about safety, productivity, utilizing the assets you've already invested in. So you can't compare Hexagon Cycle to, let's say, other Swedish companies like Atlas Copco and Sandvik or indeed Caterpillar? I definitely don't. Thank you. No, no, no. But there is a subtle difference between us and these other mining related companies. That's what I wanted to point out. Thank you very much. Thank you. Our next question comes from Mr. Max Rudiels from Ericsson. Please go ahead. Hi. Just if you could give some detail on GEO systems. In Q3, you mentioned that roughly half of the revenue growth for your systems attributable to new product launches and maybe half from an underlying market. And just if you could say how this relationship has developed into Q4? I think I mean, it's difficult to give percentages. My honest answer would be the same. But I guess that probably the European market Q4 than Q3. And what I base that on is we reached full capacity for our new products in the 3rd quarter and we have the same capacity in the Q4. So we couldn't ship any more new products. So I guess that the demand was stemming from a better end market. And as I Russia was particularly good for Geosystems in Q4. Thank you very much. And just one question. I think you mentioned this already, but the order intake outgrowing sales in metrology, did you specify which end market that was? Sort of mainly from aerospace or also from automotive? [SPEAKER LARS FRUERGAARD WESTLIE:] We didn't specify it, but it was auto. Come again, I'm sorry? It was automotive. Automotive, okay. Thank you very much. Our next question is from Mr. Ben Maslim from Bank of America. Please go ahead. Yes. Thank you. Good morning, Ola. Two questions, please. Just on PP and M, you mentioned the shift to the rental model. Do you have any extent as to how much that shift is dragging on growth rates? How long that would go on for? That's the first question. And then secondly, on working capital, do you think it's still possible to get that on working capital, do you think it's still possible to get that sales ratio down as your growth picks up? You're seeing better growth now in the product businesses and you say Geosystems is flat out. Will that start to tie up more working capital? Thank you. I think the conversion from selling perpetual licenses to leasing is not over, but it's not as strong as we saw say mid-twenty 13. Having said that, I mean, the entire cloud business will be a subscription based business. It will be even more dramatic than selling subscriptions since it's actually clocking hours. Right. But it grows on top of the ordinary business, so it should still be a positive for us. Ben, it's really difficult to give you an answer on when the conversion is done because it's very much the customers deciding. And we contract come up for renewal and then we have a discussion. And right now, the trend is that people are choosing a leasing model rather than buying a perpetual license. So I guess we'll see a bit of it into 2014 as well. That's my best question. And now I'm having micro Alzheimer's. So could you remind me about your second question? Yes, yes. If you grow faster in equipment and software, does that make it harder to get your work you tie up more working capital, harder to get working capital to sales down? That's absolutely true. And that in combination with large projects in metrology to large OEMs is not good for the working capital development either because typically you have to install everything until you get paid. Having said that, if we believe that SG and I can come back, which is a great contributor to reducing working capital and PP and M continue to grow. We gradually introduce services like, for example, the Veerapost services into Geosystems business models and Novot Health business models. I guess that the fair answer is that we shouldn't see dramatic improvements in our working capital to sales ratio, but we could see