Earnings Call: Q3 2013

Oct 23, 2013

Thank you, and welcome everyone to this interim report for the Q3 of 2013. If we turn to slide number 4 in the presentation, we can start by having an overview of the quarter. Organic growth is 5%. We report solid growth in the Americas supported by an increase in construction activity in the U. S. And strong demand in South America. I think the highlight for the quarter is the improved EMEA situation largely due to increased demand from infrastructure related activities in Western Europe as well. Asia reports a mixed quarter, but still solid growth. Geosystems, which is the star in the quarter, has seen accelerated organic growth supported by the improving European construction market, but also an increased uptake and demand for the newly launched products. Metrology, Aerospace segment solid continues to grow. Demand from customers in the automotive sector is probably at a trough. We do see CapEx plans increase into next year. So there is hope for the automotive sector going forward. But we did see in the quarter weakened demand from the automotive sector both in EMEA and NAFTA. PPNM is currently switching from a perpetual model into a rental model, but in spite of that continues to expand and growth was 7% in the quarter. ST and I continues to suffer from the downturn in the U. S. Defense segment and reports negative growth. All in all, strong profitability, 57% gross margin, EBIT margin of 22% in Measurement Technologies. We also post strong cash flow and rapid deleveraging in the quarter. Slide 5, just to remind you of the seasonality and the profit. Not much has changed. Q1, Q3 are weak quarters. Q2 and Q4 are strong quarters. If we move to slide 6, we have an overview of the P and L statement. Net sales were reduced in recorded sales to €576,600,000 But in a constant structure and local currencies, we grew by 5%. Operating earnings increased by 3% to €118,400,000 corresponding to an EBIT margin of 20.5%. And that was 5% margin expansion in the quarter. If we neutralize the currency, we would have expanded the margin by 0.7%. We post non recurring items of $14,900,000 in the quarter. And the non recurring items, the Swedish portion of them is not tax deductible. Why? The tax rate is slightly higher than the normal rate for the group in the quarter. Earnings per share amount to €0.21 excluding non recurring items €0.25 which is an increase of 4% over the corresponding period in 2012. Slide 7, the non recurring items consists of 2 posts. You have the divestment of other operations and Blum in Norway and that amounts to 8.8 $1,000,000 in a capital loss. And then we've undertaken restructuring and that relates primarily to metrology where we've accelerated the cost program that we announced in the second quarter. We've also cut back on cost related to defense in SG and I. And however, these cost efficiency savings are mostly related to metrology and SG and I. We've also implemented cost savings in Geosystems and PP and M. And this is our commitment to our margin expansion, one could say. The total program is concerning 200 employees worldwide and we expect the cash savings to be around €15,000,000 per annum with full effect as of the Q2 next year. Slide 8 highlights the 1st 9 months where we have 5% organic growth for the period. We have operating earnings amounting to $371,000,000 an increase of 6%. The EBIT margin is 20.6% for the 9 month period, which is an improvement of 0.5% over the corresponding period last year. Slide 9, cash flow. Once again, the second half proves to be the strong cash generation period for the group. Cash flow from operations before changes in working capital and tax paid amounted to $147,000,000 With tax paid and interest received and paid, Our cash flow from operations amounted to a little less than $120,000,000 We had a capital release in working capital amounting to almost €29,000,000 while cash flow from operations amounted to €148,400,000 for the quarter. Ordinary investing activities amounted to 54 $1,000,000 while the operating cash flow grew by 11% to $94,300,000 euros If we highlight the working capital trend on slide 10, we can see that we've had a positive trend in the relationship working capital to sales ever since the consolidation of Intergraph. We had a slight backlash in the Q1 and we're now back to the trend line. Slide 11, currency. Currency is the big event in the Q3 when comparing numbers against previous periods. We did see movement in the Swiss franc, the U. S. Dollar and the Chinese renminbi, but also other currencies that we do not highlight normally like the Japanese yen, the Indian rupee and the Brazilian reais had a significant negative impact in the profit and loss statement for the quarter. The negative profit impact amounts to CHF 6,300,000 in the quarter and the corresponding sales impact is minus CHF 28,500,000 for the Q3. And I think it's important to remember that this is going to continue into Q4 and we would guide for a negative impact of 4% in the 4th quarter as compared to 5% in the 3rd quarter. Market Development. If we move to slide 13, we can see that the North American share of sales has shrunk by 1 percentage point and that is linked to the U. S. Defense. Western Europe on the other hand has gained 1 percentage point and that is really linked to the recovery in infrastructure and construction seen in Geosystems' numbers. EMEA excluding Western Europe is also expanding by 1 percentage point. China 15% Asia excluding China 13%. And we also see the expansion in South America that now represents 5% of group sales. Slide 14, the trends for and the contributors to growth in the quarter. Western Europe was the single biggest contributor to growth in the quarter. South America, in spite of only representing 5% was the 2nd largest contributor to growth followed by East Asia and by East Asia we mean Japan and Korea. Middle East contributed significantly to growth as well in the quarter. North America single digit growth. China also contributing to growth, whilst U. S. Defense and Australia were the 2 negative segments or factors in the quarter. If we move to slide 15, we can look at the trends per business segment and geographic region. Significant changes in the quarter were surveying that is now growing in all areas of the world. Power and Energy, we saw a return to growth in South America. Aerospace, well, the Civil Aviation segment is growing solidly, but defense primarily North America is obviously negative. Construction returned to growth in Western Europe and is now growing globally again for the group. And automotive was another change where we saw a negative trend in North America both for automotive and manufacturing. But if we look at the guidance issued from the automotive companies, this could be the trough in the cycle for capital investments. And going into the Q1 and the second half of twenty fourteen, we should see increased activity from the global automotive again. Having said that, it wasn't bad in South America and China. If we move to slide 16 and look at the EMEA market trends, the biggest change was really Geosystems that now returned to double digit growth. Geosystems grew by 11% organic growth in EMEA and 14% in Western Europe. And we haven't seen this kind of growth in the past 2 years. Customer demand in EMEA improved and as I stated primarily from the construction and infrastructure sector. We see increased activity levels and Europe and it's a stronger recovery than the one we saw in the second quarter. It's particularly Germany, Italy, U. K, the Nordic region that are growing again. Demand in France remained weak. Automotive and Manufacturing sectors are on a very high activity level, but we did see a decrease in demand, in the quarter. If we move across the Atlantic to the Americas, slide 17. U. S. And Canada excluding defense is showing mid single digit organic growth in the quarter. Canada has now returned to growth after negative growth in the first half of the year. Majority of growth came from infrastructure applications, housing applications, power and energy segments. The defense business contracted by 36% in the quarter and this was a bit of a disappointment because Q3 is the end quarter for the fiscal year in the U. S. Administration and it usually is a much bigger quarter for our defense business. The automotive sector recorded negative growth, but aerospace continues to grow. South America, another strong quarter with very strong double digit organic growth. Asia. China recorded a mixed quarter where our Chinese business really consists of 3 sub businesses. You have the engineering sector represented by Automotive and Aerospace and that returned to growth. We saw solid growth in the quarter. You have the infrastructure and construction sector that since the downturn in high speed rail has recovered and continued to grow well in the quarter. Then the 3rd business is the project related business. And last year, we had significant sales of airborne sensors and and mining projects. We did not have those projects this year. Why? It turns out on the top level to be a fairly weak quarter for our China business. Rapidly expanding markets on the other hand in Asia are Malaysia, Indonesia, the Philippines and New Zealand. India returned to strong double digit growth in the quarter. Korea and Japan are also doing fine mid teens inorganic growth. Growth was held back even more so in the Q2 by Australia where we see a downturn In the mining sector, the Australian mining sector and Australia as a market continued to contract in the quarter was not as dramatic as in Q2 though. So if we highlight over a longer period the organic growth per geographic region and turn to slide 19, we can see that Asia continued to grow, Americas continued to expand and we can see a slight acceleration in the flattish development in EMEA powered by the return to growth for Geosystems. Segment information. We move to slide 21. Another strong quarter for our core business, Measurement Technologies, we report 21.6% operating margin, which is €122,300,000 in EBIT for the quarter on 566,100,000 of sales. For the 1st 9 months, we report $371,000,000 which is a 6% improvement over the corresponding period last year. Slide 22, organic growth by application area. I think this really highlights the return to growth for Geosystems where you can see that we're now back to pre crisis levels for Geosystems. And we haven't really seen this kind of growth in the past 2 to 2.5 years. So it's a significant event for us. We also see the slowdown from very high organic growth rates for metrology. And there is still a ray of hope here since we believe that the CapEx cycle for the automotive industry might be reaching its trough. Technology is obviously affected by the downturn in defense spending and the negative growth for SG and I coupled with this switch from perpetual to rental model in PP and M, which lowers PP and M's organic growth to 7% initially, but over time should restore and improve growth for the business. If we turn to slide 23, gross margin came in at 57% versus 56% last year. So the trend continues. EBIT margin, same thing. We had an all time high Q3 regarding EBIT margins. And you can see our 2015 target on this slide. And then if we move to slide 26, M and A orders and product releases in the quarter. On October 7, we announced that we acquire Devex, which is a Brazilian software company focusing on mine management software solutions, both for open pit and underground mines. And this acquisition will complement our mining offering in the mining sector, as it will specifically strengthen us in 3 d environments. If we move to slide 27, we also acquired a Swedish based company called AHUB on the 8th October. And what AHUB is doing is complementary to what we do in our airborne sensor business. It's a so called bathymetric lidar that can measure water and bodies of water, cubic volume basically of water by measuring the bottom of river, ocean and coastal regions. Slide 28. We made a public voluntary voluntary offer for VIRIPOS which is traded in Oslo in Norway, but based in Aberdeen in Scotland. We see significant synergies between Virepos and Hexagon's businesses where we can leverage on Virepo's infrastructure to penetrate our customer base in agriculture, mining and construction. We have a significant announcement today and that's regarding Shell. Shell has decided to standardize on our PPNM design software. And what Shell is doing is taking an industry lead in standardizing the way they use design software when undertaking large capital projects. So this is a new approach where you basically upload the design software in a cloud and the EPCs that works on the project will log on to Shell's cloud. And Shell will basically standardize all the work that they will do on their capital projects on the PPNM software. We're quite proud of this and you can read at your leisure the quote from Bob Krebser. Financially, this will have more of a long term impact. We will see an impact as of mid next year from this switch from selling perpetual licenses into standardizing on this cloud based model together with the owner operators. More about owner operators slide 30. We had significant wins in the quarter from CNRL in Calgary in Canada. And we also got an order from the Instituto Mexicano del Petroleo in Mexico City. On Slide 31, we're also helping Toyo Sotal in the important expansion in the so called presalt layer outside of Rio in Brazil. And Toyo Sotal is one of the parties that are exploring this significant oilfield. Slide 32. We see continuous demand from Chinese customers switching to Intergraph PPNM Software Solutions. Our organic growth in the quarter in China for PPNM was 26%. Sinopec is a leading driver in this growth and we saw renewed licenses in the quarter and we also landed other deals with sub suppliers and other players in the Chinese market. Slide 33, the newly launched MS50 from GEO systems is proving to be a success. We've sold more than 400 instruments since its launch late June. And we see the versatility that this instrument is bringing for the surveying and construction and engineering community. Slide 34, we're also helping to map Southeast Asia. And we had a large installation of so called GNSS reference stations in Indonesia in the quarter. Slide 35, Chester County selected Intergraph CAD software and in the quarter and they're using this and roll it out into several departments in the county. Slide 36. We also continue to focus and invest in mobile technologies in relation to public safety installations. And we have several examples of new products launched in the quarter on this slide. Slide 37. We support SET, which is the traffic engineering company responsible for the Sao Paulo transportation system, if you so wish. And it's important to remember that Sao Paulo have more than 10,000,000 vehicles populating the streets. So it's the most traffic congested city probably in the world. What we do here is to try to integrate our technology to reduce traffic jams and make sure that rescue vehicles and so on can find a path forward in this very congested city. Slide 38. Novotel got significant orders in the quarter. 1 was from the U. S. Federal Aviation Authority. It's a positioning system called WASS. And we also got the first order for so called anti spoofing modules. And what is an anti spoofing module? There is an old Bond movie called Tomorrow Never Dies where the crook sends fake GPS signals to a British warship and they think they're on international water, but they're actually in China. And that causes a great global crisis, which Bond resolves. But nowadays, we will resolve it with our anti spoofing module. Turning to Slide 39. Photon Group places a significant order with Hexagon Metrology. It's a large manufacturer of equipment, lorries, construction equipment, but also cars and buses is based in Beijing in China. Slide 40, other manufacturing opportunities in China. COMAC, the Commercial Aircraft Corporation of China, has started designing and will eventually, in the next few years, build large passenger aircrafts with plus 150 passengers capacity. The goal with this venture is to reduce China's dependency on Boeing and Airbus. And we've delivered significant orders to monitor the quality in COMAC and safeguard the delivery of this commercial aircraft. Jabil Greenpoint Factory is a new Apple iPhone supplier that bought significant orders from us in the quarter. And in summary, for the quarter, if we summarize the quarter on Slide 42, We report another strong quarter, 5% organic growth. Gross margins came in at 57% for the core business, 22% EBIT margin. The strong cash flow generation is rapidly strengthening our balance sheet opening up for opportunities for M and A transactions going forward. And that's it for the quarter. And I'm now ready to answer any questions you might have regarding the quarter. Thank you. Our first question comes from Mr. Ben Maslin from Bank of America Merrill Lynch. Please go ahead, sir. Thank you. Good morning, Ola. A couple of questions, Steve. Firstly, on Metrology, it sounds like you are a bit more optimistic on the outlook for auto CapEx. I just wonder if you've seen that already in your order intake in Q3. Maybe you can give us a bit of color on the book to bill. And then secondly on SG and I and the weakness we've seen in the defense segment, just what's your expectation for how big that business is now for this year in terms of revenues? And at what point do you start hitting easier comps stop shrinking? Thank you. Thank you. The book to bill in metrology was above 1% which is positive for a third quarter. We would expect a gradual recovery in Automotive CapEx as of Q1 and then see gradual recovery throughout 2014. We've already seen auto players invest significant amounts of money and metrology equipment, commit to invest in metrology equipment in Brazil. So I think that's a good start for the coming 6 months. And if we move to SG and I, we've gone from roughly $130,000,000 in sales down to $80,000,000 and we think $80,000,000 is the trough. And we're almost there by the Q4 and then the comps are going to get easier again. Thanks. And maybe a follow-up then on the rest of SG and I. Can you give us a bit of color on how the non defense part is performing and maybe what the tender backlog or project pipeline looks like heading into next year? It's actually cautious we're cautiously optimistic about the rest and the rest is targeting utilities and public safety. We've seen good order intake from those two segments why there is hope for SG and I, so to say, going forward. We have significant tenders out. We'll see whether they materialize between now and Christmas. Got it. Thank you. Thanks. Our next question comes from Mr. Andreas Koski from Nordea. Please go ahead. Yes. Good morning. Can you hear me? Can you hear you loud and clear. Perfect. I have a question on the strong growth in Geosystems because you recently launched a couple of new products within this division. And I wonder if you can give us the volume of within this division. And I wonder if you can give us the volume growth and how much is coming from price mix? I think it's mostly volume in Geosystems case in the Q3. We obviously mix is a big factor as well since these newly launched products and I mentioned that on one slide, the MS50 is a brand new product. It's actually a new technology altogether and we see significant sales of that product in the quarter. But most of it of the 12% is volume? Yes. And it's difficult to say. I mean, is MS 50 mix or volume? Sure, sure. And then on the restructuring programs, you expect €15,000,000 in cost savings with full effect in Q2 next year. Did you have any savings from this program already in Q3 this year or should it come later? We might have had €1,000,000 or so, but not significant. Okay, perfect. Thank you very much. Our next question comes from Ms. Steffy Polan from JPMorgan. Please go ahead. Hi, thanks. Just on PPNM, does the sort of 7% growth rate that you saw look sustainable? Can you just talk about which geographies are driving that? And of course, the Shell contract looked good. Can you say who the competition was on that deal? And maybe in a broader sense, how Smart is playing against the competition, particularly in the U. S? A quick second question would be, can you just talk more about your smart solutions and how you're planning to focus sales around those areas? And just a final one on M and A and what areas you might find of interest? That was a lot. Maybe we could take them 1 by 1. So we start with PP and M. And I think that what we see now is that PP and M, I mentioned that we're doing what many software companies are doing right now and that is switching from a perpetual license model into more of a rental model. When you do that, you basically lower your organic growth for a number of quarters until you've return to the underlying volume growth so to say. So that's one thing that is happening in PP and M. And we do think that the growth we've seen in the quarter is sustainable going forward. So let's take the second question, which what was your second question? Well, it was just around competition that you saw for the Shell contract and just broader competition competitive position that you're seeing. I mean, for example, we know that AVEVA is becoming more aggressive in the Americas. Are you seeing that? Well, if we start with the Shell contract, there wasn't much competition because it's a new way of doing business where the owner operator holds the EPCs in its system. And to my knowledge, we're the only company with an operational back office cloud function with servers, protected IP and so forth. So we were really the only solution for Shell. So I don't think competition was an issue there. It's more the business model, which is a bit of a small revolution in this industry. Regarding I don't like competition, but I can tell you where we see good growth and we see significant growth in Asia Pacific. We see significant growth in the Americas. And Europe is somewhat weaker, but that's more linked to the business sentiment right now in EMEA. Right. And then you asked about? Smart Solutions. Smart Solutions. We're actually going to launch a new division in the Q4 that is going to be responsible for our smart solutions. And it might come as a surprise to you. It's going to be called Hexagon Smart Solutions. And then you had one final question, right? Yes. M and A and what areas are of interest? Technology and geographic expansion. No more details on that? No. Fair enough. Thanks. Thank you. Our next question comes from Mr. James Goodman from Barclays. Please go ahead, sir. Good morning. Thanks. On PP and M, just going a bit going a bit further, could you maybe talk about any sequential change in trends you've seen in the end customer markets leading to the 7% growth in the quarter? And then maybe just briefly, could you quantify maybe the impact of the transition from perpetual to rental in terms of its effect on sales growth in the quarter? Thanks. I think we haven't seen much change apart from a slight slowdown in organic growth and we think it's due to this perpetual to rental model. If I have to quantify it, I would say it's probably in the range of 2%, 3%. But don't take that lightly that number. Take poison on it. That's relevant year on year. But then sequentially, what you're saying is there's been an acceleration in the level of take up of rentals? Yes. That's absolutely correct. Okay. Thanks. Thanks. Our next question Our next question comes from Mr. Prasad Bora from Goldman Sachs. Please go ahead, sir. Thanks for taking my questions. I have a few. Firstly, can you elaborate on your you talked about the revenue impact from shift to rental model. What is going to be the impact on margins, especially in the PPM segment where you have close to 35% plus margins? The third one with regards to M and A, are you finally looking at more bolt on acquisitions or would you be considering larger deals? And would the financing be more organic or would you pursue more debt or rights issue? Just want some clarity on it. Wow, Prasad. You're having a good morning, aren't you? Let's take it 1 by 1. Let's see if I got them all down. Strategy for China, I am let's put it like this. I am probably not as negative on China as you some other CEOs. What we see the underlying trend everyone knows that there is a shift from export oriented an export driven economy into a consumer driven economy. That's going to benefit our metrology business, which is the single largest business. On top of that, we see that the government is supporting this development of new civil aircrafts, which is important for us for metrology as well in China. So the metrology business has slowed down in the quarter. Growth has slowed down. It's still growing. And we believe that for the foreseeable future there is huge potential for metrology in China linked to the local consumption. If we move to the infrastructure, we have 2 businesses. We have the project based business and we have the ongoing business so to say. And the ongoing business has recovered ever since we saw the loss of high speed rail. The trend this year has been significant investments in underground systems in major cities in China. There is a new launch of building out regional airports and highways across China, which we will benefit from. So we do see the continuous recovery of the non project based business. Then we have a significant business from time to time, which is project based. And last year, it was a big mining order and a large order from the Chinese Surveying Institute for so called airborne cameras. And these cameras cost between €1,000,000 to €2,000,000 a pop. So it's a significant order when they do come. We did not have those orders in the Q3 this year. So the underlying business is doing fine, but these orders last year distort our Chinese picture. So we have an unchanged strategy to answer your question for China. Margins for PPNM when it comes to switch from perpetual to rental is probably neutral. So we don't expect a margin pressure or a margin improvement once the transition is done? And then your final question was on M and A. And I think that we will do M and A. And regarding debt, you said that or could we consider doing a rights issue or increase our debt? We're at a very comfortable level now at slightly above 2.3 times net debt to EBITDA. So it was a long time since we experienced these low levels of indebtedness. So I think we're familiar with the concept of debt. That's very clear. Probably just last one to tax you a bit more. On revenue synergies, no change in stance and you're still expecting $100,000,000 to $200,000,000 in revenues by 2015. Is there any further qualification on it? Would you be at the lower end of it or the higher end? Or is it too early to comment on that? It's too early to comment, but what we will do in the Q4 presentation is that we will introduce this new division called Hexagon Solutions. Our next question comes from Mr. Guillermo Peignot from UBS. Please go ahead, sir. Hi. Good morning. It's Guillermo Peignot from UBS. Can you hear me? We can hear you fine. Thank you very much. Just a couple of questions actually. One regarding the defense end markets. Could you maybe you answered this already, but could you comment on the book to bill as we speak? And then secondly, when it comes to your operating leverage, you did have a weak operating leverage quarter in Q2. Q3 has been okay. And I was wondering whether Q4 should be actually gain or regain part of the lost ground actually you had in Q2 when it comes to the drop throughs and profitability? Thank you. If we take the first question just to understand it, are you referring to the book to bill for the defense business? Yes, correct. That's negative. And we are anticipating that we will reach anticipating that we will reach $80,000,000 which is a significant drop from the previous level of $130,000,000 And now I'm discussing U. S. Dollars just to be clear. We should see a negative book to bill in the Q4 as well. All right. Thank you. And that will be the trough and then you easier comps in Q1? I hope so. But the only nervous thing is we don't control the U. S. Political system though. Not yet, yes. Not yet. And then your second question was about the incremental margin, which I think is a very good question. I think it's fair to say that we have expanded cost a bit too fast in the Q2 and we detected that by the end of the Q1 and that's why we're now implementing this cost reduction program to improve the incremental margin. I mean Hexagon is not a cost cutting case, but it's very important that sales expansion goes hand in hand with cost expansion. So it will be a lot more normal, put it that way, in 4Q? I was personally disappointed with the incremental margin that we performed so far in the year. We should improve it. Thank you very much, Ola. Thanks. Our next question comes from Mr. Max Friedian from Erik Panze. Please go ahead, sir. Hi. Thank you. Just if you can give some more flavor on the cost reduction program. I mean, geosystem is now growing at around 13% and still measured good growth in PPMM. What is it that you're seeing that makes it take such measures as well within these divisions? No. It's minor for Geosystems and PPNM, but I think it's about committing to our EBIT margin expansion targets. And occasionally, you need to do things like this. It's no more dramatic than that. Okay. And then my final question on automotive demand. There are some positive figures for demand from other reporting companies and you talk about increased CapEx into 2014. Can you just give us your view on where you are in the value chain for Automotive? We're probably once you've designed a new car, we're fairly early in the process. When you have the initial designs and you start making pilot manufacturing and the biggest single important time when you use metrology equipment is when you ramp up the production line. Okay. And then just finally, you partly answered this already, but just on China, how much did China grow for the overall group in the quarter? In the quarter, it was weak single digit, below 5%. Below 5%. Okay. Thank you. Thanks. Our next question comes from Mr. Dan Maslow from Bank of America Merrill Lynch. Please go ahead, sir. Thanks. Just a couple more if I can. Just on the very strong geosystems growth, do you have any sense of how much of that came from new product launches like ANOVA? And how much is the actual underlying cycle? Is there any way of splitting that out? And then do you have any large project launches planned in the other divisions as we go into next year? And then just on the Shell contract, I'm sure I know the answer already, but can you give us a sense as to how big this is in revenue terms or whether it's big enough that we'll actually see it have an impact on PPNM's growth rate maybe 12, 18 months out? Thank you. We start with the Shell contract. We would be greatly disappointed if you couldn't see it by this time next year. Right. That's roughly how long the ramp up period is. It's 9 months roughly until we should see something from it. Okay. And then you talked about new launches of new products, right? And I think we have a few things up our sleeve and we haven't shown you everything yet. Okay. But as much in geosomes, obviously that's a very big step up in growth rate. There's lots of companies still talking Europe down in terms of construction. I'm just trying to work out how much is the underlying cycle and how much is you getting a payback on your R and D launching new products like ANOVA. Is there any way of spitting out that 12%? There probably is, but I'm not clever enough to do it. So let's say it's fifty-fifty. We know what the Nova contributed with to sales. It's also fair to say that we're fairly early in the cycle. I mean, if you think of a surveyor, that's about the first thing that happens if you want to do a construction start up. You send out a surveyor to take measurements. So we should see it probably earlier than what you would see from well, construction companies and engineering companies and so on. Got it. Makes sense. Thank you. Yeah. Thanks. Our next question comes from Mr. Daniel Johansson from UBS O'Connor. Please go ahead. Hello. Thanks a lot for taking my question. Hello. I haven't taken it yet. Okay. I was wondering coming back to the Shell contract again, please. Is there some sort of an exclusivity going on here? Or can you sell still your solutions to whomever you want? Right, Deah. Absolutely. I mean, the infrastructure is now paid for. And if you when I say infrastructure, think of secure communication channels, enough power to be able to have remote clients all over the world. That's the kind of infrastructure we've set up in connection to the Shell contract. But it's not exclusive by any means. Okay. And in terms of the overall perspective here, is this the start of something new? Is this the start of the people have talked about the Industrial Revolution in the U. S. Etcetera with regards to the cheaper energy, etcetera? I'm not sure if it's linked to the new energy revolution that is ongoing in United States because Shell is actually Dutch company. But I think it's a small revolution in our industry if you put it like that. Okay. Thank you very much. Thanks. Our next question comes from Mr. Mikael Larsen from Carnegie. Please go ahead, sir. Yes. Thank you. I have a question regarding the perpetual license fees compared with rental, if you just could explain the difference? Perpetual license fee is you make a down payment and then you own the software. And if you rent it you pay a monthly fee. Okay. So it's a licensed model compared with a rental model. That's basically it. Yes. So it's basically you rent something versus purchase something. Yes. But given your steady sales trend in PPNM, I thought that you already had more of a rental setup. Absolutely. I mean, it's nothing new. It's just that it's accelerating significantly. Okay. And when is cash flow growth and the impact from this mix shift, is it fair to conclude that you now will have 8%, 9% growth, slightly below 10% given this mix shift? Or will you still be able to deliver roughly 10% ahead for KPNM. You mean once it's stable again this year? Yes, or during this period Over time, of course, it will stabilize and the model will catch up and then you should see an improved organic growth again. But you did have a really tough comps comparison in Q3 last year. That was a really strong quarter, wasn't it? It was a really strong quarter, absolutely. Okay. And my second question is regarding synergies. If you could give an update on the main synergy projects that you have, H2O, agriculture, assembly, etcetera? So they're running according to plan. I think it's a bit premature. And I prefer to come back to it in Q4 when we have more to say about it really. Okay. How much revenues did you have from this in Q3? Not much. Okay. And just my final one is on amortization of R and D this quarter and capitalization, if you could comment on that, where you were in Q3 and also what we should expect ahead? I think we are now we're balancing out on a fairly high level of capitalization and I don't expect it to increase much further. The other important thing to remember when it comes to investments, because it's really under the investment line you see it is this new facility that we're construing in Huntsville, Alabama and is ramping up from a cost perspective right now. So that will increase depreciation then? Yes. No, that will not increase depreciation. But the CapEx line will probably stay around the level where it is right now simply because we're increasing the activity in relation to the construction in Alabama. Okay. Okay. Thank you.