Thank you very much. Welcome to this interim report for the first quarter of 2012. If you have the presentation in front of you, I would like you to flip forward to slide number 4, headed Overview First Quarter 2012. As you might have seen in the report, the organic growth amounted to 6%, and the recorded growth for the quarter, 9%. Growth comes primarily in this quarter from the ongoing recovery in North America and South America that is steaming along. We also have good growth in northern parts of Western Europe. If we look at the various divisions and product lines, Metrology set another record quarter, strong demand from automotive and aerospace sectors drove growth.
Geosystems is adversely affected by the lack of investment in the high-speed rail network in China. This should be the concluding quarter on a comparative level where we still are hampered because of this effect. Intergraph PP&M is reporting sales at all-time high levels. It was another very strong double-digit organic growth quarter for PP&M. Intergraph SG&I reports negative growth in the quarter. If we look at the EBIT and gross margins, this was a record quarter when it comes to the gross margin. It was recorded at 55%, and the EBIT margin for our measurement technology business came in at 21%. The EBIT margin was burdened by restructuring charges in the quarter stemming from the restructuring program Get Fit in Intergraph SG&I. Around 190 employees were considered redundant. The charge amounts to EUR 4.9 million.
The reason why we don't declare this as non-recurring items is we expect a full payback from this program as of the third quarter this year. A short payback period. We now go to slide five. This is just a kind reminder that the first quarter is a fairly weak quarter, second quarter is strong quarter, third quarter, our weakest quarter, and fourth quarter, our strongest quarter in a year. Slide six, key figures, P&L statement for the first quarter. Net sales came in at EUR 566 million compared to EUR 521 million. This time last year, we had the so-called revenue haircut effect of minus EUR 4.4 million. Thus we report operating net sales and recorded net sales. Operating earnings, EBIT1, came in at EUR 111 million, including the charge of EUR 4.9 million, compared to EUR 104.8 million for the corresponding period last year.
That equals an operating margin of 19.6% for the quarter. We reduced our financial net compared to last year due to better borrowing conditions. Earnings before taxes amounted to EUR 97.5 million, which is 14% higher than the corresponding period last year. The tax rate came in at 19% compared to 20% for the first quarter in 2011. Thus giving us net earnings of EUR 79 million corresponding to EUR 0.22 per share. That's a 16% increase over the corresponding period last year. Slide seven, cash flow. Cash flow from operations before changes in working capital came in at EUR 112.5 million. That's 14% above the corresponding period last year. Changes in working capital, it's typically a weak cash flow quarter when it comes to working capital, Q1, came in at minus EUR 25 million, roughly the same level as last year.
Thus, cash flow from operations netted at EUR 87.5 million. Ordinary investment activities amounted to minus EUR 35 million. Thus, the operating cash flow amounted to EUR 52.5 million for the quarter. That is an increase by 15% over the corresponding quarter last year. The cash flow and the net debt position is roughly in line with our plan to deleverage and reach 2.5 times net debt to EBITDA by year-end. Currency impacts and currency effects as compared to the EUR in the quarter. The Swiss franc strengthened, so did the U.S. dollar and the renminbi against the EUR in the quarter compared to this period last year. That had a negative EBIT impact effect of net EUR 1.8 million negative.
If you break this down into parameters, we had a negative impact of roughly EUR five, six million stemming from the Swiss franc, but we had positive effects from the U.S. dollar and the renminbi. The net effect was -EUR 1.8 for the quarter. Since we report in EUR, we have a positive effect from Swiss francs, U.S. dollars, and renminbi on the top line, amounting to EUR 16.8 million for the quarter. The currency impact on the top line was roughly 3%. We now move to the market development in the quarter. On slide 10, we can see that North America has gained three percentage points of the total sales in the first quarter over the same period last year. Western Europe is stable at 36%, South America 3%, and we can see one percentage point loss in China and EMEA, excluding Western Europe, whilst Asia-Pacific is fairly stable.
Going forward into the year, I think one could expect to see growth in terms of share of total sales coming back, primarily in South America, but possibly also in China. Slide 11 is a comprehensive schedule trying to explain what we see in the first quarter per geographic region and per customer segment. If we start with our largest segment, surveying, we saw a negative trend in Western Europe, and if we break up Western Europe into the southern part and the northern part, we had a positive trend in Northern Europe, but significantly double-digit negative trend in Southern Europe, which ate up the positives that we had stemming from the northern part of the region. Middle East and Africa is growing. North America, considerable growth. We do see a recovery in the surveying and the construction sector in North America.
South America, we can simplify South America by saying everything is growing, and it's a very good and favorable outlook for that region. China surveying would be the high-speed rail, where we still have negative impacts in the first quarter, and Asia-Pacific continued to grow, and primarily in Australia. The power and the energy segment represented 19% in 2011. We can report strong growth across the board from all regions but for China. China was really a delay in already taken orders. It's not that we see a slowdown in the Chinese power and energy sector. Aerospace and defense is another very strong sector, representing 12% of sales in 2011. We see significant activity ongoing in Western Europe with Airbus and its sub-suppliers, in North America with Boeing and its sub-suppliers, in South America with Embraer, and in China with several local Chinese aerospace manufacturers.
Construction is a mixed picture where we do see single-digit growth for construction in Europe. North America and South America, strong double-digit growth. China, still negative growth in the first quarter from the construction sector, and Asia-Pacific, still single-digit growth. Public safety and security. We had a continued situation during the restructuring phase where we had favorable order intake on both sides of the Atlantic, but negative invoice sales in the quarter. South America grew and China grew, and Asia-Pacific, where we had a large order to New Zealand in the aftermath of the earthquake in New Zealand in the first quarter of 2011 as a comparison. Asia-Pacific records negative growth. Automotive is going to be another strong automotive year. It started favorably in Western Europe, primarily in Northwestern Europe, Germany, and surrounding countries. North America, we do see significant growth from the North American automotive industry.
South America, all customers are expanding capacity in primarily Brazil. After a fairly slow year last year, and especially by the end of last year in China, we do see a recovery in the automotive investments in China. Also Asia-Pacific is growing, where it's primarily Japan starting to repair and recover its automotive capacity in the aftermath of the earthquake last year. Manufacturing, which is a variety of industries, we do see strong demand in all geographic regions, but for China, that has started the year a bit hesitant. Asia-Pacific, still strong. All in all, weak growth from Western Europe, strong growth, Middle East, Africa, North America, South America, weak growth from China and Asia-Pacific. We now go to EMEA, slide 12. The demand for Hexagon's products and services was basically flat in the first quarter, 1% organic growth for measurement technologies, 0% for the group.
We do see improved demand sequentially compared to the fourth quarter for metrology, primarily used in automotive and aerospace. We also see increased levels of investments in enterprise engineering and CAD solutions in connection to power and process projects in the region. Was also a very strong market for mobile mapping solutions, was a weak construction and civil engineering market in the quarter, and we did face delayed shipments for the SG&I unit. Eastern Europe, Russia, and Middle East continue to grow, but Southern Europe remained weak. Slide 13, Americas. All businesses display double-digit growth in the region, and we do see a robust recovery in the North American market. Power, energy manufacturing, med tech are the primary growth drivers for metrology. Infrastructure projects as well as more traditional construction housing starts were favorable, thus pushing Geosystems sales in NAFTA to double-digit growth.
Defense and security products, negative sales growth in the quarter, but strong order intake. We also saw strong demand in the natural resources sector in Canada, the so-called oil sand fields, and that drove growth for Intergraph PP&M in the region. All end markets there are, as I reported previously, growing at double-digit growth in South America. If we move to slide 14, Asia. Excluding the high-speed rail effect in the first quarter, organic growth was 7%, including it was 2%. We face strong demand in metrology's core markets, primarily driven by automotive, but also aerospace and some of the electronics manufacturers in the region. The Chinese construction industry continues to be sluggish. This was another slow quarter, but we do see signs of a bottoming out. New significant business opportunities are not within high-speed rail or the traditional construction industry for Geosystems, but will come from other application areas.
It's really by combining Intergraph and Geosystems that we believe we can capture growth in Asia in the second half. Slide 15 is just describing what we've just discussed, the various regions in a graphic way. Slide 16, segment information. Organic growth by division or application area. We can see the significant growth in metrology, strong double-digit growth coming down from the almost crazy levels of 50% growth two years ago, but still very strong growth. This is fueled by the, what we see, never-ending expansion of production capacity in automotive, aerospace, and electronics, primarily in Asia. You do see technology being reported for the first time for Q4 and Q1, which are quarters where we have numbers for the corresponding period last year.
We do see a slowdown, but that is the delay in shipments in SG&I, whilst PP&M, which is the smaller business, is growing at strong double-digit growth. Geosystems had good growth just after the crisis in 2009, but with the loss of high-speed rail, where we basically lost EUR 50 million in annual turnover, we're now close to zero. We believe that this is probably the bottom for the business, and we're going to see growth from now on. Moving to Slide 18, the P&L statement for measurement technologies. Organic growth 6% to EUR 548.5 million. The operating earnings are EUR 113.4 million, which is half a percentage point reduction in operating margin compared to the corresponding period last year. Had we excluded the restructuring cost to lay off the 190 people, we would have reported 21.6% EBIT margin. A strong quarter for metrology.
If we turn to-- oh, sorry, measurement technology. If we turn to Slide 19, you can see that development which was favorable in the quarter, product mix-wise. We managed to push the gross margin another percentage point north to 55%. The EBIT margin, as reported, is slightly lower than 21% for the quarter, but we're treading along the long-term trend line, and the new target is obviously 25%. Orders, product releases, Slide 22. During the quarter, we launched new handheld distance measurement tools from Geosystems. It's a rugged laser distance measurement tool, and it's the new Leica Lino multi-line construction laser. Slide 23. We're proud to equip the Force India Formula One racing team, and it's really the latest addition to the large number of Formula One racing teams that are relying on Hexagon Metrology to build, calibrate, and maintain their cars. Slide 24.
The U.K. police have acquired a significant number of 3D laser scanners to reduce incident clear-up when you have traffic accidents. They expect to save on average 39 minutes, and this is a preparation for the 2012 Olympics in London. Slide 25. We got a customer order from the Agricultural Agency in Mexico that standardized on our GPS or GNSS system from Hexagon. Slide 26. We got an order from McElhanney that selects our LIDAR sensors to capture geological features and alignments of mining sites in their mines in British Columbia, Canada. Slide 27. Personally, I find this curious, this application. It's an industrial automation institute, PIAP, in Poland that has developed a number of maneuverable robots for guarding the Polish border. They basically control these robots using our GS10 GPS receivers to control the motion of the guard robots. Slide 28.
Autostrada A1, that goes through the central of Italy, has equipped nearby villages when they do the highway construction work with our monitoring solutions to track any cracks or damages caused by the roadwork construction work during the construction period. Slide 29. We got some significant orders from the Chinese power industry, where they acquired Hexagon Geosystems monitoring, landslide solutions for hydropower stations, and also looked at scanning solutions to scan nuclear power plant construction sites. Slide 30, we proudly launched Leica iCON, which is a new range of products aimed at the construction professional. It involves both software and hardware and communication solutions on the work site. Slide 31, we also launched a new laser scanner. It's a long-range, high-accuracy scanner. At a 700-meter range, we have an accuracy of 20 mm.
Slide 32, GeoMax, our product line stemming from our Chinese operation in Wuhan, launched four new products during the quarter to conclude and finalize the product family. Slide 33, just a few of the significant orders we received for Intergraph PP&M, and we do believe that PP&M is continuing to gain market share and gain traction for their Smart 3D software solution. Slide 34. We also launched some significant products in PP&M. It's the SmartPlant Review and the CADWorx DraftPro. Slide 35. The Great Dublin Region Water and Drainage Corporation standardized on our Geospatial platform to help them prevent water leakage and improve outage situations in Dublin. Slide 36. The SA Ambulance Service goes mobile using our emergency operations center, portable system, which is an Intergraph solution.
Finally, slide 37, London Hydro in Canada, London, Ontario, will use our mobile workforce solutions and our so-called in-service software to improve the efficiency in their network. Slide 38. This is an impressive order. CPFL is one of the largest electrical distribution companies in the world. It's a reference account to all electrical companies in Brazil and South America, and they are responsible for the electric supply to 585 different cities in Brazil, and we sold a system which will manage their outage management solutions. Finally, going forward and the reminder of the year. If we summarize Q1 on slide 40, sales growth recorded 9%, organic 6%, record gross margin of 55%, 21% MT EBIT margin, 20% for the group. This is in spite of very strong headwinds from the Swiss franc and the restructuring that's been concluded at SG&I. The operating cash flow increased by 15%.
Finally, I'd like to take this opportunity to make some marketing for our event, Hexagon 2012, which is a user event with more than 3,500 participants. That's going to be held in June the 4th through the 7th in Las Vegas, U.S. We're going to introduce a few more novelties for you there. I hope to see you then. Thank you very much for listening, and I'm now open to answer any questions if there are any on the call. Thank you.
Ladies and gentlemen, if you have a question for the speaker, please press 01 on your telephone keypad and you'll enter a queue. As you are announced, please ask the question. The first question comes from Mr. Andreas Dahl from Cheuvreux. Please go ahead, sir.
Hi, it's Andreas Dahl from Cheuvreux in Stockholm. I have two questions. First of all, in your Q4 presentation, you mentioned the release of GeoMax GNSS in China, and that a company called Haiku Hydropower was involved in the first project using the product for protection of a dam. Given that there's about 22,000 dams in China, the potential seems pretty big, and I was wondering how sales of this product has developed during the first quarter.
Well, I have to correct you there, Andreas. There are 87,000 dams in China. We will involve not only GPS, but like a Geosystems monitoring solution software as well as Intergraph dispatch system to dispatch either service personnel or the evacuation personnel if it's too late. We see a great potential for this.
Perfect. The second question would be, I just noticed that provisions on the balance sheet decreased by EUR 23 million in the quarter. Could you just help me understand what happened here?
Must be currency. I can't think of anything we've done to decrease provisions, actually.
Okay. Thank you.
The next question comes from Mr. Lars Brorson from DNB. Please go ahead, sir.
Yes, thank you very much. Good afternoon, all. Excuse me. I had a couple of questions, if I could. First on the SG&I restructuring. Secondly, a couple of quick questions on end markets. On the restructuring, can you provide a little more clarity on the nature of the restructuring within SG&I? Are these permanent headcount reductions, or should we expect some of that to compact perhaps as headcount in lower cost countries? Can you give a little flavor as to whether these are primarily front end or back end? Second to that, perhaps when will these people leave? Will they be all but gone by end of Q2? Thanks.
Thanks. You can calculate with this being a permanent reduction, they actually left on the 23rd of March.
In terms of the cost savings generated from the restructuring program, could I ask you to elaborate a little bit on the comments on your payback? You say payback by as of Q3. Am I right in suggesting that that's a payback of about EUR 5 million over two quarters, which would mean probably about a three percentage point EBIT margin uplift within SG&I? Would that be a correct calculation?
I think you're probably fairly right there. We've called this project Get Fit, the restructuring was just one part of a more overarching target to reach at least 20% EBIT in the SG&I business. If you study the documents, you can see that it's been fairly stable around 12%, 13% for the past three, four years. We believe that with the combination of different activities, we can reach 20% over a three-year period. We might do it sooner, we might do it later, but we'll see. You can calculate yourself if we could improve the EBIT margin by seven percentage points, which is the target, basically, what that would mean for the Hexagon group.
That's useful. Secondly, on end markets, just three very quick questions. Power energy in China, you talked about delayed order intake. Could you elaborate on why that is and what's happening here? Secondly, China high-speed rail. I appreciate the comparisons now are more normalized, but are you actually seeing a resumption of growth or spending going into the second half of this year? On SG&I, we talk about continuing delays in shipments. Could I ask you to elaborate on to what extent this is primarily a technology issue, perhaps more Intergraph specific or primarily a customer-specific issue? To what extent are there any risks of cancellations within these? Thanks.
Thank you. That was not one question. Let's dissect them one by one. You said the delays in power. We must remember that the Chinese power contracts are still fairly small compared to the overall PP&M business. We are growing that business very quickly. We had one delay, which was really invoiced in April rather than March. We could have done better. I wouldn't emphasize that too much. If we go to high-speed rail, which I believe was your second question. I wouldn't bank on a significant recovery in high-speed rail. Our business plan going into 2012, where we expect gradual recovery to growth in Asia again, is not built on a recovery in high-speed rail. Eventually, we will see a continuation of that activity. As I say, I think it would be stupid to plan for that this year.
If we move on to the delays in SG&I, it's a combination of technical issues and delays with the customer. Could we see cancellations? No, because we have legally binding contracts, we have people on-site, and the customers are waiting for us to implement this. It's a combination of not having the resources available on the customer side to train people on the customer side and not having certain core technologies ready yet. I do think this is the last quarter, though, that we will discuss delays.
Very useful. Thank you very much.
The next question comes from Mr. Mikael Laséen from Carnegie. Please go ahead, sir.
Yes. Hi. I also had a couple of questions on SG&I. You clarified them there quite good. Could you perhaps indicate how large the order backlog actually is for that segment, first of all?
The backlog represents roughly one year's sales.
Okay. A backlog of one year's sales that you haven't invoiced yet?
Yeah, correct.
Okay. Could you give us an indication of the book to bill, perhaps per market and segment, how you're performing there?
For what? For all segments?
Yeah, for the larger segments, geo, Metrology, and technology.
No.
Okay. I also wondered if you could-
It was a good one, though.
Okay. Metrology is driven by MedTech, you said, but how much approximately is this of that segment?
No, I think we said that it's driven by MedTech in North America, and there it's approximately 10% of our sales.
Okay.
At the moment.
Okay. My last question is on the OpEx. Looked fairly high this quarter. Was this due to FX and the restructuring costs or anything else there on the R&D side, perhaps, that you could talk about?
The OpEx, I guess, first of all, you have the EUR 4.9 million of restructuring in OpEx. Secondly, you do have a negative currency effect stemming from our, in this case, overseas activities would be anything outside Europe, where you've seen a significant appreciation of the currencies outside the Eurozone, and that will obviously have a negative impact. Thirdly, we've started to accrue for bonuses for our sales force again, and that's another effect, one-off effect that you might have.
Okay, I see. Thank you.
It's a combination of really currency, the EUR 4.9, and bonuses.
Okay.
The next question comes from Mr. Johan Huse from Handelsbanken. Please go ahead, sir.
Hi, can you hear me?
Yeah.
Great. I have three questions, and I'll start with the first one. Did you give us the impact in euros of Chinese high-speed rail in the quarter? If so, could you please remind me what that was?
No, I did not. Not in the quarter. I gave it on a 12-month period.
Okay. Please, I missed that figure. What was that, please?
It was roughly 3%-4% top line on Geosystems.
Okay. For 12 months rolling, that is including this quarter?
It's for the quarter. It's in the quarter. It's roughly EUR six and a half million.
Okay, good.
Tomorrow.
Great. Thanks. On Hexagon Geosystems, when you talk about that you expect a recovery in this segment, is this primarily due to that high-speed rail is out of the comparisons, or is it because you expect the market to overall recover?
I think we're going to see actual recovery in Europe and Asia. Then obviously the comparison with high-speed rail in 2011 is going to help as well.
Is there any chance of the magnitude you look for in this recovery?
You can have wishes and you can have expectations, I refrain from giving any comment on that.
Okay. My last question on competition, I read in Topcon's release today, they talked about severe competition in the surveying segment, we've seen some quite aggressive progressions from FARO in the laser scanner segment, particularly for the low-price models. What do you see in terms of competition in these areas?
In those two specific segments, we do not see any increased competition in surveying, we had good growth in the quarter in our laser scanner business. I think the market for laser scanning is actually growing.
Sure. No, you do not see the increased competition that some of your peers talk about?
No, I don't want to comment on my peers, but I wouldn't want to trade places with my Japanese peer at Topcon. Let's put it like that.
Sure. Okay, thank you. That's all.
Thanks.
The next question comes from Mr. Daniel Schmidt from SEB. Please go ahead, sir.
Yes, hello. Just one short question, or it's two questions on the same theme. R&D. Ola, could you give us some sort of guidance on how we should model the R&D spending versus sales going forward? I just saw in your annual report that you've capitalized quite a lot more R&D spending compared to 2010, and of course, partly is driven by Intergraph. What should we expect going forward? Secondly, where are we in the transferring of our R&D resources from North America to India? I guess, the SG&I restructuring is a part of that leg, I guess. Thank you.
R&D spending. First of all, Daniel, you have to be careful because you're the analyst of the year on the Nasdaq Stockholm, congratulations.
Thank you.
Those were edgy questions from a sharp analyst.
We can get lucky sometime, you know.
I just read it. Congratulations. Never mind. The R&D spend. I think what you need to do is to look at the expended R&D in the P&L statement, plus the capitalized R&D. That shouldn't be more than 13%-14% in 2012. We do have a bit of increases in R&D. We are using external consultants at the moment that we hopefully can replace with internal people as the year progresses. We do expand in India. We have added 100 people in our Hyderabad facility since December.
Okay, thank you. Do you know when you will stop growing the Indian hub at this rate? Is this going to go on throughout the year, or where are we in terms of putting that facility up to the standards where you want it?
We are currently, I believe, slightly shy of 1,000 people. We would have capacity to expand it to 1,500 people. Whether it's clever to have one facility with 1,500 people, or if we should look for two facilities, we haven't really decided yet.
Okay.
That's the theoretical capacity in Hyderabad.
Okay. Thank you.
Thank you.
The next question comes from Mr. Ben Maslen from Merrill Lynch. Please go ahead, sir.
Good afternoon, Ola, everyone. A couple of questions, please. Firstly, on currency, at what point do you expect the Swiss franc headwind to stop dragging on EBIT? You talked last year about relocating some of your sourcing and cost base out of Switzerland. Just maybe talk a bit about how that's progressed. Secondly, on Geosystems, which I guess isn't growing overall, can you give us a sense of the split of the growth performance between geomatics and surveying equipment, and what is happening in machine control? Just generally, how is the machine control business developing across the different verticals? Thank you.
Thanks. Currency-wise, we progressed when it comes to moving certain functions out of Switzerland. We hardly have any salary increases, obviously, in our Swiss organization. It's a long process to get the Swiss cost where it was only a year ago.
Right
in other currencies. It's not just us struggling. The entire country is obviously struggling with this situation, with an overvalued currency. I dare to say it's only the bankers that love it. Maybe a few Russians as well. Having said that, Hexagon Geosystems, we have flattish to negative growth from Geomatics. That has to do with the high-speed rail, which was a Geomatics application. Whilst machine control overall is reporting strong double-digit growth in the first quarter. Now, if we look at that for the different segments, we have negative growth in mining, that's just temporary because this time last year, we finished off Codelco in Chile and Coal India in India.
We didn't have a comparable-sized project in this quarter. Mining is a fairly lumpy business, that's what one should expect. The outlook for mining, though, if you follow other mining-related companies, looks fairly promising. Machine control construction was the growth driver in the quarter, and it grew, as I said, strong double-digit growth. We, however, only have a significant business in Europe.
where we're strong. We do not have a similar position in North America, which I would love to have at this moment in time. Our agriculture business grew. It was probably the fastest growing business, it doesn't say much because it's really small. We're still considering how to develop it further.
Maybe if I can follow up on that. Within Hexagon Geosystems overall, if Geomatics is flat to slightly down and machine control is double-digit, what is the bit that is more negative within that division? Secondly, on machine control in the U.S., how do you build that business up? Is that something you can do organically, or do you have M&A options there?
First of all, Geomatics was negative.
Okay.
I need to underline that. High-speed rail is 100% with Geomatics.
Yeah.
That was negative, and that's roughly half of the business.
Okay.
machine control was one of the bright spots apart from mining. We also have a fairly significant airborne sensor activity that had slight negative growth in the quarter. That's another project-based business where, if you sell five sensors worth EUR one and a half million each in a quarter, you have a cracking quarter, and then the next quarter you might not have any sensors to sell. I think that gives you a flavor of the kind of fluctuations you might have quarter-over-quarter.
Got it.
Other things that are coming along fairly well is what we call construction tools that I reported about, this iCON product family and the DISTO.
Which was doing fine. With high-speed rail out of the system, it should be easier to report organic growth again.
Great. Then the U.S. machine control?
The U.S. machine control is a combination of acquisitions where our bottleneck is more distribution than technology, we have two very strong competitors, or actually three in North America. We got Deere with their own solution. We got the Caterpillar Trimble joint venture, we have Topcon.
We're the newcomers. We started 20 years later than the others, we're going to get there.
Great. Thanks very much, Ola.