Earnings Call: Q1 2012

May 9, 2012

Thank you very much, and welcome to this interim report for the Q1 of 2012. If you have the presentation in front of you, I would like you to flip forward to Slide number 4 headed overview Q1 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, but 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, but this should be the concluding quarter on a comparative level where we still are hampered because of this effect. Intergraph PP and M is reporting sales at all time high levels and it was another very strong double digit organic growth quarter for PP and M. Intergraph SG and I reports negative growth in the quarter. If we look at the EBIT and gross margin, 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 and I. Around 190 employees were considered redundant. The charge amounts to €4,900,000 And the reason why we don't declare this as non recurring items is we expect a full payback from this program as of the Q3 this year, so a short payback period. We now go to slide 5 and this is just a kind reminder that the first quarter is fairly weak quarter, 2nd quarter is strong quarter, 3rd quarter our weakest quarter and 4th quarter our strongest quarter in the year. Slide 6, key figures P and L statement for the Q1. Net sales came in at 566,000,000 compared to 521,000,000 This time last year, we have the so called revenue haircut effect of minus 4.4 €1,000,000 and thus we report operating net sales and recorded net sales. Operating earnings EBIT1 came in at €111,000,000 including the charge of €4,900,000 compared to €104,800,000 for the corresponding period last year. And that equals an operating margin of 19.6 percent for the quarter. We reduced our financial net compared to last year due to better borrowing conditions. Thus earnings before taxes amounted to €97,500,000 which is 14% higher than the corresponding period last year. The tax rate came in at 19% compared to 20% for the Q1 in 2011 and thus giving us net earnings of €79,000,000 corresponding to €0.22 per share and that's a 16% increase over the corresponding period last year. Slide 7, cash flow. Cash flow from operations before changes in working capital came in at 1 112 point €5,000,000 and that's 14% above the corresponding period last year. Changes in working capital and it's typically a weak cash flow quarter when it comes to working capital Q1 came in at minus €25,000,000 roughly the same level as last year. Thus cash flow from operations netted at €87,500,000 Ordinary investment activities amounted to minus €35,000,000 Thus the operating cash flow amounted to €52,500,000 for the quarter. And 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 euro in the quarter. The Swiss franc strengthened, so did the U. S. Dollar and the renminbi against the euro in the quarter compared to this period last year. And that had a negative EBIT impact effect of net €1,800,000 negative. If you break this down into parameters, we had a negative impact of roughly €5,000,000 €6,000,000 stemming from the Swiss francs, but we had positive effects from the U. S. Dollar and the renminbi. So the net effect was minus 1.8 for the quarter. Since we report in euro, we have a positive effect from Swiss francs, U. S. Dollars and renminbi on the top line amounting to 16,800,000 for the quarter. But 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 gained 3 percentage points of the total sales in the Q1 over the same period last year. Western Europe is stable at 36%, South America 3 percent. And we can see 1 percentage point loss in China and EMEA excluding Western Europe, while 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 Q1 per geographic region and per customer segment. So 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 Q1 and Asia Pacific continued to grow and primarily in Australia. The Power and the Energy segment represented 19% in 2011 And we can report strong growth across the board from all regions but for China. And China was really a delay in already taken orders. So 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 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 Q1 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 invoiced 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 Q1 of 2011 as a comparison. So 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. And 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. And 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. So 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 Q1, 1% organic growth for measurement technologies, 0% for the group. We do see improved demand sequentially compared to the Q4 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 solution was a weak construction and civil engineering market in the quarter, and we did face delayed shipments for the SG and I unit. Eastern Europe, Russia and Middle East continued 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, BebTech are the primarily 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 and 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. And 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 2 years ago, but still very strong growth. And 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 and I, whilst PP and 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 €50,000,000 in annual turnover, we're now close to 0. And 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 and L statement for Measurement Technologies. Organic growth 6% to €548,500,000 The operating earnings are €113,400,000 which is 0.5 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 percent EBIT margin. So a strong quarter for metrology. And if we turn to 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 GEO systems. It's a rugged laser distant measurement tool and it's the new Leica Lino multiline construction laser. Slide 23. We're proud to equip the Force 1 India Formula 1 racing team. And it's really the latest addition to the large number of Formula 1 racing teams that are relying on Hexagon Metrology to build and calibrate and maintain their costs. Slide 24, the U. K. Police has acquired a significant number of 3 d laser scanners to reduce incident clear up when you have traffic accidents. And they expect to save in average 39 minutes. And this is a preparation for the 2012 Olympics in London. Slide agricultural agency in Mexico that standardized on our GPS or GNSS system from Hexagon. Slide 26. We got an order from Mac Elhany that selects our LiDAR sensors to capture geological features and alignments of mining sites in their mines in British Columbia, Canada. Slide 27, I personally I find this curious this application. It's an industrial automation institute, PIAAP in Poland that has developed a number of maneuverable robots for guarding the Polish border. And they basically control these robots using our GS-ten GPS receivers to control the motion of the Guard robots. Slide 28, Autostrade 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 road construction work during the construction period. Slide 29. We got some significant orders from the Chinese power industry where they acquired 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 worksite. 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 millimeter. Slide 32, GeoMax, our product line stemming from our Chinese operation in Wuhan launched 4 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 and M. And we do believe that PPNM is continuing to gain market share and gain traction for their Smart 3 d software solution. Slide 34. We also launched some significant products in PP and M. It's the Smart Plant Freeview and the Cadworths Draught Pro. Slide 35, the Greater 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 South Australian Ambulance Services goes mobile using our emergency operations center, more portable system, which is an integral solution. And 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 remainder 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. And this is in spite of very strong headwinds from the Swiss franc and the restructuring that's been concluded at SG and I. The operating cash flow increased by 15%. And 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 3,000 500 participants that's going to be held in June 4th through 7th in Las Vegas, United States. We're going to introduce a few more novelties for you there. So 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. The first question comes from Mr. Andreas Dahl from Chevron. Please go ahead, sir. Hi. It's Andreas Dahl from Chevron 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 Q1? Well, I have to correct you there Andreas. There are 87,000 dams in China and this is just a small sale to a very promising and large market where 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 evacuation personnel if it's too late. So we see a great potential for this. Perfect. And the second question would be, I just noticed that provisions on the balance sheet decreased by €23,000,000 in the quarter. Could you just help me understand what happened here? It 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 Brusson from BNP. Please go ahead, sir. Yes, thank you very much. Good afternoon, Olar, excuse me. I had a couple of questions if I could. First on the SG and I restructuring and secondly a couple of quick questions on end markets. On the lower or should we expect some of that to come back perhaps as headcount in lower cost countries? And can you give a little flavor as to whether these are primarily front end or back end? And second to that perhaps when will these people leave? Will they be all gone by end of Q2? Thanks. Thanks. You can calculate with this being a permanent reduction and they actually left on the 23rd March. And 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 €5,000,000 over 2 quarters, which would mean probably about a 3 percentage point EBIT margin uplift within SG and I. Would that be a correct calculation? I think you're probably fairly right there. You should I mean, we call this project get fit. So the restructuring was just one part of a more overarching target to reach at least 20% EBIT in the SG and I business. And if you study the documents, you can see that it's been fairly stable around 12%, 13% for the past 3, 4 years. And we believe that with the combination of different activities, we can reach 20% over a 3 year period. We might do it sooner. We might do it later, but we'll see. So you can calculate yourself if we could improve the EBIT margin by 7 percentage points, which is the target basically, what that would mean for the Hexagon Group. That's useful. Secondly, on end markets, just 3 very quick questions. Power and 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? And on SG and 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 specific or primarily a customer specific issue? And to what extent there are any risks of cancellations within these? Thanks. Thank you. Those were that was not one question, but let's dissect them 1 by 1. So you said the delays in power. That's actually I mean, we must remember that the Chinese power contracts are still fairly small compared to the overall PPNM business. We are growing that business very quickly, but we had one delay, which was really invoiced in April rather than March. So we could have done better. So I wouldn't emphasize that too much. If we then 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. But I as I say, I think it would be stupid to plan for that this year. If we then move on to the delays in SG and 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. So 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 Vasylen from Carnegie. Please go ahead, sir. Yes. Hi. I also had a couple of questions on SD and I, but you clarified under quite good. Could you perhaps indicate how much how large the order backlog actually is for that segment, first of all? The backlog represents roughly 1 year sales. Okay. So in fact, you have 1 year sales that you haven't been invoiced yet? Yes, correct. Okay. And also 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? Yes, for the larger segments, geo, metrology and technology. No. Okay. And 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's driven by medtech in North America and there is approximately 10% of our sales. At the moment. Okay. And also my last question is on OpEx. It looked fairly high this quarter. Was this due to FX and the restructuring costs? Or anything else there on the R and D side perhaps that you could talk about? The OpEx, I guess, first of all, you have the SEK 4,900,000 of restructuring in OpEx. And then secondly, you do have a negative currency effect stemming from our I mean, 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 €4,900,000 and bonuses. Okay. The next question comes from Mr. Jon Hester from Handelsbanken. Please go ahead, sir. Hi. Can you hear me? Yes. Great. I have three questions and I'll talk with the first one. Did I did you give us the impact in euros of high speed Chinese high speed rail in the quarter? And 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. And please, I missed that, Sergey. What was that, please? It was roughly 3%, 4% top line on Geosystems. Okay. For 12 months rolling and that is including this quarter? It's for the quarter. It's in the quarter. So if it was it's roughly SEK 6,500,000. EUR 6,500,000. Okay, good. Great. Thanks. And on Geosystems, when you talk about 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 a recovery in Europe and Asia. And then obviously, the comparison with high speed rail in 11 is going to help as well. Is there any chance of the magnitude you look for in this recovery? I hope it's I mean, you can have wishes and you can have expectations. So I refrain from giving any comment on that. Okay. Then on my last question on competition. I read in Topgolf's release today of they talked about severe competition in the surveying segment and 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? I mean, in those two specific segments, we don't see any increased competition in surveying and we had good growth in the quarter in our laser scanner business. I think the market for laser scanning is actually growing. Sure. But you don't see the increased competition that some of your peers talk about? No, but 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 then. Thank you. That's all. Thanks. The next question comes from Mr. Daniel Smith from SEB. Please go ahead, sir. Yes, hello. Just one short question or it's 2 questions on the same theme. R and D, Ulla, could you give us some sort of guidance on how we should model the R and D spending versus sales going forward? I just saw in your annual report that you've catalyzed quite a lot more R and D spending compared to 20 10 and of course partly is driven by Intergraph. But what should we expect going forward? And secondly, where are we in the transferring of our R and D resources from North America to India? And I guess the SG and I restructuring is a part of that leg I guess? Thank you. R and D spending, first of all Daniel, you have to be careful because you're the analyst of the year on the Stockholm Stock Exchange. So congratulations. Thank you. Those were edgy questions from a sharp analyst. We can get lucky sometime. And I just read it. So congratulations. Never mind the R and D spend, I think what you need to do is to look at the expanded R and D and the P and L statement plus the capitalized R and D and that shouldn't be more than 13%, 14% in 2012. We do have a bit of increases in R and D. We are using external consultants at the moment that we hopefully can replace with internal people as the year progresses. And we do expand in India, and we have added 100 people in our Hyderabad facility since December. Okay. Thank you. And do you know when you will sort of stop growing the Indian hub at this rate? Is this going to go on throughout the year? Or sort of where are we in terms of putting that facility up to sort of the standards that you where you want it? We are currently, I believe, slightly shy of 1,000 people and we would have capacity to expand it to 1500 people. Whether it's clever to have one facility with 1500 people or if we should look for 2 facilities, we haven't really decided yet. But that's the theoretical capacity in Hyderabad. Okay. Thank you. Thank you. Thank you. The next question comes from Mr. Ben Matson from Merrill Lynch. Please go ahead, sir. Yes. Good afternoon. Hola, everyone. A couple of questions, please. Firstly, on currency. At what point do you expect the Swiss franc headwinds to stop dragging on EBIT? And 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? And then 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? And then 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, and we hardly have any salary increases obviously in our Swiss organization. But it's a long process to get the Swiss cost where it was only a year ago in the currencies. And I mean, it's not just us struggling. The entire country is obviously struggling with the situation with an overvalued currency. And I dare to say it's only the bankers that love it, maybe a few Russians as well. Having said that, Geosystems, we have flattish to negative growth from geomatics and that has to do with high speed rail which was a geomatics application, while machine control overall is reporting strong double digit growth in the Q1. Now if we look at that for the different segments, we have negative growth in Mining, but that's just temporary because this time last year, we finished off Codelco in Chile and Coal India in India, and we didn't have a comparable sized project in this quarter. So mining is a fairly lumpy business, and 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, but it doesn't say much because it's really small. And we're still considering how to develop it further. And maybe if I can follow-up on that then. Within 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? And then secondly, on machine control in the U. S, how I think do you have M and A options there? First of all, geomatics was negative. I need to underline that. I mean high speed rail is 100% with geomatics. So that was negative and that's roughly half of the business. Now 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 I mean if you sell 5 sensors worth €1,500,000 each in a quarter, you have a cracking quarter. And then the next quarter, you might not have any sensors to sell. So 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. So with high speed rail out of the system, it should be easier to report organic growth again. Great. And then the U. S. Machine Control? The U. S. Machine Control is the combination of acquisitions where our bottleneck is more distribution than technology. And we have 2 very strong competitors or actually 3 in North America. We got Deere with their own solution. We've got the Caterpillar Trimble joint venture and we have Topcon. So we're the newcomers. We started 20 years later than the others, but we're going to get there. Great. Thanks very much.