Ladies and gentlemen, hello and welcome to the Hexagon Q1 Report 2022. Throughout the call, all participants will be in a listen-only mode, and afterward, there will be a question and answer session. Today, I'm pleased to present Ola Rollén. Please go ahead with your meeting, sir.
Thank you very much. Good morning, good afternoon, and good evening, everyone, and welcome to this interim report presentation for the first quarter of 2022. I suggest that we skip slides and go straight to slide four, overview for the first quarter of 2022. Sales increased by 19%, out of which 10% were organic, and currency added another 4%. We had very strong currency tailwind from primarily the Chinese renminbi and the US dollar. M&A, which we call structure, added another 5%. It is still a very challenging supply chain situation, and the lack of silicon wafers in our supply chain hampered organic growth by 6% in the quarter. However, all divisions improved their results and despite seeing negative impacts from the war in Ukraine and all supply constraints that we've mentioned previously.
We took the decision to freeze all business operations in Russia. We have sales, we have service and technical engineering in Russia, but we do not have production. That has impacted organic growth by -1% in the quarter. For those of you who remember, Russia is 2% of group sales, which means that with a complete shutdown, the annualized impact will be -2% from this action. We record a EBIT of EUR 335 million in the quarter, and that is a increase of 24%. The adjusted operating margin was 28.8%, and our gross margin increased by almost 8% to 65.1%. Slide five is just a reminder that the first quarter is our seasonally weakest quarter, followed by Q3, and then Q2 and Q4 are stronger quarters.
Slide six, an overview of the P&L statement that we've just presented, and I'm not gonna go into any details. You have it for your reference. Cash flow on the other hand, I think it's fair to comment on. Cash flow from operations before changes in working capital is very strong and is actually increasing by 26% in the quarter. With the current strained situation we do have in supplies, we have to build up working capital, especially in the hardware-related businesses. So we built up EUR 84 million in working capital. Otherwise, as I said, very strong cash conversion and cash flow. On slide eight, you can still see that we are way below historic levels on working capital to sales, 6.6%. Market development, slide ten. If we look at the sales mix, there are some shifts worthwhile commenting on.
North America has a very strong demand situation, and North America is now 33% of Hexagon sales. We seem to see a similar situation in South America that has expanded its share from 3%-4%. On the other hand, we do have a strong demand situation in Western Europe, but not as strong as North and South America, why Western Europe is 28% of sales. In the rest of EMEA, we see this 1% stemming from the conflict between Ukraine and Russia. China is keeping its share at 15%, and Asia PAC reduced by one percentage point. In summary, on slide eight, we have green arrows, i.e. growth, above 8% organic growth in most regions, North America, Western Europe, China, South America. We do have growth in Eastern Europe, Middle East and Africa, and Asia ex-China, but it's not as strong.
It's a very, very strong demand situation for almost all industrial segments for Hexagon in the first quarter. Slide 12, the so-called arrow slide, is for your reference to study. I suggest we move to slide 13 and discuss EMEA. Western Europe record 10% organic growth in the quarter. The powerhouse in the quarter was Germany, where we saw very strong double-digit growth from primarily manufacturing industries such as auto and aero, but also infrastructure investments, where Geosystems is benefited. We also had strong orders for PP&M in the quarter from the chemicals industry in Germany. Recovery in aerospace, strong demand in automotive manufacturing, but also power and energy markets. Excluding Western Europe, Russia declined by 32%, and that roughly represents the month of March for us.
It's all, of course, connected to the sanctions that were imposed by the European Union and the United States. Middle East and Africa, on the other hand, record strong growth, and we see increased activity for power and energy in Middle East and mining in Africa. Moving to America, slide 14. North America record 12% organic growth. Canada recorded strong single-digit growth on the back of its raw materials economy, i.e., mining and oil and gas. In the U.S., we see a broad-based growth that pass over all business divisions and segments, so a very, very strong demand situation in the United States. In South America, it's the continuous expansion in the Brazilian economy driven by activities such as mining, agriculture, and oil and gas.
We also see the Andean countries where in this quarter, Chile was strong, thanks to a large mining order in the quarter. Slide 15, moving to Asia. China recorded 11% organic growth in the quarter. It's driven by strong growth in general manufacturing and aerospace, automotive-related, EV-related activities. We had slightly weaker electronics market and demand in the first quarter, but that's only natural since Q1 is not a strong electronics quarter for China. China's growth was hampered by availability issues on the Geosystems side, where we simply couldn't deliver orders to construction and infrastructure projects, and we also had a challenging oil and gas market in the first quarter. Japan and India recorded strong growth. India, broad-based recovery for all businesses and strong demand across the board.
South Korea, on the other hand, had a somewhat weaker quarter where we saw weakness in power and energy in the quarter. Reporting segments, slide 17. We start with Geospatial Enterprise Solutions. Organic growth 10%. Geosystems was bang on 10%. Geosystems was the business division that suffered the most from lack of electronic components in the quarter. Safety, infrastructure, and geospatial 4% organic growth, fueled by a very, very strong growth in infrastructure, construction, and utilities, where we got a large order in the quarter from a telco. Autonomy and positioning 21% organic growth, and all end markets were very strong for autonomy and positioning in the quarter, agriculture, aerospace, and defense. Sales amount to EUR 583 million with an EBIT of EUR 106 million.
This corresponds to an operating margin expansion of 0.5%. It could have been greater had we been able to deliver on the top line for Geosystems, which is our most profitable division within Geospatial. Moving on to Industrial Enterprise Solutions, also reporting an organic growth of 10%, where MI is recording 13% organic growth. We do see strong demand across all key industries for MI, all regions, but also for our software solutions. PP&M reports 2% organic growth, and it's growth stemming from our design and asset information management software and also continuous recovery in both EMEA and the Americas.
The business is reporting EUR 581 million in sales with an EBIT of EUR 166 million, which corresponds to an EBIT margin of 28.5%, which is almost 2% better than this time last year. Slide 19, our gross margin is now at 65%, both for the quarter, but for twelve months rolling as well, which is 1% better than this time last year. Our operating margin is at 29%, which also is 1% better than this time last year on slide 20. If we talk about M&A orders and product releases, we move to slide 22. In the quarter, we acquired Minnovare, which is an Australian-based company specializing in eliminating manual and labor-intensive, unproductive processes in underground mines. Minnovare is going to be reported into Hexagon's mining division.
Slide 23, we got an order for 3D printed prefabricated homes from a US-based startup called Mighty Buildings. They are using our design and engineering simulation solutions and software to perfect the design and material choice as well as mechanical processes before they start making these homes. Slide 24, optimizing legacy train components for additive manufacturing. This is a collaboration between Hexagon and Deutsche Bahn, where they use our generative design software to optimize conventional freight car component designs and prepare them for additive manufacturing. Slide 25, the European Southern Observatory, ESO. They have traditionally used something they call VLT, which stands for Very Large Telescope. They have now decided to move towards ELT, which stands for an Extremely Large Telescope. This telescope has a 39-meter main mirror, and it's gonna be based in Chile, where the VLT currently is.
They have chosen us for developing a specialized measurement system for this application. Slide 26. For those of you that watch Drive to Survive on Netflix, I'm happy to tell you that we sponsor Oracle Red Bull Racing, and you can find our logo next to the helmet of the driver when they're driving. We are actually supporting most teams in the Formula One circuit. To my mind, Oracle Red Bull Racing is the only one displaying our logo. Slide 27. H2U is a very interesting project where they create renewable energy production like wind and solar panels in Australia to convert the electricity into hydrogen and then ship the hydrogen to Asia. We are involved in this project. It's a huge project.
The land mass that they use to build up these solar plants is enormous. But we are involved in creating operational digital twins, aligning standards and processes to produce hydrogen. This is a business for the future, obviously. Slide 28, Hexagon enable Fluxys to fulfill their carbon neutral journey, and it's a Belgium-based energy infrastructure group that has committed itself to become CO2 neutral. They use our SDX software platform to do asset lifecycle information management, AIM, and to make sure that they improve their processes so that they can reduce and finally eliminate CO2 emissions. Slide 29, Hexagon to help DiDi to enable autonomous vehicles in China. Our partner, DiDi, is going to bring high accuracy GNSS correction services in China through our network called TerraStar.
This is so-called PPP, which stands for Precise Point Positioning, where you have signals from ground-based towers combined with satellite-based positioning signals from GNSS networks. This is gonna support ADAS, i.e. Advanced Driver-Assistance Systems, throughout China. Slide 30, providing real-time visualization and analysis for NATO. NCIA stands for NATO Communications and Information Agency, and we've signed a contract where they are gonna standardize and use our LuciadLightspeed technology to upgrade their simulation systems. Slide 31, we are heavily involved in the rebuild of public transportation in Singapore. The Singapore Land Transport Authority that is in charge of the subway system and rail system, they've chosen HxGN OnCall Dispatch for its public safety portfolio to speed up response times. Finally, slide 32, we transform how professionals measure with total station.
This is not a one-off, this is a long-term trend for our Leica total stations and rovers that we try to automate workflows as much as possible. In this case, we launched the so-called AutoPole. That is the prism that you can tilt, but still get unique target identification. Slide 33, we launched BLK2FLY and BLK ARC last quarter, but we've already received multiple awards for these two new products, and we're quite happy with that. Slide 34, we've been to Pompeii this quarter and scanned Pompeii using both BLK2FLY and BLK ARC. The whole idea with this project is to capture Pompeii in 3D and preserve it and maybe simulate what it actually looked like in 79 AD.
Slide 35, we've signed a contract with Sephora to 3D model all their retail outlets, hundreds of stores, because they're gonna remodel them and refresh the concept. Slide 36, the first EAM win in China. We use our Chinese organization to introduce EAM products. That first order was booked with the Zhengzhou Coal Mining Machinery Group Co., Ltd. in China. Finally, I want to make some PR for HxGN LIVE. For the first time since 2019, we're gonna host HxGN LIVE again in Las Vegas on the 20th through the 23rd of June, and don't miss this opportunity to see all these technologies that I've just described in action. If you want to participate, please contact our investor relations at ir@hexagon.com. With that, we've concluded the presentation, and we're ready to try to answer any questions there might be.
Thank you, ladies and gentlemen. If you wish to ask a question, please press zero one on your telephone keypad. First question from Magnus Kruber from UBS. Sir, please go ahead.
Hi, Ola. Magnus here from UBS. A couple of questions from me. First, could you give us a bit of color on how the growth progressed through the quarter particularly in Geosystems? If you can give us something on April as well, how that started in the context of supply chain issues. I think you mentioned that the component shortage would ease from Q2. That would be great. Thank you.
Yeah, no, the growth, March was a good month. February was weaker. You could say growth accelerated through the quarter. We haven't seen much change in April really from Q1. What's happened since Q4 is that demand has accelerated, and you see that on our organic growth that was 7% in Q4 and is now 10% in Q1. We can't say that, the component situation has eased off because we are facing higher demand than we did three to six months ago.
Okay. In terms of how that component situation is panning out, difficult to comment, but I know you took some internal actions as well, which you might have better visibility on.
We think that it might ease off for certain divisions, but we also think that we might face a tougher situation in Q2 for other divisions. Net on net, I think unfortunately it's gonna be a similar situation in the second quarter.
Got it. Thank you so much. Secondly, specifically to China, I know you mentioned some drag on growth from the local construction market. But have you seen any other implication from that with the component shortage that's coming out of China to your production?
No. I mean, we are not dependent on components coming out of China. You read a lot about this lockdown in Shanghai, which hasn't impacted us. Where it impacts us is really, Geosystems built products in Switzerland that we export to China because we simply can't find components for some of our high-end products to China.
Got it. Thank you. Finally, could you comment a bit on the backlog in PP&M, so how that's developed year-over-year or any other color around that?
No, but you don't have a backlog, but you have a booking situation, and bookings were good. We believe that gradually we should see accelerated growth over the year in PP&M.
Perfect. Thank you so much, Ola.
Thank you.
Next question from Stacy Pollard from J.P. Morgan. Madam, please go ahead.
Thank you very much. Just two or three for me. From a product perspective, what would you say are the most relevant growth drivers for you right now? Do we expect, you know, often you'll have big product release years and then less big release years, I guess, the way to say it. Should we be expecting something very, very exciting at the HxGN LIVE this June? Second question is really related to wage inflation, talent retention, and attraction. Any comments there, and to the degree that you're able to pass on price uplifts to customers, so your pricing situation as well as cost, I guess.
Wow. Growth drivers, I think right now it's a very complex situation where we're coming out of a global pandemic, so there is pent-up demand for everything. That is obviously a growth driver for us at the moment. More long-term trends of course, this transition to a carbon-free economy where there is a lot of investment initiatives into renewable storage and so on, where we can sell our products. That is another growth driver. It's a combination of a lot of things at the moment, creating this almost perfect storm of demand that we face right now. Moving to what we're gonna present at HxGN LIVE. What do you expect? I'm a salesman, so obviously it's gonna be very exciting like always. I can't really comment on nitty-gritty details, what we're gonna launch.
Pricing power, I think we've proven so far, both in Q4 and Q1, that we can expand our margins in spite of this inflationary pressure. That's the best testament to pricing power you can have, that you can actually prove in numbers that your margin is expanding.
Okay, fair enough. Good. Thanks.
Thank you. Next question from Alexander Virgo from Bank of America. Sir, please go ahead.
Thanks so much. Good afternoon, Ola. I trust you're well. Thanks for taking the questions. I wanted to dig a little bit into the different divisions, if I could. The first one was a question on the margin implications of +2% in PP&M versus this much stronger performance in MI. I guess I'm noting the difference, the strength of margins in Geo as well. You've got a 30% number there, which I think is impressive given most of the software is in MI or is in IES, of course. That's the first question. Can you talk a little bit about the dynamics there?
Second question would be just on China and Q2, and thinking about what happened in Q1 2020, and also back in 2019 when, around this sort of time, your smartphone business had came under severe pressure, and the impact that that then had on organic growth. I'm just trying to, I guess, square the two most recent hits to your China business with what we might see in Q2, with the growth that you've already reported in Q1. I guess that's the second question. Third, I'll squeeze one in if I may, once you've answered those two. Thank you.
Thank you. If we talk about PP&M versus MI, first of all, MI is earlier in the business cycle, so we've already seen increased activity from the auto guys in terms of designing new products. Aerospace is gearing up, and so forth. PP&M, we believe that demand for new oil-producing and gas-producing units is gonna grow. It's a consequence of the macro situation with the war in Ukraine, where countries like Europe and America are gonna source from new suppliers than the old traditional ones. That is gonna give PP&M a boost in its growth in the quarters to come. I don't know if that answers the difference between MI and PP&M.
A little bit, yep. Thank you. I guess in follow-up to that, the margin impact on IES because of PP&M being lower, is that still a fair comment, i.e. mix is weighing on that margin?
To some extent, yes. We've also seen great improvements in the EBIT margin in the quarter for MI. I think the biggest lever we can hope for is actually the improved incremental margin in MI going forward, because MI is so much bigger than PP&M.
Yeah. Okay. On China?
On China, it's true that smartphones have been important historically, but it's typically a Q2 story, Q2, Q3. I think the verdict is still out on what electronics will do in China this year. We have a cautiously optimistic view on the second quarter for China, and we are doing great. Our management team and our sales teams are really innovative, and we find constantly new applications for our products. They're almost like a bumblebee. They shouldn't be able to fly, but they do.
Okay. We should take the momentum that you're still seeing in China as a positive indication for the second quarter then?
I think so.
Okay. Well, that's good to hear. Then my final question, just on the squeeze one, if I could. You've typically talked about new product growth, adding a couple of hundred basis points to the overall level of the group. I just wondered if you could give us an idea for what that might be, or might have been, I'm sorry, in Q1, given the raft of new products you have already announced.
Well, it's fairly low, because, you know, because of the component scarcity, and these new products are using an awful lot of silicon wafers. We were simply constrained in delivering. A lot, it could have been a high number had we had endless supply of components, but we didn't, so it wasn't something to brag about.
Okay, great. Thank you very much.
Thanks.
Thank you. Next question from Sven Merkt from Barclays. Sir, please go ahead.
Great. Good afternoon. Thanks for taking my question. Maybe first, could you quantify how much you raised prices in Q4, Q1 for inflation? Maybe by business segment, it would be very helpful. Then, secondly, it seems like with your working capital investments, you're building up inventory to avoid delays and maybe even beat price rises. I was wondering, to what extent do you believe your clients are doing the same? Is there a way to assess this?
Yeah. The first question I simply won't answer. We don't comment on prices. We started increasing prices in October, and we've taken steps in all businesses to increase prices over the next coming year. I believe it's not the end of it. I think we will continue to work with price as a means to protect and expand our margins.
Mm-hmm.
That's the best question you can get. When it comes to inventories, it's fairly easy. I mean, we stock very little with our customers. Our customers are typically end users, and we have a pretty good view on what they do. So it's not that. I mean, we're not selling groceries or clothes where you have retailers stocking stuff. We're selling quite expensive things that end users are buying directly from us in most of the cases.
Yeah, of course. These things are often business critical, so I'm wondering, is there not a case where you see some clients maybe bringing orders forward at all?
No, because we have booked orders. The missed revenue of 6% is orders that are paid. Some people have paid 20% to receive, and they were scheduled for delivery in Q1.
Okay, great. Maybe just one final question. Would it be possible to quantify the 2% Russia exposure by the five subsegments? Is there any kind of subsegment that maybe has a higher weighting to Russia?
GES has a much higher exposure to Russia, and it's primarily Geosystems. That is our biggest business in Russia.
Okay, great. Thank you.
Thanks.
Thank you. Next question from Mohammed Moawalla from Goldman Sachs. Sir, please go ahead.
Great. Thank you. Hi, Ola. A couple from me as well. Firstly, just in terms of the dynamic you saw in the first quarter, was there an element of perhaps some slipped business from sort of Q4? As you look into sort of Q2, did I hear you correctly saying that you expect to have some of these sort of supply chain issues resolved, but it's the demand environment which is kind of stronger, which is kind of offsetting any kind of additional headwinds you get from the ongoing supply issues? Secondly, could you break out for us the hardware versus the software?
I know we get the divisional, but just to kinda get a sense of the resiliency or the strength on the pure software side, even though optically, you know, the hardware side looked quite strong. Thank you.
The first question, no, we didn't have. You know, this is a rolling and it's an ever-evolving situation. We built backlog in Q4. We built backlog in Q1. I can't say that net on net we pushed orders from Q4 into Q1. Unfortunately, this situation is worsening between the two quarters, so we have a greater backlog ending in Q1 than we had in Q4. But I think there is a combination of two factors because demand seems to have increased in Q1 compared to Q4, even though Q1 is the weaker quarter. It's a very fluid situation and you can't say that we benefited from Q4 deliveries when we built backlog and we're working very hard on satisfying our customers and delivering to them.
When it comes to hardware, software split, it is roughly what it was at year-end, 60% software and services, 35% pure software, 40% regarding revenues. SaaS is roughly before consolidation of ETQ, 6% of sales, but growing very fast.
Got it. If I could just follow up, given the sort of dynamics you're seeing right now, is there any reason to believe that as we think about growth kind of beyond 2022, would be any different to the sort of high single digit organic that you're sort of targeting?
Now our long-term target is to grow 5%-7% organic growth, and apart from that, we don't give any forecasts. Over the years, sometimes you're gonna exceed it, and sometimes you're gonna be below it. On average, our guidance is 5%-7%.
Okay, that's great. Thank you.
Thanks.
Thank you. Next question from Johannes Schaller from Deutsche Bank. Sir, please go ahead.
Yeah, thanks for taking my question, and congratulations on the good results. Just wanted to come back to the component shortages. You obviously had working capital drag and inventories going up. At the same time, then you're talking about component shortages. How should we square those two things? Is it mostly semi-finished goods that you're stocking there, or should we think about this in a different way? The second question, just on the redesign efforts on the semiconductor side, Ola, that you mentioned in the last quarter, just how are these progressing? Maybe you can give us one or two examples where you have successfully redesigned products to use, you know, less specific semiconductors. Thank you.
Yeah. Thank you. No, the component shortages in relation to inventory levels, you should regard in a historic perspective. We have a slide on working capital to sales. We are still at very, very low historic levels on working capital to sales. This buildup is just a necessity to survive the next few months. As I said, working capital to sales is, if I'm not wrong, 6.6%, so it's very low. That's how you should regard that. When it comes to redesign, yes, we are redesigning certain circuit boards within Geosystems, and we think we're gonna see a good impact from that work in the second quarter.
On the other hand, the shortage situation has moved to other areas of the Hexagon group, and we're now facing shortages in the second quarter in areas where we were not facing shortages in the first quarter. It's an ever-moving target.
Maybe can you give us an example of an area where things got significantly worse now going into Q2?
I think it's, I don't wanna eat up my words, so I won't disclose that today. We might
That's okay.
Do it later. There is no benefit for Hexagon disclosing that.
Understood. Thank you, Ola.
Thank you. Next question from Joachim Gunell from DNB Markets. Sir, please go ahead.
Thank you. Good afternoon, Ola. I mean, a final question from me. Since you capture so much of the gross margin expansion here also on an operating profit level and trading so close to your 2026 targets already, can you please help us understand some of the, call it underlying drivers here going forward, where you believe the gross margins could be by 2026, given the shift in revenue mix?
Well, we'll see. I don't know. It's, what is it? It's four years until 2026, so it's a bit early to speculate on that. I do think the same growth drivers as we've seen for margin expansions are gonna kick in in the coming four years, and that is an ever-improving mix and also new product development. Those are the two key areas.
Thank you.
Thanks.
Thank you. Next question from Daniel Djurberg from Handelsbanken Capital Markets. Sir, please go ahead.
Thank you, operator, and thank you for the question and congratulations to a strong set of numbers in Q1. My first question is a little bit hypothetical perhaps, but you do conduct business all over the world, including in markets with very high inflation and high interest rates. I was wondering if you can have any internal lesson learned that you could share with us, i.e. how sensitive Hexagon business is to higher interest rates, if it's possible to answer that.
Well, yeah. I think a lesson learned is that keep an eye on the ball. We started in increasing prices already in early October, where other people might not have started looking at that, which gave us a great start of 2022. Now we need to continue doing that, working very hard. I also think that you have to look hard into your business model, how you conduct your business. Can you sell in another way? Could you do, I don't know, recurring revenue out of a capital sale where you have a huge upfront payment? Could you chop it up in pieces and offer it as a service rather than selling it discreetly?
We're working on many fronts trying to improve and really do things we do currently much better for the future.
Perfect. May I ask you also what you think about the M&A environment, if we have seen obviously the valuation levels ease off quite dramatically in the last three months at least. What is your view? Is the potential buff or funnel or what to say increasing on back of this for you?
I think the EBIT multiple on Twitter was quite high, and that's the most recent public transaction we've seen, so. Joking apart, what we've seen, all of us, is obviously the correction in the public market. That hasn't hit the private market yet. There is a lot of money in the market looking for growth, so there is still a lot of competition around the assets that we are looking at. If this continues, obviously there is gonna be a correction in the private market as well for prices.
Perfect. If I may, the mandatory question on the SMART Build, a great proof of concept, et cetera. It's in the Process, Power & Marine, and you have invested in the BIM to have more software, and so on. Can you give any more proof of concept on the development? Thank you.
Yeah. We've just done an analysis on our China campus building, and we saved a lot of money, and it was on time and on budget. They used Smart Build and Bricsys from design to completion. Just to correct you for future reference, we now moved Smart Build and Bricsys from PP&M to Geosystems. It moved from industrial to geospatial.
Yeah. Sorry for that.
For the future, I think that is important because now it's all about launching these products into the market, and Geosystems has better coverage in the AEC market.
Yeah. You should bring it to Stockholm as well because we need it. Thank you, and good luck in Q2.
Thank you. Next question from Nay Soe Naing from Berenberg. Please go ahead.
Hi. Good afternoon, all. Thank you for taking my questions. If I may, could I start with the PP&M segment, please? It recorded 2% organic growth, and that's obviously we're expecting a bit of recovery given the structural trends that we're seeing in the end markets. So putting that into that 2% organic growth in context with the low comp we had last year, could I get a bit more color on what your expectations are for the recovery in PP&M segment, and how should we think about the shape of the recovery for the rest of the year?
Yeah. No, I think the underlying trend in PP&M was quite favorable. We saw the so-called project business, which is the largest segment growing at strong single-digit levels. Project business is typically when we sell software to EPCs that in turn are trying to design or are involved in designing new projects, and that should actually increase going forward. It was a weak quarter for owner operators, which is a more stable segment where we sell maintenance solutions, asset lifecycle solutions to already existing plants. I think that wasn't a trend. It was just this quarter where it just happened to be weak. In cyber, we see good prospects for growth and in also all the other new segments like EAM. EAM grew by 42% in SaaS, in its SaaS revenue.
No, there are a lot of areas that are growing very rapidly.
Thank you. That's helpful. I suppose a mid-single-digit or a high single-digit growth, organic growth for the PP&M business outlook in terms of outlook, that would you say that's achievable?
I mean, technically, you do have an impact that will kick in in the second half. EAM is not recorded as organic growth in the first quarter simply because we didn't own EAM in Q1 of 2021. As soon as EAM is a part of the organic growth story, you're going to see an acceleration in this division's organic growth.
Thank you. That's helpful. One more question, if I may. You've already covered it, I just wanted to check that I have understood it correctly. You know, despite the lockdowns, the supply chain issues we're seeing in China, for the Q2 outlook, you are cautiously positive. Is that correct? Firstly, to check. Secondly, specifically for the MI segment, you know, if I've got the numbers correct, I think it's got a decently large exposure in China. But obviously it had a very solid 13% growth in Q1. So could you help me bridge that gap between, you know, what everything that's going on in China despite the fact that MI had a pretty solid quarter this quarter?
No, we are cautiously optimistic about China, so we believe in growth in the second quarter as well. MI is our oldest business in China. It was the original business when we transformed Hexagon back in 2001. We have a very innovative team of sales engineers and management people. They just quarter after quarter manage to find new applications, new end markets to sell to. We haven't seen a slowdown in the ideas and the projects they come up with. We do believe that MI, in spite of the very tough situation in China, will continue to grow.
It's very encouraging to hear. Thank you very much, Ola.
Thank you.
Thank you. Last question from Magnus Kruber from UBS. Sir, please go ahead.
All right. Thanks a lot for taking my follow-up. I just wanted to ask if you could comment a bit on the contribution margin of EAM in the quarter. Is it still around 40%?
Yes, it's above 40%.
Perfect. Following Russia's invasion of Ukraine, have you seen any increasing demand for the defense offering? If you could give us an update a bit on the U.S. market with respect to the recent changes there, that would be very helpful.
To quote a Bond movie, I could give you an update, but then I have to kill you.
That's good. That will see you in Q2, I guess.
Yeah. No, it's classified, so we don't comment on what we do.
That makes sense. Cheers. Thank you so much, Ola.
Thank you.
Thank you, Mr. Rollén. There is no question by phone.
Thank you. Thank you for listening in, and we'll do this again next quarter. Have a good weekend, everyone. Bye.
Thank you, ladies and gentlemen. This concludes the conference call. Thank you all for your participation. You may now disconnect.