Hello everyone, welcome to the Hexagon Q1 Report 2019. Throughout the call, all participants will be in listen-only mode, afterwards there will be a question and answer session. I will now hand the call over to Ola Rollén. Please go ahead with your meeting.
Thank you, welcome to this Q1 earnings call for 2019. I suggest we start at slide number four, overview of the first quarter 2019. We report an organic growth of 4% in the quarter, the operating net sales growth is 10% recorded. We saw solid growth in PI, Geosystems, PP&M, MI had 4% organic growth. Growth was hampered by the continued decline in safety and infrastructure. As we will see in a few slides, actions have been taken to ensure improvements throughout 2019. Excluding SI, the organic growth was above 6% in the quarter. Record earnings and profitability in the quarter. The growth margin came in at 62.6%, which is a new record for us. The EBIT margin came in at 24.1%, which is the strongest first quarter ever for Hexagon.
We strongly benefited from the organic growth and a very favorable product mix in the quarter with new product releases. If we turn to Slide 5, seasonality and profit. Q1 is our weakest quarter in the year, there is no change to that pattern. We do see that this is the first quarter, it is supposed to be the weakest quarter in the year. Moving on to Slide 6, we have the key figures for the first quarter net sales of EUR 916.5 million, which is 10% recorded growth, 4% organic growth, that corresponds to an EBIT margin of 24.1%, or EUR 220.5 million, which is 11% higher than the corresponding period last year. If we now turn our focus to cash flow, Slide 7, I would like to point out two things with the cash flow in the quarter.
First of all, in taxes paid, we have a EUR 12 million income tax paid on unrealized currency gains. It is a sort of one-off in the quarter, increasing taxes paid by almost EUR 20 million. Then, obviously, with the very favorable working capital development we had in the fourth quarter, it was a tough quarter to match, in terms of working capital in Q1. We had a slight increase in change in working capital. Cash conversion, 75% still in spite of these two items, very strong underlying cash flow for the first quarter of the year. Turning to Slide 8, we can see in spite of the adverse development for the working capital in the quarter, we are still way below 15% working capital to sales. Slide 10, market development.
If we look at the sales mix in the first quarter compared to the first quarter of 2018, we see very little change between the geographic regions, we do see the recovery in South America making itself shown in the numbers. South America has grown from 3% to 4% of group sales. Asia Pac is also very strong in the first quarter, led by Southeast Asia, Japan, and Korea, and it now represents 15% of group sales. More or less the same pattern, one-third of sales in the three major regions of the world. Slide 11, just trends, organic growth, I think we can skip forward. You got Slide 12 with all the arrows, and I'm not going to go through them on this call, but it's a good backup for you. Let's move to Slide 13, EMEA market trends.
Western Europe recorded 4% organic growth. We saw strong growth in Italy and Spain, we saw a slowdown for manufacturing and especially in the automotive sector in Germany and France. The growth was mainly driven by infrastructure construction and surveying in Western Europe, whilst manufacturing and automotive especially was weak in the quarter. We saw double-digit growth in Russia. It continues to recover after a very steep fall in 2015, 2016, and we've seen recovery since. Good growth in Eastern Europe, Middle East continued to decline. Moving to Americas, Slide 14. North America recorded -3% organic growth. We saw solid growth in most segments like power and energy, infrastructure and construction. Of course, most of the decline in the SI business is in North America, and that continued to hamper the numbers for the North American region.
South America continues to recover as previously stated, it's led by a strong recovery in Brazil. We still see continued strong demand, in the Andean countries, where you have a lot of mining activity. Very strong double-digit growth from South America. If we move to Slide 15, finally, Asia. China recorded 3% organic growth, that is quite an achievement in this tough market where favorable development in infrastructure construction and other manufacturing, apart from electronics, was growing at double-digit rates. Was a weak quarter for electronics due to tough comparisons and a slowdown in the electronic sector. It actually shaved off 1% organic growth for the group in the first quarter. Japan, Indonesia, and South Korea, strong double-digit growth, we see a lot of traction for new products, especially in Japan and South Korea. Reporting segments.
If we start with Industrial Enterprise Solutions on Slide 17. Industrial Enterprise Solutions report an organic growth of 5%, 4% in MI, where we saw a significant slowdown from the electronic segment as previously mentioned. We also saw solid growth, and demand in aerospace and general manufacturing across all regions of the world. We also had strong demand from our design and production software portfolio in MI. PP&M, 7% organic growth. Contributions from the traditional design portfolio that actually grew in the first quarter after, I believe, three years of decline, as well as construction and information management solutions that are new products that grew in the quarter. The investments in the organization continued in the quarter for PP&M. Sales, EUR 468 million and an EBIT margin of 24.3% in the quarter.
If we turn to Geospatial Enterprise Solutions, report an organic growth of 3%, a very solid 8% organic growth for Geosystems, driven by continued strong development in the infrastructure and construction industries in both North America and Europe. The mining solutions are growing double digit, but also new innovations such as the Leica RTC360 are generating good traction in the market. SI hampering sales 2% on group level, but minus 17% for the division. It's the continued challenges in the business. Actions have been taken to ensure improvements. Positioning grew by 18% organic growth, it's strong demand in agriculture and automotive, and a continuous recovery in our marine positioning business. Geospatial Enterprise Solutions report EUR 449 million of sales in the quarter and an EBIT margin of 25.1%. A very good margin expansion in this segment.
If we turn to slide 19, what's going on within Safety & Infrastructure? The reason for negative growth is twofold. First of all, we saw a shift from desktop products to cloud-based dynamic products in Hexagon US Federal, and that's been an ongoing drag for a number of years now. On top of that, we've had a new product launch delay since the second half of 2018 that has forced us to delay revenue recognition, but also burning a lot of resources trying to fix bugs in connection to this new product launch. The actions taken are Hexagon US Federal with the acquisition of Thermopylae that we've announced a couple of weeks ago and selective restructuring actions, we believe that we have the product portfolio for the future for our federal business. With the new product launch, the implementation is progressing.
We think that as of the second quarter, we have the more normal situation again where we utilize our resources in a more normal fashion. The outlook is that underlying demand environment for SI will remain healthy throughout 2019, and we expect SI to stabilize in Q2 and return to growth in the second half of 2019. Moving on to group numbers and slide 20, the gross margin came in at a record, it's now 62% for the past 12 months, 1% up. Our EBIT margin, slide 21, is now at 25% on a rolling 12-month basis, it's also 1% up compared to this time last year. If we now talk about the quarter in details and discuss orders and product releases, on slide 23, we mentioned the acquisition of Thermopylae Sciences and Technology.
It was done in the quarter, it enabled us to do a dynamic edge mapping for U.S. defense and intelligence customers. Edge mapping means that you create a map on the fly. Think soldiers in the field, they can use a drone, in a matter of minutes, they can create a map of the area where they are. We see a lot of opportunities in the private sector for this technology, which is very versatile and will replace the traditional static GIS desktop businesses that the GIS industry has lived from over the past 30, 40 years. It's a huge trend shift. It will operate as a part of Hexagon US Federal, which operates under a proxy agreement. Slide 24. We acquired j5 International, that's been consolidated into the PP&M business.
It's a market-leading developer of operations management software. It enables us to incorporate real-time situational awareness of facility operations into a digital twin. Think shift changes and so on. You can use the shift handovers, and you can smoothen that using j5. Slide 25. We also acquired YXLON. YXLON is another step on our vision to realize the smart factory concept. It's a natural extension for our data-driven factory strategy, where YXLON calibrates and continuously monitor and initiate compensations of not only our own products, but machine tools, robots, and structures in the manufacturing environment. It's a prerequisite to create an autonomous, connected ecosystem within the factory environment to be able to monitor and adjust and compensate. Slide 26. PP&M got an order from the Sinopec-SABIC joint venture. It's a joint venture between Sinopec of China and SABIC of Saudi Arabia.
It's called SSTPC. They now standardize on our owner-operators software for eight of their plants in the world. Slide 27, we launched something called HxGN MineOperate Asset Health within our mining business. It helps improve the efficiencies and minimize equipment downtime in the mine. It's like a remote real-time health check of your facilities and your machines. Slide 28. We continue to expand groundbreaking autonomous driving simulation capabilities. In our software world, we're launching Virtual Test Drive, which is within our open software platform for autonomous cars. We got a lot of new features in this product, but we also launched something called Open Autonomy Pilot Program, where we can host and drive autonomous models in Peoria, in Illinois, U.S., to test autonomous cars. Slide 29.
Leica Cyclone FIELD 360, which is our new onboard software for surveying and infrastructure application, won the iF DESIGN AWARD 2019. We're quite proud of that. Slide 30. We're aiding forest and wildlife management in India, in Jharkhand. The forest department of Jharkhand has standardized its monitoring resources on Hexagon's power software portfolio. Basically, to monitor all activity in the forests, including watershed information, change detection, wildlife reporting, and mining. Slide 31, we launched the first long-range laser tracker. This could be used in new types of industries such as roofs, rail installations, wind turbines, solar panels, and so on. Large-scale manufactured assets where the ATS600 is unbeatable. It can scan a surface with metrological accuracy from a distance up to 60 meters, which helps in large factory halls with no need for targets, sprays, or reflectors. This is a groundbreaking development for this application.
Slide 32. We partnered with Ericsson in connection to the Hannover Messe, the world's largest industrial show, where we showcased a 5G-ready, connected Absolute Arm portable measurement system. Slide 33. Bloomfield Collieries is a mine in Hunter Valley, Australia. They choose to standardize on our HxGN MineProtect product in our mining fleet. It's a clear tie-in with our fatigue monitoring solution that we've delivered previously to this mine. Slide 34. We also got an order in the quarter from FAA, the United States Federal Aviation Administration, to design, produce, and deliver the next generation uplink stations. This is how you make precise approaches and landings at any airport in spite of fog or haze or whatever the weather might be. Slide 35. We showcased our autonomous capabilities at the CES 2019.
The key highlights included Lexus demonstrations showing all our automotive and data intelligence solutions for autonomous vehicles. Slide 36. AECOM is a U.S.-based engineering firm that has standardized on Hexagon's surveying solutions throughout its workflow, and they can now produce 95% completed CAD drawings using our point cloud technology. Then they can seamlessly download these CAD drawings from real-world objects into their CAD models. I think this is showing you a bit of the future in the AEC industry. Slide 37. Gujarat Police Academy is standardizing on our new RTC360 and BLK360 reality scanners to capture crime scene data in a digital manner. This is a growth business for us, and we can see that reality capture in connection to crime investigations is growing quite rapidly. Slide 38. We announced a 3D image service powered by the newly released BLK3D.
It's an image service, which is available at 38 global locations as we roll it out. That was it. In summary, if we now go to slide 40. Solid development, 4% organic, 10% recorded growth. We saw good growth in several segments, but growth was hampered by the continuous decline in our safety and infrastructure business, and actions have been taken to improve performance, as previously stated in 2019. We saw continued EBIT expansion where we improved our EBIT margin by 0.3% quarter-on-quarter. With that, operator, I think we're ready for the Q&A session.
Thank you. If you do wish to ask a question, please press 01 on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing 02 to cancel. The first question is from the line of Daniel Djurberg. Your line is open.
Thank you very much and good morning. Just a clarification on the organic growth adjusting for SI, it seems to be 6%, then public safety is 5% of total sales, and I need to have a higher revenue stake than that to get to 4% for the group. Can you help me a little bit on the math, in terms of how a large part of the group was impacted negatively by the-
You got two segments. You got the U.S. federal business and the new product launch in public safety, and that is roughly 9% of group sales.
Okay. That clarifies. I was looking-
Yeah
for 9%, I couldn't find it really. Okay, thanks. Another question, if I may, would be on the, let's take this on the Leica BLK3D. You talk about this new image service and so on. It feels quite, is it like a manual services there, or if you can talk more about the Leica BLK3D, the uptake in the quarter. I haven't seen it on every billboard everywhere, et cetera. Thanks.
No, it's an uptake. It's a new product, and we launched this service in connection to the launch of the product. It simultaneously launched, you could say, the image service, where you basically buy a cloud space where you upload your images. It's a new business model, you could say.
Okay. Are you satisfied with your go-to market, i.e. through your own channel and so on, or will you address that?
No, we're satisfied with it. It's early days. We launched it in the beginning of the quarter. We have to give it a few quarters.
Okay, perfect. I will leave questions for further. Good luck here in Q2.
Thanks.
Next question is from Mattias Holmberg from DNB Markets. Please go ahead. Your line is open.
Thank you. I was wondering a bit about the PP&M segment, where I recall a couple of quarters ago you said that or actually, when we started to see the growth pick up in this segment, you said that the margin leverage or the drop-through was less than one might expect, as you had hired some more staff to facilitate new product launches, et cetera. Just wondering where we stand now on that part, if we still have this sort of muted drop-through in the growth in PP&M, or if this has started to come through more clearly now?
No, we haven't seen it come through in the first quarter. We'll see for the remainder of the year. We continue to invest compared to Q1 of 2018. We haven't had the typical sort of software drop-through in the first quarter.
I see. Another question from my side. Looking at your comment on the slowdown in the electronics business in China, could you elaborate a bit on what is driving this slowdown and also what your action plan is going forward, assuming that this phase continues to weaken?
We see a shift in the supply chain where the OEMs used to source directly. They're now pushing that task to their sub-suppliers. It's a bit difficult to say how it's going to pan out in 2019. We're working on expanding our touchpoints with the supply chain. We'll see how it works out. It's still early days.
Great. Thanks a lot.
Thanks.
Next question is from Mikael Laséen from Carnegie. Go ahead, your line is now open.
Okay, thanks. Good morning. Just want to ask a couple of questions on safety and infrastructure, first of all. What happened really here in Q1? You have a slide on that, but I didn't really understand what really happened now. You talk about this long-term shift to dynamic maps, but that has been ongoing.
Two things have happened. We've eroded and gradually lost a very successful and profitable desktop business with the U.S. government. We didn't have a complete solution, but with Thermopylae, we now have the solution to address that. Now we can start growing again in that segment. The other thing that happened was that we launched a new product where we had several installations where we had teething problems, and we simply had to throw resources resolving those teething problems at the same time as we couldn't invoice because we didn't meet the milestones we were supposed to meet. We believe that, as I said, with Thermopylae, we now have both the products and the distribution to tackle the federal problem. We also think we have our arms around the problem with the newly launched product.
Okay, got it. What do you mean with the stabilization in Q2? I guess the growth will also be negative in Q2 and then improve a bit in the second half. Is that a correct assumption?
We'll see.
The stabilization.
The one.
from this level, right?
From this level, we'll see what happens in the second quarter.
Just a clarification also. Is this affecting Hexagon Geospatial in any way, GeoMedia, ERDAS IMAGINE, and so on?
Yes, it is. When we describe it as SI, it's really geospatial and SI.
Okay. Got it.
They've delivered these solutions together.
Yeah. A final one, regarding China. It grows by 3%, and you said that that was an achievement. Can you elaborate a bit more on that? Because comparisons were actually a bit easier now in Q1. Maybe if you can explain that, what happened behind the scene?
You had an electronics business that was 1% negative on the group level, and the lion's share of that business is in China. What we managed to do in China is to grow the rest of the business significantly above 3% to mitigate the drop in the electronics business.
Okay. What are the most or the strongest areas in China for you?
Right now, it's power, it's traditional manufacturing industries, it's automotive, and it's aerospace.
They're growing by around 10% or?
Yeah. Something like that.
Okay. Thank you.
Thank you.
Next question is from Alexander Virgo from Bank of America. Please go ahead. Your line is open.
Thanks very much. Morning all. I just wanted to dig a little bit more into SI, I'm afraid. Can you just help me understand, what exactly was it that you didn't have in the first instance when you won the contract? Because it sounds to me, or maybe I'm making the wrong inference, but it sounds to me like you didn't have what you needed to win the contract in the first place. I'm just trying to understand exactly what happened there. I think the second thing on public safety is the issues with respect to China is sometimes the first time I think you've talked about that. Maybe you can just expand a little bit. Is that purely just the installation taking longer than you thought?
Related to that last bit, can you give us an indication of how much of an EBIT headwind or margin headwind those problems were in the quarter, just so we can think about how that is addressed through the back half of the year. Thank you.
I didn't get your China question, but we'll come back to that. Let's start with SI. Within SI, we delivered a product that we thought were a off-the-shelf solution. As we introduced it to the market and sold it, we realized that we needed to fill it with more content than what we previously thought. We ended up in situations where we had to send in programming resources in installations across North America to fix some bugs and also add features that we hadn't previously accounted for. That stopped the process. It stopped our ability to invoice, but it, of course, cost us a lot of money, eroding the margins for the business. That's what happened in SI. If you go back to your China question, I really didn't understand that.
Sorry. It was just in the text in the report in Geo, you call out declining public safety in China, I made an assumption, and maybe it was erroneous, that that was related to similar problems. Perhaps it was not.
No, it's not related.
Okay. Well, what was the driver of that then instead?
In public safety in China, it is just that we haven't landed any orders recently, and the comps compared to Q1 of 2018 were simply too strong.
Okay. All right. Okay. My error. Thank you for clarifying.
Thank you.
Next question is from Stacy Pollard, JP Morgan. Go ahead. Your line is open.
Hi. Good morning, Ola. Firstly on the sort of the margin performance, in the quarter, the growth sort of year-over-year seems to be mainly driven by GES, despite the sort of lower organic revenues growth. Would you say the relative softness in the IES segment is mainly a function of the sort of slight deceleration in PPM? Secondly, following up on PPM, where do you think the top is for this business, specifically in the current environment? Also, how much did oil and gas contribute to the growth in that segment? Thank you.
Well, let's dissect your question. I don't think the slowdown in IES is PPM. PPM grew by 7% organic growth. I think the slowdown is electronics, the electronic segment in MI, that is causing the slowdown in IES. We saw contribution from the oil and gas segment in the first quarter, but it's not dramatic numbers. The recovery continues, and we're far from previous peaks in that segment.
Great. Thank you.
Thanks.
Next question is from Markus Almerud from Kepler Cheuvreux. Please go ahead. Your line is open.
Hi. Markus Almerud from Kepler Cheuvreux. Couple of questions. First, on automotive. You say the automotive in China is growing very well. I assume that your exposure to traditional, in quotation marks, automotive is quite low. Also in Europe, were you seeing any signs of stabilization in the automotive industry in Europe? That's my first question.
Well, our exposure in China is actually to both traditional and the new electric automotive players. So far, by the end of last year and early this year, we've seen fantastic growth from the new electric car manufacturers in China. We saw a bit of a stabilization with some key OEMs in Europe in March. To say that it's a trend, it's simply too early.
In general in China, you're quite big there. Do you see any signs of any impact from the stimulus that they have introduced?
No, not as of yet. We see concerns about the looming trade war with U.S., which has been an issue throughout the first quarter that is sort of putting a dampening effect on investment and CapEx. We haven't really seen any impact from the stimulus.
Okay, perfect. Finally, what was the contribution from new products in the quarter? Are you still seeing a good contribution from BLK360, or is that kind of all worked through the system now, and then grows in kind of good rates, but not the same as before?
It's still growing, but it's not impacting the numbers as it did last year. It's been replaced by the RTC360 that is generating good growth for us. It's hard to guesstimate what new product contributed with, but I would say probably more than 2% in the quarter.
Excellent. Okay. Thank you very much.
Thank you.
Next question is from Wasi Rizvi from RBC Capital Markets. Please go ahead, your line is open.
Hi, good morning. Just a couple left from me and both on SI actually. Firstly, on your comment that you expect stabilization in Q2, just a clarification, is that sequential or is that a year-on-year stabilization that you're talking about? Secondly, when you talk about the growth in the back half of the year, you mentioned that you've not been able to build bill revenues while you've been working on the product fix. Is that growth mainly just that pent-up demand or is it actually a return to growth in you winning share and winning contracts?
I think that what we're trying to say is a return to growth in the second half.
Right. Is that a function of just catching up on work and contracts you've not been able to bill for while you've been fixing the problems, or is that just a underlying growth?
No, no, it's the underlying. The market is healthy. There is nothing wrong with the market, and we have to call that out, that this is not a function of demand. It's a function of our own deployment of a new product. We continue to collect orders, and the market is still good, and we expect growth from the market basically going into the second half of this year.
Got it. Just that stabilization, is that a sequential or year-on-year comment?
It's year-on-year.
Year-on-year. Thanks.
Next question is from Alex Tout from Berenberg. Please go ahead, your line is open.
Yes. Hi, Ola. Thanks for taking the question. Firstly, could you just zero in on the simulation MSC business and just give us an idea of how that performed in the quarter and sort of the distinction between pricing versus volume growth, in simulation. Then just secondly, are there any areas of the business that you see kind of peaking currently from a growth perspective, that might offset some of the improvement that you foresee in safety and infrastructure? Thank you.
Well, MSC had a really good quarter. It was in the range of 7% organic growth. Bookings grew even faster. We're quite pleased with our simulation business. In the beginning of 2019, or whatever you should say, things to offset the return to growth in SI are First of all, we do have the dampening impact on MI from the electronics. It's set to continue in Q2. Then, I guess it's not a million-dollar question, it's more like a trillion-dollar question, what will happen to the global economy? Will we have an impact on investment in related products from these talks that are ongoing and so vital for the global economy and the sentiment in the market? We simply don't know.
Thanks. Sorry. Could I just follow up on the 7% organic growth in MSC, how much of that might have been due to a pricing increase versus just usage volume increase?
I don't think it's much price in that number, simply because we haven't done a price increase in the first quarter.
Great. Thank you very much.
Thank you.
Just as a reminder, if you do have any further questions, please press zero one on your telephone keypad now. There are currently no further questions registered on the telephone line, so I'll hand the call back to the speaker. Please go ahead.
Thank you everyone for listening in, and we'll talk again in the second quarter by the end of July. Thank you everyone. Bye.
This now concludes the conference call. Thank you all for attending. You may now disconnect your lines.