Earnings Call: Q2 2020

Jul 24, 2020

Thank you, and welcome to the 2nd quarter interim report for 2020. And if we turn to Slide 4 in the presentation. Overview of the Q2. Recorded sales decreased by 8% in the quarter and organic growth was minus 10%. We saw our software business developing well with solid organic growth across the software portfolios. Safety and Infrastructure 14% and 1% organic growth, respectively. Geosystems and Manufacturing Intelligence were hit hard by the shutdowns in primarily North America and Europe and recorded minus 16% and minus 14% organic growth. But we still post a record second quarter EBIT margin of 21.3%, up against 24.5% in the second quarter of 2019. And this was supported by continuous growth in software, which gave us a richer mix and a strong focus on cost control throughout the quarter. The gross margin the reported gross margin that should be is 61.4% in the quarter versus 62.1% for the corresponding quarter of last year. But we booked SEK 13,000,000 in NRI in the gross margin or gross profit and SEK 9,000,000 last year. So the gross numbers or the real operational numbers should really be 62.9% gross margin versus 63% the same quarter of last year. As previously announced, we implement our long term cost saving measures to ensure continued stability of the company's financial performance, and they are expected to offset any reversal of the short term savings that we've seen throughout Q2. Now if we go to Slide 5, just a reminder of the seasonal patterns in the Hexagon earnings. Q2 is a strong quarter. Q4 is our strongest quarter. And Q1, Q3 are weaker than Q2 and Q4. Slide 6, looking at the P and L statement. So net sales amounted to €896,600,000 and operating earnings EBIT1 amounted to DKK226,500,000, which is a 5% decrease over the same period last year. But as previously stated, the operating margin is improved by 0.8 percent. Slide 7 is just the 6 months numbers. So we're now at €1,787,000,000 in sales for the first half year. Looking at cash flow. Cash flow from operations before changes in working release in working capital, NOK 55,900,000 bringing cash flow from operations to NOK344,200,000, which actually is an increase of 15% over the same period last year in spite of weaker profits. We can also see that we pulled the brakes on investments in both tangible and intangible assets, why the operating cash flow before nonrecurring items is even stronger. It's an increase by roughly 34% over the same period last year. The cash conversion is 127%. Normally, the target should be a cash conversion of 80% to 90% when the company is growing. Slide 9, working capital to sales. We report 9.6% working capital to sales. So it's the first time we have the working capital, which amounts to less than 10% of sales. Market development. If we go to Slide 11, we can see the sales mix and the comparison to the corresponding quarter of last year. And I think it's two things that stick out, and that is the recovery of China. China was 12% this time last year. It's now back to 15%. And we also see a decline, a sharp decline in Western Europe, 27 percent versus 31% the same period last year. Moving to Slide 12, an overview growth region. China, 16% organic growth over the same period last year. South America is reporting growth, but North America, Western Europe and Asia excluding China and Eastern Europe, Middle East, Africa all decline in the quarter. I leave Slide 13 for your reference, but it's the growth and the trend per business segment per geographic region across the world in the Q2. Now moving to EMEA. We record 19% negative organic growth in EMEA in the quarter, and it's heavily impacted by the COVID-nineteen related lockdowns that we saw in large markets from March and onwards, Germany, France, U. K, Spain, Italy, parts of Scandinavia were all hit hard by these lockdowns. Solid growth in spite of the lockdowns in the software portfolios, And we also saw growth in safety and infrastructure in Western Europe. Americas, slide 15, similar pattern, not as hard hit as Western Europe, but we record minus 19 percent organic growth. And it's related to once again lockdowns in societies. We saw favorable growth in our Power and Energy and Positioning segments. South America, in spite of lockdowns in many countries, we saw single digit organic growth. And it's the mining and the public safety segments that are growing in South America. Moving on to Slide 16, Asia. China recovered with a bang, 16% organic growth, strong recovery across all segments. We see a sort of go back to work trend, which is very powerful and very strong in China. South Korea and Japan recorded low single digit growth in spite of COVID-nineteen related slowdown in the respective economies of the 2 countries. The rest of Asia and Southeast Asia declined. India was hit hard by lockdowns as well. Reporting segments. If we move to Slide 18, Geospatial Enterprise Solutions. Organic growth, minus 9%. Geosystems was hit hardest, especially in Europe and the U. S. SI recorded 14% organic growth, and it's supported by the recent new products that we've launched like OnCall and Jeep. Otonement Positioning minus 8% organic growth, was positively impacted by solid demand in defense and agriculture. So sales amount to SEK 457,600,000 which corresponds to an operating margin of 26%, 0.5 percent improvement over the same period last year. Moving to Industrial Enterprise Solutions, Slide 19. Reports an organic growth of minus 10% Mi hit hardest, largely driven by the lockdowns across Europe and North American manufacturing industries. China reported solid organic growth and mainly driven by a recovery in the electronics segment. PP and M, 1% organic growth, good development primarily in the AEC markets. And finally, the segment reports SEK 439 €1,000,000 in sales and an operating margin of 25.3%. Now moving on to Slide 20. The gross margin is on a rolling 12 months average and cleaned out for any NRI items 63%, which is the same as this time last year. The EBIT margin is making a recovery, thanks to the very strong margin we report in this quarter orders and product releases on Slide 23, we announced the acquisition of COE and we've acquired and carved out their mapping business, which is being merged with the Hexagon content program. And it's going to strengthen our content services in Europe. Slide 24, we also announced the acquisition of GROMAX Technology, which is a computer aided engineering software company that does simulation for rotating an electric machinery. And this is going to be important for electric vehicles, wind turbine powertrains and well increasing the battery range basically for electric vehicles. Hexagon and Proudfoot on slide 25 aim at 0 harm in mining. We are combining our resources to create a safety driven solution for mining that will avoid and and minimize to a minimum the harm that employees in mining are experiencing. Slide 26, also a mining related that if there is a risk for landslide in a mine, the system will report to all vehicles near by and then create no go zones. Slide 27, leveraging artificial intelligence with library of high accuracy airborne data. We are now using artificial intelligence to automatically extract features in the data and automate the workflows. So we can now detect buildings, roads, railways and so on by using these machine and measure rail structures and we're deploying this with major rail networks across the world. Slide 29, one of these networks is German Rave. Deutsche Bahn has selected our mapping software to create a platform for asset management. Slide 30. BLK2 BLK2Go was launched earlier this year and we're now teaming up with several service providers that build their business around BLK2Go. In this case, it's Ziber Divi, which is servicing real estate agents providing house dimensions in Holland. And they use the BMK2Go to document houses. And they issue hundreds of reports per week and have seen a huge improvement in productivity using the BMK2Go. Slide 31, more about the BMK series. We've earned multiple awards, product and design awards in the quarter for our 2 new solutions, the security camera, BMK 20 fourseven and the Z platform, BMK2Go. Slide 32, we have a series of public safety orders that we were awarded in the quarter. Rhineland, Santa Clara County in California and Alberta in Canada have standardized on Hexagon's dispatch solutions. Slide 33, we're also looking at expanding the market for so called precision agriculture technology where our new product Hexagon Agron autosteering has been deployed in Brazil. Slide 34, we're looking at helping Sukkar in Turkey, streamlining their petrochemical operations in their Turkey sites by using smart materials and other products from the smart plant suite of software process industry. We have delivered our hexagon or PPM, smart 3d and smart plant products to Shandong, to Shonke in Guangdong and in Inner Mongolia as well to another chemical processing plant. So finally, if summarize Q2 reports record earnings of 25.3% in spite of the 10% organic decline in top line. Solid growth our software businesses in the quarter and our hardware businesses were more harmed by the shutdowns that we saw primarily in Western Europe and North America. We're now full speed implementing our long term cost savings measures that we previously announced to ensure continued stability and profitability improvement. And with that, we've come to the end of the presentation, and we're now ready to start our Q and A So So the first question is from Stacy Pollard of JPMorgan. Your line is now open. Thank you for taking my questions. Bola, Ola, big picture question first, sort of for the group. How was June versus April? So sort of how did the quarter progress? And how do you view developments as we go into H2? And I know that can be difficult, but just kind of seeing what your pattern might be. And then 2 specific ones, maybe demand environment in automotives, both for metrology and for the automated driving, how that's progressing? And then secondly second sub question, I guess, you've spoken of BLK 20 fourseven and BLK2Go. Do you think those new products are enough to push that division back into growth into the second half? Or is there just still an overlay of macroeconomic conservatism that might offset that? June was better than April, but June must be better than April simply because in April most major markets in Western Europe and North America were in lockdown, whilst some of them were actually unlocked in June. So technically, you can't deliver products to a company that is in lockdown, but that wasn't the case in June. So it's too early to say that it's a recovery. June technically should be stronger than April. Moving on to automotive. We've seen weak demand throughout the quarter in automotive, but as the automotive plants went back to starting producing cars, of course, our activity picked up as well. And in China, we saw a strong recovery for automotive in the quarter, primarily in the shut down and put on hold. And we hope they will gradually now come back. BLK is definitely going to be a driver for GEO systems in the second half. It's enough to return to growth, that's too early to answer really. Maybe just a quick follow-up. I probably didn't ask that first question very well. Can you give us more color on June specifically in the sense of I don't even know if you have a number for June, but would it have were there any divisions that would have grew in June on a year on year basis that didn't grow for the quarter on a year on year basis? Does that make sense? It does, but it's not very meaningful because it's you're comparing 2 months with complete lockdown to a month where you actually saw customers opening up. So you might draw Sorry, I meant June this year versus sorry, I meant June this year versus last year, let's say. Yes, we definitely saw growth in China. We saw growth in South America. We definitely saw growth in certain parts of the world, June on June. The next question is from Adam Wood of Morgan Stanley. Your line is now open. Hi, good morning. Thanks very much for taking the question. I've got 2, if I could, please. Maybe first of all, Ulla, you're normally quite reticent to kind of out what's going to happen in the future, but you're quite clear in the release this morning that you think you've seen the trough. Could you maybe just talk a little bit about what you're seeing in the business, whether it's pipeline, recoveries in certain regions that give you the confidence to make that statement in the release? And then maybe just secondly, on free cash flow, it was a very impressive performance in the quarter. I think a lot of investors were nervous that customers would want longer payment terms and that would hurt your working capital. Is there any concerns as you go through the rest of the year that, that working capital could reverse? Or do you feel that's banked and we go back to a kind of more normal working capital cycle from here? First of all, the trough is I mean, it's simply that we do not expect our organic growth to get worse. We might be wrong, but this is the view we got right now. Now it's all about the road to recovery and how quickly the global economy can recover from where we're at right now. And so we believe our organic growth to improve quarter on quarter when we do return to growth. That is still a question that we have to come back to in the Q3 when we report that. Regarding the free cash flow, I really don't see any abnormal behavior in the payments of goods. So I think this is just a function of more soft flow. So you it might moderate a little bit then as hardware comes back as a mix in the portfolio? It could. I mean, you typically give longer credit terms while you have an upfront payment for software. So is it dramatic? I don't know. But maybe we can't keep 9.8% working capital to sales as we've seen growth coming back. Perfect. That's helpful. Thank you. Thank you. The next question is from the Connor Frum of Carnegie. Your line is now open. Yes, Nathan Lofgren here, Carnegie. Just wondering about the short term savings effect you had in Q2. Is it possible to quantify that in any way? It is. We believe the short term savings are around €25,000,000 to €35,000,000 Great. And can you please explain what you mean by long term cost savings offsetting this? So what do you believe you will how much savings can you have short term savings can you have now continuing to have in the short term? And how much long term cost effect can you extract in the second half? That's a very difficult question. I mean, we've saved an enormous amount of money on reducing travel. And that has been extraordinary in this quarter. We haven't said that much on the announced layoffs reduction in personnel. And we think that from now on, we're going to travel a bit more, but we're also going to see reduced payroll, which we might not have seen in the second quarter. And that's what's going to happen. Got it. And the second question is about the seasonal pattern. You highlighted it again here. As usual, I mean that Q3 is typically weaker than Q2. But do you expect this also this year because Q2 is a bit special with lockdowns and just that should mean that Q3 should be better than Q2, right, or? Yes. I predict that we will know that on the 25th October, which I believe is our Q3 release. The next question is from Suneck of Maybe if I could start with the software side. You obviously had a very good and resilient quarter. Could you remind us at what your current mix of software deployment models is? I think OnCall is a SaaS solution, so that's probably recurring. But what about the overall division and what about in PPM? I just want to get a sense of what is like recurring and what was recognized upfront. And then I have a follow-up question. Yes. It's we got 3 types of products products at Exelon. We got pure industrial software, which is SI, PPM, geospatial and then we have pure hardware. And the pure software business amounted to SEK 337,000,000 out of the SEK 897,000,000 So pure pure was almost 40%. And that grew in the quarter. And I would say that this is just my guess from top of my head, but I would say 80% of that was recurring revenue. Okay. Okay. And then the rest was upfront. And then a second question just on the AEC design software. We had obviously good growth in there again. Could you comment where this demand is coming from, I. E, which region, if it was residential or infrastructure? And maybe also who you're winning again from a competitive perspective? We acquired a company called Brixxis that makes design software, CAD, for the construction industry in 2018. And we're now launching that product offering through our PPNM distribution channel across the world. So we actually see an uptick in the sales all over the world in all regions for this software. And that is now being prepared to be linked and connected to our costing and our project management software, Ecosystems and our smart build software that is about to be launched. Is it then probably fair that it's mainly coming from the infrastructure side rather than residential? Now we don't know because if you sell it to an architect, for example, we don't get to see what that architectural firm is working on. So I don't think we have a view on what they're working on. Okay. Thank you. Thanks. The next question is from Mohammed Moala of Goldman Sachs. Your line is now open. Great. I have two questions. First of all, just circling back on the software growth. Could you give us a bit more color around that? Is it is that positive growth more in line with PP and M for the aggregate group? Or was it a bit faster than that? And then secondly, just on the shorter term savings, can you give us a sense of how much of those sort of $25,000,000 to $35,000,000 do you expect to kind of spend back in the second half? And to that extent, are you also looking to potentially start sort of reinvesting back into business to sort of stimulate growth above and beyond the macro? Thank you. If we start with the software growth, recorded growth in the pure software portfolio was around 5%. So I think organic, it was slightly lower because we had some small acquisitions, but it was stronger than the 1% we report in PP and M. And regarding the second half, as I previously stated, we're going to start traveling a bit more in the second half. It's a global company, and you need to travel to meet customers and colleagues. But as we do that, we're going to see these more longer term payroll related savings kick in. So I think it's a wash. We previously stated that we're going to save in the range of SEK 125,000,000 once the program is fully implemented, and that would correspond to SEK 31,000,000 per quarter. So let's say we've saved SEK 25 €1,000,000 to €30,000,000 in Q2 on short term issues. Then obviously, the long term program is going to bridge that. Great. And then maybe if I can just come back to that sort of low single digit growth in software. Were there any particular product categories within the kind of non PPM and then software portfolio that sort of you would call out perhaps proving to be quite resilient and could sustain that for us? Absolutely. I think our on call product, the new dispatch software is having a small success in the quarter. I also think MSC did well given the market performance. And I think that in our AEC segment, which is reported on the PPNM, we see solid Okay. That's very helpful. Thank you. Thanks. The next question is from Danny Joburg of Hammockbanken. Your line is now open. Thank you for taking my question. Most questions answered, but I missed the beginning. Out of the cost saving you mentioned, euros 25,000,000 to euros 35,000,000 seen in Q2. Was this in full due to COVID-nineteen? Or was it also including the cost savings? How much of it was temporary, so to say? Most of it was temporary. We haven't seen much impact from the long term savings program in the Q2, and that wasn't expected. It takes longer time to implement it. So short term savings was actually the consequence of people working from home, not traveling, saving on normal expenses. Perfect. And if I may, another question on COVID-nineteen impact, that's a bit longer on sales and marketing. I guess, of course, it's tough to make Hexagon Live. So but will we see any impact of product launches for late 2020 or early 2021 because we still, of course, have good traction with the black BLK2Go and BLK 20 fourseven, RockSpot, etcetera. But should we be worried about next generation due to COVID-nineteen? No. We're a brave organization. We're actually kicked off the planning for Hexagon Line 21. So we're planning to physically hold Hexagon Live in June of 2020 1. That's the plan at the moment. And hopefully, the world will return to a more normal situation next year. That's the plan. Yes. Let's hope for that. And I have a last question, a bit hypothetical We have this increased tension between U. S. And China, and you obviously sell the software, Smart 3 d to Shandong, Petro and etcetera, and it seems to go quite well in China. Do you see any risk of given that how Europe and U. S. Treat Huawei, for example, and any risk for retaliation or that could hit also you and not only the network equipment providers. It's a bit hypothetical that. We haven't seen any attributions to our business yet. But in a fluid political situation, you never know what's going to happen. So course, we don't have a crystal ball on how this will evolve. We just have to mitigate and plan ahead, and that's what we're doing. Thank you. You too. The next question is from Bhavy Rizvi of RBC Capital Markets. Your line is now open. Hi, good morning and thanks for taking my questions. 3 for me, if I could. Firstly, just on the new products pipeline. How are you thinking about new products? Do you think you'll delay? Do you think it's the right environment to launch new products? I mean, I guess, you could talk a bit about how the new BLK products are doing. The second one is on Geosysporin specifically. I think that's a business where you use distributors a bit more than the rest of the business. How do you think they're feeling? Economy? I guess it feels like there's some infrastructure and construction spend coming. Do you think they're confident enough to start spending and stocking up yet? And then the last one is a slightly broader one on the kind of AEC and construction market. It sounds like you're working towards a more complete offering combining Bricsys, Ecosystem and SmartBuild. And it's probably a good time to be pushing efficiency in the construction industry if we think that's going to infrastructure and construction going to lead the recovery. But what's the competitive landscape like there? I mean, who do you think are your competitors? We've seen RIB being acquired by Schneider and maybe more complete solutions. Do you think most of your sales and your competitors are going to be selling broad solutions? Or would it sell in pockets of somebody selling cash, somebody selling some project management? Or do you think you can make that a bit the complete full solution, a bigger part of the market? Let's see. If we start with question number 1, no product launches, we've delayed most of our product launches till after summer. And the reason was because we canceled Hexagon Live in Las Vegas in June. We decided that we're going to launch the new products when people come back after their summer holidays. So that's the plan for new products. When it comes to geosystems distributors, it's fair to say that, of course, they were all shut down, especially in Western Europe and North America. And we've begun to see a trend where they start restocking again. Have to have products in stock in the Q3. And then, yes, it's true that we are stitching together our offering in the AEC market for the long term. And I think that, that industry is so undigitalized that we don't need to worry about competition. There is several players looking into this. I think we have a slightly different strategy where we focus on productivity and quality improvement and not just design. That's it. Okay. That's helpful. And then is it will it for the foreseeable future still be people buying bricks separately or ecosys separately? Or do you think you can very quickly move to selling kind of the complete solution? Was that kind of something that you need to educate the market on over time? Our platform product is called SmartBuild, and that will be integrated. BriX is just a design CAD, and it will always be a CAD. Smart build is something different. It's more like an MRP system for the construction industry. The next question is from Victor Huppert of Danske Bank. Your line is now open. Okay. Good morning. So we asked a brief question on the BLK 2 Go, which you commented on some service providers that you've teamed up with. Could you say if it contributed in any material extent to Q2? And also within PPMM, what to expect going forward when the what we are seeing currently with the oil price and the prices in that sector? What do you expect in terms of mix within PPM going forward? PPMM, if we start with that. I mean, PP and M is a software business, so we expect to have a similar mix going forward as we've seen for the 1st 6 months this year. Regarding BLK2Go, it obviously contributed to the growth in the quarter, but it was less than 1% on growth levels. So it wasn't material in the Q2. Okay. Thank you. Thanks. The next question is from Supriya Sabramian of UBS. I just have one remaining question. This is around the sort of slight differentiating growth trends in North America and EMEA. So you mentioned that these are the 2 markets that were the most impacted by the COVID restrictions in 2Q. Could you explain why there is such a big difference in the growth trends? Yes, both declining, but still the magnitude was quite different. And I think this pattern was similar in 1Q as well. So could you explain what was driving this in the quarter? Thank you. No, it's very simple. If you take the major countries in Western Europe throughout a great deal of March, April May, people were locked into their homes and they didn't go to work. So if you now think about a large automotive plant like Bolksberg for Volkswagen, it's empty. They can't there is no product acceptance department there to accept your deliveries. There is no one there to take your phone call. How do you do business? Right. And would you say that the, let's say, the lockdowns in North America weren't as stringent maybe? No, I would say that they were probably not as coordinated as the major countries in Western Europe. And I would also because certain states in North America kept business going. So you have less of an impact in North America. Okay. Got it. Thank you very much. Thank you. The next question is a follow-up of Fani Dobrik of Hamburg, Inc. Your line is now open again. Thank you. Just a follow-up. On the balance sheet, accounts receivable down 10%, which we can understand, of course, and prepaid expenses and accrued income is quite flat year over year. Can you give perhaps the mix of the prepaid expenses versus accrued income and if accrued income is if you should read this positively into the coming growth in the quarters? I'm going to see if I can do that. I mean, the software business is more stable and it grew in the quarter. So obviously, you have an increase on the liability side because of that. Yes. Fair enough. As there are no further questions, I hand back to the speakers for the conclusion. Right. And the conclusion is, I hope you all have a great summer, and we'll talk again in October. Thank you, everyone, for listening.