Earnings Call: Q1 2021

Apr 29, 2021

Thank you very much. Welcome everyone to this 1st quarter interim report of 2021. And if we turn to Slide 4, overview of the 1st quarter or in 2021. Recorded sales increased by 10%. Organic Growth, however, increased by 11%. And to the right, you have the sales bridge where you can see that Organic growth, 11% currency, minus 5%, primarily U. S. Dollar and Chinese renminbi. And then structure, I. E, acquisitions contributed with plus 4%. All in all, we record SEK 978 €1,000,000 in the quarter in sales, and we also record €258,000,000 in EBIT, and that is an increase of 34% compared to the Q1 of 2020. The adjusted operating margin was 26.4 percent, and the gross margin was 64.4% in the quarter. We now go to Slide 5. This is just For you to remember that the Q1 is typically the weakest quarter in our seasonal pattern where Q3 is also weak and the 2 strongest quarters are Q2 and Q4. Slide 6, the P and L statement. Net sales, euros 977,900,000, 11% organic growth. Our EBITDA amounted to 3 €7,000,000 or corresponding to an EBITDA margin of 37.5 percent EBIT, at EUR 258,000,000 and EBIT margin of 26.4 percent. And the earnings per share amounted to EUR 0.54, an increase of 32%. Slide 7, cash flow. Extraordinary cash flow for the Q1, cash conversion of 107% in the quarter. And as you can see, strong improvement across the board before taxes, working capital and after investments. If we move to Slide 8, we can also see how the working Capital to sales ratio is evolving very favorably. So it was 4.9% of net sales in the Q1. And we booked a lot of deferred revenue from software contracts in the Q1, which out this ratio. Market Development. If we go to Slide 10, we have an overview of the sales mix across the regions of the world. And we still have the pattern that we have roughly onethree in the 3 major trading regions of the world. 4% decline in North America, but a 6% increase in China. We move to Slide 11, it's an overview how the regions traded where China indeed was very strong with 73% organic growth. But we saw good growth in Eastern Europe, Middle East and Africa and in South America. Western Europe returned to growth, North America On the back of strong comps in the Q1 of 2020, we saw a decline. We also saw a decline in Asia, excluding at China. Slide 12 is an overview per business segment and geographic region, and it's for your own review at a later date. But if we move to Slide 13, EMEA market trends. Western Europe saw 7% organic growth. We saw demand strong demand in U. K. And Italy, primarily in Western Europe. Solid demand in Surveying, Infrastructure, Construction segments, sequential improvements in the Manufacturing Power and Energy AgMaths, but still a bit to go in manufacturing areas such Aerospace and Automotive in Central Europe. Russia and Eastern Europe recorded strong double digit growth in the quarter. If we look at America, Slide 14, North America record -one percent organic growth. Strong growth in surveying, infrastructure and construction, ashen but weakness in aerospace and power and energy. And if one has to remember that Americas in Q1 of 2020 was unharmed by the pandemic and grew by 6% in the Q1 of last year. South America, strong single digit organic growth. We saw strong development in both agriculture, public safety and power and energy that came back. Moving on to Asia, Slide 15. China recorded amazing 73 percent organic growth. Yes, it was a significant decline this and last year, which makes it easier. But even compared to 2019, we see good growth in China. And it's a strong broad based recovery in all our industrial segments. Moving to South Korea, Southeastern Asia and Australia, they all record solid growth as well in the quarter, but we saw weak demand in the manufacturing sector in Japan and the power in India in the quarter. Reporting segments. If we move to Geospatial Enterprise Solutions, Slide '17, we record 13% organic growth, Geosystems fantastic 22% organic growth, supported by both strong demand from traditional segments such as surveying and construction, but also new solutions. FI minus 2 percent organic growth, we saw weakness in defense, but it was offset by continuous growth in Public Safety. Autonomy and Positioning, minus 2%, negatively impacted by order delays in our defense markets and weak promoted demand in the quarter. Sales amount to NOK 503,000,000 and EBIT margin is a record 28.6% compared to 22.6% at this time last year. Industrial Enterprise Solutions. Organic growth, 8 Ascent Mi recovered strongly in the quarter, recorded 12% organic growth, and it was driven by the acceleration and in China from both Automotive and Electronics and General Manufacturing. Weak demand in the Aerospace segment continued. PP and M, minus 4% organic decline. And it's a challenging oil and gas market that drives the decline in the quarter. We saw Solid growth in AEC and our newly acquired cybersecurity statement as well as Asset Information Management. Sales amounted to SEK 475,000,000 and EBIT equaled an EBIT margin of 25%, up almost 4% over Q1 of 2020. Slide 19 is just our 12 month a rolling gross margin trend. For the quarter, we did 64% gross margin. Slide 20, our EBIT margin was 26% in the quarter and for the 12 months. If you back out the currency impact, we would have reached 27% EBIT margin already in Q1. M and A orders and product releases. If we start on Slide 22, we are forming a strategic alliance with Boston Dynamics. And we're now using their robot called Spot and using our sensors in combination with this robot. So it's an autonomous reality capture robot. It will help reduce time, cost and increase safety when working in potentially dangerous asures or hazardous areas. And this is the first configuration in a series of new robotics product solutions that we will launch in 2021. Slide 23, we launched the Leica Citymapper for low altitude data capture. If we think about complex weather and congested flight areas, if you can fly at a lower altitude, you can still capture 3 d data about cityscapes without really interfering with flight path or bad weather. Slide 24. We've already gotten Orders for this no matter, it's 2 companies. It's Blue Sky in the UK and its Cyclo Media in the Netherlands. Slide 25, modernizing public with Hexagon Oncon. We got 2 new orders for Oncon, one from the city of Milwaukee and one on Lea County in Florida. Slide 26. We have now got confirmation that we're going to At least 14 U. S. States this year and update the mapping data for those 14 states. This corresponds to 2,300,000 square kilometers of flown area. Slide 27, keeping the lights on in the Amazon. I thought the Amazon was pitch black at night. We got 2 orders, and this is from 2 utilities In this state, in Brazil, where they choose our outage management system as well as our mobile workforce management solution to help them restore power quickly when an outage happens. Slide 28. This is a somewhat morbid application. And it's multi body dynamics software in forensic investigations. If you have fatal disaster in the construction industry, you need to study what impact and what happens to the human body when you have a free fall. And you can use our software for that as well. And that is what the University of Perugia in Italy is doing. Slide 29, we streamline the innovative development at Hyundai. Hyundai needed to quickly more quickly and accurately design and develop multiple products for uses in electric vehicle drive trains. And they decided to opt for Hexagon Design and Engineering software that will enable the company to optimize designs earlier in the development process of these components. Slide 30. We also launched a new reverse engineering solution called ReCreate. And reverse engineering is when something already assists, and we want to blueprint the CAD drawing of this already existing object. We've already sold this application to Hyacinth Motors, which will reverse engineer trucks for the fitment of their hydrogen Qcell technology. Moving on to Slide 31, in spare Automated shop floor inspection for Aerospace is Bristol based U. K. Company, and it's a driving force behind robot based inspection in the aerospace industry. And they choose our metrology solutions to create their systems. Slide 32. We've launched a cloud based version of our very popular metrology software, PCDNS. It's in combination with Hexagon SFX asset management, and it now exists as a mobile app, which makes pisdemics more accessible on the shop floor, for example, and also easier to use. Slide 33, driving digital transformation at Numaligar Refinery in India. The refinery choose to use our Hexagon FDX suite of software to support their digital transformation of their refinery operations. Slide 34, this is just an example how we bring technologies together thereafter we've acquired a company. We did the acquisition of Pass Global in Q4, and now we have the first integration with the Hexagon product, which is our J5 Shift Operations Management. Finally, Slide 35. Hexagon also launched a new subsidiary called rEvolution, which is a new business venture as focused on reinventing how industry addresses complex environmental challenges. We will use Hexagon's technology to accelerate the transition to a sustainable economy. And it's going to be a profit driven venture where we will invest in green tech projects in combination with Hexagon Technologies. And with that, we've come to the summary for this quarter. If we go to the summary page, 11% organic growth, continued strong development in Geosystems, acceleration in MI, strong recovery in China, 73% organic growth. So all in all, it's a record Q1 on sales, EBIT and cash entry. And with that, operator, I am ready to start the Q and A session. Thank you. We have a question from the line of Magnus Kruber from UBS. Please go ahead. Your line is open. Ola, Magnus here with UBS. A couple of questions from me. First, could you give us a bit of color on how the Growth progressed through the quarters in Mi and Geosystems. And ideally, how if you can give some color on how April has started, that would be very useful. I think Geosystems ended last year on a strong note, and it continued and accelerated into Q1. Mi is later in the cycle and continued to improve month by month in the Q1. Got it. Thank you. And on the very solid margins in the geospatial in the quarter, how should we think about the margin Seasonality through the year given it's very strong first quarter print. Yes. I mean, we don't typically have seasonality like that. We typically have weaker margins, I should say, in the Q1. However, this year, we don't seem to have started the year with weak margins. So we'll see. Got it. Thank you. And finally, If you could talk a little bit about the supply chain at the moment, any component shortages or bottlenecks that you see so far? We can't say that we've suffered greatly, but we've seen shortages of electronics components in the supply chain, but it hasn't had a material impact on our operations. Assurance, and we do not believe that it's going to have a material impact going forward, but either. Perfect. Sounds good. Thank you so much, Ola. Thank you. Our next question comes from the line of Stacy Pollard from JPMorgan. Please go ahead. Hi, thanks very much. So two questions for me or maybe 3. China is booming, so how much of that was some catch up Or is it just really strong underlying demand that can be sustainable, okay, maybe not 75% or 73%, but is this just really strong demand in a Solid long term way coming from China. 2nd question is maybe PP and M. I know it has much easier year on year comps as you go into Q2. Do you think this could be the turnaround quarter? Or are the challenges in oil and gas just too much still? And third question is really a follow-up on the margin. I know you don't give the detailed guidance, but is it right to think that Cost savings program was already showing benefits in Q2 of last year. And therefore, we should think of something more normalized Year on year increase range like instead of big leaps forward. Yes. If we start with China, it's obviously so that since China contracted by 40% this time last year, it's got easy comps. But there is an underlying growth and acceleration in growth that is coming from new activities, new projects, new solutions, which is going to propel growth in China for hopefully the remainder of the year. Maybe not, as you said, at 73%, but definitely good growth in China in 2021. If we look at PP and M, we believe that It's a second half story. We think we will still see weakness it in the Q2. But as of the Q3, we might see a more normalized situation in that market. And let's see what was your 3rd, it was on the cost savings. Yes, on the margin. Yes, the short term cost savings were at their peak in Q2 of 2020, but we didn't see much long term savings. And in the second half of twenty twenty, we saw short term savings being replaced by more longer term savings. So Yes, I think this would be the best quarter comparing Q1 cost structure against Q1 cost structure atorof21. This is obviously the quarter where you would see most of the cost savings in 2021. Okay, thanks. Thank you. Our next question comes from the line of Joakim Genel from DNB Markets. Please go ahead. Thank you so much for that. So Perhaps just a follow-up on your North American business and the somewhat challenging and Have you seen can you just comment a bit on the month over month development in North America for the submarkets where You had somewhat of a challenge to grow. We see a weak start First of all, one must remember that North America grew by 6% in the Q1 of 2020. So It was the only area in the world that grew for Hexagon this time last year. So When we look at comps, it's much easier for both EMEA and Asia to beat Q1 of 2020 than North America. But having said that, we do see a recovery in general engineering, general manufacturing in North America, and we do see a recovery entering in North America. And we do see a recovery in the automotive sector that is improving month by month. Aerospace has been weak up to now, but I think we do believe that Aerospace has hit bottom and is slowly recovering. Very clear. And Just the final one. Can you comment a bit on what your ambitions are in terms of new product launches here for the full year and how much that and I believe that this year, the big launches will come in the 3rd quarter, And the big benefit from those launches will only be seen in Q4, but it could be interesting and relevant numbers. All right. Thank you. That's all for me. Thank you. We have a question from the line of Erik Kollern from SEB. Please go ahead. Thank you. I've got three questions. First one, returning to GE Systems and the very strong growth there. You mentioned new solutions towards the end. Could you elaborate a bit more on that. Is that the back series, various situations there, GS18, I perhaps, what are the big drivers there? It's all of them that drove growth. But within Geosystems, you also have Business like our imagery program, mining and so forth, and that also launched new products in the quarter. And if we think of the more software focused platforms there, I guess, you just mentioned them. But are they growing as fast? Or is this more of a traditional hardware expansion? Okay, okay. And no, we saw growth, but I think that commentary goes through our Hexagon that hardware actually outgrew software in the quarter simply because software didn't contract as much last year. Very good. And then returning to the seasonality, Is there any reason to expect something else than normal sales seasonality into the Q2? No, I don't think so. Not I mean, we haven't seen much of the second quarter, but we have the April numbers. Average. And there is no reason to believe that this second quarter would be different than the normal second quarters. And then two more questions. The balance sheet is obviously growing stronger by the day. Debt versus profit is That was we've seen in a very long time. So any color on the M and A pipeline? And then the last question, I got to ask on the collaboration with Boston Dynamics. Is that a proper material business case behind that or more of a gimmick? As we start with Boston Dynamics, we believe that to be the future, we believe that you will see robots like that in all sorts of industries ranging from mechanical engineering, manufacturing to construction to security applications and so forth, Not necessarily just the dog, the spot that you saw in the picture, but there are other solutions as well. And then you have the balance sheet and M and A. Yes, and it might happen. It might happen. You previously said multiples Were high, any change there? Any sort of refocus on targets or No, we prices are still high for quality assets. If you're looking for SaaS as business with recurring revenue and strong double digit margins, then you have to pay a lot for those assets. And that seems to continue into 2021. Thank you. Thank you. Our next question comes from the line of Mohammed Mawalla from Goldman Sachs. Please go ahead. Great. Thanks very much. Hi, Ola. A couple from me. Firstly, I may have missed it earlier, but could you remind us kind of what was the mix of the software growth versus the hardware growth around the Kind of 11% group growth that you did. And then secondly, as we think about both PPMM and Geosystems, Do you think that so with Geosystems we're kind of hitting now the sort of peak growth around Q2 and thereafter we kind of revert back Trend or is the activity in China so robust that double digit growth can continue? And on PP and M, I know that you've sort of cautioned that the market is weak, but can that business return back to growth by the second half for the year? Or is that too optimistic? Thank you. I think that first of all, software grew at roughly 5% organic growth. So hardware, as I said previously, outgrew software in the quarter. So that was the first And then you had a question on PP and M. And yes, we believe that PP and M will return to growth, but it's probably a story for the second half of this year and not in Q2. And then you had one more question. Yes. On Geosystems is doubled. Do you think this growth rates can continue in the back half when we start to normalize the trend growth then? Well, I mean, since we don't give forecasts, I guess I have to repeat what I always say, and that If you're alive in the future, you will see. Okay. Thank you very much. Thank you. There are no further questions registered. So I hand back to the speaker for any closing remarks. Yes. And thank you, everyone, for listening in to this Q1 call, and we're going to do this again late July. So goodbye.