M&A Announcement

Jul 6, 2021

Welcome to the Hexagon Conference Call. I'll now hand the floor to our speakers. Please begin your meeting. Thank you, everyone, and welcome to this answer. Conference regarding the agreement to acquire Inforce EAM Business, where EAM stands For Enterprise Asset Management, if we turn to Slide 3 in the presentation, We can view EAM's business at a glance. It's a SaaS revenue business model. And the CAGR The SaaS revenue CAGR is roughly 35% for the last few years. The total revenue in 2021 is answer. €184,000,000 and the cash conversion is 110% in this business model. We are slightly north of 40% when we do the adjusted operating margin for the business. Answer. And at the bottom, you can see the revenue split per revenue answer. So SaaS is roughly 40% in 2021, but it's rapidly replacing answer. Actual licenses. Geographically, it's dominating the revenue with answer. Mostly in North America, which is a huge opportunity for us, obviously. Customer revenue, top 10 customers only represent 10%, and most of sales are done directly through answer for the old sales force. If we move to Slide 4, In for EAM is a answer. Best in class SaaS based EAM solution. And what you use it for is to manage critical assets answer. And to digitalize many of our operations. And it enables customers in nearly any industry to reach answer. Optimum operational efficiency in their manufacturing or operational kit. Answer. It's the foundation of digital innovation in asset intensive industries, and we're going to connect it to our answer so called digital realities. And that's where the synergy lies with Hexagon. I'm going to move to Slide 5. The total addressable market answer. It's roughly SEK 3,400,000,000 by 2020 answer. It's a very, very sticky business model. It's once you've installed answer. The EAM system, you typically keep it. And Gartner recently made an assessment answer. All the various players in the market and they put in for EAM as the absolute leader answer. And you can see all the other players in the market in the quadrant. Now if we move to Slide 6, let's talk about Hexagon answer. We have since long talked about our strategic feedback answer. Everything is becoming digital, and we talk a lot nowadays about digital answer. So Hexagon's business idea has been to connect sensors on the left hand side that captures answer. Just the real world in 3 dimensions, collect the data, feed the data to analytical tools, answer. I. E. Software platforms on the right hand side. And then you interact with the real world answer. Based on the conclusions you draw on the right hand side and you change the real world. Answer. Trying to automate these sensors. And you can see examples of automatic sensor or data collection answer. To the left, it's a collaboration with Boston Dynamics, where we put laser scanners on the back answer. On that, Tom, it's the DNA 20 fourseven that is capturing data answer. And as we collect that data, We've also, in parallel, built a very strong analytical portfolio of software assets to the right. Answer. And In for EAM fits into this wheel of information, answer. As you can see from Slide 8, it's really the interaction and the change answer. Once you've done the analysis. So In for EAM, it's going to be seamlessly integrated to our answer. Platforms in our various divisions, anything from SmartPlant to SDX to MSC's suite of analytical tools. And then it has the ability answer. And then it has the ability to generate automatic work orders either to humans answer. Or in the future, to these sensors that you see to the left. And this is how we move towards autonomous ask. Answer. So in for EAM is a vital piece in this never ending feedback loop of information answer. So if we move to Slide 9, we see answer. Synergy opportunity of roughly $100,000,000 between Hexagon and EIM for EAM. And it's going to be realized gradually answer. Starting from 2022, and it's going to mature by 2026, where we guesstimate it's answer. It's going to be roughly SEK 100,000,000. But we see synergies in industrial Facilities in manufacturing, in infrastructure solutions as well as buildings. So It's touching almost all of Hexagon's business today. If we move to Slide 10, I want to give you an Example on industrial facilities, where you might have a refinery or a power plant answer. At the bottom left hand side of this picture, you have a pressure sensor, censoring that something is happening to a answer. And our SDX, our PPM SDX product can localize that answer. And highlight where it is. It will now generate a signal to In for EAM, on. But in turn, we'll generate a work order to the service engineer. Answer. And in this case, it might be to send a spare part, a new valve to Section 2 in this answer. Finally. I'll give you another example on Slide 11 in the manufacturing space, I. E. Automotive, answer. Aerospace electronics, you've got the manufacturing machine, the gray machine to the bottom left that makes, for answer. And you've got our metrology machine, CMM, that measures answer. And capacity gains the original CAD drawing, and that's what's happening at the top right. Answer. And if you have that red line, everything is okay. But if it looks like the blue line on the top of answer. You're out of tolerance. And then you generate a signal to In for EAM. Answer. And in for E and M will generate a work order where it could be 1 out of 2 things. It could be the tool that is worn out, answer. So replace the tool or it could be that the machine is out of calibration. And we can detect that answer from our metrology software, and we can now automatically generate work orders on the answer. Slide 12, let's take utilities and infrastructure. Answer. Think of a large power line where you have an outage. With sensors today, you can measure and geo reference answer. Where the outage is happening. And we can visualize that with our GIS systems on a map that you see to the answer. Exactly where the outage is. And if we now connect that geo referenced outage ask. 2 in for EAM. We can generate an automatic work order to send a crew to, in this case, somewhere in Manhattan answer. Finally, buildings, eco systems and how we can generate automatic feedback answer. Let's say the air conditioning is down in this building and we geo referenced that answer. In our BIM model, we can automatically generate a work order through in for answer. To send the service technicians to that floor. And with answer. SDX and other software solutions, we can also tag automatically tag spare parts to answer. So it's a never ending feedback loop of information flowing between the real and answer. To the analysis that you've done in the Hexagon software. If we now move to Slide 14, we also Communicate long term commitments today. The first partnership is between the In for group, like answer. RP software and Hexagon, where we have a strategic partnership to resell answer. Products between Infor, the Infor Group and the Hexagon Group. But we also formed a strategic alliance with answer. Coke Industries, that is one of the largest industrial groups in North America. And Coke answer. Just for Hexagon through Mr. Brett Watson, who is President of Coal Equity Development. So we really look forward to developing these strategic partnerships and alliances further. Moving on to transaction details and financials. If we go to Slide 16, we answer. Acquire in force EAM business for a transaction value of 2.7 answer. $150,000,000 $800,000,000 are paid in cash, and the balance is answer. Paid through the issuance of EUR 132,600,000 new Hexagon Class B answer. And at the end of this, Coke Industries will own 4.9% answer. Of the equity in Hexagon. And the net debt to EBITDA after this transaction, answer. Pro form a is estimated to 1.75 times EBITDA. Answer. Recovering revenues are north of 70%. The SaaS revenue In 2021, it's roughly 40% but growing. And Retention rate 110% to 115% and CAGR SaaS answer. Bookings is growing at 60%. Revenue overall will grow somewhere north of 20%, answer. EBIT margin somewhere north from 40%. So if we summarize Everything we've been through today, it's a best in class SaaS based EAM answer. The software platform that we're acquiring, it's market leading in its segment. It's purpose built, Highly configurable, got world class modern architecture that works with all device answer. And we're going to we now we'll be able to move from the traditional EAM to what's called Asset Performance Management, APM. We see company wide synergies throughout the Hexagon Group. We answer. Revenue synergies to be roughly €100,000,000 5 years from now. And we see a lot of diversification into new verticals for Hexagon. And as I said, it serves all of Hexagon's answer. We're forming a set of partnerships with both Infor and answer. Coke Industries. And Coke will join as an active shareholder on the Board answer for the Hexagon. It's also going to enhance our profitability profile. It's accretive to Hexagon's adjusted operating margin on. And earnings per share as of closing, including the newly issued shares. And it increases our recurring revenue and answer. And it accelerates our SaaS transition across Hexagon. So with that, Our first question comes from the line of Adam Wood of Morgan I've got 2, please. The first one is really just to understand what's going on with underlying growth in the business. It's often difficult for investors to get a view of what's underlying when you've obviously got very fast SaaS growth, but part of that is driven by cannibalization of the on premise business. I think Gartner expects this to be a answer. 7% growth market in the midterm. Could you maybe just help us a little bit as we come to the end of this SaaS transition, what you think this business is capable of answer. On a kind of underlying growth excluding the shift from one side of on premise to SaaS on the other. On. And then maybe secondly, could you help us on the pace of integration? How quickly can you integrate this technology answer. Into the businesses you want to integrate it to? And how dependent are you on that to deliver the revenue synergies? Thank you. If we start with the second, obviously, integration is critical to deliver synergies. We don't expect that to be too dramatic. Answer. And we've done a lot of studying of this asset before we finally acquired it. So I think as of next year, 2022, we're going to start seeing revenue and profit synergies trickling through our P and L statement. The The underlying growth for EAM is higher than the market growth. You're answer. Absolutely correct that Gartner believe the market growth is at 6%, 7%. We're seeing a double digit answer. And for the next 5 years, it's fair to say that we believe growth is going to be more answer. High teens or even 20s. Perfect. Thank you very much. Answer. Thank you. Thank you. And the next question comes from the line of Stacy Pollard at JPMorgan. Please go ahead. Your line is open. Answer. Thanks very much. I guess one of my questions is a little bit similar to Adam. And when you look at the $100,000,000 in synergies, answer. I did the same. We sort of put that on top of the underlying growth of 10%, just to be clear. So that is on top of the underlying. And then secondly, My question about how should we think of the phasing of those synergies? You said to start by 2022, but is it fair to assume that it will be quite back end loaded towards answer. As it really flows through. And then second question, what is the impact on EPS? You did mention accretive. I have to be honest, my first quick stab was that it makes my model slightly dilutive. So maybe could you clarify the PPA? Because I think that might be the difference. Answer. Yes. No, we haven't included PPA in the model when we say it's accretive. Answer. So can you say what PPA will be or approximately? We don't know exactly Because we haven't done the opening balance sheet, but approximately SEK 25,000,000 per annum. So you would still get accretion, answer. But not the 1st year. Got it. And then the timing of the synergies? Answer. I think if I'm not mistaken, it's now we believe it's the Palace straight. It's a straight line realization of the synergies. So I mean, it's going to be less or around 10% of the total answer. And then gradually grow up to EUR 100,000,000 by 2026. Answer. Got it. Very useful. Thank you. Thanks. And Our next question comes from the line of Mohammed Marwala of Goldman Sachs. Please go ahead. Your line is open. Great. Thank you very answer. Congratulations on the deal as well. I had a couple as well. So Ola, as we think about sort of extracting that growth rate on a steady answer. More in the kind of high teens or 20s. Is there anything from a go to market that you need to change because often Kind of the buyers can be different. And are there any specific verticals where you see the kind of the biggest opportunities answer. Around extracting those revenue synergies perhaps in the near term? And then secondly, could you comment a bit more how on the competitive ask. This changes because obviously you have SAP, Oracle, IBM is in the space as well. Do you see this mostly as a kind of install base Sell opportunity or would you look at also kind of the greenfield opportunities? I I think you've got 2 things going on. 1st, you have the traditional business situation that EAM faced answer. Before Hexagon acquired it, where you had almost competitors that you just mentioned. And EAM is answer. Failing well against them when they compete. It's a modern product. It's SaaS based and it's very configurable and it's easy to implement. So I think it's fair to say answer. That EAM is gaining market share in this market. Then on top of that, we open answer. New channels, new distribution channels through PPM, through SG and I, through GEOS answer. And so to and my to their customers, where we will sell it as a combination With our current product offering. Okay. And can I clarify also in terms of you talked answer? Now being the product being kind of modern best in class, Inforhead obviously done a lot of acquisitions. So has the product Completely rewritten or has there been elements of it that have been transformed just to better understand answer. No, no. This is a completely, I wouldn't say rewritten. It's newly written answer. Correct. The platform is brand new. Okay. Thank you. Answer. Thanks. And our next question comes from the line of Alexander Virgo, Bank of America. Please go ahead. Your line is open. Thanks very much. Good morning, everybody. So I wanted to just talk a little bit about go back to this integration point answer. And I'll ask just how you see it fitting in the portfolio. Where do we put it, I suppose, in terms of accounting? But also, It sounds like this business will end up touching across the whole of your portfolios. And the concept of your autonomous connected eco answer. This sort of really continues the integration of the portfolio that AC strategy has started. So I just wondered if you could talk a little bit about how This accelerates the evolution of that, the delivery of ACE. And then just practically speaking, where do we model it in terms of answer. And then final point final question, I'm sorry, just to clarify on SaaS. It accelerates your transition to answer. SaaS and the existing portfolio, I wondered if you could give us the number that, that is at the moment. Answer. Yes. So if we start with where it's going to reside, answer. It's going to report into PP and M, so it's going to be within our industrial segment. Answer. Over time, obviously, it's going to find its way into geospatial as well. And I believe, answer. Like 3 years from now, it's hard to say where the lion's share of the EAM business is going to be because we expect it to answer. We integrated in our business model. So answer. And we don't we haven't disclosed the SaaS business in the core business today, but answer. That's a great question for the upcoming Capital Markets Day in September. I think we'll come back to it then. Answer. Thanks, Ana. Thanks. And our next question comes from the line of Benoit at Barclays. Please go ahead. Your line is open. Great. Good morning. Thanks for taking my question. It looks like that SaaS over Last year was only driven by license substitution. And my question is, should we expect a maintenance migration also going answer. And then secondly, I would like to come back to the integration examples you mentioned. It seems to me that, EEM really will Great work orders on top of your existing solutions. Isn't that something quite simple actually that If you could build yourself, why is that something you didn't want to do organically? No. It's not simple if you start answer. There, it's actually quite complicated. And that is a very good topic answer. For the Capital Markets Day, how EAM is actually working and interacting with large operational assets. Answer. So we can come back to that. You are correct to the extent that, of course, both maintenance and answer. And perpetual licensing is cannibalized by the SaaS model, maintenance to a much lesser extent on. Sorry, then perpetual licenses. We believe maintenance might be flat for the foreseeable future. Okay. So you're not planning to move existing maintenance cost over to the SaaS solution in the foreseeable future? Answer. No. Okay. That's clear. Thank you. Thanks. And our next question comes from the line of Magnus Kruber at UBS. Please go ahead. Your line is open. Magnus here with Yes. Thanks for taking my questions. I mean, most of the customers would have bought EAM as part of a wider ERP deal with Inforce. So how are you going to answer. And to upgrade in tandem with the In for? And will you go to market with them and so forth? Any thoughts around that would be answer. We will go to market with them, but it's actually a very small overlap, and it's very seldom you buy answer. Bundled with the ERP. This is typically a standalone decision with the customer base. Answer. So we were compatible with other ERP programs like SAP answer. And the others in the market. Got it. That's very good, obviously. And then Secondly, I think you mentioned 40% operating profit margins in the release after integration. Just to be clear, is that before or after after we deduct the PPA. It's before PPA because we don't know the PPA today. Answer. But we've got to make the PPA to €25,000,000 per annum roughly. But that's the estimate answer. Yes. That's good enough, obviously. And then just finally, obviously, the CHF 100,000,000 synergies is a quite answer number. Could you give us a sense for sort of how you went about deriving that? Answer. We do what we always do. We make a business plan. So it's synergies that are specific for manufacturing, discrete manufacturing. Answer. We have synergies for China, for EMEA, Geosystems, answer. SI and PPM. And when you summarize it up, that's where we answer. Excellent. Thank you so much. Looking forward to see how this develops. Thank you. Thanks. Thank you. And the next question comes from the line of Erik Golrang of SEP. Please go ahead. Your line is open. I have two questions. The rest have been asked and answered. The first one is on The sales potential in the strategic alliance, is that in any way included in the EUR 100,000,000? Or is that something that would come on top? If you could sort of give a sense for the potential there. And then the second question in your decision here, how you split the funding of this between cash answer. And new equity, was that coming from sort of a desire to bring in Cocos As an owner or to keep a strong balance sheet, what are the levers you looked at when you decided how to fund this? 1st of all, if we talk sales potential, no, there is nothing included From the strategic alliances, Coke Industries is a very interesting business. They span from pulp and paper into oil and gas and discrete manufacturing. And There are a lot of areas. I think the value is roughly $100,000,000,000 for the operation. So we really look forward to explore that potential. And when it comes to the split, We want to keep a strong balance sheet. We believe there are opportunities still in the M and A market answer. To expand further for Hexagon, and we also believe that it's advantageous for us to strike this alliance with a very answer. Strong U. S.-based owner. Have they expressed an interest to increase that stake further? Answer. There is no such discussion right now. Thank you. Thanks. Thank you. And we have one further question in the queue. And that question is from the line of Victor Hochberg of Danske Bank. Please go ahead. Your line is open. So on the pending approval, do you think it's just customary? Or could it be any amendments that you would have to make for this to go through in Q4. No, I think this is just customary, but on. You never know in this world. But up to now, I mean, we don't have any overlapping businesses and answer. There shouldn't be any cause for concern. Okay. Answer. And the integration costs, is that going to be taken then in Q4 if you integrate the company? And what kind of level of costs are we talking about? Answer. We don't know that at this stage. But since we believe that we'll have all necessary approvals by October, I guess The Q4 is a good guess. Okay. And could you say this being a SaaS business, could you say anything about their net Revenue retention or share metrics or anything else which you could add on top of the presentation? The retention is I mean, it's 115%, I believe, we state in the Yes. SAAT net retention on Slide 17, 110% to 115%, and that includes the churn, And the churn is less than 4%. Okay. That is good. And what's the what would you say The scalability in this model would be when you approach the SEK 100,000,000 in synergies in a couple of years' time, if it's above 40% today on EBIT answer. I think we haven't said how much above 40%. So I think if we stick to 40% plus answer. In 2021, we can come back to that when we realize the synergy. Okay. Answer. And just a last question on the pickup in revenues and the SaaS based revenues in 2021. What was the driver for that one? Answer. No. It's a combination of market share gains and the conversion from perpetual to fast. Answer. Okay. Thank you very much. Thanks. Thank you. Answer. There There are no more closing comments. Thank you very much for listening in, and it's going to be exciting to start answer.