Hexagon Ab B Shs New

Welcome, everyone, to this third quarter of 2021. If we move straight to slide four, the overview of the quarter. We grew by 15% recorded, 10% organic growth, and the bridge is M&A contributed with 4%, currency 1%, and organic growth 10%. Sales netted at 1,077,000,000 and EBIT came in at 28% EBIT margin. If we then move to slide five, just a reminder that Q3 is our second weakest quarter in the seasonal pattern where Q1 is the weakest typically and Q2 and especially Q4 are strong quarters. Moving to slide six, key figures for the third quarter. Net sales amounted to $1,077,000,000. And as I've just stated, earnings won or EBIT won $297,000,000, which is 19% better than the corresponding period of last year. We've got the nine months. Numbers on slide seven for your reference. And moving on to cash flow. Cash flow from operations before changes in working capital improved and was quite strong in the quarter. We had the setback in working capital where prepaid expenses was the single largest factor in the working capital buildup in this quarter. Investments were along the lines with our plan for 2021, so nothing abnormal there. And the cash conversion was 79% in the quarter. Moving on to slide nine, we can see that we're still at very low levels when it comes to working capital to sales, slightly shy of 6%. in the third quarter, but up from the 3.8% we recorded in the second quarter. Market development, if we move to slide 11, not much has shifted in the sales mix. We do see China up 1% in terms of mix, and the rest of Asia packed down 1%. The rest remains stable. And as you can see, we have one-third of our business in each region around the world. Slide 12, trends for organic growth per geographic region. North America, Western Europe, China, Asia, and South America all report above 8% organic growth. The only area with slightly lower organic growth in the quarter is Eastern Europe, Middle East, and Africa, where we had strong water intake and sales in Africa to the mining sector in the third quarter. Slide 13 is for your reference for studies later on. Slide 14, EMEA market trends. solid growth in Western Europe where we see 11% organic growth. And it's a combination of the recovery in the construction, the larger construction and infrastructure sectors, which is driving demand for surveying and engineering products. We also see a continuous recovery in the manufacturing sector automotive and aerospace across Western Europe. Weaker development cited in Spain and France for the quarter. Already commented on Eastern Europe, Russia, Middle East. Russia is driving that growth. Eastern Europe was also strong while Middle East Africa was slightly weaker. Moving on to America, slide 15. North America recorded 8% organic growth with strong demand in infrastructure surveying and construction. We also saw a return to growth in the manufacturing sector as well as power and energy. We saw weakness in our defense-related business connected to FI. South America recorded double-digit organic growth, strong development both in the Andean countries as well as in Brazil with a super strong double-digit growth. Moving on to Asia, slide 16. China recorded 10% organic growth, and it was a combination of a recovery in several sectors but also a strong underlying demand. from the manufacturing sector, broad-based manufacturing, anything from electronics, electric vehicles, aerospace, and general manufacturing. Tough comparison numbers for infrastructure and construction that recovered already in the third quarter of 2020, and we saw strong growth already last year in China. Japan, New Zealand, Australia, India all recorded double-digit growth. So did Southeast Asia, where we are beginning to see a recovery in the shift from manufacturing in mainland China to countries such as Vietnam and Malaysia and Thailand. South Korea was the only market that recorded decline. in sales due to weakness in the power and energy sectors. Reporting segments, if we move to slide 18 and discuss geospatial enterprise solutions, organic growth for this segment was 10% in the quarter. And within that segment, we saw geosystem surging at 16% organic growth. driven by strong demand from all core markets for geosystems. SI minus 6% organic growth, and that was the weaker US defense demand in the third quarter. Autonomy and positioning, 8% organic growth, strong growth in precision agriculture segment for the quarter. Sales amounted to 552 million, up from 487 million previous year, and EBIT margin was 30.3%, up from 24.4%, almost 2% improvement in the margin in the quarter. Moving to slide 19, industrial enterprise solutions, organic growth, The mix is MI growing at 13% driven by the strong recovery in general manufacturing, automotive, electronics, and the software portfolio. PPMM returned to growth in the quarter and recorded 2% organic growth. And it was primarily driven by a recovery in the North American market. and solid growth in our asset information management portfolio, as well as the AEC products. Sales amounted to 525 million, up from 453 million last year, and EBIT was improved by 0.1% to 25.5%. Now, the growth margin on slide 20 continues to improve. This is the 12-month gliding average. So, we record 64% for the last 12 months, up 1%. If we move to slide 21, it's good to see that we're now within our target range. We've passed 27% EBIT margin for the last 12 months. And we're continuing to improve the margin. Talking a bit about M&A, orders and product releases in the quarter. It was the big quarter we acquired Immersion on slide 23. Immersion is a pioneer in spatial mapping and visual positioning. And what they do is they do something called spatial anchoring technologies. Spatial anchors is basically the way we navigate being humans in our surroundings. And Emotion uses that same technology and we will now embed this in our Hexagon products going forward. Slide 24. Enhancing materials management capabilities with Jovix. Jovix was acquired during the quarter and it's an award-winning material tracking software that is developed specifically for the construction industry and that will be integrated into our construction portfolio. Slide 25, we did an acquisition in China in the quarter as well Wuhan ZG technology was acquired. ZG technology provides 3D digital solutions based on background of photogrammetry and remote sensing disciplines that Wuhan University has developed. And this will strengthen our position in industries like auto, aerospace, 3D printing, biomedicine, rail, heavy machinery, and so forth. Slide 26. We had a big launch of autonomous sensors in the quarter. We introduced Leica BLK Arc and Leica BLK to fly. And BLK Arc is initially based on the Boston Dynamics rover or robot. but it will deliver a fully autonomous mobile laser scanning solution. Leica BLK2Fly is the first fully integrated autonomous flying laser scanner. We don't call it a drone. It is a flying sensor. And the beauty about it is that anyone can use it. With a few simple taps on the tablet computer, you can quickly learn how to operate both the ARC and the BLK2Fly. And this is seamlessly integrated into our cloud-based software HXDR. Slide 27, introducing hexagonal line meshes. Hexagon Mine Mesher is the tailored solution that combines BLAST design software with drilling and BLAST movement monitoring. It brings accuracy and precision to every step of the drill and BLAST process in mining operations. Slide 28. We've also introduced a new rail security and surveillance portfolio. It's from the BLK series. And we call it rail security and surveillance. Slide 29. The Hexagon Content Program also launched a new functionality, and that is digital twins of major cities. It's an off-the-shelf product where if you're interested in the city, you can buy that in 3D, 2D or 3D. And it will enable users to better manage and monitor critical assets within those city centers. And assess risks, provide visualization of new projects, and so forth. Slide 30, accelerating autonomous quality assurance. Hexagon launched our HXGN robotic automation. which is the new robotic programming and control software that enables non-specialist quality professionals to program industrial robots to perform fully automated quality inspection. Slide 31, we launched a product called HDL-1010. And this is a small revolution when it comes to measuring blitz and blade applications, which are crucial for anything from wind power to turbines and aerospace engines. Slide 32, we're also supporting India's new bullet train project. There will be a corridor operated between Mumbai and Ahmedabad. And the train will travel at 320 kilometers per hour. And they used our surveying total stations and levels to do precise alignment, which is crucial for high-speed rail. And we proved it in several markets, among others in the Chinese build-out of high-speed trains. Slide 33. Hexagonal on-call continues to reach success in the market. We had several orders in the quarter, among others in Bahia, one of the largest states in Brazil. But we also had an installation to monitor traffic in Sao Paulo. I'm moving to slide 34. We've also helped Yamaha Motor to simulate an unmanned helicopter in the quarter. Yamaha Motor was in need of a robust solution to accurately simulate the fluid and structural performance of unmanned industrial use helicopters, and they choose our simulation tools to do so, and we streamlined the efficiency and the cost-effectiveness of the platform. Slide 35. Lane Shine Minerals in Laos has used Hexagon's Mine Operator, OpPro and Mine Enterprise to assist in the process of transforming this from a copper to a gold-focused mine. Slide 36, building an end-to-end engineering digital twin. Harbor Energy is UK's largest independent oil and gas business. Now, they had legacy solutions to track their asset performance, and they turned to Hexagon to help to standardize these processes and enable multiple external and internal uses. to work concurrently and collaboratively within a single controlled environment. So they choose Hexagon SDX as the basic platform and several add-on solutions to create this digital twin. Slide 37, Numaligria Refinery choose Hexagon as well to support its digital twin. And this is a trend that we see more and more in plant assets, that you need to digitize your processes. They also choose Hexagon SDX as their platform for digitalization. Slide 38. we're introducing a new car body positioning system, which is very important in automotive factories. Vipo 6D car body positioning system is using something called six degrees of freedom to position car bodies against industrial robots. And this system enables robots to adjust positions in real time, mitigating inaccurate positions which can lead to collisions or failed quality, and simply avoid collisions between robots and the car body. Slide 39, robotic cells powered by Hexagon's technology is helping to inspect challenging components. In this case, it was Skoda Auto in the Czech Republic that needed to switch from so-called tactile measurement. to optical measurement technologies to increase throughput and overall efficiency, but without sacrificing the accuracy of the system. And they used our robot automation software to do so, and our optical metrology sensors. So that was the summary of this quarter. And if we now turn to the final slide, slide 41, we have a record third quarter in sales and operating earnings. It is actually the second strongest quarter ever in the history of Hexagon. We did see supply constraints of certain components. That hampered the growth and profitability, and we estimate that to a 2% impact on growth in the quarter. We also hosted a capital markets day where we launched new financial targets. We've stated that between 2022 and 2026, we will, in average, grow by 8%. 12% per annum. The split will be 5% to 7% organic, 3% to 5% structural growth, and we will achieve an EBIT margin above 30%. And with that, we've come to the end of this presentation, and we now open up for questions, if there are any.

Thank you. So if you wish to ask a question, please press 0 and 1 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 0 and 2 to cancel. There will be a brief pause while questions are being registered. The first question we've received is from Joaquin Gunal. EMB markets, please go ahead. Your line is now open.

Thank you for that. Good morning. So if you can perhaps help us a little bit more with regards to the commentary here on the sequential development of the supply chain constraints and more in particular what that alludes to and what the mix shift you see for both, I mean, what's the differences between the your different business segments here. If we start off with geospatial, which seems to have weathered this better, and industrial as well. Thank you.

Yeah, no, it's difficult to say because the situation is moving every day. We're trying to redesign components to be able to use other suppliers, but we're suffering from in principle, the same problems as everybody else, silicon wafer-based components. And that is touching our ANP and our geosystems businesses primarily, whilst obviously software businesses are not impacted to the same extent as these hardware-driven businesses.

That's helpful. And can you also on that backdrop perhaps say or comment about how fast software was growing here in Q3 year over year versus hardware and services?

Software was growing at a slightly lower rate simply because it's very much recurring revenue. And in an upturn, in a cyclical upturn, non-recurring revenues tend to grow faster than recurring revenues. So slightly lower than the 10% average, and hardware was growing faster than the 10% average.

Very clear. And just a final question here with regards to the organic growth ambitions from the CMD. Can you talk a bit about how this slightly higher ambitions on organic growth bridges with an ambition to drive more of a, call it, fast transformation? I mean, basically... further down the line replacing perpetual software licenses into subscriptions?

No, I don't see that as a conflict. We basically think that the global markets, our end markets, will perform slightly better and that they are slightly more imbalanced over the coming five years than they were in the period 2016 through 2021. And what I'm alluding to is really the energy markets where we believe we will have a more steady demand from our customer base in the energy markets compared to the previous five years. That will in turn fuel manufacturing and construction. So that is the outlook, really.

Understood. Thank you.

The next question is from . Please go ahead, .

Yes, thank you for taking my question. Good morning. A question about TPM. They grew by 2% in Q3, and can you talk about the growth per product category, maybe, and your end market development in Q3? Yeah.

Both AIM and AEC. grew at strong double-digit growth in the quarter. And then we had a contraction in the ETC-related market where we sell software to ETCs. And we had a slight growth in what we call the owner-operator market in oil and gas or energy.

Okay. And Do you see the ETC side and the owner-operator side as more trends going forward that will continue, or do you see a pickup there as well?

Our view is that over the next five years, growth is probably going to be challenging and slow in the ETC segment, but we do see growth in the owner-operator segment going forward, and we do believe that AIM, especially in combination when we include Infor EAM in that product portfolio, will grow strongly together with AEC. Okay, just a final one. So you can see a mix shift over the next five years.

Okay, got it. And just a clarification, can you say how much asset information and AEC? or I'll present all the segments of revenue in total, approximately.

I can, but bear with me one second. Okay, I am...

It is roughly 20% now.

Okay, great. Thank you very much.

And it's going to grow further when we consolidate in for EAM. Okay.

Okay, thank you. Then we go to the next question. This is from Katinka Rukasa, JP Morgan. Please go ahead. Your line is now open.

Hi, thank you for taking my question. Defense and public safety still seems quite weak. So could you provide more color on what happened in those end markets?

Yeah, public safety was not weak. It was our defense related where we have a We have a classified business where we sell product into the U.S. defense, and that was weak in the quarter. But the public safety business actually grew in the quarter.

Okay, got it. And which of your products are really driving the demand? You also had some launches this quarter. Can you comment on the early traction you're seeing for these products?

For new products or?

Yes, for new products indeed.

I think it was pretty much the product that I showcased in my presentation. You see a range of industrial solutions where we improve the efficiency for anything from electronics to the manufacture of cars over to construction and infrastructural solutions as well as mining solutions. It was a pretty strong quarter across the board for most products, and I wouldn't call out any new product because this is a broad-based recovery that we see from very low levels of activity in the global economy, and we shouldn't forget that, that 2020 was a bad year. So it is really the recovery we see, and it's across the whole industries, really.

Okay, got it. And then final question, just coming back on the component shortage. Can you quantify what you thought the impact was on margin this quarter and how we should think of that next quarter?

The impact was 2%, which translates to something like 20, 25 million top line. And obviously, when you have everything paid for in a quarter and you lose out on the margin, 20, 25 million, the incremental margin on those millions is very high indeed. It is very close to what you see our growth margins are.

Okay. Thank you very much.

The next question is from Sven Mert, Barclays. Please go ahead. Your line is now open.

Great. Good morning. Thanks for taking my question. I have first a question on the demand environment. To what extent do you believe is the demand you are currently seeing at least partly driven by customers bringing orders forward just because they expect longer delivery times as a result of, you know, overall constrained supply chains? And then secondly, you started another share-based compensation program. Should we expect share-based compensation will further increase in the future as you use this more heavily as a compensation tool?

I think, first of all, no, we don't see any customers bringing orders forward. Our products are not products that you bring forward. You buy them when you have a need. So I don't see that. And our share-based compensation, we did not introduce a new program. It's a part of the program that we launched at the AGM one year ago. It's a four-year program that will run over the next four years.

Yeah, I meant that you added a second element to that. That's why the share-based compensation now increased. Should we expect that there will be more increases like this?

It will gradually increase to 60 million per annum, and that has been communicated. So over the next four years, it will grow to that level.

Okay. And just maybe one more question just on China. It was down 3% in GS. Could you just give us a bit more color here? You mentioned that there was obviously a tough comp, but we also are seeing a bit of cooling construction market in China. To what extent has that already influenced your business and has there been any change in trends towards kind of the end of the quarter?

No, it hasn't. The end of Hexagon quarter is always the busiest period. So if you take an average quarter, we roughly do 80% in the last month. And out of those 80%, we probably do 50% in the last two weeks. So that is just our cyclicality through a quarter. There has been a slowdown, but it hasn't really impacted. So I would say it's more comps than a slowdown in the market. We are typically not active in the segments that we're seeing slowing down. Residential construction. Okay, that's clear. Thank you.

Thank you very much for taking my questions.

Most questions have been asked already, but I have a couple of more philosophical ones, if I may. The first one would be on Hexagon as a sustainability enabler. many of us saw your presentation, Hexagon Live 2019, for example. And I was thinking if you can comment a little bit on, we have something called the EU taxonomy, et cetera, that a lot of people struggle with to understand how to get the revenue aligned with this, et cetera. And I'm thinking if you could perhaps communicate the percentage of sales that you believe is aligned with this EU taxonomy, but also if you have some business that is, you could say, ESG counterproductive, and that you would like to spin off or something.

Sorry, I missed the last because I needed to understand your question. So if we start, we are going to communicate that in the annual report of 2021. And hopefully, if you wait for that, it's going to help.

I will. Definitely will. Thanks. I have another philosophical one in front of me. Yeah, sure. And that is a little bit more easy to answer perhaps. And that is you have new products going into the more autonomous sensor solutions like add-ons on the BLK2Go and 360 and 3D, etc. And my question is, do you see any hurdles from these being a little bit more complicated, i.e. it's being, you know, added upon this spot from Boson Dynamics that could impact to me volumes or usability or price perhaps and also with the same with the BLK to fly if it's it's a hurdle to make your customer you know to love them to man or to handle these new gadgets I think

BLK to fly, even I can fly it. So I don't think that's a hurdle. I think that's a pretty good add-on to a portfolio of products that a typical surveyor or engineer would use on a construction job site or if you want to remodel a building or whatever you want to do. So I think the BLK to fly is pretty straightforward. BLK Art, which is the Boston Dynamics platform, might be a bit more intuitively, I don't know, people might hesitate a bit more to buy it simply because it is a bit more, I don't know, alien to what you usually use. Bear with me here. But... But I think that the ARC will find its way in applications where you might not want to send people, and it will patrol and scan industrial facilities, petrochemical facilities. Let's say you have a leak or something, and you want to send out a service engineer to check on that leak. Well, if it's a refinery, it might be better to send the dog than sending a human. I think it will find its way. I believe the two-fly will have an easier and more rapid growth than maybe the ARC. But I do believe this is just the beginning of robotics as we see it in all our applications. And five years from now when we have an earnings call, you will think nothing about these things.

And the very last one, very fast one, and it is on the lower end of the ELK, the 3D. You see some iPhones, et cetera, coming with small LiDAR scanners, et cetera, with apps like Sketchfab and Polycam, et cetera. You see a risk for price issues coming from beneath, and also would you be thinking of, you know, having your own like a 3D scanning protocol application on the to sell for these users.

I see it as a great compliment. We've always had consumer businesses sort of touching our professional businesses. You had Google Maps a couple of years ago that started to sell into the professional mapping market. And typically what happens is that You have a defined consumer space where you have good enough solutions, and then you have the professional space where these consumer technologies are simply not good enough. And the same thing goes with this LiDAR, that the accuracy is not good enough for true professional applications where we reside. But what it does is it enables people to think out of the box how you can use LiDAR technologies. And typically, it grows the end market for us as well as for the consumer companies introducing them. So we see it as a benefit, actually.

Perfect. Thank you, and good luck in Q4. Thank you.

The next question is from Alexander Virgo, Bank of America. Please go ahead. Your line is open.

Thanks very much. Morning, Ola. How are you? I have a quick kind of a follow-up. I suppose it's more just around the colour for how you see the progression of the next two or three quarters as we go through various issues around supply chain and inflation and the rest of it. I mean, the fact that you've printed the second best quarter in history and your weakest quarter in the year is obviously something to be considered. And I'm just thinking about how we should think about the way your margins evolve, primarily. I'm asking that question, I suppose, because you're at GES margins north of 30% in a hardware business, which is being affected by supply chains. and with weak China as well. And then on the IES side, your margins are still in the mid-20s, which is a little unusual, if you'll pardon me for saying it, just because of the software mix. PPM has recovered. China is growing 15%. So I'm just trying to get a feel for how do you see the weight of the two divisions sort of developing over the next 12 months, I suppose. I'm just trying to think about how we factor in the fact that you printed this very, very strong quarter in spite of the various headwinds that you've got. Those headwinds do appear to be ameliorating, but probably not very quickly. So I appreciate it's a slightly fluffy question, but I'm just trying to get a feel for how you're setting it up and how you're thinking about the next 12 months, given what we've got in front of us.

I wish I could answer that. You should just be happy with a quarter.

I'm very happy with it, but I'm just trying to get a feel for how, when we see China going, it's weaker on comps, I guess I get that in GES. It's strong in IES. We've got multiple question marks around power outages, around the heavy industry being controlled quite heavily into the end of the year, question marks around the impact that that has on China growth. That's been a big engine for you over the last sort of 12 months through recovery. You've got Europe recovering, U.S. recovering. It all kind of feels from a CapEx standpoint, which is what's really driving your business, quite positive. And yet, yeah, there's a sort of an element of uncertainty around it. So I'm just trying to get a feel for how we interpret the fact that you've printed a quarter like this in the weakest quarter in the year. Yeah. And how... Yeah. I know you don't provide guidance, but I'm trying to push you for a little bit of help in terms of how we – because I don't want to normalize it, but there's obviously a chunk of business that still you haven't been able to deliver, you haven't been able to capture because of constraints. So actually it should have been an even stronger quarter. And I'm just trying to think about how to be what I go for, basically.

Yeah, I think philosophically you could say that geospatial should have a positive outlook simply because we haven't seen any impact from government-sponsored stimulus programs because they're late. So on both sides of the Atlantic, politicians are planning to pour billions into infrastructures. And that should provide, call it a very good backdrop for the geospatial business going into 2022. Let's disregard components for a bit. Because I do believe that eventually the big engine of the global economy will catch up and we will not see component shortages throughout 2022. That's geospatial, and geospatial is doing amazingly well for being primarily a hardware-based business, as you say. And it should be set to continue. We then look at the industrial. What we see is a mixed shift from PPM to MI, and MI has slightly weaker margins than PPM, which has an impact on the overall performance. margin on the industrial segment. Having said that, PP&M had a big investment quarter where they invested significant resources into OPEX for AEC and AIM, which had an impact on the incremental margin of the sales improvements that we saw in the quarter. And that is, of course, a short-term issue that you grow into as business continues to grow. So you figure it out yourself. Okay.

All right. That's very helpful. Thanks. And would you say just on the cost side, are you now fully run rate on the original kind of 130 that you'd targeted?

Yeah. And I think what people tend to forget, 2020 was an unnatural, abnormal year. So was 2021. But if you compare the third quarter of 2019 with the third quarter of 2021, you're beginning to see a pattern where you can see that our optics is significantly lower and our growth margin is improved. So I think we deliver 2% stronger EBIT Q3 of 2021 compared to Q3 of 2019. And that is low. That is the lasting impact of all this restructuring.

That's great. Thanks very much, and thanks for bearing with my question. Thank you.

The next question is from Victor Harper. Please go ahead.

Yes, good morning. So just a short question. Could remind us about the seasonality in the EM business, if it does follow your seasonality in the year?

No, it's typically like all software businesses, the fourth quarter is the strongest quarter. The second half tends to be stronger than the first half.

Okay, thank you. And also, coming up the last quarter, point you made in the last question about this year obviously being a non-normal one in 2020 as well and I think in connection with the Q2 call or in the Q2 call you said that 2022 supposed to be a more normalized demand year now with the two months having passed how would you see the situation going into 2022 do you see it as a more normalized year if we exclude the new products or do you see something having changed?

I think it's going to be normal. We always have to safeguard any predictions due to the shortages in electronics, which could have an impact early in 2022. But I do believe that what we see is a demand-led recovery in most markets in 2021, and that demand will normalize in 2022.

Okay, very good. Thank you.

Thanks. The next question is from Mason Lyne, Byron Burke. The line isn't open. Please go ahead.

Hi, Ola. Good morning. Thank you for taking my questions. I've got a question on defence, you know, where we're seeing a little bit of weakness there. And then if my numbers are correct, I think it's been a couple of quarters and we've seen the weakness there. So I just want to get your sense on the outlook for this segment and on the defence orders that were affected, the performance in the quarter. Should we think about these orders as delays or are these the cancelled orders? As in, will they come back in the future? If so, when can we expect them to come back?

What's happening is it's a central agency that has sourced the software product centrally for more than 100 agencies within the U.S. defense body. They decided to cancel that and asked all the local and regional bodies to source it directly. So it's going to take some quarters to pick up these orders. It was easier for us when we had one end customer that spread the licenses across hundreds of organizations. Now we have to do the work and go knocking doors and sell those licenses to the individual agencies. And how long it takes until you've recovered that, that is hard to predict, actually.

Right, okay, understood, thank you. And just one more question, last one. Could you give us a little bit of update on the Infor EM business? I know we just recently completed the acquisition. I just want to get a sense of projected revenue and the growth rate we had for that business. How are you tracking along?

The nine-month bookings are up double digits and the staff bookings are up 30%, so it's more or less in line with our own expectations for the business when we acquired it.

Perfect. Thank you very much. Thanks.

There are no further questions, so I would like to come back to you.

And with that, we're completely exhausted the third quarter of 2021, so let's do this again in February when we have the fourth quarter numbers. Thank you, everyone.