Hexagon Ab B Shs New

Hello, and welcome to the Hexagon Year-End Report 2021. Throughout the call, all participants will be in listen-only mode, and afterwards, there will be a question-and-answer session. Today, I'm pleased to present Ola Rollén. Please go ahead with your meeting.

Thank you. Welcome, everyone, to this Q4 report for 2021. And I suggest that we move straight to slide number four. We had a record quarter sales increased by 17%. The organic growth was 7%. And we could have shipped another 6% organic growth had we not faced component supply shortages in the quarter. Our largest divisions, Geosystems and Manufacturing Intelligence, managed to grow by 7% and 9% with solid margin expansion. PPM continued to recover, recording an 8% organic growth in the quarter. And this was also our first quarter with EAM Solutions, and EAM delivered a 42% SAS revenue growth. Our EBIT came in at 373 million, and that's an increase by 24%. If we now move to slide five, that is just a reminder that Q2 and Q4 are strong quarters seasonality-wise, and Q1 and Q3 are slightly weaker. moving to slide six key figures operating that sales amounted to 12 17 million euro which is 17 percent growth seven percent organic and our operating earnings came in at 373 million which corresponds to a margin of 31 percent And that is an EBIT increase of 24% in the quarter. Just for your revision, you got the full year numbers on slide seven. We have operating net sales of 4.3 billion, and we make an EBIT of 1270 million, corresponding to 29%. Using the old reporting structure, our EBIT margin would have been 28% for the full year. Moving to slide eight, cash flow. I think the most important thing to highlight is the change in working capital where we had a huge release of working capital in the fourth quarter of 2020. And we had working capital build up due to uh the the shortage of components in the fourth quarter of 2021. it was still a strong cash conversion 81 percent in the fourth quarter and if we move to slide nine we can see that working capital to sales is still at record no levels in spite of this small build-up in the fourth quarter Market development moving to slide 11. North America is now 32% of sales. The three global regions are one-third each. And we saw a slight contraction in Asia Pac down from 14% to 12% of sales. moving to slide 12 within these reporting regions we see north america growing stronger growth than eight percent organic so is eastern europe middle eastern africa as well as south america and then western europe is growing within the zero to eight percent range china up two percent on on very strong comparison numbers for Q4 of 2020. And then we have Asia excluding China, which is the only region that is contracting in the quarter. I leave slide 13 for your review later on, but highlighting that all industries, but possibly electronics, are at all-time high. Electronics had its peak in the third quarter, which is natural if you look at the customer base that we're servicing in that industry segment. Moving on to slide 14, EMEA market trends. Western Europe recorded 6% organic growth. We saw solid growth across all segments and a strong recovery in the automotive industry. aerospace and manufacturing, as well as construction and infrastructure sectors. Strong countries were, if I were to highlight some, UK, Italy, and Germany. Eastern Europe, Russia, and Middle East all recorded double-digit growth in the quarter. We move to America's slide 15. North America recorded 9% growth. The strongest country in North America was Canada. That's the good demand from both oil and gas as well as minerals and natural resources. But strong recovery in most verticals in North America. Continued weakness for our defense business in the United States. South America recorded double-digit organic growth. driven by solid development in mining and agriculture, as well as the continuous recovery in the Brazilian economy, where we grew by 18%. Finally, on slide 16, regarding markets, Asia. China, 2% organic growth on the back of very strong comparison numbers. uh continuous strong growth in the manufacturing sector despite the tough numbers we compare this fourth quarter with infrastructure and construction is hampered by availability issues and we made a decision to cut supplies to the asia region for geospatial solutions india Double-digit growth grew by 14% organic growth in the quarter. A good recovery for India. And Japan and South Korea were the only major markets contracting in the quarter. And that is really, we're seeing competition for our Japanese and South Korean customers coming from China. Reporting state. If we move to slide 18, geospatial enterprise solutions. Reporting organic growth of 5%, geospatial was the business area that suffered the most from lack of components. In spite of that, geosystems, which probably suffered the most, delivered 7% organic growth, SI-4 hampered by the US defense orders or lack of orders. Autonomy and positioning was another area that was hampered by component supply, but still managed to grow by 8% in the quarter. Sales 586.5 million and an EBIT margin of 31% in the quarter. Moving to slide 19, industrial enterprise solutions. So an organic growth of 8% had less issues in the fourth quarter with component supply compared to geospatial. MI continued to recover and grew by 9% organic growth. And we do see both automotive aerospace and design and engineering software coming back. PPM also recovering, 8% organic growth, was driven in the quarter by the asset information management software as well as our AEC portfolio. Good recovery in EMEA and EAM, which is reported in the PPM numbers, So strong growth in both sales and order for its SAS solutions. Sales of 630 million, an EBIT margin of 32%, so a strong recovery for industrial enterprise solutions. Moving to slide 20, we report a increase of one percent in our gross margin for the full year 65 for the rolling 12 months past 12 months slide 21 is the old definition of our operating margin where we actually reached our target that we set in 2016 of 28 percent and if we move to slide 22 we can see according to the new definition where the last 12 months is a 29 percent unit margin we then move to slide 24 and we start discussing m a orders and product releases we launched a project during the fourth quarter where we collaborate with a non-profit organization called beneath the waves this is a super exciting environmental project where we try to preserve the seagrass meadows in the caribbean and we do it through our subsidiary our evolution and we've leveraged the hexagons airborne bathymetric lidar technology to cover the seagrass beds and document them. And we're going to accurately map thousands of kilometers of the seabed in just a few days using an airplane to validate the findings. If we move on to slide 25, we're very proud that our subsidiary PATH has been awarded the Global Company of the Year Award from Thorsten Sullivan. Moving on to slide 26, this is an exciting order where Hexagon's AMP and mining divisions collaborated in the development of an automated road train solution for the mining services company Mineral Resources Limited, MRL. And we integrate drive-by-wire technology with an autonomous management system to orchestrate vehicle movement in the road train haulage. So you can see two big, big lorries. acting as a road train on this slide. Moving to slide 27, we had significant orders from the automotive industry in India. Both Mahindra and Tata Motors bought Hexagon Solutions for simulations of future products. Slide 28. This is another interesting slide. sustainability application where a architectural design and consultancy company in Thailand, Greenwell, used our computational fluid dynamics to reduce the green footprint of this building. And this might be something that could become a standard where you optimize what's called HVAC, heating, ventilation, and air conditioning. Moving to slide 29, it was, as I previously commented, a good quarter for aerospace. We had orders from, among others, Kawasaki Heavy Industries, where they want to predict how sheet metallic components and materials will be affected by various forming processes in its manufacturing and they choose our design and engineering software to follow up on said operation slide 30 we also got an interesting public safety order in the quarter from the the country of Honduras where They're going to standardize on our cloud-based solution, Hexagon OnCall, and they're going to roll it out nationwide. And it's going to affect more than 10 million people. Moving to slide 31, we also got our first order from a Chinese company. And in this case, it was a chemicals company that selected Hexagon SDX. to digitally transform its processes. Slide 32, autonomous reality capture and momentum is building for our newly released product, BLK Arc, which in layman terms is called the dog, where we combine our sensors with the Boston Dynamics robotic platform. We've got a series of new orders in the quarter for the recently released product where they will use it for anything from airport security to plant inspection and better localization of robots and humans. moving to slide 33 we also launched BLK to fly in the quarter and we've also received orders for that platform it is one application where a construction company want to compare the actual construction against the BIM model and look for deviations against the BIM and we've also seen a lot of other BIM-related applications where you use this platform to verify your BIM data. Slide 34, we launch a new organization at Texagon today, a metaverse-focused business unit that will drive growth in digital transformation. In connection to that, we got two orders. We got one order from Enel, where they use us for asset and infrastructure digitalization. Enel is a huge company with plants in more than 30 countries, and they've ordered hundreds of our BLK sensors and our Cyclone software to digitally capture all their assets, their factories. and then create a digital twin. Another super exciting project is that we now have an agreement with the Federal Agency for Cartography, EKG, in Germany to digitize the entire country of Germany. And we kicked off that project and it's going to continue throughout 2022. With that, we come to the dividend. So if we turn to slide 36, as you've seen in our interim report today, the Board of Directors of Hexagon proposed a dividend of 0.11 euro, which is an increase of 22% over 2020. And in summary, if we end on slide 38, it's a record quarter. It's the best quarter ever. We missed 6% organic growth, so both EBIT margin and sales could have been much stronger without the supply constraints that we were faced with in the quarter. And the Board of Directors proposed a dividend of €0.11. And with that, operator, I think I've concluded my presentation and we are now ready to answer questions.

Thank you. Ladies and gentlemen, 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 zero and two to cancel. There will be a brief poll while questions are being registered. And the first question is from Daniel Jouberg, Condors Banken. Your line is now open. Please go ahead.

Thank you very much, and congratulations, Ola, to a really strong set of numbers and outlook. Thank you. I had was to start with that I personally feared a little bit of potential cost hike, comeback of inflation and so forth, and also perhaps a hefty uptake in FG&A activities in October, November last year. Now proven wrong, I still wonder your view here on the net between post-inflation pricing opportunities for 2022. Your view on this would be great. Thanks.

It is a challenging time because we've had more than 15 years of low inflation economy, global economy. So people are not used to price increases, but we're definitely seeing a salary inflation and we have to mitigate that with price increases. Luckily for us, we have the pricing power. So far, we haven't seen any backlashes on our price increase strategy for 2022.

Sounds great. And if I may, just a short follow-up, and that could be on the AEC that you mentioned did well for the process power marine in the quarter. And that also includes the smart build. So my question is, the changes you do, is it more of a natural step to change unchanged asset portfolio of the info, for example, or is it more that the smart build and the AAC can do better under Thomas Herring and under PPNM?

No, it's about, we have a series of new products coming out in 2022 that are designed, hardware products and solutions that are designed for the AEC market where it's going to benefit us strongly to combine the product offering, offering the software platform alone with the tools that we create for that software platform. And that's why we do the change.

Perfect. Thank you and good luck in 2022. Thanks.

The next question is from Alexander Virgil with Bank of America. Your line is now open. Please go ahead.

Thanks very much. Good morning, Ola. I trust you are well. Thanks for taking the questions. So I wanted to dig a little bit into this component constraints just to understand some of the moving parts. I think you talked about probably half of that impact when we spoke before Christmas. So can you give us a bit of a feel for what exactly it is that's driven a bigger impact? And I guess in part digging into your comment in your prepared remarks about direction of supply and moving, I'm guessing, to serve North America and Europe instead of China. So if you could dig into that, and presumably as a part of that, The implied tailwind from the software side of the business, because presumably all your component headwinds are really on the hardware side of the business, it implies software growth is actually probably mid-teens, unless I'm getting my maths wrong. So that would be really helpful, good place to start. And I've got one follow-up after that, please.

Thank you. No, you're absolutely right. We've seen an increasing demand for our products in the fourth quarter and throughout the fourth quarter building up. So products that weren't constrained in the third quarter became constrained in the fourth quarter. And we had a discussion what to do and then we come to china and in china we we are involved in longer term projects than projects that we might sell to in europe and north america think large infrastructure the silk road and so on so we we have a bit better planning horizon in china and we took the deliberate decision to shipped to the short-term opportunities we saw in Europe and America and then sacrificed China in the quarter only to supply them in the first quarter of 2022. And your math is correct, Alexander, so don't fret. Software outgrows hardware in this quarter.

Thanks very much. That's nice to hear. I guess the guidance that you've given, not that you give guidance in detail, but the commentary that you've made about how long it will take to unwind these constraints and also presumably the working capital buildup will reverse as well. What's your sort of best guess as we think about the trajectory through 2022? Should we be expecting 600 basis points in Q1, I guess, is the quantitative question.

I think it might be. It's hard to say because it's a moving target every day. I think that we're going to see the peak or the trough, the peak in the backlog and the trough in the reduced organic growth in the first quarter. And I think we're going to see a gradual recovery in the second quarter. What we're trying to do is we're trying to even out this backlog throughout the remaining quarters Q2, Q3, Q4 in 2022. we're actually going to achieve a slightly higher growth in those three quarters than our budget or our plan for 2022. And that's how we're planning things operationally right now. That might change, though. Sure.

No, that's a great start. Thank you very much.

Thanks.

The next question is from Eric Gorham, SEB. Your line is now open. Please go ahead.

Thank you. I have two questions. The first one is a follow-up on the topic of supply constraints. I think you talked specifically about some redesign being a key mitigating factor in the last report. Is that still the case, or is there anything else specific in terms of your visibility on component supply that makes you certain that as of Q2 you'll start to see improvements?

No, the redesign helps. And you have to mimic the large electronics companies because they are, I mean, the gorillas in the industry. If you think Apple, only the iPhone is produced by more than 200 million units per year. So if you compare Apple's silicon wafer purchases to The large automotive company that might make 10 million cars per year, it's actually nothing compared to the electronics guys. So you try to mimic them, you try to become mainstream. And then secondly, we have some signals from the industry that... capacity is building up in the semiconductor industry and it will gradually ease throughout 2022.

Okay, thank you. Then on the completely different question on the BLK arc and your offering there, we've seen similar products in partnering with Boston Dynamics with the spot. How does your solution there differ to what we've seen from competition?

It's better. Don't buy something from competition. Yeah. If you need a dog, call us.

Very good. That's it for me. Thank you. Thank you.

The next question is from Johan Gunnars, GMB Markets. Your line is now open. Please go ahead.

Thank you. So can you perhaps, Ola, from a broader perspective, I mean, coming back to the four trends you highlighted during the CMD that should accelerate the organic growth profile for Hexagon in terms of subscription, smart digital reality, autonomy, and the energy transition, which of these would you say should become the real main growth accelerator and say at what point in time do you expect us to see an infection point for Hexagon's positioning into this?

It's hard to say when. You typically can see it afterwards where the inflection point was. It's hard to say when you're in the midst of it. But we got three major tracks for this company growing in the next 10 years. And that is discrete manufacturing where We want to play an active role in automating production chains using our quality systems to do so. The second route would be AEC and process industries where the combination of PPM, geosystems, EAM and so forth will enable us to create digital twins around construction sites process plants and so forth and then the third avenue is really this brand new world of the metaverse with digital twins of cities, of the streets, of countries, of people and so forth, that opens up new possibilities for Hexagon to enter into consumer-related industries and also stay with mapping and navigation.

That's helpful. And perhaps slightly on the same topic with regards to the ambitious 2026 targets here. Is there a reason here for the Conservatives to not change your margin target here in accordance with the change of definition to EBITDA?

But the one who lives will see. I mean, we have ups and downs in the economy. And look at last year when we finalized our financial targets that we set in 2016. So we missed the top line by a bit. It's mostly currency, but who could have planned for this COVID outbreak? So... We'll revise the targets when we reach them, and if we are significantly above and it looks ridiculous, then, of course, we'll change them. But it's five years to go.

That's clear. Thank you. That's all for me. Thanks.

The next question is from . Your line is now open. Please go ahead.

Great. Good morning. Thank you for taking my questions. I just wanted to follow up first a bit on the dynamics on the cost side. How much travel and event cost do you expect to return for this year? And is there anything beyond the cost inflation you touched on earlier that we should consider for 2022? And then secondly, I was wondering if you could comment how much the LTIP will ramp up this year. Will this already increase to the full 60 million run rate or will it be low for this year? Also, should we expect that share-based compensation will remain at 60 million in 2026?

First of all, dynamics on cost. It's hard to say, but we have to mitigate the cost increases with rationalization and price. So that's our plan for the year. The LTIP is growing by one quarter. per year so it's 60 million over four years so you can plan one quarter of 60 million for every year up to 2024 and beyond that we'll see what happens in 2024 okay that's clear thank you very much thanks

The next question is from Adam Wood, Morgan Stanley. Your line is now open. Please go ahead.

Hi, good morning, and thanks for taking the question. I've got two, please. Maybe just further follow-up on the kind of cost planning for 2022. I mean, you obviously rightly flagged there's an uncertain outlook. Could you maybe just talk a little bit about how you plan phasing investments in the business through the courses? Does the backlog change? that you have give you comfort that you can put all the investments in straight away, or will there be some caution in terms of how you plan, especially given kind of risks of cost inflation and employee attrition, um, through the year. That's the first one. And then secondly, just a charge, um, on the import business, um, obviously a fairly chunky one against the revenue base of import. Could you maybe just give us a little bit more detail on exactly what is cash, non-cash in there, which assets are being written off and so on, just to understand what that charge is going towards. Thank you.

I think we have to come back because that's a lengthy explanation on EAM. Regarding the cost plan, I mean, investments, I don't know what you mean by investments, but I mean, Investments, you take decisions on years in advance. You can't run a technology company by making plans every quarter. So are investments a fairly firm?

Perfect. Maybe we'll discuss the EM charge offline. Thank you.

Yeah, thanks.

The next question is from Stacy Pollard, JP Morgan. Your line is now open. Please go ahead.

Hi, thank you. Three questions from me as well. So regarding supply constraints, I did hear you say 6 percentage point impact on revenue growth. Did you say that it was also 6% on EBIT? And then any thoughts on seasonality for margins as we model through 2022? I'll let you do that one first maybe.

Okay. No, I mean, the impact on EBIT is significantly greater because you have to envision a fully loaded cost structure in the fourth quarter where the incremental margin on those extra 6% would have been significantly higher than the average for the group. So unfortunately, it hurt EBIT much more than the six percent it had at the top line and then what was your second question well just as we thought through the seasonality for margins yeah 2022 yeah i don't see any reason why the seasonality would change q1 is our weakest quarter q3 our second weakest q2 our second strongest and and q4

strongest quarter and I think that will repeat itself in 22 as well okay no that's fine I was just checking if supply constraints made any impact into 22 and then the last questions were really just division also PPM division to what degree does higher oil price help the PPM division now and you know I know these project lead times very long and you're less upstream anyway so maybe it doesn't matter that much but just a quick one on that one and then SI defense still weak When do you expect that to come back to go?

PPM, there is a correlation between the oil price and sales for PPM over a longer term. But short term, quarter by quarter, it has very little impact on sales. So what we're seeing right now is a general recovery where EPCs are starting to invest in software again because they do receive orders for new projects which might in turn have something to do with the oil price but it's more of a longer term view regarding SI it's a gradual process where we lost our biggest sponsor in the US defense and they delegated the purchasing of the product to some 200 agencies within the u.s defense body and we are now contacting these 200 customers and trying to land orders with them bilaterally and that's why it's going to take some time but a good guess would be that we recover and this time next year we're going to be fully recovered sarah thanks very much Thanks.

And the next question is from Mohamed Mawala, Goldman Sachs. Your line is now open. Please go ahead.

Great. Thank you. Morning, Mawala. A couple from me. First of all, just again, coming back to kind of the shape of the growth, you sort of implied that Q1 would indeed be the trough. In terms of your kind of visibility, it sounds like this is still something that could be better. But are you essentially saying that growth in Q1 would further decelerate relative to kind of the levels of Q4? And then I had also a sort of separate question on sort of the gross margin dynamic. Obviously, your gross margins have expanded due to the rising software mix. given the issues around some of the component shortages and cost inflation. I know the software side is still doing pretty well. Is it fair to assume that on a kind of full year basis, perhaps the gross margin would be more flattish this year before it recommences its expansion? Or do you think that the gross margin can still keep growing in 2022? And then lastly, just on PPNM, you know, you talked about sort of project activity returning. From a kind of competitive standpoint, have you seen sort of any shift in the landscape? And, you know, where do you see sort of the big opportunities? Is it the more kind of discretionary design projects? Or is it still a lot of the kind of more data management simulation and that sort of stuff? Thank you.

Thanks. That was a lot for one morning. But I'm going to try to work through your questions. Shape of the growth, it's hard to say sitting here in February what the shape of the growth and if Q1 will decelerate growth further compared to Q4. I simply can't give you an educated answer. Rising software mix should improve gross margin. That's true, but it's not entirely true because if you have If you have a cloud-based software, you're very close in terms of gross margins to where our hardware is. So we don't see that big difference between gross margins for hardware and software right now. PPM, competitive landscape. I think for us, the big opportunity is really the combination of using SDX our platform, our digital twin platform, in combination with EAM and the reality capture that we can do with, among others, BLK ARC and BLK to fly. That is a huge opportunity for the future.

Okay. So is it fair to say on that comment on the gross margins, given the kind of cloud mix effect? and the supply chain issues, of course, margin could cause before kind of regime expansion over the time period, over the medium term?

I think over the medium term, theoretically, right now, with the next generation products we got, we could see the growth margin climb another, I don't know, 9%, maybe 74%. That is in theory, and it's over the medium term.

Yeah. Okay. Thank you.

Thanks.

Ladies and gentlemen, at this point, just as a reminder, if you would like to ask a question, please press the zero and one on your telephone keypad now. And the next question is from Johannes Schaller, Deutsche Bank. Your line is now open. Please go ahead.

Yeah, thanks for taking my question and congratulations on doing so well in this supply-constrained environment. I wanted to come back on your outlook going into Q1, Q2, just on the component supply. I mean, if we're talking to some of the largest industrial semiconductor makers and power microcontroller sensor manufacturers out there, it doesn't really look like H1 is getting much better, probably more getting better towards the end of the year. Could you maybe give us a bit of a sense on a more granular basis from your contracts and the visibility you have from your suppliers? Do you have really higher volume commitments already in the second quarter of the year? And then related to that, let's assume supply does not get better. What's your contingency plan? Can you still shift from China to other markets for another few quarters, or is that more a very short-term thing? Thank you.

I think shifting geographically is always a short-term thing. You're juggling demand and you're trying to prioritize when people absolutely need the product. The reason why we hope, and you're absolutely right, it's a super tough situation for the semiconductor industry, The reason why we think it might ease off as from the second quarter is because we've redesigned certain wafers, certain chips that we use to resemble more high volume and less scarce products in the market. It doesn't help if you have a low volume, highly exotic silicon wafer in this situation. So if you can standardize that and move towards something that is more high volume for the suppliers than it makes all the sense in the world. And that's what we're working on.

Okay. That's useful to know. Thank you. Thanks.

And we have a follow-up question from Alexander Vargo, Bank of America. Your line is now open again.

Thanks very much. I wondered if you could just talk a little bit about the shape and the template, I suppose, precedent maybe for the NL contract. How does that work in practice in revenue recognition terms and what visibility does it give you? And then I was intrigued by your comments on Japan and South Korea and the impact that you were seeing from Chinese competition. I wondered if you could just flesh that out a little bit for us, please.

Yeah, so the NL contract, we started deliveries in the fourth quarter, but it's definitely going to be more of a 2022 issue. Having said that, we are relying on components for the BLK sensors, so that must come as well in order to realize the contract. But it could grow into something bigger. super exciting when we we've scanned everything and they're gonna create a 3D twin out of all these plants so this could be super interesting going forward regarding Japan and Korea it is really the the The shipyards where we see Chinese shipyards taking orders from Japanese and South Korean shipyards in special ships like LNG tankers and so on.

I see. And they don't use your software in the same or you're not selling your software to them in the same, I guess, in the same degree or same scale. No, we do. No, we do.

We had growth in China, but we had decline in Japan and Korea.

Okay, so the point being it's Chinese competition for where you build the ships as opposed to Chinese competition for you.

Correct.

Thank you.

And there are no further questions at this point, so I hand back to our speaker.

With that, I thank you for listening in and wish you a good day. We'll do this again next quarter. Thank you. Bye.

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.