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Good day and thank you for standing by. Welcome to the Hexagon Q1 Report 2025 Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1, 1 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star one, one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Norbert Hanke. Please go ahead.

Good morning, and thank you for joining our first quarter 2025 conference call. I am Norbert Hanke, Interim President and CEO of Hexagon, And I am joined by our Chief Strategy Officer, Ben Muslin, and our Chief Financial Officer, David Mills. In Q1, we delivered 0% organic growth, 67% gross margins, and an operating margin of 26%, and with a cash conversion of 71%. The current revenue grows strongly by 10%. So the quarter began well, but in mid-March, geopolitical uncertainties impacted the volume. March is the largest month in the quarter for revenues, so this had a sizable impact on our growth potential in Q1. The largest impact, however, was on operating margin. Here we saw the combination of negative currency and the late decline on volumes on a cost base positioned for growth. We have seen demand stabilizing now in April. However, we remain very cautious of the uncertain market backdrop and will continue to monitor this and adjust our cost base accordingly. Besides the challenging market, we have made good progress. The preparations to separate the ELI division are on track. And during the quarter, we did announce that the SIG division will be included in the new company. This reflects the shared heritage and synergies between SIG and ELI and will further focus Hexagon Core around precision measurement technologies. We have also announced that NUCO will be listed in the US with the temporary SDRR program. Finally, you will have noted we launched a robotics division during the quarter, which intends to leverage our skills in measurement technologies, AI, and autonomy in the field of humanoid robotics. This will be a key focus of the agenda at Hexagon Live in June 2025, and I encourage you all to attend. Turning to the next slide, please. Before we move into our usual presentation, I want to spend a few moments on the impacts of the geopolitical uncertainty we noted during Q1, which was driven by tariffs. Starting with the indirect impact, which was by far the largest contributor to the drop in volumes and margins. We saw significant declines in Canada, Mexico in March, which were the first countries to be subject to increased U.S. tariffs. We then saw impacts in China and Western Europe later in the month as well. We have seen delays in shipments and orders, deflecting the very uncertain environment. Our cost base was built around an expectation of a return to growth. This expectation was underpinned by a growth in January of 1% and growth in February of 9%. March, which typically accounts for 50% of the revenue in Q1, ended with an overall decline of 6%. The timing of the impacts left us unable to address the cost base proactively, meaning we experienced a significant drop from volumes to operating margins. As noted earlier, we have seen a normalization of demand in April. However, we remain cautious in our near-term outlook. Turning now to the potential direct impacts on tariffs. We expect the direct impacts to be more manageable than the customer uncertainties. In total, based on the current tariffs, we expect the impact on earnings to be up to 15 million in the quarter. with the potential to mitigate some of these with proactive actions. This includes, for example, rerouting of shipping, alternative sourcing of critical materials, strategic inventory management, and price increases. We are also investigating the feasibility of further localization of US manufacturing. In response to the overall uncertain environment created by these tariffs, We will continue to monitor and adjust our cost base as needed.

Turning now to Ben. Thank you, Norbert.

Good morning. If we go to slide six, here we have the overview of divisional performance during the quarter. As Norbert said, we saw a week of unexpected development in terms of organic growth, reflecting the slowdown towards the end of the quarter. By division, ALI, SIG, and Autonomous Solutions have delivered modest organic growth during This was offset by continued weakness in manufacturing intelligence and geosystems. Across the group, we continue to see good momentum in recurring revenues, including subscription software, which increased by around 10% during the quarter. And this was offset by weakness in the sensor business and a slowdown in perpetual software licenses. We saw a weaker margin development during the quarter than the prior year period. largely reflecting the pause in demand seen in March, coupled with a weaker product mix in some divisions and currency transaction headwinds. We go to slide seven, that shows divisional performance over time. You have these numbers already, it's just shown for your reference. Slide eight, if we go to manufacturing intelligence, MI reported revenues of 469.9 million, which was down 2% organically compared to the prior year. The quarter started solidly but declined by high single-digit rates in March, with trade uncertainty feeding into delayed customer decision-making. The division reported EBIT of €117.1 million and the operating margin declined to 24.9%. This reflects the weaker demand environment and currency transaction headwinds. Recurring revenues increased during the quarter, which was offset by a weaker trend in the sensor and robotic solutions portfolio. By geography, growth was negative in the Americas, particularly within Canada and Mexico, and there was continued softness in Europe, offset to a degree by growth in Asia and a stable development in China. If we go to slide nine, an asset lifecycle intelligence, ALI reported revenues of $204.4 million during the quarter and 5% organic growth. This was slightly below our expectations, reflecting a slower development in North America and a lower level of perpetual licenses than we saw in the fourth quarter. We saw double-digit growth in the SaaS product lines, including EAM, but a weaker trend in services, reflecting a growing use of our partner channel to deliver certain product lines. EBIT declined to 62.9 million euros, and the EBIT margin declined to 30.8%, reflecting the slower growth in perpetual licenses and additional investments we're making in products like SDX2, which we've just launched and are ramping up. If we go to slide 10 and Geosystems, Geosystems reported revenues of $375.7 million during the quarter, which represented a 2% organic decline compared to last year. By geography, we saw a stabilization in European demand, albeit at low levels. but we saw renewed weakness in China during the quarter. In the Americas, we saw an overall decline during Q1, which reflected the slowdown in March, particularly in Canada. Geosystems saw continued good growth in software sales and recurring revenues, but this was offset by weakness in the surveying tools business and a slowdown in the reality capture segment. EBIT declined during the quarter to 102.8 million euros with an operating margin of 27.4%, which reflects a weaker product mix during the quarter, currency transaction headwinds, and the weaker volume development. We go to slide 11, an autonomous solutions. AS delivered revenues of 151.5 million during the quarter, which represented 2% organic growth compared to the prior year. In the autonomy and positioning business area, we saw continued weakness in precision agriculture. This was offset by good growth in the aerospace and defense segment. In mining, we saw slight growth in the quarter, with a good performance in mine planning and operations software, offset by a slowdown in overall sensor shipments towards the end of the quarter, especially in North America. We also saw continued growth from the autonomous road project in Australia. EBIT came in at 47.7 million euros, representing an EBIT margin of 31.6%. This decline compared to the prior year reflects both the volume decline towards the end of the quarter, but also a different product mix to last year. Slide 12, if we go on to safety infrastructure and geospatial, we saw a mixed quarter from SIG, which delivered revenues of $120.5 million and organic growth of 2%. Demand was very strong in the public safety segments, which delivered double-digit organic growth during the quarter. And this was offset by weakness in the U.S. federal business, which experienced some delays on a number of key projects. By region, Asia delivered the strongest growth, led by implementations in Malaysia, whereas growth was slightly negative on the American side, reflecting the delays in federal mapping and services projects. SIG delivered EBIT of €22.3 million and an EBIT margin of 18.5%. with the decline reflecting the underabsorption in the U.S. federal business and investments made to support the strong growth outlook that we see going forward in public safety. If we go to slide 13, the acquisition updates, we discussed the incoming acquisitions of Septentrio, Geomagic, and CAD Service during the last call. So here we focus on the acquisition of the UCRS software assets of KONE Communications, which we announced a couple of weeks ago. This software suite and related services is capable of integrating many different communication channels, including mobile phone networks, video surveillance, satellite and digital radio, into our public safety suite of products, providing a more integrated solutions for customers. The acquisition is expected to close by the end of the second quarter. So we welcome UTRS to the Hexagon Group, and with that, I hand over to David.

Thanks, Ben. In the following slides, I would like to take you through the Q1 performance, which reflects the uncertainty experienced in the broad economy in the period, and particularly in the latter half of March, which directly impacted the level of growth achieved in the quarter versus expectations, and consequently drove a misalignment with the cost structure and that dilution of the EBIT1 margin. Cash flow was in line with the quarterly working capital cycle and represents a solid quarter performance, despite the wider challenges alluded to. Moving on to slide 15. Starting with Q1 2015 income statement, stepping through the sales bridge. Sales of 1,322,800,000 is a reported growth of 1.8%, with both a 1.1% impact from FX on sales and a 1% net impact from the structure, giving zero organic growth. Positively, gross margin continued to improve, up to 67.2%. and this was delivered by a strong performance in particular within the software portfolio. Operating earnings decreased by 8% to 344.7, with a 290 basis point decrease in the margin to 26.1%, the elements of which I will break out in the profit bridge. Interest expense and financial costs now decreasing year over year to 33 million versus 42 million gave a delta on earnings before taxes of minus 7%. Taxes, being 18% in line with prior year, bring us down to an EPS of 9.4 euro cents, also declining by 7%. For reference, the EBIT-1, including PPA, includes 28 million of amortization, and so dilutes the EBIT-1 percentage by 215 basis points to 23.9. Moving to slide 16 and to the gross margin. As we saw in the income statements, Q1 delivered a further improved gross margin year over year at 67.2. And this brings the rolling 12 months to 67.1, up from 66.1 by 100 basis points, continuing the strong upward trend. The positively quarterly performance being a continuation of the Q4 trend of resilient margins in the sensor business, coupled with improved margins in the software portfolio, enhanced by a positive divisional mix. and only now moderately improved by the reduced impact of the structural divestment. Moving to slide 17, in the Q1 profit bridge, currency has a moderate influence with a 0.3 dilutive EBIT impact. This is due predominantly to the net year-over-year transaction impact, which is a negative of 6.9 million from a current year loss of 5.8 million against the prior year gain of 0.9. offsetting what would have otherwise been a positive impact from the translation, being a 1% positive $15 million on sales with an EBIT impact of $7 million. The positive translation movements this quarter were driven mainly from the impact of the appreciation of the US dollar by 3% and the CNY by 2%, where sales exceed cost, and offset marginally by a continuing but moderate appreciation of the Swiss franc by 0.3%, which has the opposite characteristic. The structural element was positively contributing, being above group EBIT percentage, and reflects the net impact of acquisitions less disposal. This being incremental acquired sales, of which the material elements were Septentrio in the first month, and Indurab in the AS division, and Fuyanci and XWatch in Geosystem, exceeding the final month of the disposal of the hand tools business in MI. The uncertainty of proposed tariffs in the month of March is the main cause of the dilution of EBIT in Q1, which is reflected in the organic column. The market uncertainty impacted anticipated quarterly volume in the region of 3.5%. The resultant decrease of organic sales of circa 45 million from our internal forecast at an average rolling margin of 67% is a loss of contribution in the region of 30 million. This additional contribution and excluding negative transactional effects would have delivered an overall margin in the 28% range. The unexpected negative volume impact in conjunction with the usual Q1 dynamics with the cost base being 60% salary driven and they're fully impacted by annual wage inflation in the quarter and already committed investments in areas of expected strong growth with offsetting pricing impacts being realized more gradually explains the negative drop through. We will closely monitor the development of volume during Q2 and take a considered approach to cost and take a proactive approach around pricing where possible until the situation normalizes. Moving to slide 18. On the Q1 cash flow, which shows a return to a more cyclically aligned cash generation and conversion for Q1 in comparison over the prior year. Q1 is a seasonally weaker quarter for cash conversion than the average for the year. The adjusted EBITDA variance of minus 4% demonstrates the continued stronger cash leverage versus the EBIT1 variance at minus 8% due to the natural increase in D&ABAC as the underlying depreciation is increasing as we've seen throughout the prior period. Capital expenditure increased year over year due to the capitalized development expenditure. The movement in working capital is the main driver for the variation in operating cash flow, being a build of $58.4 million versus a release in the prior year of $12.7 million, which is consistent with the expected Q4 to Q1 cycle, which I will take you through in the following slides. This generated an operating cash flow of $244.6 million, declining 27%, which is a cash conversion of 71% versus 88% prior year. Cash taxes and interest payments decreased as did the non-recurring items cash outflow to minus 15.5 million versus the prior year of 28.8, which brings an operating cash flow of 138.5 million, equally down 27%. Moving to slide 19, the Q1 networking capital being a build of 58.4 versus the prior year release of 12.7, and following on from the Q4 release of 140.6, increased the proportion of rolling 12-month sales to 6.9, still below the prior year level of 7.3, despite the working capital build and flat sales. The constituent elements of the movement being receivables and prepaid decreased by 9 million from Q4, resulting in DSOs at around 87 days, which is in line with the prior year. Inventory increased by 22 million, this being adversely impacted by the late reduction in realized shipments and by the movement of some inventory ahead of proposed tariffs. Liabilities decreased by $45 million with the trade DPOs at the level of 59 days versus 56 per year. An increase in deferred revenue of $63 million, which is reflective of the normal billing cycle in software. Finally, the accrued expenses are decreasing as expected from Q4 to Q1. Moving on to slide 20 and the final slide. We see the usual seasonality where Q2 and Q4 are typically the stronger performance quarters, but this must be considered with the current uncertainty of the tariff situation. In conclusion, the challenging macro environment and resultant demand uncertainty in the key third months of the quarter resulted in a lower achieved sales volume, and despite the strong gross margin with no opportunity to mitigate the cost structure, The consequential misalignment of the cost base negatively impacted EBIT delivery. This situation will be continually assessed in the following quarter with proportionate cost management as appropriate. The cash conversion was in line with the expectations for Q1, which is cyclically weaker and remains a focus. And with that, I'd like to hand back to Norbert.

Thank you, David. Before we conclude today's presentation, I will take you through some customer stories from the quarter. before spending a moment on our new robotics division. So the first story comes from our geosystems division, where we have been using our reality capturing portfolio to help Netflix create a 3D environment to facilitate visual effects for one of their shows. This example demonstrates the breadth of our reality capture portfolio. This is way beyond surveying and construction. Turning now to the next slide. Here's an example from MI division, where we have been working with a major European aerospace leader. We are providing software and services to design and build the next generation of commercial planes. This is an example of our key account management in action, allowing us to work collaboratively with a major customer to deliver this multi-year agreement. Turning now to our next example. Now from the ALI division. Here we are helping a major Korean engineering firm by leveraging Jovix. Jovix is our materials readiness application, which digitizes and automates paper-based data for the construction industry. At Hyundai, this has driven efficiency, improved decision making, and enabled cost savings.

Turning to my next slide, please. This is an example from our SRG division.

Here, an AI agent and the reporting tools are helping to manage housing developments in Sao Paulo. By triggering notification of illegal practices and monitoring and analyzing collective data, we are improving the oversight to mitigate issues. Turning now to my next slide, please. Before I conclude, I want to spend a moment on our new robotics division, which we launched during the quarter. This new division will focus on organic products designed to accelerate next-generation autonomy, in particular in the field of humanoid robotics. Why is Hexagon in this? We believe our position as a leader in measurement technologies, sensors, and autonomous systems together with our partnerships in AI places as well to access and guide the marketplace of humanoid robots. We will use our significant expertise and relationships to focus on industrial applications, building on our existing work to mitigate labor shortages while improving quality and effectiveness. This division will be a key focus at the upcoming Hexon Live event in Las Vegas in June. I encourage everyone to join us there.

Turning now to my concluding remarks.

To conclude, in Q1, we saw a return to macro uncertainty, which impacted our financial performance. Demands stabilized in April, but we remained cautious of the uncertain environment and will monitor and adjust our cost base as needed. Outside of the macro environment, we have continued to make good progress. The separation of ALI with an expanded scope, which includes SRG, is on track. We have confirmed that NUCO will be listed in the US market with a temporary SDR program for investors not able to participate in the US markets. We have a strong pipeline of new products in H2, which will make a material impact from 2026 and beyond. This includes a launch from our new robotics television as well. We remain really excited about the future of Hexagon. With that, I will hand back to the operator to introduce the Q&A session.

Thank you. As a reminder, to ask a question, you will need to press star 1, 1 on your telephone, and wait for your name to be announced. To withdraw your question, please press star 1, 1 again. We will take our first question, and the question comes from the line of Daniel Durberg from Handelsbanken. Please go ahead. Your line is open.

Thank you, operator, and good morning, Norbert, Ben, David, and Tom, and thanks for the transparency. in the prepared remarks. A question, though, on the scene stabilization here in April. Can you give any more color on this? After the April 2nd event, this statement comes as a positive surprise to me, at least. So are we mainly talking about the hardware sensors in China and NAFTA? in MI and geosystem, or is it more broad-based, this stabilization? Thanks.

Hi, Daniel. You know, I think the way I characterize it, as Norbert described, is in March we had some customer delays because of the geopolitical uncertainty, which impacted March. Then we've seen a bit of a catch-up in April. So we haven't fully closed the month yet, and it is the lowest contribution month of the quarter. But we have seen a return to growth in some of the business lines that were affected in March. But it's difficult to extrapolate that into a trend, given some of it is clearly timing differences of when these customer orders have been booked. So we kind of, you know, April has gone back to some growth, and then we'll wait and see how the rest of the quarter develops.

Perfect. May I also ask you, perhaps it's for the board, but given the current uncertainty, your political unrest and less difference in valuation in the U.S. versus Europe, for example, would it not be fair to have the ALI as a non-temporary listing in the Nordics, so in Stockholm?

I think, Daniel, that is a question for the board. That's something that we will come back to later in the year. I think the logic of the SpinCo being listed in the US is as much the geographical location and heritage of the business, where the customers are, where the employees are. So it is more of a US company. And the SDR is intended to manage a smooth transition to the US listing and make sure that all investors actually participate in the upside. So as we said in the release, we'll be speaking to investors over the next few months to get their feedback on that and come back later in the year with more details on how long the SDR will last for.

That's fair enough. If I may also, have you done any changes or adjustments so far in Q2? You mentioned that you're closely monitoring the situation, the demand, etc. But so far, are there any NRIs in Q2 that we should be aware of worth highlighting here?

No, not at this stage, Daniel, but obviously, you know, the divisions are closely monitoring the customers and the demand intake, and they will, as in a normal course, look to moderate costs where at all possible. They will take a very cautious approach. Obviously, having seen the movement that we saw so late in the quarter, they're on notice to try to monitor and see where we go. But, you know, the situation is very variable, so we have to keep that under close watch and decide what is the appropriate action. We've seen a sort of more considered direction of travel than we have after just, like, the last six weeks' impact.

Perfect.

Thank you very much.

I'll get back in queue.

Thank you.

We will take our next question. Your next question comes from the line of Balaji Tirupati from Citi. Please go ahead. Your line is open.

Hi, thank you. Balaji Tirupati from Citi. Two questions from my side. Firstly, could you share how your conversation with customers evolved through the course of last month in terms of their prioritization of investments? And also, in your strategy to mitigate the limited tariff advent your business might face, how much would be near-term pressure on prices that you will see? And do you expect that being completely offset by price increases? Thank you.

Let's start with the last one about the tariffs, for example. As I mentioned already, we are observing this very carefully and taking already approach with things, increasing price increases, for example. and as well re-routing already what we are doing in inventory management as well. So we do believe that we are on a good track to mitigate quite a bit of, say, the exposure so far from our point of view. And the first question, can you just describe a little bit more what you're looking for here? Because that wasn't clear to me from the get-go.

I was asking how your conversations with customers evolved through the course of last month plus. And that is in context of how your customers are prioritizing their investment to address the current macro environment with your portfolio.

So, I mean, we have ongoing discussions and I was personally involved in some things as well on ratios and so on. So it's the uncertainties from the customer to say, okay, we are interested. So we have not seen any cancellation on things, but we have delayed responses from our customer and to a certain extent. I referenced what Ben was saying. We do have seen certain things come back beginning of April of delayed projects from our point of view. So we are in very close contact with the customers, but they have the same uncertainties as we have in the sense. And I think that is a little bit of, yeah, all of us in the same boat here, honestly speaking.

Understood. So more of wait and watch approach from your customer rather than reprioritizing their spend at this moment.

I would say so, yes. Very clear. Thank you.

Thank you.

We will take our next question. Your next question comes from the line of Victor Trollston from Thanks. Please go ahead. Your line is open.

Yes. Thank you, operator, and thank you all for taking my questions. I guess, firstly, perhaps, on the NLI question, If you could shed some light on it, I must say, from my perspective, I'm a bit surprised about how that margin could fall, you know, almost 400 bps, you know, year over year, while the division was still growing 5% organically. So I guess if you could, you know, help us with some details on that. And also, you know, in relation to that, could you give us the gross margin development in ALI in Q1 versus, you know, last year? That's my first question.

Yeah. Hi, Victor. I mean, the gross margin we don't give, but there was no real change relative to last year. In terms of the margin drop overall, I would say there are two factors. One is that growth was a few percent weaker than we expected going into the quarter. And you obviously get a high drop through in a software business, given where the gross margins are. We had a very good level of perpetual demand in Q4, and it was slower in Q1. And going back to what Norbert said about customers pausing to wait and see what happened, we did see some hesitation from customers in ALI around potential perpetual sales as well. So that's one aspect of it. The second one is that we are making additional investments, and we called this out last quarter as well, around new products that we're ramping up like SDX2. And, you know, SDX is a new product. It's not contributing yet a lot to revenues, and those investments drag on the margin. And then finally, it is the seasonally slowest quarter for ALI. If you look at it from a revenue perspective, that seasonality has not been so obvious over the last few years, but Q1 is normally the weaker margin over the year. So it's a combination of factors.

Okay. Thank you, Ben, for that. But I guess just from my perspective, earnings is down year over year. So I still understand the drop through comment. But to me, it seems to vast majority be a cost. Well, it is what we should call it, given that sales is up year over year. But fair enough. Yeah. Okay, thanks for that. And then I guess also just, if you could help me at least, but compare the current situation a bit to what you saw in 2019. I guess that I'm a bit surprised on, let's say, the split of the weakness now in Q1 compared with what we saw in 2019, when it was mainly a China issue. I think China had negative... 20% organic growth for a couple of quarters. So if you can help us, are there any similarities with that period this time around, which we should expect for the coming quarters, or are there any clear differences?

Yeah, I think, Victor, it's a good question. If you look back to 2019, the trade issues were focused on China. What we've done since 20, and that was where we saw the impact in our revenues, Since 2019, we've worked hard, like a lot of companies, to localize our business in China and make it a lot more self-sufficient. So in the current round of trade issues, it's more insulated. You see less impact from the tariffs, the reciprocal tariffs that are going on between the US and China. As Norbert showed in one of his earlier slides, the impact this time around has been on other businesses where The tariffs weren't a focus back in 2019, but they are this time around, like Canada, like Mexico, like Europe into the US. And that's where we saw the pause in demand in March.

Okay. Well, super. Thank you very much. I'll stop back in line. Thanks, Victor.

Thank you. We will take our next question. And your next question comes from the line of Mikael Leeson from Carnegie Investment Bank. Please go ahead. Your line is open.

Thank you. Good morning. I have a question also on the live segment. You mentioned that demand in North America for this segment was more subdued than in other regions. Could you maybe elaborate a bit more what's going on in North America where you saw the weakness maybe in your end markets or in different product categories or in your customer types, owner-operators, and CPCs?

Yeah, hi, Michael. You know, I wouldn't call it out as a huge trend, because obviously 75% to 80% of ALI's revenue is recurring, so it's very predictable. But, you know, we did see some delays in North America, in Canada, you know, in markets like heavy process industries, where I think As Norbert said, customers decided to wait and see how things developed. So North America still grew overall, but it was slower than EMEA and Asia.

Okay.

And did you also see a kick up there in April for the live segment? Not dramatically, no, because 75-80% is recurring anyway. So And as I said earlier, the month isn't closed, so we haven't got full analysis of every business and every product line.

Okay. And I also have a question on the R&D side. It was 175 million now in Q1 adjusted. And I also noticed that amortization increased sharply to 72 million, 31% up. How should we think about R&D cost structure going forward and Can you also comment on the trend if you look at capitalization versus amortization? That would be helpful. Thanks.

Sure. And you're right. I mean, we have talked on several quarters at us being at an elevated R&D spend at this moment in time. And obviously, with the sales not coming through in terms of volume, it does look a little higher as a percentage. But our projects are long-term and we have that investment over a long period with, we've talked about it, significant expectation of releases over this year. So we are at an elevated level and we were along the lines of 5 million quarter over quarter increase in the gross spend. The majority of that coming from the areas where we still see the growth with ALI and SIG, as Ben mentioned, with SDX and with SIG for on-call. So we continue to see increase in those investments. The other area is in the AS division with the road train, the automated road train. Those are the areas where we're seeing increases in the sort of MI and GE systems area. We're sort of seeing that more flat to slowly decreasing, just to give you some indication. But as we said, they're at a high level. So that's not unexpected that they would start to trend down over the period of time. And then obviously with the IAS38, you have the amortization coming back as we have released as a product. And we've mentioned a couple of them. you know, the likes of STX2, the like of the Icon Trades product, the like of the ATS800, just to give you a flavor for the different divisions, all of those product releases are clearly moving into the amortization phase and you're seeing that come back across through the P&L.

Okay, thank you.

Thank you.

We will take our next question. Your next question comes from the line of Joachim Gunnel from DNB Markets. Please go ahead. Your line is open.

Thank you very much. So just help us bridge the commentary with the stable trajectory into April. And I would assume that the bulk of your deliveries in Q2 is also, call it, tilted towards June. And the fact that you haven't made any adjustments to your cost base yet. So what's your line of sight when it comes to visibility to align your cost versus those deliveries? And then how will that be better captured in Q2 than we saw in Q1?

Yeah, we'll answer from my side. So the stabilization is really, as Ben was talking about, we have seen come back, we have seen in various, and it's not only one business, it's across all, but it's early stages. I would like to mention this as well. We have relatively good visibility, but at the end month, and it's important still, and then we can see and talk a little bit more about that, honestly speaking, how things have developed. So from our point of view, we have certain expectations that this will continue and that we are more or less back to the normal growth rates, what we are looking for as well. Regarding the adjustments, as David was talking about, what we are giving clear out to the different management and the different divisions and even further down because as you may recall we are a decentralized organization and people know what they need to do now in this kind of circumstances because let's say we have not these kind of things happens on a regular basis so we rely on the management and have visibility as well to a certain extent on the weekly to monthly basis as well and will

active quality meeting as well as we go.

Thank you and then on the tariff impact you quantified here by 15 millions on earnings should we annualize that to say 60 million as the potential tariff cost had when you envision for the full year?

I mean, you can do that. I'm not holding you back, but honestly speaking, we need to see things because we will definitely change our behavior. That I can ensure you because, I mean, we have seen things I already mentioned that we are doing more and more localization. We have done, but we will do an extra effort, let's call it like that, to do even more. And I hope that I can say you don't need to do it. At the moment, you probably, yeah.

can do it but i hope that we don't need to do this very clear that's also encouraging and just finally on the on the spin-off everything is progressing according to plan is what i'm reading to your commentary yes absolutely is there any sort of call it risk that in a more uncertain world that that that that you would have to revise that decision no uh i can't i mean at the end it's the decision of the board i just need to be very clear

But from our view, what we have seen so far, there is no hesitation at all, in a sense, from my point of view. But I have to admit, I rely here on the board to make the announcement then at the appropriate time, if there should be something.

All right. Thank you very much.

You're welcome.

Thank you. We will take our next question. Your next question comes from the line of Eric Golrang from SEB. Please go ahead. Your line is open.

Thank you. And I have to have some patience with a couple of more questions trying to understand the EBIT margin drop. And maybe as a comparison, and I mean, you talked about 2019, also as a comparison to first quarter of 2020 there, when you had a similar margin drop, but on a 7% organic, negative organic growth rate, which is quite different. So, I mean, the difference, this is really the, I mean, the pace of amortization of capitalized R&D and then just the direction of investments. And if so, and I know you talked about it, you have been at least, as I've understood it, signaling stabilization in investments. But is that now not the case? It's rather continuing up? That's the first question.

Yeah, I mean... dilution of the margin clearly is the volume impact that we've seen i mean we have we had an expectation of a significantly higher volume and that would have given us through a contribution which would have brought us as i mentioned much more towards the 28 which you know seasonally adjusted from q4 at a 30.3 without fx 200 basis points from q4 would have been in line with where our expectations would have been for the quarter so Clearly, the problem was the volume issue. That was exacerbated by the FX. Obviously, that's always a topic that we can't control, but a negative FX on transaction 5.8 in the quarter is another element which gives us a drag onto the EBIT. In terms of linking that through to the R&D, yeah, clearly when we are investing, we're investing with a growth mindset. The development is to stimulate growth, and these are not one-quarter investments. These are long-term investments that we need to keep moving and positive momentum behind in order to deliver the products and the software that will drive the future growth. So we continue with that investment strategy, believing in the product strongly, and they will come through in the future with a growth. But this quarter, it was the growth that we didn't foresee, the uncertainty that the tariffs brought that dropped through to the EBIT margin.

And Eric, if I can add to that, comparing to Q1 2020, I mean, in that situation, all markets went down simultaneously and you had a natural hedge on your costs because there was no travel, there were no trade shows. There were government schemes to fund employees. There was furlough and so forth. And there isn't that this time around. And as David said, we geared the cost base for a steady pickup in growth. So it's a different scenario.

Thank you. Next question is, and I'll follow up on Joakim's question there.

set up for growth into Q1 and as I read it I mean you're monitoring situation but you're still set up the same way into the second quarter right nothing has really changed from my side we have see alerted the organization more that's for sure because as soon as we have seen the drop we we took some measures in the sense, from my point of view, but we are monitoring, as we said in the announcement, we are monitoring how Q2 is developing in the sense. We have done certain measures locally as well.

Okay. Thank you.

Thank you. We will take our next question. Your next question comes from the line of Naeso Neng from Berenberg. Please go ahead. Your line is open.

Hi, thank you for taking my question. Can I start with the tariff impact, please, in your profit line? Can I just check then the 15 million impact from the direct impact, is it also included in the 30 million missed against your internal forecast? And I understand that you haven't taken any cost action today, but if you were to take any cost actions, how flexible level of protection that would it give going forward? Please, if I could start with a follow-up after this.

Okay, the 15 million would be going forward. There is no impact of tariffs in the Q1 results because they were all put into the delayed mode. So there's no material impact of any form in the current results.

And then your second question related to... If you were to take cost actions going forward, what sort of protection level would you be looking at at EBIT level? So if we have another 14 million miss in sales against your internal forecast, what level of EBIT impact would you like to limit it to?

Yeah, I mean, I wouldn't give that. I mean, that's a complicated question because in terms of any implementation of any cost measure, there's a phasing to it, which means that you can't give a prediction onto a single quarter and we don't guide to a single quarter in that form. What's important is we need to see the overall direction of travel of where the volume is going and then we will take appropriate action and give visibility as we did with previous schemes to what we're intending and hoping to deliver from those schemes. So it's not something I would give as a what if maybe on an uncertain volume at this stage.

Got it. Understood. That makes sense. And then just last question from me. The increase in amortization from intangible assets, about 17 million in Q1, should we annualize it for the full year as well? So give me about 17 million. And then, you know, given the R&D capex in previous years, should we expect a similar level of increase in 26 as well?

The amortization, it will gradually, it will stay similar levels, but it will gradually tick up. That's the nature of the IAS 38 calculation when you've been investing. And the gap will come down over a period of time. That's our expectation and built into our planning. So that's what you would expect to see that over a period of time. Got it. Thank you. I'll get back in the queue.

Thank you. We will take our next question. Your next question comes from the line of Ben Castillo-Burnsout from BNP Paribas. Please go ahead. Your line is open.

Yes, good morning. Thanks for taking my question. Two, please. Firstly, the weakness in the sensor and robotic solutions. Can you just give us a sense of for how long reasonably can customers delay those transactions? To what extent are the maintenance schedules or device expiries that customers must buy before a certain deadline, or can customers delay for much more than just a quarter or two? And then the second question was just on China. The trends have been quite lumpy around shipments and timings, I think you mentioned. But what is your sense on underlying demand trajectory? Is it getting better? Is it deteriorating, kind of stable? and your expectations for this year on China specifically. Hi, Keith.

Hi, Ben. So on China, I would say it's a different outlook between the construction segment and what we see in discrete manufacturing. For our China business, MI is probably 75% of revenue, so we're more focused on that side of the market. And there, actually, we see relatively stable demand. I think that Automotive is a little bit softer. I think electronics, I think aerospace, general manufacturing are still okay. It's probably as much to do with the very strong focus of our local organization and their key account management program. So we're getting some very good wins with key customers that are offsetting perhaps some of the weakness you see in the China discrete manufacturing market. But there, I think, looking out as far as we can see, we see it as relatively stable. On the construction side, which is a smaller exposure and impacts geosystems, that market is still very weak. It can be a bit volatile quarter by quarter, depending on projects and how our partners manage their inventory. But we're not seeing any pickup in the underlying construction market in China. It's still tough.

And regarding the delay, you were asking how much is the possibility to delay things. That's very hard to say because it depends really on the product itself, honestly speaking, because some of them you have seen immediately come back as well on other products that there could be a delay as well for very, not easy to say, even months from my point of view in this sense. So I think this is a little bit looking in the crystal ball, honestly speaking, in which I'm not doing at the moment because this is too much at the moment on uncertainties in the sense.

Okay, understood. Thank you. Thank you.

We will take our next question. And your next question comes from the line of Sven Merck from Barclays. Please go ahead. Your line is open.

Great. Good morning. Thank you for taking my questions. Maybe first a question on managing cost. Hexagon has gone through a number of cost savings problems over the last few years. So I just want to get your sense, how sensible is it to cut costs further from here? Are you confident that you are still far away from a point where cutting costs is potentially hurting not the growth prospect of Hexagon? And then secondly, it would be great if you could elaborate a bit further on what the robotics division is about. What are the solutions you're planning to sell? Are you planning to develop robots yourself or are you selling solutions to develop robots to third parties? Just get a bit more color of what types of products you're actually planning to sell here. Thank you.

In terms of managing cost, it's clearly something you have to do in conjunction with the divisional structure that we have. The divisions are very close to their businesses. They need to be reviewing and analyzing where their cost structure sits in relative terms to their targets and then in relative terms to their volume. It would never be our intention to damage the structure, and we have the divisional structure there to ensure that that's not something that we do. So I think that's not a concern I have in terms of where we sit from a sort of cost management, as in what is the relatively proportionate amount. That's clearly why we need to spend a little bit more time understanding the uncertainty that we currently face. It would be easy to knee jerk reaction, but we need to understand where this uncertainty is and therefore put a proportionate amount when we have a better line of sight to what the impacts could be.

Regarding the robotics, as I mentioned already earlier, I mean, we have very unique capabilities in the sense where we bring things together. So, and I think from our point of view, the big moment will be Hexagon Live, where we really reveal what we're doing. I can explain that it's in the ecosystem of a humanoid robot, that I can say in the sense, but please forgive me. I hope you're joining us at Hexagon Live. There you will see it firsthand yourself.

Okay, fair enough. Thank you very much.

Thank you. we will take our final question. And the final question comes from the line of Alexander Virgo from Bank of America. Please go ahead. Your line is open.

Yeah, thanks very much. Good morning, everybody. I wondered if you could just talk a little bit about the customer behavior through Q1. And I guess what I'm getting at here really is that Most of the other commentary from both your peers and the broader supply chain has been to the effect that there wasn't really any pre-buy and there hasn't really been any effects on behavior and activity. I think that if I look at your direct peers, some of them say Faro Tech, Atlas Copic, I appreciate that that color and commentary does appear to be a little bit more aligned. But I just want to understand if I look at February up nine and March down six, clearly somebody pre-bought and then didn't buy. And I wondered if you could just give us a sense of what exactly we're talking about here in terms of the products or in terms of the end markets or customers and the supply chains, because it is clearly a little bit more of a trend than I think perhaps we have seen elsewhere. So that's really what I'm trying to get at here.

Yeah. Hi, Alex. I don't think we saw pre-buy. You know, I I mean, it's hard to tell, but I don't think our products are things that people, you know, components, right? They're finished goods. I don't think people were pre-buying them. I think we genuinely saw through January and February, you know, an underlying pickup in demand. Relative to other companies, I think we have a little bit more book and bill business. Perhaps they ship more from backlog, so you're not affected immediately. But particularly in North America, we do have a situation where customers can order in March and have it delivered. And that obviously, because it's the most important month, 50% or so of quarterly revenues, and it was in the epicenter of where the customer uncertainty was, had a disproportionate impact on us relative to other companies. And I think the slide that Norbert showed on the geographical mix shows where that was in Q1 in particular. But I think that could be why we were more affected by it than some of the other companies.

Okay. I think it's probably also worth saying that I think the original assumptions were probably that the census business took more of a hit than actually it seems to have done given the software growth probably wasn't as strong as you'd expect it either. Is that fair?

Yeah, that is fair. You know, I think As I said on ALI, 75% or so is recurring, but you still have a portion which is discretionary. And I think because of the uncertainty, customers did wait and see, and that impacted ALI's growth by a couple of points. And I think for SIG, as we said, we had very good growth in the public safety business. The federal services business was impacted by some of the delays we've seen this year. coming out of the administration chains. So that wasn't as strong as we were expecting either.

Okay, that's all helpful. Thank you very much. And if I could just clarify one thing, David, the 15 million tariff impact that you talked about, direct cost, is that an annual number or is that a quarterly number? I wasn't quite clear on one of the earlier questions in the explanation.

No problem, Alex. That was a quarterly number.

Yes. Thank you.

Thanks Alex.

Thank you. This concludes the question and answer session. I'll now hand back to for closing remarks.

Yeah, I think appreciate that you joined us in the sense and all the best going forward.

This concludes today's conference call. Thank you for participating. You may now disconnect.