Hexagon AB (publ)

Thank you very much for joining this Q4 2023 and full year report. Welcome. We're pleased to report another good growth quarter. Throughout the last couple of years is continuing is driven by the efforts that we're making in innovation. Automation, sensor fusion, cloud technologies are carrying growth throughout most of our divisions. And that's also coming with margin expansion, which underlines good execution, good discipline and strength of the business model. In Q4, we were pleased to report we're so strong. cash conversion and overall for the full year 2023 results came on track with our 2026 objectives which we're going to review in a second as a result the board proposes an increased dividend of 0.13 euros per share in detail q4 represented the growth of five percentage points on an organic basis with adjusted gross margin up to 67%, which of course is a very important metric for us, driven by improvements not only in volume but also in mix and a growing prevalence of our software-centric solutions. Operating margin came in at 31% in the quarter with cash conversion of 103 percentage points. For the full year 2023, Growth on an organic basis was up 7% with an adjusted gross margin of 66%, operating margin of 29 percentage points in cash conversion within the guidance range. If we move on to slide five, of course, Q4 as well was the opportunity to meet a lot of you, also face-to-face at Capital Markets Day back in December in London. We've discussed a series of things during that day. We restate the confidence in the targets in the mid term targets for twenty twenty six. We plan to keep on growing the business on an organic basis between five and seven percentage points. Growth from structure is planned to come in around the three to five percentage mark. Operating margin will need to keep on taking up and we plan for that to land above 30% inclusive of PPA amortization by 2026. We've also laid out plans by areas and by division in terms of how innovation, commercial execution, operational discipline will need to help us to leverage the strong value proposition that we are sitting on. Q4 has been a reconfirmation of the fact that the macro trends that we help our customers with in terms of quality of the output, in terms of financial viability, productivity of their operations, in terms of safety, and security of the operations, but also decarbonization is really underlying that we are at the right spot in the market. We are gearing up the portfolio to capture those opportunities and we want to have the discipline to build the strongest possible financial profile for the group as a result of that. But in London, we've also discussed broader commitments, starting with cash conversion that has been formalized in terms of the guidance between 80 and 90%. We've talked about ESG. and targeting 95% reduction in scope one and two emissions by 2030, as well as net zero alignment by 2050. We've talked about financial disclosures and making a few changes to give you the best possible visibility within the business, as well as our initiatives to connect and align as much as possible management incentives to the financial profile that we're trying to build for the group. The good performance in terms of margin in Q4 was also supported by the rationalization program that we have launched as of the end of Q2. As a reminder in slide six, we're working on four fundamental pillars in terms of building more operational efficiency within the group. We're working on synergies and lowering and optimizing the cost of serving the business across divisions. We are tackling small areas of underperformance or trying to align our operations as much as possible to the financial profile that we're trying to build for the future. We're optimizing our physical footprint and we're working on investments in automation, physical and digital automation to make our operations as efficient as possible. In terms of synergies between the divisions, we are working on a simplification of the organization. We have had a relatively strong Q3 and Q4 approach to these themes, and we are going to be rolling out within 2024 shared services, operations, and centers between at least our two major divisions, GEO and EMI, and we're well on track with that. In terms of performance, we start to see some of the benefits of these initiatives already in Q4. And we have announced a couple of weeks back a second divestment within the MI division. We've sold the hand tool business worth roughly 50 million euros in sales on 2022 phases. And we plan to close that transaction within a couple of weeks. In terms of the physical footprint of the group, 52 facilities have been closed in 2023. There's a lot of focus on this topic and we plan for another 60 plus facilities to be targeted and closed down in 2024 for an overall reduction of the physical footprint of about 25% from the beginning of 2023. We also keep on working with our leadership team in terms of rationalizing further the manufacturing footprint of the group and optimize it in terms of our geographical presence. And then last but not least, in terms of automation, we've made investments in physical automation to improve throughput and cost footprint in terms of assembly operations, calibrations, But we also roll out digital tools to really step up productivity in terms of services, in terms of technical support teams. Overall, we've talked about taking a one-off charge within Q3 in terms of P&L investments worth 198 million euros. In terms of cash out related to the program, 32 million have been spent in Q4 and 48 to date. We have benefited of 20 million euros in savings within Q4, and we have triggered a current run rate of 95 million euros in terms of annualized savings. Now, Ben Maslin, our Chief Strategy Officer, is going to take you through updates in terms of reporting segments and industries.

Thank you, Paolo, and good morning. So, first, the organic growth overview for Q4. If we take it regionally first, we continue to see good growth in Asia, Middle East, and Africa. South America declined on a tough mining comparative, but is growing, excluding that. And China continued to grow in the quarter, despite a slower overall economic backdrop. North America delivered solid growth overall, despite us exiting some lower margin defense contracts. Western Europe remains the weakest region, especially Germany, the Nordics, and the UK, with the region registering only slight growth overall. By segment, discrete manufacturing shows a good momentum still, with the exception of automotive, where we have seen some slowdown over the last six months, largely reflecting tougher comparatives. This is being offset by good growth in general manufacturing in electronics and aerospace markets. Power, energy, and mining had a good quarter, and those segments we think have good momentum going into 2024. We continue to see a weaker construction and surveying demand, particularly in developed markets, and especially in Western Europe, although this is overall being mitigated by good growth in reality capture. Construction markets outside of Europe continue to grow during the quarter. If we move to geospatial enterprise solutions, We saw revenues of 675.5 million euros in the quarter, and that represented organic growth of 2%. The EBIT margin of 30.9% was slightly down on last year, driven by currency translation and transaction effects. By subdivision, Geosystems saw 3% organic growth. This was driven by good growth in mining, reality capture, geospatial content sales, and our software platform. Together they represent around 45% of our divisional revenues and the positive development here offset the weaker development we saw in that surveying and construction products during the quarter. The safety infrastructure and geospatial, we saw a continued decline during the quarter with good momentum in public safety offset by our decision to exit some low margin service contracts that we took in the first quarter of last year. This drag is expected to be less significant in Q1 2024, and after that, we will start laughing. Easier comparatives would expect to get back to growth. For autonomy and positioning, we continue to see very good momentum, especially in precision agriculture and the marine segments, and we expect that to continue going into this year. Onto industrial enterprise solutions, IES delivered revenues of $759.8 million in Q4, and that represented organic growth of 7%. The EBIT margin of 31.2%, that increased significantly compared to last year. That reflects good product mix, operational leverage, and as Paola said, the payback of savings. Manufacturing intelligence achieved 7% organic growth in the quarter, and as I said, they had good growth across most segments and geographies, including China. Orders also grew in the quarter at a similar rate to revenues, so our backlog is relatively unchanged coming into 2024. For the ALI division, we saw good growth right across the product suite, and especially for design and engineering software, cybersecurity software, and SDX. asset lifecycle information management platform. On to the next slide, new divisional structure. As Paola mentioned, we're going to move to a new divisional reporting structure from the next set of quarterly results. And here we show the five divisions and the key end markets that they serve. The only change to the previous divisional breakdown under which we reported organic growth is that we've moved the hexagon mining business from geosystems to autonomous solutions, that was previously called AMP. And this is to better capture synergies across our positioning on autonomy technologies, as Maria described in more detail at the Capital Market today. Next slide shows historical performance by quarter for the new divisions. We broke out full year 22 at the capital market today. So here we add the progress that we had by quarter through 2023. Organic growth by division is as we previously reported with the exception of geosystems and autonomous solutions, which has been restated due to the transfer of hexagon mining. The restated quarters also allow you to see the seasonality across the year in the different divisions, with the first quarter normally being the weakest from a margin perspective due to lower volumes and Q4 the strongest. Two exceptions to the normal pattern that I would flag from last year. Firstly, in ALI, they had a stronger than the normal quarter of perpetual license wins in Q123, which helped the margin somewhat. And secondly, Geosystems, which, as you can see, has seen some margin compression by quarter as we went through 23 as volume growth slowed and because it has a more significant drag in currency than the other divisions. So we hope that helps with the modeling. The IR team are, of course, available to help with any additional questions you have on the restatement. And with that, I think it's over to David.

thanks ben and in the financial review i would like to take you through some more detail of the strong performance for q4 and full year and that we've already alluded to touching on the areas of importance we discussed at the cmd for delivery of our long-term financial target in particular in terms of ebit margin progression and cash conversions Starting with the Q4 income statement, stepping through the sales bridge, sales of $1,435,000 gave a reported growth of 2%, negatively impacted by FX of minus 4, and with structure of 1%, giving an organic growth of 5%. Gross margin improvements delivered a positive uptick of 30 basis points. Adjusted operated earnings grew in line with organic growth by 5%, which resulted in a 70 basis points improvement in the adjusted operating margin percentage to 30.5. In the earnings before taxes, excluding adjustment line, interest expense of 49 versus the prior year of 18 resulted from interest rates driving the dilution. The adjustment line includes an equivalent 29 million for PPA amortization and LTIP costs are running at 18 million versus 13 in the prior year. Taxes being 18% in line with prior year bring us down to an EPS of 11.8 euro cents. Moving on to the Q4 profitability bridge. Unlike the prior two quarters, FX doesn't give a dilution on overall EBIT percentages delivery in the quarter. It's a minor accretion. This is despite a currency translation of 55 million on sales with a corresponding 24 million EBIT impact at roughly 45%. This is because of the net transaction, which was a positive with a current year loss of 10.5 million versus a prior year loss of 20.5. Translation movements are driven from currency devaluations to the euro of the CMY by 7%, the US dollar of 5%, where we have sales exceeding costs, and appreciation of the Swiss franc by 3%, which is the river. The structural element being predominantly the acquisition of Cognify, Hardline, and ProjectMate, net of the disposal in the SID division, delivered an accretive 41% margin. Similarly, the organic element, which includes the portion of the savings from the rationalization program for business growth, delivered 40% margin. That bridges the 70 basis points improvement to 30.5. Moving on to the full year income statement, sales were $5,440,000,000, representing a reported growth of 5%, again, negatively impacted by 4% FX. and structure two giving organic of 7% for the full year. On the full year, we delivered a solid gross margin percentage improvement of 70 basis points to 66.1. Adjusted operated earning growth of 5% with a full year adjusted operating margin of 29.4% versus 29.3 prior year. And in the following slide, I will show the FX impacts in this comparison. As we've seen each quarter, interest expenses have dragged versus the prior year. And on a full year basis, this was $155 million versus $39 million, impacting the earnings before taxes excluding adjustments. Within the adjustments, the main difference year over year being the Q3 rationalization program of $198.7 million. Taxes were at 17.8% versus the prior year of 18.3%. This brings us to an EPS adjusted of 43 euro cents, 2% below the prior year. Moving on to the full year profitability bridge, the magnitude of the dilution of the negative currency development is clear. Currency translation impact of 180 million on sales had an 81 million effect to EBIT, which again is 45%. And the net transaction was a further negative 20 million, with a current year loss of 24 minus a prior year loss of 4. Transaction movements are driven by the same currencies I mentioned in Q4. Structure from the acquired business in the first year of consolidation delivered a bulk group margin of 33%, with the balance of the organic growth at an accretive 42%. The important conclusion being that the dilution from currency is offsetting the impact from the organic leverage. So the reported operating margin only increases by 10 basis points, whereas the neutralized for currency impacts, it would have increased by 100 basis points. Moving on to the gross margin, we discussed the importance of the long-term positive gross margin percentage development for the group during the CMD presentation at some length, as it correlates so strongly with EBIT margin improvement. The fourth quarter at 66.5% versus 66.2% was a continuation of this theme and cemented a strong annual improvement, reaching 66.1% versus the prior year of 65.4%. The drivers of this being the software mix, innovation-led development, and increased operational leverage. In the next slide, we go to cash flow, which shows a broad and material improvement, with a stronger operational cash leverage at 8% than the EBIT at 5% due to the increased ad back from depreciation and amortization. In conjunction with a marginally reduced net investment level, cash generation post-investment improved by 15%. The cyclical improvement in working capital gave a release of 69 million versus the prior year build of 76, which resulted in a cash conversion for the quarter of 103% versus the prior year of 61. The impact of the strong fourth quarter being a full year cash conversion of 80% versus the prior year of 72, including cash taxes and interest payments, operating cash flow before non-recurring items was 105% above the prior year. Moving on to the next slide, working capital. In Q3, we discussed the cyclical nature of working capital, and in particular, the ratio to sales, the intention to remain below the 10% level. And we saw in Q4, with the positive impact of the release of 69 million, the ratio dropped to 7.9, down from 9.5 to the prior quarter. Looking at the constituent elements, Receivables and prepaid, though an increase, is a positive contributor, as despite the strong invoicing in the fourth quarter through very good collections, we only increased by 33 million, with DSO dropping a couple of days between Q3 and Q4. With the strong shipments, we saw a reduction in inventory as expected, and DII is now a similar level to the prior year. Coupled with the usual Q4 increase in deferred revenue and accrued expenses, it was a positive impact in the quarter, contributing to the strong cash conversion. My final slide is highlighting our progression to date on the plan disclosure change we've discussed, and Ben is already taking us through the new segment information that is new in the quarter.