Hexagon AB (publ)

Good day and thank you for standing by. Welcome to Hexagon First Quarter 2024 Report Conference Call. At this time, all participants are in the 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 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the president and CEO of the company, Mr. Paolo Guglielmini. Please go ahead, sir.

Yeah, good morning. Thank you for joining our Q1 2024 earnings call. We are pleased to report another solid quarter with organic revenue growth of 3%, resilient margins, and strong cash conversions. Slow demand in Europe and the weak construction market, combined with strong comparable growth in prior periods, made for a difficult backdrop. But the team did very well to capitalize on a strong US market, the demand from counter cyclical verticals, and more importantly, our own innovation and proximity to clients in order to deliver a 13th quarter of consecutive growth. The growth margin at 66.5%, and the operating margin at 29% were solid achievements despite slower growth and inflation. We delivered on those through focus on recurring revenue, growing at 6% in the quarter, now at 520 million euros, with SaaS growing above the 20% mark, and through innovation for active cost management and portfolio optimization, as we have seen from the recently announced divestments. Cash conversion was also very positive in the quarter at 88% considering its seasonality, supported by the constant internal focus and the favorable mix. Despite the short-term challenges in market demand, we keep on strengthening the business model. We have an exciting pipeline of innovation ahead of us, and we are very well positioned looking into the future. Moving on to slide number four. We have leveraged regionally our balanced footprint. In the quarter, we grew the business in the Americas by 4%, despite the weakness in South America, with good demand coming from infrastructure, from manufacturing, aerospace and defense. EMEA was flat, with market conditions that are remaining difficult, particularly in Central Europe and the UK, but supported by commercial aerospace growth and good adoption of our software solutions. Asia was up by four percentage points in the quarter, despite a very strong quarter last year in India. In China, the market is and will remain challenged, but this quarter highlighted once again that we have a fantastic team in place, making the most out of the local trading environment, as analysts and investors got to appreciate during the visit to our operations earlier in March. Moving on to the detail of the divisional performance in slide five, manufacturing intelligence recorded growth of five percentage points. ALI grew at 2% on a tough 2023 comparable of 16 percentage points of growth. Geosystems contracted by two percentage points. AS and SIG grew by respectively 8% and 5% in the quarter. We've also included in slide six a snapshot of the division's quarterly top and bottom line development for your reference. If we now go through the divisional performance one by one, starting with manufacturing intelligence in slide seven, MI delivered on revenues of 478 million euros at an operating margin of 26%. EMAI is exposed, as you know, to verticals and regions that in this moment are in very different phases of their life cycles, some more challenged than others, but still manage to grow also in orders, although in low single digit in Q1. We're doing very positive progress with our laser trackers portfolio that's supporting precision robotics for large scale applications, aerospace in particular. We have seen good growth in our software portfolio, particularly in simulation and the enterprise quality management solutions, pushing recurring revenue for MI up 8 percentage points on a year-on-year basis. The margin progression of 100 basis points was achieved through the divestment of PMI and the continuous efforts on rationalization and operational excellence. Moving to the asset lifecycle intelligence division in slide eight, ALI closed on 192 million euros of sales with a continuation of its positive momentum and trajectory. SAS revenues were up by 20 percentage points in the quarter, recurring revenue up by 10 percentage points, building a stronger foundation into the future. Last year, 16 percentage points of growth in Q1 with very strong perpetual licenses represented the top comparable in both top and bottom line. But looking further, the strategy of digital continuity from design and engineering all the way to operations and maintenance is gaining momentum. In the quarter, ALI also held a very well attended and successful customer advisory board with some of our top clients really appreciating the data and cloud centricity of the direction of the business, which we will continue to build on through the acquisition of iTunes Digital, recently announced a next generation asset performance management solutions. Moving now to GeoSystems in slide nine. Geo recorded sales of 377 million euros in the quarter, down by two percentage points, although still at a very healthy margin of 31%. despite the negative impact of FX because of its cost structure in Switzerland. Market demand and confidence in both commercial, residential projects and infrastructure spend, particularly in China and in Europe that accounts for almost half of the geo business is the short term challenge for geo. But we have very strong reasons to remain confident in the future of geo systems. We have a clear technology edge in geomatic solutions. We have a very differentiated offering for reality capture. We see continued growth of our AECO software portfolio and an innovation roadmap that we have pursued in the last quarters. And all of this will allow us to bounce back to growth as demand improves. Moving to autonomous solutions in slide 10, AES recorded sales of 135 million euros at an operating margin of 35%. In the quarter, we've seen strong adoption of autonomous technologies in agriculture and in A&D. Correction services within AES grew at 30%. Positive sign towards the long-term plan to build recurring revenue and move towards software-defined accurate positioning solutions. We have seen more muted demand in mining, primarily due to timing of deals, although the outlook remains positive, driven by adoption of digitization and safety solutions for this sector. All in all, we see strong long-term potential for AS, despite the short-term challenge of improving from a 22% growth year in 2023. Lastly, the safety infrastructure and geospatial division in slide 11 recorded sales of 117 million euros at an operating margin of 21%. It was a good quarter with a lot of focus on market adoption and project delivery for our on-call computer-aided dispatch solution that's been recently launched. In this area, we see deals momentum. We see larger transactions. as customers, cities, agencies, and municipalities are moving to adopt state-of-the-art cloud-based tools for improved collaboration and effectiveness of their operations. The strong margin improvement of SEG shows the positive benefit of portfolio management and the refocus of the business from services increasingly to pure software.

If we now move to finance with David Mills, Thanks, Paolo. So before we move into the Q1 financials in detail, I wanted to reference the new disclosures that you may already have noted from the presentation so far and our enhanced report published this morning. These updates being in response to the investor feedback last year and represent a delivery on the commitment made at the CMD in December. In the following slides, I would like to take you through what was a solid performance considering the more muted organic growth with resilient EBIT delivery and improved cash flow. So moving on to slide 13, starting with the Q1 2024 income statement, stepping through the sales bridge. Sales were at $1,299,000,000, which is a reported growth of 1%, negatively impacted by FX of minus 2%, and a zero net impact from structure, giving an organic growth of 3%. Gross margin held flat year over year at 66.5%, which is a seasonally high level, as we will see in subsequent slides. Operating earnings grew in line with organic growth by 1% to 376.5 million, with a 10 basis points improvement in the margin to 29%. The earnings before taxes decreased due to the interest expense of 43 million versus the prior year of 27 million, resulting from the increase in the trust rates driving the dilution at this level. Taxes being 18% in line with the prior year bring us down to an EPS of 10.1 Eurocent. For reference, the EBIT including PPA includes an equivalent 28 million amortization to the prior year and so dilutes the EBIT one by 220 basis points to 26.8. Moving on to slide 14, In the Q1 profitability bridge, currency has a marginally dilutive EBIT impact, despite the negative currency translation on sales of 23 million having a corresponding 13.6 million EBIT impact, which is a margin of 59%. The net year-over-year transaction difference is a positive of 5.8 million, from a current year gain of 0.9 and a prior year loss of 4.9. The translation movements being mainly driven from the continuing currency trends of the further devaluation to the Euro of the CNY by 6% and the US dollar by 1% with sales exceed cost and a further appreciation in the Swiss franc of 5%, which is the reverse impact. The accretive structural element reflects the net positive impact of acquisitions less disposals in the quarter with the material elements being Cognify and Hardline. net of the disposals in the SIG division, and the two-month impact of the hand tool business in Switzerland within MI. The resultant organic element with a 33% incremental profit is also accreted by 10 basis points. So excluding the currency, we would have delivered 20 basis points improvement rather than the 10 reported. Moving to slide 15, turning to the gross margin, as already mentioned, Q1 2024 gross margin was a seasonal high, gross margin at 66.5%, but it was actually an equivalent to the prior year, whereas Q1 2022 would reflect a more normal trend. The strong quarterly performance being from broadly resilient margins enhanced by a positive mix of software over sensors in the relevant divisions of manufacturing intelligence, AS, and geosystems. The rolling 12-month margin improvement improved by 24 basis points over the prior year to 66%. Moving to slide 16, we have the cash flow, which continued to show the improvements building from Q4, and so gives a very positive start to the year, considering Q1 is a traditionally weaker cash conversion quarter. The adjusted EBITDA demonstrates a strong cash leverage at 5%, higher than the EBIT1 at 1%, as the D&A add-back is increased by 18%. Investment levels remaining at similar levels carry the 5% improvement to cash flow post-investments. A further improved performance in net working capital with a release of $13 million versus the prior year of $60 million generated an operating cash flow before tax and interest improvement of 36%, which corresponds to a cash conversion of 88% versus the prior year of 66%. including cash taxes which reduced by eight million and interest payments which still show the increase year-over-year mentioned earlier the improvement in cash flow before recurring is 55 percent non-recurring items outflow of 28 million brings us to an operating cash flow of 190 million of 63 percent moving to slide moving to slide 17 we take the networking capital in more detail. Following on from the significant release in Q4 of 69 million, a further release of 13 million in Q1 support the rolling 12-month sales down to 7.3, which is 60 basis points below Q4 and the prior year Q1. The constituent elements of the movement being receivables and prepaid, the quarter following a strong shipment in Q4 appropriately shows a reduction in receivables of 46 million, with DSOs at a similar level to the prior year at 86 days. We continue to manage inventory with a moderate increase and cyclically lower sales. We see DII at 118 days, but this is significantly below the prior Q1. Though liabilities decreased over Q4, the DPOs are on a solid quarterly improvement trend up to 56 days. The second consecutive quarter increase in deferred revenue is reflective of the billing cycle and strong software performance and helped offset the cyclical release in accrued expenses. So in conclusion, the quarter showed resilience of the business with a marginal improvement in EBIT performance supported by the rationalization program and despite the continued currency headwinds and the cash focus has given us a positive Q1 delivery building on a strong close of 2023. With that, I would like to hand over to Ben for the next section.