Hexagon AB

STO:HEXA B

Earnings Call Transcript 2022-Q1

[Operator]

Ladies and gentlemen, hello, and welcome to the Hexagon Q1 report 2022. [Operator Instructions] Today, I'm pleased to present Ola Rollen. Please go ahead with your meeting, sir.

[Ola Rollén, executive]

Thank you very much. Good morning, good afternoon, and good evening, everyone, and welcome to the interim report presentation for the first quarter of 2022. And I suggest that we skip slides and go straight to Slide 4, overview for the first quarter of 2022.

Sales increased by 19%, out of which 10% were organic and currency added another 4%. We had very strong currency tailwind from primarily the Chinese renminbi and the U.S. dollar. M&A, which we call structure added another 5%. It is still a very challenging supply chain situation. And the lack of silicon wafers in our supply chain hampered organic growth by 6% in the quarter. However, all divisions improved their results and despite seeing a negative impact from the war in Ukraine, and all supply constraints that we've mentioned previously.

We took the decision to freeze all business operations in Russia. We have sales, we have service and technical engineering in Russia, but we do not have production. That has impacted organic growth by minus 1% in the quarter. And for those of you who remember, Russia is 2% of group sales, which means that with a complete shutdown, the annualized impact will be minus 2% from this action. We record an EBIT of EUR 335 million in the quarter, and that is an increase of 24%. And the adjusted operating margin was 28.8%, and our gross margin increased by almost 8% to 65.1%.

Slide 5 is just a reminder that the first quarter is our seasonally weakest quarter followed by Q3 and then Q2 and Q4 are stronger quarters.

Slide 6, an overview of the P&L statement that we've just presented, and I'm not going to go into any details. You have it for your reference. Cash flow on the other way, I think it's fair to comment on. Cash flow from operations before changes in working capital is very strong and is actually increasing by 26% in the quarter. With the current strained situation we do have in supply, we have to build up working capital, especially in the hardware related businesses. So we built up EUR 84 million in working capital. Otherwise, as I said, very strong cash conversion and cash flow.

And on Slide 8, you can still see that we are way below historic levels on working capital to sales, 6.6%.

Market development, Slide 10. If we look at the sales mix, there are some shifts worth while commenting on North America has a very strong demand situation and North America is now 33% of Hexagon sales. We see a similar situation in South America that has expanded its share from 3% to 4%. On the other hand, we do have a strong demand situation in Western Europe, but not as strong as North and South America while Western Europe is 28% of sales. In the rest of EMEA, we see this 1% stemming from the conflict between Ukraine and Russia. China is keeping its share at 15% and Asia Pac reduced by 1%.

So in summary, on Slide 8, we have green arrows, i.e. growth, above 8% organic growth in most regions. North America, Western Europe, China, South America. We do have growth in Eastern Europe, Middle East and Africa and Asia, ex China, but it's not strong. So it's a very, very strong demand situation for almost all industrial segments for Hexagon in the first quarter.

And Slide 12, the so-called arrow slide is for your reference to study.

And I suggest we move to Slide 13 and discuss EMEA. Western Europe recorded 10% organic growth in the quarter and the powerhouse in the quarter was Germany, where we saw very strong double-digit growth from primarily manufacturing industries such as auto and aero but also infrastructure investments where Geosystems is benefited, but we also have strong orders for PP&M in the quarter from the chemicals industry in Germany. So recovery in aerospace, strong demand in automotive, manufacturing but also power and energy markets. Excluding Western Europe, Russia declined by 32%, and that roughly represents the month of March for us. And it's all, of course, connected to the sanctions that were imposed by the European Union and the United States. Middle East and Africa, on the other hand, recorded strong growth, and we see increased activity for power and energy in Middle East and mining in Africa.

Moving to Americas, Slide 14. North America recorded 12% organic growth. Canada recorded strong single-digit growth on the back of its raw material economy, i.e., mining and oil and gas. In the U.S., we see a broad-based growth that [indiscernible] over all business divisions and segments. So a very, very strong demand situation in the United States. In South America is the continuous expansion in the Brazilian economy, driven by activities such as mining, agriculture and oil and gas. But we also see the Andean countries where in this quarter, Chile was strong, thanks to a large mining order in the quarter.

Slide 15, moving to Asia. China recorded 11% organic growth in the quarter. It's driven by strong growth in general manufacturing and aerospace, automotive-related EV-related activities. We had a slightly weaker electronics market and demand in the first quarter, but that's only natural since Q1 is not a strong electronics quarter for China. China's growth was hampered by availability issues on the Geosystems side where we simply couldn't deliver orders to construction and infrastructure projects. And we also had a challenging oil and gas market in the first quarter.

Japan and India recorded strong growth. India, broad-based recovery for all businesses and strong demand across the board. South Korea, on the other hand, had a somewhat weaker quarter where we saw weakness in Power and Energy in the quarter.

Reporting segments, Slide 17, we start with Geospatial Enterprise Solutions. Organic growth, 10%. Geosystems was bang on 10%. Geosystems was the business division that suffered the most from lack of electronic components in the quarter. Safety Infrastructure & Geospatial 4% organic growth fueled by a very strong growth in infrastructure, construction and utilities where we got a large order in the quarter from a telco. Autonomy & Positioning, 21% organic growth, and all end markets were very strong for Autonomy & Positioning in the quarter, agriculture, aerospace and defense. Sales amount to EUR 583 million with an EBIT of EUR 106 million. So this is a -- corresponds to an operating margin expansion of 0.5%. And it could have been greater could we -- had we been able to deliver on the top line for Geosystems, which is our most profitable division within Geospatial.

Moving over to Industrial Enterprise Solutions, also reporting an organic growth of 10% where MI is recording 13% organic growth. And we do see strong demand across all key industries for MI all regions, but also for our software solutions. PPM reported 2% organic growth. And it's growth stemming from our design and asset information management software and also continuous recovery in both EMEA and the Americas. The business is reporting EUR 581 million in sales with an EBIT of EUR 166 million, which corresponds to an EBIT margin of 28.5%, which is almost 2% better than this time last year.

Slide 19. Our gross margin is now at 65%, both for the quarter, but for 12 months rolling as well, which is 1% better than this time last year. Our operating margin is at 29%, which also is 1% better than this time last year on Slide 20.

If we then talk about M&A orders and product releases, and we move to Slide 22. In the quarter, we acquired Minnovare, which is an Australian-based company specializing in eliminating manual labor intensive unproductive processes in underground mines. And Minnovare is going to be reported into Hexagon's Mining division.

Slide 23, we got an order for 3D printed prefabricated homes from a U.S.-based startup called Mighty Buildings. And they are using our design and engineering simulation solutions and software to perfect the design and material choice as well as mechanical processes before they start making a home.

Slide 24, optimizing legacy train components for additive manufacturing. This is a collaboration between Hexagon and Deutsche Bahn, where they use our generative design software to optimize conventional freight car component design and prepare them for additive manufacturing.

Slide 25, the European Southern Observatory, ESO, they have traditionally used something they called VLT, which stands for very large telescope. They've now decided to move toward ELT, which stands for an extremely large telescope. And this cytoscope has a 39-meter main mirror, and it's going to be based in Chile, where the VLT currently is and they have chosen us for developing a specialized measurement system for this application.

Slide 26. For those of you that watch Drive To Survive on Netflix, I'm happy to tell you that we sponsor R3DBull racing. And you can find our logo next to the helmet of the driver when they are driving. And we are actually supporting most teams in the Formula 1 circuit, but to my mind, Oracle is -- R3DBull Racing is the only one displaying our logo.

Slide 27, H2U is a very interesting project where they create renewable energy production like wind and solar panel in Australia to convert the electricity into hydrogen and then ship the hydrogen to Asia. And we are involved in this project. It's a huge project. The land mass that they used to develop these solar plants is enormous. But we are involved in creating operational digital twins, aligning standards and processes to produce hydrogen and this is a business for the future, obviously.

Slide 28. Hexagon enable Fluxys to fulfill their carbon-neutral journey, and it's a Belgium-based energy infrastructure group that has committed itself to become CO2-neutral. And they use our SDx software platform to do asset life cycle information management, AIM, and to make sure that they improve their processes so that they can reduce and finally eliminate CO2 emissions.

Slide 29, Hexagon to help Dayou to enable autonomous vehicles in China. Our partner Dayou is going to bring high accuracy GNSS correction services in China through our network called TerraStar X, and this is so called PPP, which stands for precise point positioning where you have a signal from ground-based towers combined with satellite-based positioning signals from GNSS network. And this is going to support ADAS, i.e., advanced driver assistance systems throughout China.

Slide 30, providing real-time visualization and analysis for NATO, NCIA stands for NATO Communications and Information Agency, and we've signed a contract where they are going to standardize and use our LuciadLightspeed technology to upgrade their simulation system.

Slide 31. We are heavily involved in the rebuild of public transportation in Singapore, the Singapore Land Transit Authority that is in charge of the subway system and rail system. They've chose Hexagon OnCall Dispatch for its public safety portfolio to speed up response times.

Finally, on Slide 32, we transform how professionals measure with total station. This is not a one-off. This is a long-term trend for our like total stations and robots that we try to automate workflows as much as possible. And in this case, we launched the so-called AutoPole that is the [indiscernible] that you can but still get unique target identification.

Slide 33. We launched BLK2FLY and BLK ARC last quarter. But we've already received multiple awards for these 2 new products. And we're quite happy with that.

Slide 34. We've been to Pompeii this quarter and scanned Pompeii used in both BLK2FLY and BLK ARC. And the whole idea of this project is to capture Pompeii in 3D and preserve it and maybe simulate what it actually looks like in 79 AED.

Slide 35. We've signed a contract with Sephora to 3D model all their retail outlets, hundreds of stores because they're going to remodel them and refresh the concept.

Slide 36, the first EAM win in China. So we use our Chinese organization to introduce EAM products. And that first order was booked with the Zhengzhou Coal Mining Machinery Group company in China.

Finally, I want to make some PR for Hexagon Live for the first time since 2019. We're going to host Hexagon Live again in Las Vegas on the 20th through the 23rd of June and don't miss this opportunity to see all the technologies that I've just described in action. And if you want to participate, please contact our Investor Relations at ir.hexagon.com.

With that, we've concluded the presentation, and we are ready to try to answer any questions that might be.

[Operator]

[Operator Instructions] First question from Magnus Kruber from UBS.

[Magnus Kruber, analyst]

Magnus from UBS. A couple of questions from me. So first, could you give us a bit of color on how the growth progressed through the quarters in particularly Geosystems. And if you can give us something on April as whether that started in the context of supply chain issues. I think you mentioned that the component shortage would ease from Q4 [indiscernible] from Q2 that would be.

[Ola Rollén, executive]

Yes. No, the growth -- March was a good month. February was weaker. So you could say growth accelerated through the quarter. We haven't seen much change in April really from Q1. And what happens in Q4 is that demand has accelerated, and you see that on our organic growth, that was 7% in Q4 and is now 10% in Q1. So we can't say that the component situation has been stopped because we are facing higher demand than we did 3 to 6 months ago.

[Magnus Kruber, analyst]

Okay. And in terms of how that component situation is panning out, difficult to comment, but I know you took some internal actions as well, which you might have better visibility on.

[Ola Rollén, executive]

We think that it might be off for certain divisions, but we also think that we might face a tougher situation in Q2 for other divisions. So net on net, I think Unfortunately, it's going to be a similar situation in the second quarter.

[Magnus Kruber, analyst]

Got it. And secondly, specifically to China, I know you mentioned some drag on growth from the local construction market. And have you seen any other implication from that with the component shortage that's coming out of China to your production?

[Ola Rollén, executive]

No. I mean, we are not dependent on components coming out of China. So you read a lot about this lockdown in Shanghai, which hasn't impacted us. Where it impacts us is really Geosystems built products in Switzerland that we export to China because we think we can find components for some of our high-end products to China.

[Magnus Kruber, analyst]

Got it. And then finally, could you comment a bit on the backlog in PP&M, so how that's developed year-over-year? Or any other color around that?

[Ola Rollén, executive]

You don't have a backlog, but you have a booking situation and bookings were good, and we believe that gradually, we should see accelerated growth over the year in PP&M.

[Operator]

Next question from Stacy Pollard from JPMorgan.

[Stacy Pollard, analyst]

Just 2 or 3 for me. From a product perspective, what would you say are the most relevant growth drivers for you right now? And then do we expect often you'll have big product release years and then less big release years? I guess the way to say it. Should we be expecting something very, very exciting at the Hexagon Live this June?

And then second question is really related to wage inflation, talent retention and attraction. Any comments there? And to the degree that you're able to pass on price uplift to customers. So your pricing situation as well as cost, I guess.

[Ola Rollén, executive]

Well, growth drivers, I think right now, it's a very complex situation where we're coming out of a global pandemic. So there is pent-up demand for everything. And that is obviously a growth driver for us at the moment. But then more long-term trends, of course, this transition to a carbon-free economy where there is a lot of investment initiatives into renewable storage and so on where we can sell our products. That is another growth driver. So it's a combination of a lot of things at the moment, creating this almost perfect storm of demand that we face right now. And then moving to what we're going to present at Hexagon Live. What do you expect? I am a sales man, so obviously, it's going to be very exciting like always. I can't really comment on nitty-gritty details, what we're going to launch. And pricing power, I think we've proven so far, both in Q4 and Q1 that we can expand our margins in spite of this inflationary pressure and that that's the best testament to pricing power you can have that you can actually prove the numbers that your margin is expanding.

[Operator]

Next question from Alexander Virgo from Bank of America.

[Alexander Virgo, analyst]

I wanted to dig a little bit into the different divisions, if I could. The first one was a question on the margin implications of plus 2 in PPM versus this much stronger performance in MI. I guess I'm noting the difference, the strength of margins in Geo as well. You've got a 30% number there, which I think is impressive given most of the software is in IES, of course. So that's the first question. Can you talk a little bit about the dynamics there?

Second question would be just on China and Q2 and thinking about what happened in Q1 2020 and also back in 2019 when around this sort of time, your smartphone business had -- came under severe pressure and the impact that, that then had on organic growth. I'm just trying to, I guess, square the 2 most recent hits to your China business with what we might see in Q2 with the growth that you've already reported in Q1. I guess that's the second question. And third, I'll squeeze 1 in, if I may, once you've answered those 2.

[Ola Rollén, executive]

Okay. Thank you. If we talk about PPM versus MI, first of all, MI is earlier in the business cycle. So we've already seen increased activity from the auto guys in terms of designing new products, aerospace and gearing up and so forth. PP&M, we believe that demand for new oil producing and gas producing units is going to grow. It's a consequence of the macro situation with the war in Ukraine, where countries like Europe and America are going to source from new supplies and suppliers and suppliers than the old traditional ones, and that is going to give PP&M boost in its growth in the quarters to come. I don't know if that answers the difference between MI and PPM.

[Alexander Virgo, analyst]

Yes. I guess, in follow-up to that, the margin impact on IES because of PPM being lower. Is that still a fair -- is that still a fair comment, mix is weighing on that margin?

[Ola Rollén, executive]

To some extent, yes, but we've also seen great improvements in the EBIT margin in the quarter for MI. And I think the biggest lever we can hope for is actually the improved incremental margin in MI going forward because MI is so much bigger than PPM.

[Alexander Virgo, analyst]

And then on China?

[Ola Rollén, executive]

On China, it's true that smartphones have been important historically, but it's typically a Q2 story, Q2 and Q3. So I think the verdict is still out on what electronics will do in China this year. But we have a cautiously optimistic view on the second quarter for China, and we are doing great. Our management team and our sales teams are really innovative, and we find constantly new applications for our products. So they're almost like a bundle be they shouldn't be able to fly, but they do.

[Alexander Virgo, analyst]

Okay. So we should take the momentum that you're still seeing in China as a positive indication for the second quarter then?

[Ola Rollén, executive]

I think so.

[Alexander Virgo, analyst]

Okay. So that's good to hear. And then my final question, just on the squeeze one, if I could. You've typically talked about new product growth adding a couple of hundred basis points to the overall level of the group. I just wondered if you could give us an idea for what that might be or might have been, I'm sorry, in Q1 given the given the last of new products you have already announced?

[Ola Rollén, executive]

Looks fairly low because of the component scarcity and these new products are using an awful lot of silicon wafers. We were simply constrained in delivering. So it could have been a high number had we had endless supply of components, but we didn't. So it was not something to brag about.

[Operator]

Next question from Sven Merkt from Barclay.

[Sven Merkt, analyst]

Maybe first, could you quantify how much you raised prices in Q4 -- Q1 for inflation and maybe by business segment that would be very helpful. And then secondly, it seems like that with your working capital investments, you are building up inventory to avoid delays and maybe even price rises. And I was wondering to what extent do you believe your clients are doing the same. Is there a way to assess this?

[Ola Rollén, executive]

Yes. The first question, I think we won't answer. We don't comment on prices. But we started increasing prices in October, and we've taken steps in all businesses to increase prices over the next coming year. And I believe it's not the end of it. I think we will continue to work with price as a means to protect and expand our margins. And that the best question you can get. When it comes to inventories, it's fairly easy. I mean we talked very little with our customers. Our customers are typically end users, and we have a pretty good view on what they do. So it's not that -- I mean, we're not selling groceries or cloths where you have retailer stocking stuff. We're selling quite expensive things that end users are buying directly from us in most of the cases.

[Sven Merkt, analyst]

Yes, of course. But then these things are often business critical. So I'm wondering, is there not a case where you see some clients maybe bringing orders forward at all?

[Ola Rollén, executive]

No, because we have booked orders. So the missed revenue of 6% is orders that are paid. Some people have paid 20% to receive, and they were scheduled for delivery in Q1.

[Sven Merkt, analyst]

Okay. Great. And then maybe just one final question. Would it be possible to quantify the 2% Russia exposure by the 5 subsegments? Is there any kind of subsegment that maybe has a higher weighting to Russia?

[Ola Rollén, executive]

GES has a much higher exposure to Russia, and it's primarily Geosystems, but that is our biggest business in Russia.

[Operator]

Next question is from Mohammed Moawalla from Goldman Sachs.

[Mohammed Moawalla, analyst]

A couple from me as well. Firstly, just in terms of the dynamic you saw in the first quarter, was there an element of perhaps some slip business from Q4. And as you look into sort of Q2, did I hear you correctly saying that you expect to have some of these supply chain issues resolved, but it's the demand environment, which is kind of stronger, which is kind of offsetting any kind of additional headwinds you get from the ongoing supply issues?

And then secondly, could you break out for us the hardware versus the software? I know we get the divisional, but just to kind of get a sense of the resiliency or the strength on the pure software side, optically the hardware side look quite strong.

[Ola Rollén, executive]

So the first question, no, we didn't have -- this is a rolling and it's an ever-evolving situation. We built backlog in Q4. We built backlog in Q1. But I can't say -- but net-on-net, we pushed orders from Q4 into Q1. Unfortunately, this situation is worsening between the 2 quarters. So we have a greater backlog end in Q1 than we had in Q4. But I think there is a combination of 2 factors because demand seems to have increased in Q1 compared to Q4, even though Q1 is a weaker quarter. So it's a very fluid situation, and you can't say that we benefited from Q4 deliveries when we build backlog. And we're working very hard on satisfying our customers and delivering to them. When it comes to hardware/software split, it is roughly what it was at year-end, 60% software and services, 35% pure software, 40% recurring revenue. SaaS is roughly before consolidation of [ EPPU ] 6% of sales, but growing very fast.

[Mohammed Moawalla, analyst]

Got it. Got it. And if I could just follow up, given the sort of dynamics you're seeing right now, is there any reason to believe that as we think about growth kind of beyond 2022 would be any different to the kind of sort of high single-digit organic that you're sort of targeting?

[Ola Rollén, executive]

Our long-term target is to grow 5% to 7% organic growth. And apart from that, we don't give any forecast. But over the years, sometimes you're going to exceed it, and sometimes you're going to be below it. But on average, our guidance is 5% to 7%.

[Operator]

Next question is from Johannes Schaller from Deutsche Bank.

[Johannes Schaller, analyst]

Congratulations on the good results. I just wanted to come back to the component outages. You obviously had working capital drag and inventories going up. But at the same time, when you're talking about component outages, how should we square those 2 things? Is it mostly semifinished goods that you're stocking there? Or should we think about this in a different way?

And then the second question, just on the redesign efforts on the semiconductor side, Ola, that you mentioned in the last quarter, just how are these progressing? And maybe you can give us 1 or 2 examples where you have successfully redesigned products to use less specific semiconductors.

[Ola Rollén, executive]

Yes. Thank you. No, the component shortages in relation to inventory levels, you should regard in a historic perspective. We have a slide on working capital to sales. We are still at very, very low historic levels on working capital to sales. So this buildup is just a necessity to survive the next few months. But as I said, working capital to sales is, if I'm not wrong, 6.6%. So it's very low. So that's how you should regard that. When it comes to redesign, yes, we are redesigning certain boards within Geosystems and we think we're going to see good impact from that work in the second quarter. On the other hand, the shortage situation has moved to other areas of the Hexagon Group. And we're now facing shortages in the second quarter in areas where we were not facing shortages in the first quarter. So it's an ever-moving target.

[Johannes Schaller, analyst]

So maybe can you give us an example of an area where things got significantly worse now going into Q2.

[Ola Rollén, executive]

I think it's -- I don't want to eat up my words, so I won't disclose that today. We might do it later, but there is no benefit for Hexagon disclosing that.

[Operator]

Next question from Joachim Gunell from DNB Markets.

[Joachim Gunell, analyst]

So a very -- I mean, a final question from me, since you captured so much of the gross margin expansion here also on operating profit level and trading so close to your 2026 targets already, can you please help us understand some of the, call it, underlying drivers here going forward where you believe the gross margins could FY '26 given the shift in revenue mix?

[Ola Rollén, executive]

We see. I don't know. What is it? It's 4 years until '26. So it's a bit early to speculate on that. But I do think the same growth drivers that we've seen for margin expansions are going to kick in, in the coming 4 years, and that is an ever-improving mix and also new product development, those are the 2 key areas.

[Operator]

Next question from Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, analyst]

Congratulations to a strong set of numbers in Q1. My first question is a little bit hypothetical perhaps, but we do conduct business all over the world, including in markets with very high inflation and high interest rates. And I was wondering if you can have any internal lesson learned spare with us i.e., how sensitive Hexagon business is to hire internal product rates, if it's possible to answer that.

[Ola Rollén, executive]

Well, yes, I think a lesson learned is that keep an eye on the ball. We started increasing prices already in early October, where other people might not have started looking at that, which gave us a great start of 2022. And now we need to continue doing that, working very hard. I also think that you have to look hard into your business model, how you conduct your business. Can you sell in another way? Could you could you do, I don't know, recurring revenue out of a capital sale where you have a huge upfront payment, could you shop it up in pieces and offer it as a service rather than selling it discreetly. So we're working on many fronts trying to improve and really do things we do currently much better for the future.

[Daniel Djurberg, analyst]

Perfect. And then may I ask you also what you think about the M&A environment, if you've seen -- we have seen, obviously, the valuation levels is off quite dramatically in the last 3 months at least. What is your view? Is the potential funnel or what you say, increase in on back of this for you?

[Ola Rollén, executive]

I think the EBIT multiple on Twitter was quite high, and that's the most [Indiscernible] But joking apart, what we've seen all of us is obviously the correction in the public market. That hasn't hit the private market yet. There is a lot of money in the market looking for growth. So there is still a lot of competition around the assets that we are looking at. But if this continues, obviously, there is going to be a correction in the private market as well for prices.

[Daniel Djurberg, analyst]

Perfect. And if I may, the mandatory question on the smart build great concept, et cetera, it's in the process power Marine, and you have invested in the to have more software and so on. Can you give any more proof of concept on the development?

[Ola Rollén, executive]

Yes. We've just done an analysis on our China campus building, and we saved a lot of money, and it was on time and on budget. And they use smart build and Bricsys from design to completion. And just to correct you for future reference, we now moved smart build and Bricsys from PPM to Geosystems. So it's moved from industrial to Geospatial.

[Daniel Djurberg, analyst]

Yes. Sorry for that.

[Ola Rollén, executive]

For the future, I think that is important because now it's all about launching these products into the market and Geosystems has better coverage in the AEC market.

[Daniel Djurberg, analyst]

Yes, you should bring it to Stockholm as well because we need it.

[Operator]

Next question is from Nay Soe Naing from Berenberg.

[Nay Soe Naing, analyst]

If I may, could I start with the PPM segment, please? It recorded 2% organic growth, and that's obviously, we're expecting a bit of recovery given the structural trends that we're seeing in end markets. So putting that in that 2% organic growth in context with the low comp we had last year. A bit more color on what your expectations are for the recovery in PPM segment? And how should we think about the shape of the recovery for the rest of the year?

[Ola Rollén, executive]

No. I think the underlying trend in PP&M was quite favorable. We saw the so-called project business, which is the lower segment growing at strong single-digit level. And project business is typically when we sell software to EPCs that in turn are trying to design or are involved in designing new projects. And that should actually increase going forward. It was a weak quarter for owner operators, which is more stable segment where we sell maintenance solutions, asset life cycle solutions to already existing plants. And I think that was going to trend. It was just this quarter where it just happened to be weak. And then in fiber, we see good prospects for growth and in also all the other new segments like EAM. EAM grew by 42% in its revenue. So no, there are a lot of areas that are growing very rapidly.

[Nay Soe Naing, analyst]

That's helpful. I suppose a mid-single digit or high single-digit growth -- organic growth for the PP&M business outlook in terms of outlook that would you say that's achievable?

[Ola Rollén, executive]

I mean, technically, you do have an impact that will kick in, in the second half. EAM is not recorded as organic growth in the first quarter simply because we didn't own EAM in Q1 of '21. But as soon as the EAM is a part of the organic growth story, you're going to see an acceleration in this division's organic growth.

[Nay Soe Naing, analyst]

That's helpful. And one more question, if I may. You've already covered it. I just wanted to check that I have understood it correctly. Despite the lockdowns, the supply chain issues we're seeing in China, for the Q2 outlook, you are cautiously positive. Is that correct? Firstly to check. And secondly, specifically for the MI segment, if I got the numbers correct, I think it's got a decently large exposure in China. But obviously, it had a very solid 13% growth in Q1. So could you help me bridge that gap between everything that's going on in China despite the fact that MI had a pretty solid quarter this quarter.

[Ola Rollén, executive]

No, we are cautiously optimistic about China. So we believe in growth in the second quarter as well. And MI is our own business in China. It was the original business when we transformed Hexagon back in 2001. And we have a very innovative team of sales engineers and management people. And they just quarter after quarter, they managed to find new applications, new end markets to sell to, and we haven't seen a slowdown in the ideas and the projects they come up with. So we do believe that MI in spite of the very tough situation in China will continue to grow.

[Nay Soe Naing, analyst]

It's very encouraging to hear.

[Operator]

Last question from Magnus Kruber from UBS.

[Magnus Kruber, analyst]

I just wanted to ask if you could comment a bit on the contribution margin of EAM in the quarter. Is it still around 40%?

[Ola Rollén, executive]

Yes, it's about 40%.

[Magnus Kruber, analyst]

Perfect. And then following Russia's invasion of Ukraine, have you seen any increasing demand for the defense offering? And if you could give us an update a bit on the U.S. market with respect to the recent changes there that would be very helpful.

[Ola Rollén, executive]

To quote bond movie, I could give you an update, but then I have to kill you.

[Magnus Kruber, analyst]

I will [Indiscernible], I guess.

[Ola Rollén, executive]

Yes. No, it's classified. So we don't comment on what we do.

[Operator]

Thank you, Mr. Rollen, there is no question.

[Ola Rollén, executive]

Thank you. And thank you for listening in, and we'll do this again next quarter. Have a good weekend, everyone. Bye.

[Operator]

Thank you, ladies and gentlemen. This concludes the conference call. Thank you all for your participation. You may now disconnect.