Hexagon AB

STO:HEXA B

Earnings Call Transcript 2023-Q1

[Operator]

Good day, and thank you for standing by. Welcome to the Hexagon Third Quarter Report 2023 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded.

I would now like to hand the conference over to your speaker today, Paolo Guglielmini. Please go ahead.

[Paolo Guglielmini, executive]

Yes. Thank you very much, and thank you for joining us today. Let's start from Slide 4 to review some of the highlights from this Q1 2023. We had a good solid quarter, posting net sales of EUR 1.287 billion. That represents an 11% reported growth on prior year with strong organic growth of 8 percentage points through from structure and negligible FX in the quarter. We were pleased to see a good uptick in terms of gross margin up to 66.5%, with all-time high in the quarter, 1.4 percentage points above Q1 2022. I would say primarily driven by volume and pricing, but particularly a richer software mix and new product releases that came in at higher gross margin than previous generations. We have posted adjusted operating earnings of EUR 371 million, an 11% uptick on prior year. Adjusted operating margin was 28.9 percentage points, pretty much on par with Q1 2022 and yet negatively affected by FX. I would say, overall, the business has leverage pretty well on the additional volume.

If we go on Slide 5, and we start analyzing more detail in that organic growth. Looking at the 2 reporting segments, the Industrial Enterprise Solutions segment has posted 11% organic growth, driven by asset-light cycle, 16 percentage points. I would say, across the board, good, solid progress, perpetual deals closed a high value in the quarter, good diversification of the business and strong performance for the enterprise asset management portfolio.

Manufacturing Intelligence came in at 10 percentage points of organic growth coming from most product lines. I would say e-mobility and all the area of investment has helped a lot, commercial aerospace, and we are taking in CapEx and investment to drive commercial aircraft production volumes uptick, another noticeable driver in the business.

The Geospatial Enterprise Solutions reporting segment grew up 5 percentage points. Very solid performance from Geosystems on portfolio for buildings and construction and infrastructure, positive across product lines; 4 percentage points of growth in Autonomy & Positioning with good performance, I would say, in defense and in agriculture; Safety, Infrastructure & Government declined 11 percentage points. Now supply, this is something that we were expecting in the quarter. I would say 8 percentage points of this decline came from winding down highly volatile, very low-margin service contracts in defense in the United States. Besides that, we also had a one-off software deal fully recognized in Q1 2022 in the [ top ] communication space that will reoccur in this quarter.

In terms of regional breakdown for the revenue, 14 percentage points of growth in Asia, with China strong at 10% and a good momentum going further. Europe came in at 9 percentage points of growth. North America grew 1% but held back by those 2 impacts in SIG that we just mentioned.

Going on to Slide #6. Cash flow. Operating cash flow amounted to EUR 117 million in the quarter, primarily affected by a onetime tax payment with timing different from prior year. Working capital came in at 7.9 percentage points of sales. Again, [indiscernible] this incremental growth and somewhat also driven by an uptick in inventory in order to have safety stocks and protect from the electronic component shortages. I would say that impact, we've got less to do now with our P&L, the situation from the top line delivery has more or less stabilized. We still have some of those impacts from an inventory perspective.

Cash conversion improved year-on-year at 66%, an improved picture, although still reflecting weak seasonality in Q1 with the annual guidance of 80% to 90% is reconfirmed on a full year basis.

And if we move now to Slide #8, Ben Maslen will take us through the Geospatial Enterprise Solutions segment.

[Benjamin Maslen, executive]

Thank you, Paolo, and good morning, everybody. The GFO, as Paolo said, organic growth of 5%, starting with Geosystems, 9% organic growth. We saw demand pretty much strong in every region, but particularly Asia and the Middle East. We also saw a stabilization in the Chinese market after a weak second half of last year. And by product, we saw strongest demand in our mining business, surveying solutions, and also a good uptick from the new BLK2 systems. In SIG, at minus 11% organic growth, within that, the public safety business grew slightly. As Paolo mentioned, we took the decision to exit a number of low-margin services contracts and was at 8% of the 11% decline, with the bridge item being the large perpetual contract we had last year in the infrastructure business.

Autonomy & Positioning was 4% organic growth, driven by strong demand for that submission in aerospace and defense market.

In terms of the profitability, the operating margin rose from 30.1% last year to 30.3%, positively impacted by product mix both within the divisions and across the divisions, which offset the negative impact on FX.

If we go to Slide 9, just some highlights of what's been happening in the divisions during the quarter. So firstly, with Geosystems, they launched a product called REVEAL, an AI-driven solution for heavy construction. Here, you can use a [ laser scar ] for drone, capture a point [ via a ] construction site, and that's what we see on the right. Then AI automatic identify objects, it could be vehicles, vegetation, stockpiles and so forth. You can then remove them to have a much clearer picture of the underlying what's going on.

If we go to Slide 10, you can see Immersal. We launched a new smart city visual positioning system. But here, you can combine Hexagon's digital reality platform, HxDR, and Immersal Spatial Anchoring to allow you to collect -- connect the real world to the digital world. You can build a 3D map of a city and use compute divisions to derive very accurate positioning within that model, and that can be used to drive augmented reality applications, as you can see on the right.

Slide 11, Hexagon, during the quarter, acquired a business called Projectmates. This is a SaaS project management software platform used by project owners. So you can use it to track progress on the job site, monitor delays, rework and changes and so forth. Projectmates will be integrated with other tools in the smart build suites and can take progress and monitoring information from [indiscernible] cameras [indiscernible].

If you look at Slide 12, great to get an innovation award at CES for the Leica BLK360 scanner. This is in the virtual and augmented reality category. The new BLK360 launched last year, It's smaller and lighter than the original version, which was launched in 2016. And as a reminder, it can scan 4x as quickly, which obviously helps customer workflows. And it's already contributing to the organic growth that we see in Geosystems.

Over to SIG on Slide 13, just some selected customer wins highlighting the continued good momentum for OnCall. So first, the Alpharetta, their Department of Public Safety, they wanted a SaaS solution. They chose the OnCall dispatch, analytics and record management products to meet that demand. BMW also selected OnCall to manage their security operations across 7 different European manufacturing facilities, a good example of how this technology used outside of the core [indiscernible] its market.

And then finally on to here, Slide 14. A nice example of our technology is applied to environmental applications, Saudi Arabia's National Center for Vegetation Cover and Combating Desertification selected our geospatial software to support their initiatives, including a plan to plant 600 million trees by 2030. They will use our software suites to help monitor this project and make sure that, that vegetation initiative flourishes.

Back to you, Paolo.

[Paolo Guglielmini, executive]

Great. So looking at the Industrial Enterprise Solutions portfolio from Slide 15, as discussed, both MI and ALI experienced good growth across regions. MI is primarily driven by growth in general manufacturing in the software portfolio, in the CAD portfolio. We have, of course, integrated on top of this 10% organic growth ETQ as of April of last year. I would say in terms of demand for the product devices, stronger technology in China, but I would say also in Central Europe, where we see a lot of demand related to R&D projects and productization of new tools and efforts related to e-mobility.

In the Asset Lifecycle Intelligence portfolio, 16% organic growth was great to see, growth in the core and in the enterprise asset management portfolio. Of course, EAM is more and more tightly connected with the rest of the business. Synergies are starting to flow through in between core ALI and EAM. And we've had good progress here, both on in terms of driving recurring revenue growth and closing transformational perpetual deals.

If we look at a couple of these sort of marquee or significant wins in Slide 16. Two projects related to the enterprise asset management portfolio at the top. A major U.S.-based technology corporation has selected Hexagon's EAM to manage its global data center facility assets. The goal really is to maximize asset performance, increase reliability, support this hypergrowth phase as they build new data centers and retrofit existing ones. This is a landmark win for EAM.

The second from Transdev Australasia. This is an operator of buses and various light rail and rail services in Australia and in New Zealand. A large company managing thousands of assets, delivering more than 100 million journeys per year, so a lot of complexity and a lot of need to manage maintenance routines and keep up time going. What EAM helps them do is really centralize all of their systems, create improved visibility, automate processes and improve overall the asset life cycle management. I mean these 2 wins underline how horizontal that platform is, so for the best in class, and we're putting investment in to make sure that we are relevant with more of these verticals.

If we move to Slide 17. Two important wins in the core of the offering of ALI, the first one with BASF, of course, the largest chemical producer in the world. The BASF was a long-term customer for ALI. And then progressively, BASF is moving on to the SaaS offering of ALI, I would say, a testament to upsell capabilities and the relationship that has been built over time.

The second example is from Georgia Pacific. Georgia Pacific is one of the world's largest manufacturers, distributors of tissue, pulp paper, packaging, building products. Of course, it's part of the Koch Industries group. GP has selected Hexagon as a strategic partner when it comes to OT cybersecurity. Our cyber solutions will provide inventory and vulnerability management capabilities, enable comprehensive OT asset inventory.

Moving on to Manufacturing Intelligence in Slide 18. A couple of examples of new accounts that have been opened through the ETQ quality management software platform. Their offering is called Reliance, and it's a true multi-tenant offering, with 40 applications signed for high complexity OEM-type accounts. In this case, we've closed significant business with Sealed Air, which is a global food safety and product protection solution provider, a large company, more than 16,000 employees, ETQ Reliance is their global quality management system, replacing a lot of homegrown processes. It's going to get rolled out across their 100 manufacturing plants' forward line.

Second example is from Belgium, Solvay, a very well-known leader in materials, chemicals, solutions to solve critical industrial, societal, environmental challenges, large company active in multiple countries, more than 20,000 employees. Again, a lot of innovation and critical solutions. They are deploying ETQ. Solvay is a long-time customer of MI and has been introduced by the CAE portfolio from R&D on to quality, and we are deploying Reliance across their facilities.

Just to conclude on MI. We have announced the launch of our digital manufacturing platform already a couple of months ago and now commercially available from Q1. Nexus has been codeveloped with our long-term partner Microsoft, using their Microsoft Teams Fluid framework, a lot of focus on making our technologies increasingly available through Nexus, more easily consumable by customers, a lot of focus on helping customers collaborate across silos and across applications onto this next-generation platform. We also announced in the quarter a couple of partnerships, amongst others, with Altium EDA, a fast growth sort of designer of electronic software design tools. We're going to connect our platform and theirs to make sure we can go and cross-sell customers and help them solve multiphysics type problems. So we look forward to seeing Nexus growing commercially over the next quarters.

[Benjamin Maslen, executive]

To Slide 20, just an overview of the organic growth by geographic region and by industry. So as you can see from the growth rates there, we had good growth in all regions with the exception of the U.S. U.S., as explained, is a down arrow by the decision to exit those contracts in the defense sector in SIG. Ex that, every market in North America was in good momentum.

China, 10% organic growth. That momentum continues and we feel optimistic about that for the second half of the year. Some softness were down arrows in infrastructure and construction markets. We've seen a little bit of a slowdown there with [indiscernible] systems, but that's being offset by very good growth in every region in the surveying business and also reality [indiscernible]. I think the rest of those you can process yourselves with you. Back to you, Paolo.

[Paolo Guglielmini, executive]

Great. And just in conclusion on Slide 23, and then so first, a solid quarter, solid start of the year and a continuation with good momentum. Great opportunity for all of us also to get up with our customers and find new ways of looking at helping them deliver great quality products across industries. We'll be at HxGN LIVE, our user conference in Vegas on the 12th to the 15th of June, and we would love to see, of course, also, as many of you on the line, investors, partners, stakeholders and customers are absolutely invited to join us in Vegas. Thank you.

And with that, operator, I think we're ready to take questions.

[Operator]

[Operator Instructions] Now we're going to take our first question, and it comes from line of Joachim Gunell from DNB.

[Joachim Gunell, analyst]

So 2 questions from my side. Starting off with ALI, can you highlight the underlying growth rate here of the perpetual-based licenses as well as the softwares revenues in Q1 and what is driving that? And based on the growth rate of the perpetual business, is it fair to assume a slowdown over the coming quarters?

[Benjamin Maslen, executive]

Yes, you're right. I mean, we saw very good growth both on the subscription product, but also on perpetual. I would say that we don't know next quarter and the quarters after how many perpetual licenses we will win. So there's a little bit of volatility there. They probably added a few percent to the overall growth rate of ALI, but we saw double-digit growth on the subscription side. The underlying momentum is very strong in that business.

[Joachim Gunell, analyst]

Great. And also on the both operating and the free cash flow conversion, slight improvement sequentially. I know there are seasonal effects here, but can you just comment a bit more about the drivers to get back to your 8% to 9% target here on a full year basis?

[Benjamin Maslen, executive]

Yes. I think the -- as you say, Q1 is normally seasonally weaker growth. And the reason for that is you obviously pay the sales commissions and bonuses that you accrue for during the prior year. And you'll see that movement on the balance sheet, the decline in the accrued expenses after those moneys being paid. Ex that, I think we made progress in terms of accounts receivable during the quarter. We brought that balance down. We are carrying a little bit of extra inventory at the moment. If you remember last year, we had restrictions on our ability to deliver because of component shortages, and we've taken the decision to carry a bit more inventory to make sure we can meet customer demands. And we don't see that problem getting worse. We're going up from here. And I think as we go through this year, we would expect that cash conversion ratio to creep up and, I would say, be in the 80% to 90% range for the full year.

[Operator]

The next question comes from the line of Sven Merkt from Barclays.

[Sven Merkt, analyst]

Great. Maybe a first question on the capitalization of R&D. This has increased again significantly this quarter. Can you comment what drove this, and at what level intangible CapEx will stabilize from here? And can I also follow up on the working capital? Even seasonally adjusted, it has been weak, and I expected this to benefit a bit more from the reversal of the working capital investments you have done in Q4. Can you explain what happened here exactly? And from a phasing perspective, when you really expect to see an improvement now in working capital?

[Benjamin Maslen, executive]

On the working capital side, I think one thing that's obviously stronger at the moment is demand. So that does lead into your account [ receipt call ] driven the hockey stick we have at the end of the quarter to carry. So the longer demand surprise on the upside, the more there's going to be a drag on working capital. I think that's the gravity of having a hardware component of our business. But as I said, we did bring accounts receivable down in the quarter, and the real swing factor on the working capital in Q1 is it seems a phenomenon which is paying the accrued payments that get built up last year. So that will happen in Q2, Q3 or Q4, and that's the reason to expect cash conversion to accrue.

[Paolo Guglielmini, executive]

Yes. In terms of R&D investments and capitalization, what I would say is that we are in an investment cycle because we see some opportunities across the board. I think we have quite an exciting lineup of innovation coming up. I would say a lot of the innovation that we see in positioning is driven by contracts that were pre-signed and commitments that we have, so relatively kind of low-risk type of development. A lot of what we see coming from manufacturing intelligence is future-proofing the core of the metrology revenues for next generation, especially in portable devices that will come in at higher gross margin, Nexus, the future group of software offerings.

I think a lot of the growth that we're seeing in ALI today comes from the investments that have been made in the last years to make sure that we lead from a SaaS perspective. I see -- I would see the kind the R&D expense line kind of blast lining, going further. I mean I see we have the teams in place now, and then the capitalization rate depends mostly on getting closer to those release dates and having more line of sight from productization and having kind of derisked technology development, but we think there's a massive opportunity and we want to stay ahead of it.

[Sven Merkt, analyst]

Great. That's helpful. And can I also ask a question on cost growth from here? Costs were quite high this quarter at EUR 480 million. And if we now think about the cost growth sequentially throughout the year, are you still hiring? Should we expect sequential growth from here? Any color really would be helpful.

[Benjamin Maslen, executive]

Yes, Sven, I think obviously, there are some cost lines that are still normalized and coming out of COVID. But I think if you look at things like travel and entertainment, we're probably back to normal rates now. We are hiring selectively and the business is sort of growing. So if you're trying to drive growth in EAM or ETQ [indiscernible] do that. But I think we're keeping a fairly -- want to put on the brake as well at the same time given some of the concerns that there are around the macro development through the second half and into next year. We want to make sure that we've don't overcommit. We don't see a step-up in those cost lines from here. I think that's reflected this quarter in the margin being slightly up here only.

[Operator]

And the next question comes from the line of Adam Wood from Morgan Stanley.

[Adam Wood, analyst]

I wanted to talk about the Manufacturing Intelligence business a little bit. I guess this has been a very challenging cycle for all of us to kind of work through. We've been talking about recession probably more than a year. That business has had a very strong performance, particularly in Q4 and Q1. Supply chain constraints are probably factored into that. And so it's kind of hard to work out how consumer demand translates into demand that some of your customers are seeing. Could you maybe just talk a little bit around when you look at pipelines in that business, are you continuing to see strength? You're not seeing consumer weakness in the end markets kind of feed through into demand at your customers? I appreciate you're not volume driven, but ultimately, there will be some correlation. And maybe talk a little bit about whether you see things like electrification driving new cycles of spending on quality. So any help around the kind of cycle in MI would be helpful.

And then maybe just secondly, probably similarly on China, how much of Q1 was a rebound from reopening? [indiscernible] pipeline suggest again that actually, with the easier comps, that business can sustain these levels of growth through the rest of this year? Or was there some bounce back from reopening benefit in China?

[Paolo Guglielmini, executive]

Yes, Adam, thank you. I mean on Manufacturing Intelligence, what I would say is that the portfolio is becoming more diversified. And what's important for that business is to be associated with and be highly competitive in the new areas of growth and research and innovation and digitalization, right? So as you said, electrification is one of those, but not only. There's increased demand associated with sustainability solutions. In consumer electronics, there's more of an adoption trend that is helping us. ETQ came in with customers in medical, in the medical sector that traditionally were not so much of a focus for us, and we managed to cross-sell into those accounts with the rest of the portfolio. So cost is very positive where we see sort of an association and a growth in revenue from OEMs and key accounts and leaders in more of those industries.

I would say when it comes to China, China had a good start of the year. I would say Manufacturing Intelligence, of course, will be in good shape. I mean they grew -- China grew at 10% in the quarter. And of course, Manufacturing Intelligence is 3/4 of the business. So clearly, that was in good shape. But I would say the energy portfolio did well as well. Construction is probably still on a lower base than it was some time ago, but it grew in the quarter. I mean we've attended multiple events in different locations. There was good participation to construction, infrastructure type events, good demand. We're working on localization. So all in all, I mean we are positive on China for the rest of the year. There's good momentum in the [ teams ] that reflected in the deal flow and pipeline.

[Operator]

And the next question comes from the line of Daniel Djurberg from Handelsbanken.

[Daniel Djurberg, analyst]

I would like to actually revisit the investments you do in R&D that is on a quite high level. You mentioned that you now have launched Nexus. And my question is if we should expect the total R&D as a percentage of sales to stay at 20%, 21% level or coming back to like 80%, 90% on back of that launch? Or if we should expect to know that you have much more in the pipeline that you are working on?

[Paolo Guglielmini, executive]

Yes. Thank you, Daniel. I mean so when you look at that spend in terms of overall R&D spend, I mean we look at the constant -- at the current run rate as being on the high side, right? So that means also we monitor it accordingly internally. And I think when you go and spend in R&D reflects a little of the shift in between existing development projects nearing completion and launch, and at the same time, trying to launch new initiatives that keep your sort of innovation pipeline going for the future. As I said before, I don't see a year in R&D spend further. What we're going to spend a lot of time doing in the future is to try and find more, especially in the software portfolio, more elements that we can go and cross utilize within the portfolio. So we're spending a lot of time looking at platforms components across the divisions and try and make sure that everything that we do to build Nexus at the best possible platform and data automation tools, we want to make sure that those capabilities get reutilized in other industries.

In ALI, we are, I think, competing very well when it comes to SaaS adoption in process industries. There's a lot of work that has been done on our architecture in the past 3 years. We want to reutilize some of those elements in other parts of the portfolio. So I think for us, the future is about focusing on those releases in the next 12 months, making sure that they count commercially and then go and find those areas of cross-use and optimization.

[Daniel Djurberg, analyst]

Perfect. And if I may, another question on -- yes, why not on the working capital again. I was wondering if you see differences now on back of geographical or difference in working capital to sales on back of geographical uptakes, et cetera. And also if overall, if the customer are more cash flow-centric, that we should expect this trajectory to continue to go north towards 10% or something?

[Benjamin Maslen, executive]

Daniel, no, I don't think so. I think if you look at the asset side of the balance sheet, then I think receivables came down and inventories have certainly had a step up. But that's not getting worse. The shortages, if anything, they will improve, I think, as we go through the year. And the Q1 cash flow, really, the big driver would be accrued expenses, which is a seasonal phenomenon and if it's going to happen, in Q2, 3 or 4. So no, I think bigger picture, [ I think I hesitate seeing a] downward trend in terms of working capital to sales for a long time, as the businesses has shifted toward software and services, and medium term, we would expect that to continue.

[Operator]

The next question comes from the line of Erik Golrang from SEB.

[Erik Golrang, analyst]

I have 3 questions. First one on the gross margin expansion you saw in the quarter, is that coming from both divisions or particular support from one that you mentioned, new products, volume and pricing, but if you look at it from a divisional perspective? And then the second question is on the organic sales drop in SIG related to the exited business. Should we expect something -- I think you talked about a 3% or an 8 percentage point drag from that. I guess we should annualize that for the rest -- the coming 3 quarters? And then the third question, if you could say something about sort of around demand. We talked about China. But if you look in Europe and North America, how was sort of growth trending through the quarter? Some companies have talked about a softer end to the quarter, particularly in North America. If you exclude the exited SIG business there in North America, what was the underlying sort of growth trends through Q1?

[Paolo Guglielmini, executive]

I would say -- thank you for the questions. Moving on the first one, related to the gross margin, I think there's been an uptick in both reporting segments driven by different dynamics, but certainly in both areas. When it comes to SIG, yes, I mean I think we're going to see a similar type of impact in Q2 and then possibly comparing ourselves to Q3 and Q4 2022, we're going to see that impact of softening. But again, we want to be very focused on making sure that our commitments are aligned to the strategic direction, meaning synergistic business, be more staff sort of oriented and being very focused on things that can be accretive from an EBIT perspective, and those business lines don't kind of match those criteria.

In terms of Europe and North America, the -- in North America, we see deal flow pipeline being at a good level. So a lot of the impact was really driven by SIG. We are wary, of course, of a business environment that is uncertain. And so we can reflect that in the way we kind of go to market in North America. When it comes to Europe, for me, the good news of what happened in Europe in the quarter is that a lot of that spend, whether that's aerospace CapEx for commercial aircraft, so whether that's investment in e-mobility, supporting the construction of Gigafactories, trying to make those processes more resilient and stable, or whether that's sort of infrastructure-led spend, those are very long-term type of activities. So gaining ground in those areas, I think, is going to prove valuable for us in the future.

[Erik Golrang, analyst]

Okay. And then one follow-up on SIG, if I may. This has been a slowing part of the portfolio for quite some time. And yes, still clearly on the sort of group profitability from a margin perspective at least. How much more do you think you'll need to do that before -- how much more shrinking to be able to start growing that business at a good incremental margin?

[Paolo Guglielmini, executive]

Look, I mean, we will see about that. What we think is positive in that part of the offering is that in the quarter, we have closed a good amount of the business, for instance, with OnCall. So we see that, that product group is starting to pay off in terms of innovation, the new generation dispatch systems, both on-prem and on SaaS competing well. So that's really a positive. We're going to keep on looking at especially those service assignments. We want to make sure that we focus on our IP, and we want to make sure that service are finally are conducive to software sales in the future, so scrutinize profitability for all of those assignments is on to fulfill that criteria.

[Operator]

And the next question comes from the line of Mikael Laseen from Carnegie. Excuse me, Mikael, your line is open. Please ask your question.

[Mikael Laséen, analyst]

Okay. Yes, I have a few questions. First one is a follow-up on this termination of the low-margin contract [ in F&I ]. How should we think about the margin impact here? Did you have an extra cost for doing this?

[Paolo Guglielmini, executive]

Yes, Mikael, thanks for the question. No, this was really us deciding not to rebid for certain contracts or being way more that would take careful in making sure that business would have come in at the right margin levels. We have done a realignment of the cost structure in the quarter, but most of the resources dedicated to those projects were external to start.

[Mikael Laséen, analyst]

Okay. So when this is after your books, the [ On ] contract, you could have a margin support, I guess?

[Benjamin Maslen, executive]

Yes. From a mix perspective, Mikael, we're stepping out of marked contracts that have a significantly lower margin than the division as a whole. So yes, mix will actually help.

[Mikael Laséen, analyst]

All right. And on the Manufacturing Intelligence, can you say something about the order trends in that part of your business, the bookings?

[Paolo Guglielmini, executive]

Yes. I would say, Mikael, the bookings were in good shape. I mean we've built a little bit of backlog in the quarter. And I would say that happened both in the devices and in the software side of the portfolio. So again, good deal flow, good creation of new opportunities, we close well as well as recognizing well. So still good momentum.

[Mikael Laséen, analyst]

Okay. And also on the supply chain side, what happened here in Q1 compared to the second half? And it would be great if you can comment also on the delivery and shipping costs and maybe component cost, if that is starting to stabilize?

[Paolo Guglielmini, executive]

Yes. I mean I would say the type of components that are a little bit more under pressure from an availability perspective has changed. I mean as we said, not as much of a top line impact any longer. We have had some missed shipments in some divisions and a little bit of a catch-up in others. So I would say, neutral. All in all, in some of our categories, we see pricing easing a little bit. And I would say also logistics costs driven by supply chain eased as well, especially in MI, where as a mixture of kind of being more efficient and pricing easing, we hope to see that trend continuing.

[Mikael Laséen, analyst]

Okay. Got it. And just a final one, if I may. Your spatial competitors have talked about dealer inventory reduction. Do you also see this in the market? And how is like your systems affected?

[Benjamin Maslen, executive]

Yes. Mikael, we've seen a little bit of that in the U.S. I mean obviously, the U.S. business for us is smaller. We have -- think have more direct sales than they do, so that it's less of a drag on our business. But yes, I think there has been some inventory rebalance in the U.S. construction markets.

[Operator]

And the next question comes from the line of Nay Soe Naing from Berenberg.

[Nay Soe Naing, analyst]

I've got a few as well, if I may. Starting with the organic growth rate in the quarter, it's been a big positive surprise for me, and I think probably for a few other analysts on the call as well. Just focusing on the GS specifically, you managed to do 9% year-on-year growth organically. And going forward for the rest of the year, could you kind of maybe give us a sense of how we should be thinking about that, especially if the headwinds are -- so, yes, if the headwinds in China unwind for the rest of the year and then especially in H2 will have an easier comp compared to what we just had in Q1 and Q2?

[Benjamin Maslen, executive]

Yes. So I think there are a lot of moving parts. I mean if you break the Geosystems growth down to the quarter, you probably had a couple of percentage points of growth coming from new products. Something like the BLK360 is not really macro attendant in particular. The mining business, where you've got very good growth, has got its own cycle, content mapping and things like that. So there's a lot of individual drivers in Geosystems that have good momentum, good trajectory.

If you think about the construction features, I think it's not a big business for us compared to MI in China and Geosystems. We do see an improvement relative to Q4 and we would hope that continue to go there. Offsetting that, we'll have to see how high interest rates feed into the construction development in North America and Western Europe. A lot of moving parts. But net-net, I think that there were drivers of the Geosystems that are not dependent on the macro, things like new products and markets like reality capture where we feel confident to continue to work with them however it plays out.

[Nay Soe Naing, analyst]

That's helpful. And then my next question is on -- we touched a lot on the investment cycle or investment paces you're going through at the moment. That's probably reflected in when you try and match the -- a lot of the good progress that you made at the EBIT margins to the -- from the cash generation margin, I suppose the free cash flow margin, we started to see a disconnect in the past 2 years. EBITDA has nicely trended upwards, but whereas on the free cash flow margin side, we're not seeing that. But my question is going to be, when should we expect that disconnect to stop? And when do we start seeing improvement in free cash flow margin that will track the margin improvement we see in the P&L as well?

[Benjamin Maslen, executive]

Yes. And on the working capital side, if you look at the slightly longer-term trends, I mean you had probably an overshoot in terms of our ability to put in working capital through COVID and immediately post-COVID. So that unwinds. As you have a couple of years growth, you have to put the working capital back out there. Plus, as I said, on top of that, we have held a bit more inventory to make sure we can deal with some of that component volatility that we see. But we don't see it any worse from here. I think as that settles down, we go back to the longer-term trend that we've been on that the working capital sales start to come down.

As Paolo said, we are in a period now where the overall level of R&D spending is higher than it's been for the last few years because of the very large projects that we're working on. We don't see that amount going up from here. And obviously, as those products are launched and they drive growth, that would drive the investment ratio to sales to start to come down again.

[Nay Soe Naing, analyst]

Super helpful. And last question for me. In your hardware business side, we've seen from other manufacturing hardware vendors, especially in automation as related to digitization that they're seeing a good pickup in the order books. I was wondering if you could comment a little bit on your order book and visibility for the remainder of the year, so in your hardware business?

[Paolo Guglielmini, executive]

Yes, I would say, as we discussed earlier, there was good order intake, especially in the manufacturing metrology area where we build backlog. I would say that was pretty neutral as well in Geosystems where, for sure, we didn't burn our backlog in the quarter. So I think that feels in decent shape.

[Nay Soe Naing, analyst]

And for the Geosystems side?

[Paolo Guglielmini, executive]

Yes. As well, in Geo, we didn't have a backlog erosion in the quarter. So all things considered, good progress both on the deal side and on the shipment side.

[Operator]

And the question comes from the line of Alexander Virgo from Bank of America.

[Alexander Virgo, analyst]

I wondered if I could just distill the free cash comments down into, is it fair to say the balance of the year is likely to be a working capital unwind -- tailwind to free cash, but your level of investment is going to stay at these sorts of levels for the foreseeable future? That's the first question. And then the second question is, I wondered if you could comment around sort of the very front end of construction market dynamics? Because I'm guessing as the position that you guys occupy in terms of surveying and sort of right around the front end of discussions on projects and FIDs, et cetera, you might have a slightly better insight into what's going on in terms of activity and dynamics there than most.

[Benjamin Maslen, executive]

Yes, Alex. On the construction side, as the arrow chart shows, I think we saw a little bit of softness maybe on the machine control kind of business. And that goes back to the previous question around the inventory destocking or normalization. If you ask us, that's a little bit of a drag. But against that, the surveying business was pretty strong across the board. And as you know, that largely played into heavier construction projects, more infrastructure projects. And I think there was a lot of spending in that area across the world that is definitely helping that business. So I think it depends a little bit which segment of the construction market, which job [indiscernible].

And then breaking down the cash flow question, yes, I think that assumption is right. I think from a working capital perspective, we would expect that to be more a positive driver as we go through the back end of the year. because you won't have the season effects that we had in Q1, which is the payment of the commissions for [indiscernible].

In terms of the investment level, yes, I think we don't see it going up from here, but I think some of these are longer-term projects, multiyear investment projects. I think for the rest of this year, that will stay at a pretty similar level.

[Operator]

Dear speakers, there are no further questions. I would now like to hand the conference over to Paolo Guglielmini for any closing remarks.

[Paolo Guglielmini, executive]

Yes. I would say, just to say thank you, everybody, for joining us. A lot of very interesting questions, and we're going to talk again in 3 months.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.