Hexagon AB

STO:HEXA B

Earnings Call Transcript 2021-Q4

[Operator]

Hello, and welcome to the Hexagon Year-End Report 2021. [Operator Instructions] Today, I am pleased to present Ola Rollén. Please go ahead with your meeting.

[Ola Rollén, CEO, President & Director]

Thank you. Welcome, everyone, to this Q4 report for 2021. And I suggest that we move straight to Slide #4. We had a record quarter. Sales increased by 17%. The organic growth was 7%. And we could have shipped another 6% organic growth had we not faced component supply shortages in the quarter. Our largest divisions, Geosystems and Manufacturing Intelligence, managed to grow by 7% and 9%, with solid margin expansion. PPM continued to recover, recording an 8% organic growth in the quarter. And this was also our first quarter with EAM solutions and EAM delivered a 42% SaaS revenue growth. Our EBIT came in at EUR 373 million, and that's an increase by 24%. If we now move to Slide 5. That is just a reminder that Q2 and Q4 are strong quarters seasonality wise, and Q1 and Q3 are slightly weaker. Moving to Slide 6, key figures. Operating net sales amounted to EUR 1,217 billion, which is 17% growth, 7% organic. And our operating earnings came in at EUR 373 million, which corresponds to a margin of 31%, and that is an EBIT increase of 24% in the quarter. Just for your revision, you got the full year numbers on Slide 7. We have operating net sales of EUR 4.3 billion, and we make an EBIT of EUR 1,270 million, corresponding to 29%. Using the old reporting structure, our EBIT margin would have been 28% for the full year. Moving to Slide 8, cash flow. I think the most important thing to highlight is the change in working capital, where we had a huge release of working capital in the fourth quarter of 2020, and we had working capital buildup due to the shortage of components in the fourth quarter of 2021. There was still a strong cash conversion, 81% in the fourth quarter. And if we move to Slide 9, we can see that working capital to sales is still at record low levels in spite of this small buildup in the fourth quarter. Market development, moving to Slide 11. North America is now 32% of sales, the 3 global regions are 1/3 each. And we saw a slight contraction in Asia Pac, down from 14% to 12% of sales. Moving to Slide 12. Within these reporting regions, we see North America growing stronger growth than 8% organic, so is Eastern Europe, Middle East and Africa, as well as South America. And then Western Europe is growing within the 0% to 8% range. China, up 2% on very strong comparison numbers for Q4 of 2020. And then we have Asia, excluding China, which is the only region that is contracting in the quarter. I leave Slide 13 for your review later on, but highlighting that all industries, but possibly electronics, are at all-time high. Electronics had its peak in the third quarter, which is natural if you look at the customer base that we're servicing in that industry segment. Moving on to Slide 14, EMEA market trends. Western Europe recorded 6% organic growth. We saw solid growth across all segments and a strong recovery in the automotive, aerospace and manufacturing as well as construction and infrastructure sectors. Strong countries were, if I were to highlight some, U.K., Italy and Germany. Eastern Europe, Russia and Middle East all recorded double-digit growth in the quarter. If we move to Americas, Slide 15. North America recorded 9% growth. The strongest country in North America was Canada, that's a good demand from both oil and gas as well as minerals and natural resources, but strong recovery in most verticals in North America. Continued weakness for our defense business in United States. South America recorded double-digit organic growth, driven by solid development in mining and agriculture as well as the continuous recovery in the Brazilian economy, where we grew by 18%. Finally, on Slide 16, regarding markets. Asia. China, 2% organic growth on the back of very strong comparison numbers. Continued strong growth in the manufacturing sector despite the tough numbers we compare this fourth quarter with. Infrastructure and construction is hampered by availability issues, and we made a decision to cut supplies to the Asia region for geospatial solutions. India, double-digit growth grew by 14% organic growth in the quarter, a good recovery for India. And Japan and South Korea were the only major markets contracting in the quarter, and that is really we're seeing competition for our Japanese and South Korean customers coming from China. Reporting segments. If we move to Slide 18, Geospatial Enterprise Solutions reported an organic growth of 5%. Geospatial was the business area that suffered the most from lack of components. In spite of that Geosystems, which probably suffered the most, delivered 7% organic growth. SI minus 4 hampered by the U.S. defense lack of orders. Autonomy & Positioning was another area that was hampered by component supply, but still managed to grow by 8% in the quarter. Sales EUR 586.5 million and an EBIT margin of 31% in the quarter. Moving to Slide 19. Industrial Enterprise Solutions saw an organic growth of 8%, had less issues in the fourth quarter with component supply compared to gestation. MI continued to recover and grew by 9% organic growth. And we do see both automotive, aerospace and design and engineering software coming back. PPM also recovering, 8% organic growth. It was driven in the quarter by the asset information management software as well as our AEC portfolio. Good recovery in EMEA and EAM, which is reported in the PPM numbers. So strong growth in both sales and order for its SaaS solutions. Sales of EUR 630 million, an EBIT margin of 32%. So a strong recovery for Industrial Enterprise Solutions. Moving to Slide 20. We report an increase of 1% in our gross margin for the full year. 65% for the rolling 12 months -- past 12 months. Slide 21 is the old definition of our operating margin, where we actually reached our target that we set in 2016 of 28%. And if we move to Slide 22, we can see according to the new definition, where the last 12 months is a 29% EBIT margin. We then move to Slide 24, and we start discussing M&A, orders and product releases. We launched a project during the fourth quarter where we collaborate with a nonprofit organization called, Beneath The Waves. This is a super exciting environmental project where we try to preserve the seagrass meadows in the Caribbean. We do it through our subsidiary, R-evolution and we've leveraged the Hexagon's airborne bathymetric LiDAR Technology to cover the seagrass beds and document them. And we're going to accurately map thousands of kilometers of the seabed in just a few days using an airplane to validate the findings. If we move on to Slide 25. We're very proud that our subsidiary PAS has been awarded the Global Company of the Year Award from Frost & Sullivan.Moving on to Slide 26. This is an exciting order where Hexagon's A&P and Mining divisions collaborated in the development of an automated road-train solution for the mining services company, Mineral Resources Limited, MRL. We integrate drive by-wire technology with an autonomous management system to orchestrate vehicle movement in the road-train haulage. So you can see 2 big, big lorries acting as a road-train on this slide. Moving to Slide 27. We had significant orders from the automotive industry in India, both Mahindra and Tata Motors want Hexagon solutions for simulations of future products. Slide 28. This is another interesting sustainability application where an architectural design and consultancy company in Thailand, GreenDwell, used our computational fluid dynamics to reduce the green footprint of this building. And this might be something that could become a standard where you optimize what's called HVAC, heating ventilation and air conditioning. Moving to Slide 29. It was, as I previously commented, a good quarter for aerospace. We had orders from, along others, Kawasaki Heavy Industries, where they want to predict how sheet metallic components and materials will be affected by various forming processes in its manufacturing. And they use our design and engineering software to follow up on said operation. Slide 30. We also got an interesting public safety order in the quarter from the country of Honduras, where they're going to standardize on our cloud-based solution, HxGN OnCall, and they're going to roll it out nationwide, and it's going to affect more than 10 million people. Moving to Slide 31. We also got our first order from a Chinese company. And in this case, it was a chemicals company that selected HxGN SDx to digitally transform its processes. Slide 32, autonomous reality capture and momentum is building for our newly released product, BLKARC, which in layman terms is called the dog, where we combine our sensors with the Boston Dynamics robotic platform. We've got a series of new orders in the quarter for the recently released product where they will use it for anything from airport security to plant inspection and better localization of robots and humans. Moving to Slide 33. We also launched BLK2FLY in the quarter, and we've also received orders for that platform. It is 1 application where a construction company want to compare the actual construction against the BIM model and look for deviations against the BIM. And we've also seen a lot of other BIM-related applications where you use this platform to verify your BIM data. Slide 34. We launched a new organization at Hexagon today, a metaverse-focused business unit that will drive growth in digital transformation. In connection to that, we got 2 orders. We got 1 order from Enel, where they use us for asset and infrastructure digitalization. Enel is a huge company with plants in more than 30 countries, and they've ordered hundreds of our BLK sensors and our cyclone software to digitally capture all their assets, their factories and then create a digital twin. Another super exciting project is that we now have an agreement with the federal agency for cartography, BKG, in Germany to digitize the entire country of Germany. And we kicked off that project and it's going to continue throughout 2022. With that, we come to the dividend. So if we turn to Slide 36. As you've seen in our interim report today, the Board of Directors of Hexagon proposed a dividend of EUR 0.11, which is an increase of 22% over 2020. And in summary, if we end on Slide 38. It's a record quarter. It's the best quarter ever. We missed 6% organic growth. So both EBIT margin and sales could have been much stronger without the supply constraints that we were faced with in the quarter. And the Board of Directors proposed a dividend of EUR 0.11. And with that, operator, I think I've concluded my presentation and we are now ready to answer questions.

[Operator]

[Operator Instructions] And the first question is from Daniel Djurberg, Handelsbanken.

[Daniel Djurberg, Research Analyst]

Congratulations, Ola, for having a strong set of numbers and outlook.

[Ola Rollén, CEO, President & Director]

Thank you.

[Daniel Djurberg, Research Analyst]

I would start with that I personally shared a little bit of potential cost hike come back on inflation and so forth. And also had the uptick in SG&A activities, at least in October, November last year. Now if I am not wrong, I still wonder your view here on the net between cost inflation, pricing opportunities for 2022. Your view on this would be great.

[Ola Rollén, CEO, President & Director]

It is a challenging time because we've had more than 15 years of no inflation economy, global economy. So people are not used to price increases. But we're definitely seeing a salary inflation, and we have to mitigate that with price increases. And luckily for us, we have the pricing power. So, so far we haven't seen any backlashes on our price increase strategy for 2022.

[Daniel Djurberg, Research Analyst]

Sounds great. And if I may, just a short follow-up and that could be on the AEC that you mentioned did well for the Process Power Marine in the quarter and that also includes a smart build. So my question is the changes you do. Is it more of a natural step to change unchanged asset portfolio of the info, for example? Or is it more about smart build and the AEC can do better under too much hiring and under PP&M?

[Ola Rollén, CEO, President & Director]

No. We have a series of new products coming out in 2022 that are designed -- hardware products and solutions that are designed for the AEC market, where it's going to benefit us strongly to combine the product offering, offering the software platform along with the tools that we create for that software platform. And that's why we do the change.

[Operator]

The next question is from Alexander Virgo with Bank of America.

[Alexander Stuart Virgo, Managing]

I trust you are all well. So I wanted to dig a little bit into this component constraints. Just to understand some of the moving parts. I think you talked about probably half of that impact when we spoke before Christmas. So can you give us a bit of a feel for what exactly it is that's driven a bigger impact? And I guess, in part, digging into your comment in your prepared remarks about direction of supply and moving, I'm guessing, to serve North America and Europe instead of China. So if you could dig into that, and presumably, as a part of that, the implied tailwind from the software side of the business, because presumably all your component headwinds are really on the hardware side of the business. It implies software growth is actually probably mid-teens, unless I'm getting my math wrong. So that would be really helpful, a good place to start. And I've got one follow-up after that, please.

[Ola Rollén, CEO, President & Director]

No. You're absolutely right. We've seen an increasing demand for our products in the fourth quarter and throughout the fourth quarter building up. So products that weren't constrained in the third quarter became constrained in the fourth quarter. And we had a discussion what to do and then we come to China. And in China, we are involved in longer-term projects than projects that we might sell in Europe and North America, think large infrastructure, the silk road and so on. So we have bit better planning horizon in China. And we took the deliberate decision to ship to the short-term opportunities we saw in Europe and America and then sacrifice China in the quarter only to supply them in the first quarter of 2022. And your math is correct, Alexander. So don't fret, software outgrows hardware in this quarter.

[Alexander Stuart Virgo, Managing]

It's nice to hear. I guess the guidance that you've given -- you gave guidance in detail, but the commentary that you've made about how long it would take to unwind these constraints and also presumably the working capital buildup will reverse as well. What's your sort of best guess as we think about the trajectory through 2022. Should we be expecting 600 basis points in Q1, I guess, is the quantitative question.

[Ola Rollén, CEO, President & Director]

I think it might be -- it's hard to say, because it's a moving target every day. I think that we're going to see the peak, or the trough, the peak in the backlog and the trough in the reduced organic growth in the first quarter. And I think we're going to see a gradual recovery in the second quarter. What we're trying to do is we're trying to even out this backlog throughout the remaining quarters, Q2, Q3, Q4 in 2022. So we're actually going to achieve a slightly higher growth in those 3 quarters than our budget or our plan for 2022, and that's how we're planning things operationally right now. That might change, though. So...

[Operator]

The next question is from Erik Golrang, SEB.

[Erik Golrang, Analyst]

I have 2 questions. First one is a follow-up on the topic of supply constraints. I think you talked specifically about some redesign being a key mitigating factor in the last report. Is that still the case? Or is there anything else specific in terms of your visibility on component supply that makes you certain that as of Q2, you'll start to see improvement.

[Ola Rollén, CEO, President & Director]

No, the redesign helps. And you have to mimic the large electronics companies because they are, I mean, the gorillas in the industry. If you think Apple only, the iPhone is produced more than 200 million units per year. So if you compare Apple's silicon wafer purchases to a large automotive company that might make 10 million cars per year. So it's actually nothing compared to the electronics guys. So you try to mimic them, you try to become mainstream. And then secondly, we have some signals from the industry that capacity is building up in the semiconductor industry, and it will gradually ease throughout 2022.

[Erik Golrang, Analyst]

Okay. Then on the completely different question on the BLKARC and your offering there. We've seen similar products announced partnering with Boston Dynamics with the Spot. How does your solution there differ to what we've seen from competition?

[Ola Rollén, CEO, President & Director]

It's better. If you need a dog, call us.

[Operator]

The next question is from Joachim Gunell, DNB Markets.

[Joachim Gunell, Junior Analyst]

Can you perhaps, Ola, from a broader perspective, I mean, coming back to the 4 trends you highlighted during the CMD that should accelerate the organic growth profile for Hexagon in terms of subscription, smart digital reality, autonomy and the energy transition, which of these would you say should become the real, call it, main growth accelerator. And at what point in time do you expect to see an inflection point for Hexagon's positioning into this?

[Ola Rollén, CEO, President & Director]

It's hard to say when. You typically can see it afterwards where the inflection point was. It's hard to say when you're in the midst of it. But we've got 3 major tracks for this company growing in the next 10 years. And that is discrete manufacturing where we want to play an active role in automating production chains using our quality systems to do so. The second route would be AEC and process industries where the combination of PPM, Geosystems, EAM and so forth will enable us to create digital twins around construction sites, process plants and so forth. And then the third avenue is really this brand-new world of the matter birth with digital twins of cities or the streets or countries or people and so forth, that opens up new possibilities for Hexagon to enter into consumer-related industries and also stay with mapping and navigation.

[Joachim Gunell, Junior Analyst]

That's helpful. And perhaps slightly on the same topic with regards to the ambitious 2026 target there. I mean is there a reason here for the conservative investor to not, call it, change your margin target here in accordance with the change of definition to a bit well?

[Ola Rollén, CEO, President & Director]

The one I made, we'll see. I mean we have ups and downs in the economy and look at last year when we finalized our financial targets that we set in 2016. So we missed the top line by a bit. It's mostly currency, but who could have planned for this COVID outbreak. So will revise the targets when we reach them. And if we are significantly above and it looks ridiculous, then, of course, we'll change them. But it's 5 years to go.

[Operator]

The next question is from Sven Merkt, Barclays.

[Sven Denis Merkt, Equity Research Analyst]

I just wanted to follow up first a bit on the dynamics on the cost side. How much travel and event costs do you expect to return for this year? And is there anything beyond the cost inflation you touched on earlier that we should consider for 2022? And then secondly, I was wondering if you could comment how much the LTIP will ramp up this year. Will this already increase to the full EUR 60 million run rate? Or will it be below for this year? And also, should we expect that share-based compensation will remain at EUR 60 million in 2026?

[Ola Rollén, CEO, President & Director]

First of all, dynamics on cost, it's hard to say, but we have to mitigate the cost increases with rationalization and price. So that's our plan for the year. The LTIP is growing by 1/4 per year. So it's EUR 60 million over 4 years. So you can plan 1/4 of EUR 60 million for every year up until 2024. And beyond that, we'll see what happens in 2024.

[Operator]

The next question is from Adam Wood, Morgan Stanley.

[Adam Dennis Wood, European Technology Equity Analyst]

I've got 2, please. Maybe just a follow-up on the kind of cost planning for 2022. I mean, you obviously rightly flagged there's an uncertain outlook. Could you maybe just talk a little bit about how you plan phasing the investment in the business through the quarters? Does the backlog that you have give you comfort that you can put all the investments in straight away? Or there will be some caution in terms of how you plan, especially given kind of risks of cost inflation and employee attrition through the year? That's the first one. And then secondly, just a charge on the Infor business. Obviously, a fairly chunky one against the revenue base in Infor. Could you maybe just give us a little bit more detail on exactly what is cash, noncash in there, which assets are being written off and so on, just to understand what that charge is going towards.

[Ola Rollén, CEO, President & Director]

I think we have to come back because that's a lengthy explanation on EAM. Regarding the cost plan, I mean, investments, I don't know what you mean by investments. But I mean, investments, you take decisions on years in advance. You can't run a technology company by making plans every quarter. So our investments are fairly firm.

[Operator]

The next question is from Stacy Pollard of JPMorgan.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

Three questions from me as well. So regarding supply constraints, I did hear you say 6 percentage point impact on revenue growth. Did you say that it was also 6% on EBIT? And then any thoughts on seasonality for margins as we model through 2022? I'll let you do that one first, maybe.

[Ola Rollén, CEO, President & Director]

No. I mean, the impact on EBIT is significantly greater because you have to ambition a fully loaded cost structure in the fourth quarter where the incremental margin on those extra 6% would have been significantly higher than the average for the group. So unfortunately, it hurt EBIT much more than the 6% it hurt at the top line. And then what was your second question?

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

Just as we thought through the seasonality for margins for 2022, yes.

[Ola Rollén, CEO, President & Director]

I don't see any reason why the seasonality would change. Q1 is our weakest quarter; Q3, our second weakest; Q2, our second strongest; and Q4, our strongest quarter. And I think that will repeat itself in '22 as well.

[Stacy Elizabeth Pollard, Head of Software and IT Equity Research]

Okay. No, that's fine. I was just checking if supply constraints made any impact into '22. And then the last questions were really just divisional. So PP&M division, to what degree does higher oil price help the PPM division now? and I know these project lead times are very long and you're less upstream anyway. So maybe it doesn't matter that much, but just a quick one on that one. And then SI, defense still weak. When do you expect that to come back to growth?

[Ola Rollén, CEO, President & Director]

PPM, there is a correlation between the oil price and sales for PPM over longer term. But short term, quarter-by-quarter, it has very little impact on sales. So what we're seeing right now is a general recovery where EPCs are starting to invest in software again because they do receive orders for new projects, which might in turn have something to do with the oil price, but it's more of a longer-term view. Regarding SI, it's a gradual process where we lost our biggest sponsor in the U.S. defense and they delegated the purchasing of the product to some 200 agencies within the U.S. defense body. And we are now contacting these 200 customers and trying to land orders with them bilaterally. And that's why it's going to take some time. But a good guess would be that we recover. And this time next year, we're going to be fully recovered.

[Operator]

And the next question is from Mohammed Moawalla, Goldman Sachs.

[Mohammed Essaji Moawalla, Equity Analyst]

Great. A couple from me. First of all, on just again, coming back to kind of the shape of the growth. I think you sort of implied that Q1 would indeed be the trough. In terms of your kind of visibility, it sounds like this is still something that could be better, but are you essentially saying that growth in Q1 would further decelerate relative to kind of the levels of Q4. And then I had also a sort of separate question on sort of the gross margin dynamic. Obviously, your gross margins have expanded due to the rising software mix. Given the issues around some of the component shortages and in cost inflation, I know the software side is still doing pretty well, is it fair to assume that on a kind of full year basis, perhaps the gross margin would be more flattish this year before it recommences its expansion? Or do you think that the gross margin can still keep growing in 2022? And then lastly, just on PP&M, you talked about sort of project activity returning. From a kind of competitive standpoint, have you seen sort of any shift in the landscape? And where do you see sort of the big opportunities? Is it the more kind of discretionary design projects? Or is it still a lot of the kind of more data management, simulation, and that sort of stuff?

[Ola Rollén, CEO, President & Director]

That was a lot for one morning, but I'm going to try to work through your questions. Shape of the growth, it's hard to say sitting here in February, what the shape of the growth. And if Q1 will decelerate growth further compared to Q4, I simply can't give you an educated answer. Rising software mix should improve gross margin, that's true. But it's not entirely true because if you have a cloud-based software, you're very close in terms of gross margins to where our hardware is. So we don't see that big difference between gross margins for hardware and software right now. PPM competitive landscape. I think for us, the big opportunity is really the combination of using SDx. Our platform, or our digital twin platform in combination with EAM and the reality capture that we can do with, among others, BLKARC and BLK2FLY. That is a huge opportunity for the future.

[Mohammed Essaji Moawalla, Equity Analyst]

Okay. So is it fair to say on that comment on the gross margins, given the kind of cloud mix effect, that and the supply chain issues, your gross margin could pause before kind of resuming expansion over the time period over the medium term?

[Ola Rollén, CEO, President & Director]

I think over the medium term, theoretically, right now with the next-generation products we've got, we could see the gross margin climb another, I don't know, 9%, maybe 74%, and that is in theory and it's over the medium term.

[Operator]

[Operator Instructions] And the next question is from Johannes Schaller, Deutsche Bank.

[Johannes Schaller, Research Analyst]

Congratulations on doing so well in this supply-constrained environment. I wanted to come back on your outlook going into Q1, Q2 just on the component supply. I mean, if we're talking to some of the largest industrial semiconductor makers and power microcontroller sensor manufacturers out there, it doesn't really look like H1 is getting much better, probably more getting better towards the end of the year. So could you maybe give us a bit of a sense on a more granular basis from your contracts and the visibility you have from your suppliers? I mean, do you have really higher volume commitments already in the second quarter of the year? And then related to that, let's assume supply does not get better. What's your contingency plan. Can you still shift from China to other markets for another few quarters? Or is that more a very short-term thing?

[Ola Rollén, CEO, President & Director]

No, I think shifting geographically is always a short-term thing. You're juggling demand and you're trying to prioritize when the people absolutely need the product. The reason why we hope -- and you're absolutely right, it's a super tough situation for the semiconductor industry. The reason why we think it might ease off as from the second quarter is because we've redesigned certain wafers, certain chips that we use, to resemble more high-volume and less scarce products in the market. It doesn't help if you have a low volume, highly exotic silicon wafer in this situation. So if you can standardize that and move towards something that is more high volume for the suppliers, then it makes all the sense in the world. And that's what we're working on.

[Operator]

And we have a follow-up question from Alexander Virgo, Bank of America.

[Alexander Stuart Virgo, Managing]

Ola, I wondered if you could just talk a little bit about the shape and template, I suppose, precedent maybe for the Enel contract. How does that work in practice in revenue recognition terms? And what visibility does it give you. And then I was intrigued by your comments on Japan and South Korea and the impact that you are seeing from Chinese competition. I wondered if you could just flash that out a little bit for us, please?

[Ola Rollén, CEO, President & Director]

Yes. So the Enel contract, we started deliveries in the fourth quarter, but it's definitely going to be more of a 2022 issue. Having said that, we are relying on components for the BLK sensors, so that must come as well in order to realize the contract, but it could grow into something super exciting when we've scanned everything and they're going to create a 3D twin out of all these plants. So this could be super interesting going forward. Regarding Japan and Korea, it is really the shipyards where we see Chinese shipyards take in orders from Japanese and South Korean shipyards in special ships like LNG tankers and so on.

[Alexander Stuart Virgo, Managing]

I see. And they don't use your software in the same -- or you're not selling your software to them, I guess, in the same degree or same scale? Is that the right way to think?

[Ola Rollén, CEO, President & Director]

No, we do. We had growth in China, but we had a decline in Japan and Korea.

[Alexander Stuart Virgo, Managing]

Okay. So the point being, it's Chinese competition for where you build the ships as opposed to Chinese competition for you?

[Ola Rollén, CEO, President & Director]

Correct.

[Operator]

And there are no further questions at this point. So I hand back to our speaker.

[Ola Rollén, CEO, President & Director]

With that, I thank you for listening in, and wish you a good day, and we'll do this again next quarter. Thank you. Bye.

[Operator]

Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.