Earnings Transcript for HEXA-B.ST - Q1 Fiscal Year 2024

Operator: Good day, and thank you for standing by. Welcome to Hexagon First Quarter 2024 Report Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. It is now my pleasure to hand you over to the President and CEO of the company, Mr. Paolo Guglielmini. Please go ahead, sir.

Paolo Guglielmini: Yes, good morning. Thank you for joining our Q1 2024 earnings call. We are pleased to report another solid quarter, with organic revenue growth of 3%, resilient margins and strong cash conversion. Slow demand in Europe and the weak construction market combined with strong comparable growth in prior periods made for a difficult backdrop, but the teams did very well to capitalize on a strong U.S. market, the demand from countercyclical verticals, and more importantly, our own innovation and proximity to clients in order to deliver a 13th quarter of consecutive growth. The gross margin at 66.5% and the operating margin at 29% were solid achievements despite slower growth and inflation. We delivered on those through focus on recurring revenue, growing at 6% in the quarter now at €520 million, with SaaS growing above the 20% mark, and through innovation for active cost management and portfolio optimization as we have seen from the recently announced divestments. Cash conversion was also very positive in the quarter at 88% considering its seasonality, supported by the constant internal focus and the favorable mix. Despite the short term challenges in market demand, we keep on strengthening the business model. We have an exciting pipeline of innovation ahead of us and we are very well positioned looking into the future. Moving on to Slide number 4. We have leveraged regionally our balanced footprint. In the quarter, we grew the business in the Americas by 4% despite the weakness in South America with good demand coming from infrastructure, from manufacturing, Aerospace and Defense. EMEA was flat with market conditions that are remaining difficult, particularly in Central Europe and the U.K., but supported by commercial aerospace growth and good adoption of our software solutions. Asia was up by 4 percentage points in the quarter despite a very strong quarter last year in India. In China, the market is and will remain challenged, but this quarter highlighted once again that we have a fantastic team in place, making the most out of the local trading environment as analysts and investors got to appreciate during the visit to our operations earlier in March. Moving on to the detail of the division on performance in Slide 5. Manufacturing Intelligence recorded growth of 5 percentage points. ALI grew at 2% on a tough 2023, comparable of 16 percentage points of growth. Geosystems contracted by 2 percentage points, AS and SIG grew by respectively, 8% and 5% in the quarter. We've also included in Slide 6 a snapshot of the division's quarterly top and bottom line development for your reference. If we now go through the divisional performance one by one, starting with Manufacturing Intelligence in Slide 7. MI delivered on revenues of €478 million, at an operating margin of 26%. MI is exposed, as you know, to verticals and regions that in this moment are in very different phases of their life cycles, some more challenged than others, but still managed to grow also in orders although in low single digit in Q1. We're doing very positive progress with our laser trackers portfolio that's supporting precision robotics for large-scale applications, aerospace, in particular. We are seeing good growth in our software portfolio, particularly in simulation and the Enterprise Quality Management solutions, pushing recurring revenue for MI up 8 percentage points on a year-on-year basis. The margin compression of 100 basis points was achieved through the divestment of PMI and the continuous efforts on rationalization and operational excellence. Moving to the Asset Lifecycle Intelligence division in Slide 8. ALI closed on €192 million of sales with a continuation of its positive momentum and trajectory. SaaS revenues were up by 20 percentage points in the quarter, recurring revenue up by 10 percentage points, building a stronger foundation into the future. Last year, 16 percentage points of growth in Q1 with very strong perpetual licenses represented the tough comparable in both top and bottom line. But looking further, the strategy of digital continuity from design and engineering all the way to operations and maintenance is gaining momentum. In the quarter, ALI also held a very well-attended and successful Customer Advisory Board with some of our top clients really appreciating the data and cloud-centricity of the direction of the business, which we will continue to build on through the acquisition of Itus Digital recently announced a next generation asset performance management solutions. Moving now to Geosystems in Slide 9. Geo recorded sales of €377 million in the quarter, down by 2 percentage points, although still at a very healthy margin of 31%, despite the negative impact of FX because of its cost structure in Switzerland. Market demand and confidence in both commercial, residential projects, and infrastructure spend, particularly in China and in Europe that accounts for almost half of the Geo business is the short-term challenge for Geo. But we have very strong reasons to remain confident in the future of Geosystems. We had a clear technology edge in geomatic solutions. We have a very differentiated offering for reality capture. We see continued growth of our AECO software portfolio and an innovation roadmap that we have pursued in the last quarters, and all of this will allow us to bounce back to growth as demand improves. Moving to Autonomous Solutions in Slide 10. AS recorded sales of €135 million at an operating margin of 35%. In the quarter, we have seen strong adoption of autonomous technologies in agriculture and in A&D. Correction services within AS grew at 30%. Positive sign towards the long-term plan to build recurrent revenue and move towards software-defined accurate positioning solutions. We have seen more muted demand in mining, primarily due to timing of deals, although the outlook remains positive, driven by adoption of digitalization and safety solutions for this sector. All in all, we see strong long-term potential for AS, despite the short-term challenge of improving from a 22% growth year in 2023. Lastly, the Safety, Infrastructure & Geospatial division in Slide 11 recorded sales of €117 million at an operating margin of 21%. It was a good quarter with a lot of focus on market adoption and project delivery for our OnCall computer-aided dispatch solution that's been recently launched. In this area, we see deals momentum. We see larger transactions as customers, cities, agencies, and municipalities are moving to adopt state-of-the-art cloud-based tools for improved collaboration and effectiveness of their operations. The strong margin improvement of SIG shows the positive benefit of portfolio management and the refocus of the business from services increasingly to pure software. If we now move to finance with David Mills.

David Mills: Thanks, Paolo. So before we move into the Q1 financials in detail, I wanted to reference the new disclosures that you may already have noted from the presentation so far and our enhanced report published this morning. These updates being in response to the investor feedback last year and represent a delivery on the commitment made at the CMD in December. In the following slides, I would like to take you through what was a solid performance considering the more muted organic growth with resilient EBIT delivery and improved cash flow. So moving on to Slide 13, starting with the Q1, 2024 income statement, stepping through the sales bridge. Sales were at €1.299 billion, which is a reported growth of 1%, negatively impacted by FX of minus 2% and a zero net impact from structure giving an organic growth of 3%. Gross margin held flat year-over-year at 66.5% which is a seasonally high level, as we will see in subsequent slides. Operating earnings grew in-line with organic growth by 1% to €376.5 million with a 10 basis points improvement in the margin to 29%. The earnings before taxes decreased due to the interest expense of €43 million versus the prior year of €27 million resulting from the increased interest rates driving the dilution at this level. Taxes being 18% in line with the prior year bring us down to an EPS of €0.101. For reference, the EBIT including PPA includes an equivalent €28 million amortization to the prior year and so dilutes the EBIT1 by 220 basis points to 26.8%. Moving on to Slide 14. In the Q1 profitability bridge, currency has a marginally dilutive EBIT impact despite the negative currency translation on sales of €23 million having a corresponding €13.6 million EBIT impact which is a margin of 59%, as the net year-over-year transaction difference is a positive of €5.8 million from a current year gain of €0.9 million and a prior year loss of €4.9 million. The translation movements being mainly driven from the continuing currency trends of the further devaluation to the Euro of the CNY by 6% and the U.S. dollar by 1%, where sales exceed cost and a further appreciation in the Swiss franc of 5% which is the reverse impact. The accretive structural element reflects the net positive impact of acquisitions less disposals in the quarter with the material elements being Qognify and Hard-Line net of the disposals in the SIG division and the two-month impact of the Hangzhou business in Switzerland within MI. The resultant organic element with a 33% incremental profit is also accretive by 10 basis points. So excluding the currency, we would have delivered 20 basis points improvement rather than the 10 reported. Moving to Slide 15. Turning to the gross margin, as already mentioned, the Q1 2024 gross margin was a seasonal high gross margin at 66.5%. But it was actually an equivalent to the prior year, whereas Q1 2022 would reflect a more normal trend. The strong quarterly performance being from broadly resilient margins enhanced by a positive mix of software over sensors in the relevant divisions of Manufacturing Intelligence, AS, and Geosystems. The rolling 12-month margin improvement improved by 24 basis points over the prior year to 66%. Moving to Slide 16, we have the cash flow which continued to show the improvements building from Q4 and so gives a very positive start to the year considering Q1 is a traditionally weaker cash conversion quarter. The adjusted EBITDA demonstrates a strong cash leverage at 5% higher than the EBIT1 at 1%, as the D&A add back is increased by 18%. Investment levels remaining at similar level carry the 5% improvement to cash flow post investments. A further improved performance in net working capital with a release of €30 million versus the prior year of €60 million generated an operating cash flow before tax and interest improvement of 36%, which corresponds to a cash conversion of 88% versus the prior year of 66%. Including cash taxes which reduced by €8 million and interest payments which still show the increase year over year mentioned earlier, the improvement in cash flow before recurring is 55%. Non-recurring items outflow of €28 million brings us to an operating cash flow of €190 million up 63%. Moving to Slide 17, we take the net working capital in more detail. Following on from the significant release in Q4 of €69 million, a further release of €13 million in Q1 has brought the rolling 12-month sales down to 7.3%, which is 60 basis points below Q4 and the prior year Q1. The constituent elements of the movement being receivables and prepaid, the quarter following a strong shipment in Q4 appropriately shows a reduction in receivables of €46 million, with DSOs at a similar level to the prior year at 86 days. We continue to manage inventory with a moderate increase and cyclically lower sales, we see DII at 118 days, but this is significantly below the prior Q1. Though liabilities decreased over Q4, the DPOs are on a solid quarterly improvement trend up to 56 days. The second consecutive quarter increase in deferred revenue is reflective of the billing cycle and strong software performance and helped offset the cyclical release and accrued expenses. So in conclusion, the quarter showed resilience of the business with a marginal improvement in EBIT performance supported by the rationalization program and despite the continued currency headwinds and the cash focus has given us a positive Q1 delivery building on a strong close of 2023. And with that, I would like to hand over to Ben for the next section.

Ben Maslen: Thanks, David. Good morning, everybody. If we go to Slide 19, here we start with a summary of the strategic priorities that Paolo outlined for the group at the December Capital Markets Day to drive stronger value creation. This quarter, I'm going to go through examples of customer wins and product launches that highlight the investments we're making to improve our technology leadership, and improve our gross margins, and drive our commercial execution, and expand our addressable market or TAM. If we start with operational excellence and move on to the next slide, here we give an update on the rationalization program that we launched in July last year to improve our overall efficiency. So, as before, this program has four pillars. From a synergy perspective, we continue to simplify the organizational structure of the group and optimize the cost of supporting the business with structures like shared service centers to cover order management, HR, and payroll. In the quarter, we completed the disposal of the TESA PMI hand-tools business, which was dilutive to Hexagon's overall growth and profitability objectives. We continue to rationalize our facility footprint, closing a further six sites during the quarter, and we've now closed around half of the facilities that we targeted at the start of the program and we've made further investments in automation to both improve the throughput and cost efficiency of operations and invest in digital tools to support our technical support and service teams. So collectively, these initiatives generated around €29 million of savings in the first quarter and we exited Q1 at an annualized run rate of €139 million, well on track to reach our target of €165 million to €175 million. If we move to Slide 21, we made further progress during the quarter, integrating sustainability into our business. We published our first fully integrated annual and sustainability report, which includes new disclosures, according to the GRI, on both our sustainability performance and our ambition and roadmap going-forward. And in addition, our R-Evolution venture, also during Q1, launched an initiative called Green Cubes, where Hexagon Technology is used to capture and provide precise volume measurements, health assessments, and the biodiversity trends of rainforests to aid conservation. There's a link at the bottom of the slide that will explain this interesting concept in more detail. If you move on to Slide 22, here you can see the overview of the product footprint that we gave at the Capital Markets Day by division, to help understand how our products map to the new divisional structure better. And moving on, what we've done here is highlight where in the portfolio this quarter's customer and product case studies come from to help understand the new divisions better. So we go to the first example on Slide 24. Here an example from ALI, AGC Chemicals Company, a global supplier of glass, chemicals, electronics, and ceramics who adopted ALI's j5 solution to digitize mission critical paper based checklists, inspection reports, and other documents, saving time and ensuring much better decision-making. On Slide 25 we have an example from Geosystems machine control business. Gnant, an Austrian construction company focused on infrastructure has adopted Hexagon's 3D machine control solutions to optimize earthworks and grading to improve precision and efficiency and cut CO2 emissions by an estimated 20% to 30%. On Slide 26 we have an example from Geosystems software portfolio. Port Houston, a major handler of container traffic is using Projectmates, our recently acquired SaaS construction management platform for owners to improve budgeting and decision making and improve collaboration between field workers and the office. On Slide 27, we have an example from our mining technology suites. Codelco have expanded their use of collision avoidance solutions and fleet management solutions to four additional mine sites. On Slide 28, we have a customer win for SIG. Guilford Metro in North Carolina have adopted the Hexagon OnCall Dispatch portfolio to modernize their operations, enjoy greater analytical capability, and ultimately improve public safety for their constituents. On Slide 29, for manufacturing intelligence, we highlight an example from the Automated Quality inspection portfolio. A major automotive OEM became the first customer for our PRESTO XL automated robotic inspection cells, which accelerates 3D measurement of components and sub-assemblies. Following on from this on Slide 30. For those of you at the Hannover trade show this week, if you visited our booth, you will have heard about the new PRESTO System and robotic automation software showcased, with more product launches to extend the range of this family to measure components of different sizes. The PRESTO System can measure up to 2 times faster than traditional systems, and if you'd like more information, there is a QR code on the slide which links to a report that explains the end market opportunity further. On Slide 31, another important product release from Manufacturing Intelligence made during the quarter. The SmartScan VR800 structured light scanner with dual stereo camera can deliver high resolution images both on short and long distances and removes the need for complex recalibration when the measured parts are changed over, which saves time and improves throughput for the customer. And then finally on Slide 32, a product from our ventures organization whose role is to take existing Hexagon technology and apply it to new applications or markets. The Aura sensor is focused on healthcare and the facial aesthetics market, using integrated hardware and software to create a photorealistic 3D digital twin of the face, the detailed analysis, and simulation. The solution uses our existing photogrammetry, meshing and texturing tools, as well as technologies from our BLK sensor solutions. Aura was launched at AMWC in March and has had very positive initial feedback and will start shipping later in the year. And with that, back to you Paolo.

Paolo Guglielmini: Yes. Thank you, David and Ben. In conclusion, we delivered on a solid quarter despite the challenging market conditions. Cash, margins, recurring revenue are a very good testament to the strength of the business model. As you've seen, we're also making good progress in terms of operational improvement, in terms of innovation, delivery, and building a more and more rich technology ecosystem to make the group resilient and ready for the challenges and the opportunities into the future. I will now hand over to the operator for the Q&A part of the call. Thank you.

Operator: [Operator Instructions] Our first question comes from the line of Daniel Djurberg from Handelsbanken. Please ask your question, Daniel.

Daniel Djurberg: Thank you, operator. And good morning, Paolo and David. And congrats to solid numbers, cash conversion, et cetera. I have a question first on -- you mentioned short-term challenges that they are prevailing in Geosystem, in EMEA and China especially. Should we expect things to get -- or to worse in Q2, Q3 compared to what we saw in the quite muted demand also in Q1? That's the first question.

Paolo Guglielmini: Yes, hi. Good morning. Thanks for your question. I think the trading conditions in China, in both the construction sector and manufacturing, have been relatively challenging now for several quarters in a row, and the same is true for the construction sector in Central Europe. Looking at the pipeline that we have in portfolio and sometimes the complexity in closing deals or the timing to completion, it's easy to notice as well the SMBs and smaller companies that are in the supply chain of automotive manufacturing in Central Europe are probably feeling the pinch of inflation. But that's been going on for several quarters in a row. The only thing that we can do is to be very well, sort of, disciplined and positioning ourselves well in terms of innovation into the future. All in all, we do not expect trading conditions to change massively into Q2, as well as, us having performed at similar growth levels last year's Q2 versus the first quarter of 2023.

Daniel Djurberg: Perfect. Thank you. And if I may also, to David, on the R&D spend. Can you give a little bit of comparison numbers in Q1 -- from Q1 2023, especially on the net positive effect on the P&L? I think it was €63 million in the quarter if you compare the difference between capitalization and amortization -- R&D?

David Mills: Yes. No problem at all. So, I mean, we gave the split of the R&D for the first time. So you see that €211 million spend, €118 million cap, and the €55 million amortization coming to the €148 million. Just to give you some of those in context, the capitalization rate of 56% is completely consistent with the full-year run rate last year. The spend level is probably best to benchmark that off the Q4 spend and showed, despite inflation adjustments into salaries, a €2 million reduction from the previous quarter. So that was down from €213 million in Q4.

Daniel Djurberg: Perfect. Thank you. And the final question if I may, on the cost savings, up now to €39 million and adding €29 million or something in the quarter. Should we expect the final tranche of the savings to be seen already in Q2, that you will reach the average €170 million of growth already in the end of Q2?

David Mills: I'm sorry to interrupt you. I don't think we'll quite reach it into Q2, but I would hope to reach it by Q3, Q4, as we originally said. As we mentioned last quarter, we would have expected it to start to slow down the incremental increase. It was actually a little higher this quarter because with the muted demand, we tried to accelerate where possible. So we expect to hit it ahead of time or on time.

Daniel Djurberg: Perfect. Thank you.

Paolo Guglielmini: Exactly. And to expand on what David was referring to. I think if you look at the performance in Manufacturing Intelligence, the performance in AS and SIG, you see that the businesses that have experienced a little bit more growth are starting to leverage and kind of utilize the work that has been done behind the scenes in terms of optimization and restructuring. So what we're trying to do is to make sure that we position all of these businesses well for when demand will strengthen up.

Daniel Djurberg: Sounds great. Thanks. And I'll get back in line.

Operator: Thank you, Daniel. Our next question comes from the line of Andre Kukhnin from UBS. Please ask your question, Andre,

Andre Kukhnin: Hi. Good morning. Thank you very much for taking my questions. I'll go one at a time as well. Could you maybe comment on how the monthly cadence of the quarter progressed, especially in the Manufacturing Intelligence business, and in particular in Western Europe? Have you seen any improvement in the run rate there? Or is it still too early?

Paolo Guglielmini: Yes. Hi, Andre. Good morning. I don't think we've experienced a radical difference in terms of bookings per month if compared to prior Q1s in any specific region. Of course, there's a dependence on deals and the specificity of the pipeline, but nothing that was noticeable.

Andre Kukhnin: Got it. Thank you. And just coming back to the new product launches, we indeed enjoyed the time spent on the booth at Hannover earlier this week. Would you say any of these new product launches like Presto XXL or the SmartScan VR800, any of them are potentially real blockbusters like BLK360 proved to be?

Paolo Guglielmini: Well, we definitely do hope so. And we think that everything that's happening in the pipeline of MI, both from a precision robotics perspective and from a software perspective, basically is there to either generate more throughput in inspection, moving quality -- dimensional quality inspection into the manufacturing process or is aimed at digital continuity. So that customers can make better and better usage of 3D data as to try and improve their own quality standards, or the quality of their design or the quality of their machining.

Andre Kukhnin: Thank you. If I could just follow up. I think what was really different was sort of 360, I think it fundamentally changed the way a certain process is done to a kind of structurally more efficient one and would you say a product. Would you say PRESTO or the VR800 reals have that potential to actually change the process with that product or system introduction?

Paolo Guglielmini: We think that the return on investment that these solutions offer is noticeable. When it comes to PRESTO, you have a return on investment case for customers that's built on throughput and being able to really operate lights-out manufacturing facilities. And in terms of the scan that we just released, it is a similar dynamics to what we have seen with scanners for Geospatial applications in the past. You're basically going to reduce the labor aspect of data capture and potentially also help with the skill level and the learning curve of those operators, making the data capture more simple, more intuitive.

Andre Kukhnin: Thank you very much. If I may just be the last one on portfolio. Can we think about further disposals as we go through this year and into 2025? Or was PMI kind of more of a one-off cleanup?

David Mills: Yes. Andre, we keep on looking within the portfolio. We think that PMI and its disposals have been sort of important, as the marginal profitability in those division shows. So we keep on looking for opportunities. It's pretty clear that we look for businesses that have a faster organic growth trajectory, that have accretive margin characteristics, and we focus on recurring revenue. So we want to make sure that that's part of all the businesses that we invest in, in the portfolio.

Andre Kukhnin: Great. Thank you very much for your time.

Operator: Thank you, Andre. Our next question comes from the line of Joachim Gunell from DNB Markets. Please ask your question, Joachim.

Joachim Gunell: Thank you for that. Good morning. So if we can pick up that the growth discussion just once more. The mix out the commentary here and the fact that you emphasize that your midterm targets are even reached, they bake in a downturn, et cetera. Is it fair to assume, basically, that based on your current line of sight, that you anticipate that Hexagon will be below that threshold for 2024 and recoup that in the remaining -- reminder of the period, since I mean, the comp situation will obviously continue not only in Q1, but also in Q3.

Paolo Guglielmini: Yes. Joachim, good morning. We will see about that. I think the guidance of 5% to 7% is for the period, but of course, we benchmark ourselves off that guidance as we move into 2026. I find that the market conditions have been challenging now for several quarters, and then, of course, in between sitting on a continuous demand in terms of digitization, in terms of supply chains, and backlogs, some of that weakness took a little bit of time to kind of work itself through the system. We monitor macro and we hope that there's going to be changes instilling more confidence for an acceleration into the second half of the year.

Joachim Gunell: Thank you. And on the free cash flow side, Q1 is usually not a great working capital quarter here. Assuming that the current growth mix dynamics continues into, say, Q2, is it fair to expect greater than the normal seasonality here on the cash flow side?

David Mills: As I mentioned, the Q1 cash flow is a good cash flow for a Q1. And at 88% coming off the back of a very strong 103% in Q4, we've had two very good quarters. I mean, we're very focused on it, but we remain with our target 80% to 90% for the full year, and that's what we're aiming to do. I'm just pleased to have a good start to the year with the 88% banked already.

Joachim Gunell: Fully understood. And then just finally, more, say, long term here. On the ambition to basically increase technology value through data monetization, can you just provide some comments here on how you long-term plan to compete with the larger technology firms as they move into the manufacturing world here with mixed use software offerings, and then how Hexagon will eventually win in this space?

Paolo Guglielmini: I find that different data types have different requirements in the way you acquire that data, you store that data, you analyze the data, and you put it to good use. So in an industrial setting, it's very difficult to have sort of a one-size fits all approach to that. Unlike what we are doing, for instance, in Geosystems applications, where we are becoming better at better, at driving an attach rate in between scanners and building reality capture tools that are best in class, right, and then giving platforms to customers so that they can store that data, share that data, collaborate within those point clouds. We're building more and more AI into HxDR. So the customers quickly and quasi autonomously will be able to label and tag components within those platforms. And then, of course, we work to build a more expansive technology ecosystem on those platforms. The reason why we've talked in the past about the partnership with NVIDIA is because bigger customers in the context of the construction sector want to be able to do large scale visualization and simulation of the data that we capture through our devices and for that matter, through third party scanners as well.

Joachim Gunell: Perfect. Thank you, Paolo and David.

Operator: Thank you, Joachim. Our next question comes from the line of Sven Merkt from Barclays. Please ask your question, Sven.

Sven Merkt: Perfect. Good morning. Thank you for taking my questions. I understand that you hope for a macro improvement in H2, but any meaningful contribution from new product launches that could help you as well in the rest of the year? And then secondly, did I understand it correct that the annual run rate cost savings are now €5 million higher than you initially expected? And is there any chance for further increase? And then finally, just on the reinvestments of the cost savings. You commented in the past that you hope to maintain much of the cost savings, but given that we are now a few quarter into the program, any more clarity you could provide us on what proportion you hope to keep? Thank you.

Paolo Guglielmini: Yes. Hi, good morning. I can give you some high level commentary by division in terms of the innovation on both software platforms and precision robotics that we think is going to come and help us throughout the quarter. Of course, but what we can see, having been already released. I mean, in MI, there's a lot of focus on precision robotics is the one challenge that customers have and want us to solve for them. So we believe in what we're doing in terms of automation there. In terms of software, we try and build an offering that is open but also well connected. So we see good adoption in in Nexus. We've talked about the role of our venture investments in the context of Aura. We have developed in the last 18 months a Connected Worker solution that's a great fit for manufacturing customers that has been brought to market as part of the Nexus sort of portfolio. And we see good uptick in there contributing to the recurring revenue number that I've mentioned. In ALI. It's all about digital continuity. We see more and more customers that have asset management requirements, that see the benefit in having a tools provider that guarantees data centricity in between the design and the operations. So I think we've done a lot of innovation in ALI that's coming to fruition to support that growth into the rest of the year. For Geosystems, as you know, we've been investing. I think we have already innovated in reality capture in the last year, and I think we're going to have a more expansive innovation story to tell in the next 12 to 15 months. We think we're building a very competitive portfolio there. Autonomous Solutions has experienced good growth. The growth that we've had in mining is partly down to the strategy of being sort of agnostic and partly is down to digital continuity and building a good solutions offering across the various acquisitions that have been done in the last years. And then in SIG, we're very focused on, OnCall because it is a quantum leap in terms of usability and in terms of opportunities for collaboration for those customers. So we have a lot of contribution of innovation and, of course, we look forward to the next quarters in terms of more product releases in these divisions.

Ben Maslen: And Sven, if I could add on the macro for the second half, I mean, it's not particularly that we're calling an improvement, it's just that some businesses you have easier comparatives. So if you look at Geosystems, the Geomatics and construction products, part of their business, which is over half of it, was down significantly in the second half of last year already. So you will hit easier comparatives. And in Geosystems, you sell more via channel partners who kind of pull forward the weakness by inventory reduction and eventually that plays out and sets a lower base to grow off. If the economy improves in the second half, we'll have to see.

David Mills: And just to your question on the rationalization program, my comment was in terms of an acceleration of the speed of realization of the savings rather than the actual absolute magnitude of the end. That's still at the same sort of level. In terms of what proportions we keep, I mean, that's obviously relative to what the growth outlook is. I mean, the more challenging the growth outlook, the more of the savings we would look to keep to ensure that the businesses are leveraging appropriately and obviously it's not common across all of the divisions, we have them in different phases at this time as well. So there's no one answer for that. But it's something that we look at based on the growth portfolio -- the growth outlook at the time.

Sven Merkt: Okay, perfect. Thank you for the details.

Operator: Thank you, Sven. Our next question comes from the line of Alexander Virgo from Bank of America. Please ask your question, Alexander.

Alexander Virgo: Thank you so much. Good morning. Paolo, David, and Ben, thanks for the presentation. I wonder if I could just dig into ALI a little bit. I think if I recall correctly from the CMD, recurring revenue there is about 75% of the business. How much of that is SaaS? Is the first question. Housekeeping, I guess. And just trying to think about the dynamics of what you've seen here because if its overall growth is 2%, then my numbers are correct, your perpetual license decline is quite significant, 20% or something. So if I'm wrong, please correct me. But I'm just trying to understand the dynamics of that, how we think about through the year and into next year, basically, as you start to see, I'm guessing an even more shift -- bigger shift to SaaS and to ARR. So that's the first question. And then second question would be around gross margin evolution. Obviously, a very strong Q1. David, you talked about that being similar to Q1 last year and indeed it is. I'm just wondering again how we think about seasonality here. And I guess a big chunk of that's going to end up being mixed, but I appreciate any comments or help you can give us on that. Thank you.

Paolo Guglielmini: Yes. Hi, Alex. If I take the ALI one. So yes, for ALI, recurring revenue is about 75% of sales. SaaS is around 20% to 25%. And it's growing at a fast rate. You're right, within ALI there is a kind of ongoing shift from license-based sales towards recurring and towards SaaS basically. So that shift is something that's been going on for a few years. There is quarterly volatility because you are still booking occasionally perpetual licenses. So in Q1 last year, they had a very good quarter, perpetual licenses didn't repeat this year. So perpetual licenses were down. But I think over time, as we outlined at the Capital Markets Day, you will continue to see this shift towards recurring revenue. And we were happy with the recurring revenue growth, which was double-digit in ALI during the quarter.

David Mills: Yes. And on the gross margin, I mean, as you rightly say, it's always going to be a bit of a mixed discussion. We have that complexity, that it's not only a product portfolio, it's a divisional mix, which is quite hard to predict in advance. So it's difficult to say that. The other element that will affect the gross margin is how much and how quickly any pricing increases comes into the phasing of the gross margin. And again, in the current conditions, how much of that we're able to hold. Obviously, we make price increases, but it takes time for those to come through backlog in some divisions and other areas. So it's quite difficult to know when the phase of those will come in. We always try to protect the gross margin, as you know, and a long-term improving gross margin is something that's very important to us, but slightly difficult to predict.

Alexander Virgo: Okay, thank you.

Operator: Thank you, Alex. Our next question comes from the line of Viktor Trollsten from Danske Bank. Please ask your question, Viktor.

Viktor Trollsten: Thank you, operator, and good morning, everyone. Perhaps, if possible, some more color on Geosystems, just the sort of comps that you are facing now in the second half. If I try to break out what you have said on reality capture some assumption on building software solutions, et cetera, it seems to me at least that's not for the traditional construction business in Geosystem, it was basically down 10%, 15% in the second half. Would you be able to confirm if I look at it correctly or am I completely off?

Paolo Guglielmini: Yes. Hi, Viktor. Yes, I think it varies a little bit by quarter, but the Geomatics and construction products part of Geosystem started to weaken through the middle of last year. And I think it was probably down that kind of magnitude in Q3 and maybe a little bit less in Q4 and Q1 this year.

Viktor Trollsten: And I'm sorry. Yes. Okay. But it has basically fallen for four quarters now. And I guess just how I look at it, sort of the same magnitude during COVID-19 is that how you look at it also?

Paolo Guglielmini: Yes. I mean, I would say it's been -- it's probably a slightly lower decline than you saw in COVID, but it is significant decline in comparison with any previous construction downturn. So it's not been obvious because we've had continued growth in reality capture, machine control, the Geospatial content program, and then the software businesses that sit in Geosystems. But if you actually break it down, and you're right, we have flagged this in previous quarters. It was -- it did weaken materially through the back end of last year.

Viktor Trollsten: Okay. No, that's helpful. And then on the margin profile of this business, it sounds like it has higher than Geosystem average margins. Can you help out just with some sort of fueling for mix in that part of the business?

Paolo Guglielmini: Yes, I wouldn't say that there are huge differences between the margins of the different product groups. The impact is more -- the impact that lower volumes have on your operational leverage and the margins overall. But in terms of gross margins, there aren't huge differences that I would call out to help your modeling.

Viktor Trollsten: Okay, that's -- just final on that topic. So on run rate, it seems that sequentially it is rather flat more or less. So on run rate heading into the second half, would that be enough to see some sort of growth rate in that business? Is that how we should sort of think about it?

Paolo Guglielmini: For Geosystems?

Viktor Trollsten: Yes. The traditional Geosystem business. Yes.

Paolo Guglielmini: Yes. We said the same thing last quarter. We expected the first half of this year to be tough because you were still lapping difficult comparatives in Geomatics and construction project -- products. And then as we get into the second half of 2024, we would hope to get back to some growth.

Viktor Trollsten: Okay, no, super. And just finally, if I may, on capital allocation, because you continue to deliver quite a bit in Q1, if you could just help us to think around, let's say, the coming quarters, is it still the plan or the scenario is that you will continue to deliver through good cash flow or do you aim to sort of -- or reinvest that through M&A or organic initiatives?

Paolo Guglielmini: Yes. Viktor, we stay focused and true to how our M&A roots. There's been a reopening in the last couple of months in terms of variety and quality of assets. For us, it's really down to the right project with the right set of synergies. We feel good about where we are in terms of the balance sheet and the capability to invest. But, yes, it's down to the quality of the opportunity really.

Viktor Trollsten: Okay, fair enough. Thanks a lot. Thank you.

Paolo Guglielmini: Thank you.

Operator: Thank you, Viktor. Our next question comes from the line of Toby Ogg from JPMorgan. Please proceed with your question, Toby.

Toby Ogg: Yes. Hi, good morning, and thanks for the question. Perhaps just on the rationalization program, just wanted to come back on the automation side and the rollout of GenAI tools. Could you just give us a bit more detail around that piece, specifically, what tools are you using? Has any of this been rolled out yet? And are you actually seeing any productivity gains? How big are those potential gains and how meaningful of a cost-efficiency driver do you think integrating GenAI tools across different functions could be for you over time? Thank you.

Paolo Guglielmini: Yes, Toby. I mean, we make use of GenAI tools in a variety of ways. And actually, from a portfolio perspective, using in different scales AI to improve the quality of our point clouds. It's something that we've been doing for a very long time, using advanced analytics at the edge to optimize data flows between the sensors and cloud to optimize the cost point for customers. It's something that we've been doing for a while. In terms of using internally these tools for effectiveness, we partner with Microsoft on the topic since now several quarters. We have now a couple of hundreds of people that are using Copilots for effectiveness in a variety of tasks that are related to software development. And so, yes, we do see productivity gains of a variety of sorts, from speed to cost and we work with our partners to make sure that we improve in the learning curve for these tools to become productive.

Toby Ogg: That's great. Thank you.

Operator: Thank you, Toby. Our next question comes from the line of Johan Eliason from Kepler Cheuvreux. Please ask your question, Johan.

Johan Eliason: Yes, good morning. This is Johan from Kepler Cheuvreux. Just a follow-up question on M&A. Ben alluded to that they hopefully would reactivate the agenda a bit more in this year at the Capital Markets Day. How is the pricing developing? Is it sort of coming down to your expectations or still the assets you mentioned that were available at a fairly elevated price level? Thank you.

Ben Maslen: Hi, Johan. I would segment it a little bit, I think, for the small and medium-sized acquisitions that Hexagon has done a lot of historically, we haven't seen a huge change in pricing over the last few years. It boils down a little bit to the seller's priority for their business, the partner they're looking for how you would integrate it. There are other factors at play. So there, I think pricing is as it was and we have a good pipeline and you've seen the acquisitions we did of Itus and XWatch in the last few weeks, and we would hope to do some more going forward. The larger deal just tends to move a little bit more, I would say, in line with the overall valuations in public markets. So we obviously had a period of fairly elevated valuations back in '20 and '21 when they came down. And if you obviously look at what the market has done so far this year and some of the transactions that they've been in public markets, they've ended up going back up. So I think, as Paolo said, we're very focused on ramping back up the small and medium-sized deals. And for the larger deal, there's obviously things that we're looking at, but you have to focus more on the overall valuation and the synergies that you would get from the deal.

Johan Eliason: Okay. Thank you very much.

Operator: Thank you, Johan. Our next question comes from the line of Mikael Laseen from Carnegie Investment Bank. Please ask your question, Mikael.

Mikael Laseen: Good morning. Hi. Yes, a few questions. First one is on MI. If the book to bill this quarter was greater than 1?

Paolo Guglielmini: Yes. Hi, good morning. We -- as I said earlier, we have had basically flat backlog in MI within the quarter. So we haven't been burning backlog in a quarter in which bookings and order intake for our metrology products was up in low single digit.

Mikael Laseen: Okay. So basically very close to 1. Okay. Can you also discuss the prospects for the ALI segment and maybe expand on customer demand across various end markets? And also explain the progress of EAM sales and profitability for that part.

Paolo Guglielmini: Yes, sure. I mean, I think for ALI, the outlook has not dramatically changed. I mean, we want ALI and we see ALI having the potential to grow in low single digit into this year, despite some of the backdrop that we see in the market, I think that's perfectly achievable. And then it can vary from quarter to quarter based on comparables. I find it to be very important for them that the recurring revenue growth stays in double digit. That's very important. ALI works at very high -- very little churn, right? We have renewal rates that are extremely high. Customers are very sticky. In terms of EAM, we have had a quarter in Q1 in which, because of timing of deals, we haven't had the best SaaS bookings quarter. And we think that that's going to very quickly change. So we expect to have, on a full year basis, a stronger SaaS booking year than we have had in 2023 that will support EAM for revenue growth rates in line with what we explained at the Capital Markets Day. So from our perspective, the outlook for ALI is unchanged and it's positive.

Mikael Laseen: Okay, great. And the final one is on capital expenditures in 2024. What can we expect for the full year in terms of tangible, intangible CapEx? Something about that.

David Mills: Yes. I mean, as you've seen, we're holding our investment level at a relatively flat level, and we have done for the last couple of quarters. And the intention with normal capital expenditure bearing any material one-offs is that we would keep it at that kind of flat level.

Mikael Laseen: Okay. Excellent. Thanks.

Paolo Guglielmini: Thank you, Mikael.

Operator: Thank you. Our next question comes from the line of Nay Soe Naing from Berenberg. Please ask your question, Nay Soe.

Nay Soe Naing: Hi. Good morning. Thank you for the question. I've got two, if I may. The first one is on the -- on your midterm profitability margins. It'd be great if I could hear from you what is giving you the confidence, especially in light of some of the top-line macro related growth weakness that we're seeing? And what's given the confidence that you'll be able to hit those margins, please? And the second question is on some of your recent technology partnership announcements, some really exciting news recently, one with Nemetschek in your reality capture business, another one in your Nexus platform with Microsoft. So it'd be great if you could maybe share the thinking that's gone behind these partnerships and the sort of opportunities that you're looking to pursue with these technology partners. Thank you.

Paolo Guglielmini: Yes. Hi. Good morning, Nay Soe. So on the first question regarding margins, we get confidence when we see that we can execute a very good marginal profitability rate when we have growth which already has happened for some of the divisions in this quarter. The outlook for us is unchanged. I mean, the restructuring program, the divestment innovation coming in at improving gross margins are a good foundation. We think we are where we should be in terms of R&D spend, and we really are focused on the delivery of those roadmaps into this year and the next one. In terms of the partnerships, the -- I think the playbook hasn't really changed. We try and be, I would say, more focused on these collaborations, anything that allows us to good use the vast amount of 3D data that we capture with our customers or for our customers, which is the case with Nemetschek, typically, to go and improve the quality of designs or the quality of BIMs. When it comes to Microsoft, it's more a partnership that's centered around their Cloud capabilities or the capability of some of their microservices or the capability of their AI stack to make sure that we bolster our own software stack with them. But we have very good, I would say, commercial progress with Nemetschek, and when it comes to Microsoft and NVIDIA, we have very continuous and open exchanges at all levels. So clearly they've been very positive relationships for us.

Nay Soe Naing: Very helpful. Thank you. Just a very quick follow up here. On the margins topic, it's really helpful that you're disclosing the amount of amortization coming from capitalized R&D. I believe it was around €55 million this quarter. Just want to get a sense of what sort of rate should we be looking at for the remainder of the year and then also in the future years, presumably they will go up given the investments that's gone into the business in the past few years.

David Mills: So the amortization rate going up, you mean? Yes, you would expect the amortization rate or the amortization value to increase over the period because we've had that investment over the last two to three years into the platforms that we've talked about on CMD. Yes.

Nay Soe Naing: Any guidance that you could share in terms of the full year amount that we should look at for 2024 and maybe for '25, '26 as well?

David Mills: Not particularly, no, I mean, it has a natural trend, but it obviously depends on the balance of what investments, whether it's a hardware, whether it's software. So it's dependent on release date and the product portfolio coming into the market.

Paolo Guglielmini: What's important for us is that the majority of the projects that we have in pipeline, that might have an impact in terms of amortization kickback either are aimed at next-generation systems that will come in at very good gross margins because of having embedded technologies that allow us to deliver a step change from previous generations, or we are developing solutions for markets in which we don't compete today, right? So that incremental amortization is always going to come in against a clear commercial benefit.

Nay Soe Naing: Okay, understood. Thank you very much, both.

Operator: Thank you. We have now reached the end of the question and answer session. Thank you very much for all your questions. I'll now turn the conference back for closing comments.

Paolo Guglielmini: Yes. Thank you very much for staying online with us for the last hour. And we talk again in three months from now. Thank you.

Operator: That concludes today's conference call. Thank you for participating. You may now disconnect.