Hexagon AB (publ) (HEXAB) Earnings Call Transcript & Summary

Welcome to the Hexagon conference call. [Operator Instructions] I'll now hand the floor to our speakers. Please begin your meeting.

Thank you, everyone, and welcome to this conference regarding the agreement to acquire Infor's EAM business, where EAM stands for enterprise asset management. If we turn to Slide 3 in the presentation, we can view EAM's business at a glance. It's a SaaS revenue business model. And the CAGR -- the SaaS revenue CAGR is roughly 35% for the last few years. Total revenue in 2021 is $184 million and the cash conversion is 110%, this business model. We are slightly north of 40%, when we do the adjusted operating margin for the business. And at the bottom, you can see the revenue split per revenue stream. So SaaS is roughly 40% in 2021. But it's rapidly replacing perpetual licenses. And geographically, it's dominating -- the revenue is mostly in North America, which is the huge opportunity for us, obviously. Customer revenue, top 10 customers only represent 10%. And most of sales are done directly through fully owned sales force. If we move to Slide 4, Infor EAM is a best-in-class SaaS-based EAM solution. And what you use it for is to manage critical assets and to digitalize the maintenance operations. And it enables customers in nearly any industry to reach optimum operational efficiency in their manufacturing or operational kit. It's the foundation of digital innovation in asset-intensive industries. And we're going to connect it to our so-called digital realities. And that's where the synergy lies with Hexagon. I'm going to move to Slide 5. The total addressable market is roughly $4 billion by 2023. It's a very, very sticky business model. It's -- once you've installed an EAM system, you typically keep it. And Gartner recently made an assessment of the various players in the market. And they put Infor EAM as the absolute leader in its field. And you can see all the other players in the market in the quadrant. Now if we move to Slide 6. Let's talk about Hexagon and Infor EAM. We have [ since long ] talked about our strategic feedback loop. Everything is becoming digital. And we talk a lot nowadays about digital twins. So Hexagon's business idea has been to connect sensors, on the left-hand side, that captures the real world in three dimensions: collect the data, feed the data to analytical tools, i.e., software platforms on the right-hand side. And then you interact with the real world based on the conclusions you draw on the right-hand side, and you change the real world. Now if we move to Slide 7. Recently, we've spent a lot of effort trying to automate these sensors. And you can see examples of automatic sensor or data collection to the left. It's a collaboration with Boston Dynamics, where we put laser scanners on the back of that dome, it's the BLK247 that is capturing the data autonomously and using AI to sort out what we see and capture. And as we collect that data, we've also in parallel built a very strong analytical portfolio of software assets to the right. And Infor EAM fits into this wheel of information as you can see from Slide 8. It's really the interaction and the change of the real world once you've done the analysis. So Infor EAM is going to be seamlessly integrated to our software platforms in our various divisions, anything from SmartPlant to SDx to MSCs [indiscernible] analytical tools. And then it has the ability to generate automatic work orders either to humans, or in the future, to these sensors that you see to the left. And this is how we move towards autonomous solutions, where the computers and the data seamlessly analyze changes in the reality and take action. So Infor EAM is a vital piece in this never-ending feedback loop of information and action. So if we move to Slide 9. We see synergy opportunity of roughly $100 million between Hexagon and Infor EAM. And it's going to be realized gradually starting from 2022. And it's going to mature by 2026, where we guesstimate it's going to be roughly $100 million. But we see with these synergies in industrial facilities, in manufacturing, in infrastructure solutions as well as buildings. So it's touching almost all of Hexagon's business today. If we move to Slide 10. I want to give you an example on industrial facilities, where you might have a refinery or a power plant at the bottom left-hand side of this picture. You have a pressure sensoring that something is happening to valve somewhere. And our SDx, our PPM SDx product, can localize that sensor and highlight where it is. It will now generate a signal to Infor EAM that, in turn, will generate a work order to a service engineer. And in this case, it might be to send a spare part, a new valve, to section 2 in this refinery. But we give you another example on Slide 11 in the manufacturing space, i.e, automotive, aerospace, electronics. You've got a manufacturing machine, the gray machine to the bottom left, that makes, for example, cogs. And you've got our metrology machine, the CMM, that measures that for me and compares it against the original CAD drawing. And that's what's happening at the top right. And if you have that red line, everything is okay. But if it looks like the blue line on the top of that screen, you're out of tolerance. And then you generate a signal to Infor EAM. And Infor EAM will generate a work order, where it could be one out of two things. It could be the tool that it's worn out, so replace the tool. Or it could be that the machine is out of calibration. And we can detect that from our metrology software. And we can now automatically generate work orders on the shop floor. Slide 12. Let's take utilities and infrastructure. Think of a large power line, where you have an outage. With sensors today, you can measure and georeference where the outage is happening. And we can visualize that with our GIS systems, on a map that you see to the right, exactly where the outage is. And if we now connect that georeferenced outage to Infor EAM, we can generate an automatic work order to send a crew to, in this case, somewhere in Manhattan to fix the outage. Slide 13, finally, buildings ecosystems and how we can generate automatic feedback loops. Let's say, the air-conditioning is down in this building. And we georeference that in our BIM model. We can automatically generate a work order through Infor EAM to send a service technician to that floor. And with SDx and other software solutions, we can also tag -- automatically tag spare parts to that system. So it's a never-ending feedback loop of information flowing between the real world and the digital world. And in this case, Infor provides the action and the reaction to the analysis that is done in the Hexagon software. If we now move to Slide 14. We also communicate long-term commitments today. The first partnership is between the Infor group, its ERP software, and Hexagon, where we have a strategic partnership to resell products between the Infor group and the Hexagon group. But we also formed a strategic alliance with Koch Industries that is one of the largest industrial groups in North America. And Koch is now going to be our third-largest shareholder in Hexagon. They're going to be represented on the Board of Directors of Hexagon through Mr. Brett Watson, who is President of Koch Equity Development. So we really look forward to developing these strategic partnerships and alliances further. Moving on to transaction details and financials, if we go to Slide 16. We acquired Infor's EAM business for a transaction value of USD 2.750 billion. $800 million are paid in cash and the balance is paid through the issuance of 132.6 million new Hexagon Class B shares. And at the end of this, Koch Industries will own 4.9% of the equity in Hexagon. And the net debt to EBITDA after this transaction pro forma is estimated to 1.75x EBITDA. Slide 17, so if we just summarize the EAM business overview. Recurring revenues are north of 70%. The SaaS revenue in 2021 is roughly 40% but growing. And retention rate, 110% to 115%, and CAGR SaaS bookings is growing at 60%. Revenue overall will grow somewhere north of 20%, EBIT margin somewhere north from 40%. So if we summarize everything we've been through today, it's a best-in-class SaaS-based EAM software platform that we're acquiring. It's market-leading in its segment. It's purpose-built, highly configurable, got world-class modern architecture that works with all device types. And we're going to -- we now will be able to move from the traditional EAM to what's called asset performance management, APM. We see company-wide synergies throughout the Hexagon group. We estimate revenue synergies to be roughly $100 million 5 years from now. And we see a lot of diversification into new verticals for Hexagon. And as I said, it serves all of Hexagon's business divisions. We're forming a set of partnerships with both Infor and Koch Industries. And Koch will join as an active shareholder on the Board of Directors of Hexagon. It's also going to enhance our profitability profile. It's accretive to Hexagon's adjusted operating margin and earnings per share as of closing, including the newly issued shares. And it increases our recurring revenue and software mix. And it accelerates our SaaS transition across Hexagon. So with that, we've reached the end of my presentation. And operator, I think we're now ready to answer any questions.

[Operator Instructions] Our first question comes from the line of Adam Wood of Morgan Stanley.

Congratulations on the deal. I've got two, please. The first one is really just to understand what's going on with underlying growth in the business. It's often difficult for investors to get a view of what's happening underlying when you've obviously got very fast SaaS growth, but part of that is driven by cannibalization of the on-premise business. I think Gartner expects this to be a kind of 6%, 7% growth market in the mid-term. Could you maybe just help us a little bit as we come to the end of this SaaS transition what you think this business is capable of delivering on a kind of underlying growth, excluding the shift from one side of on-premise to SaaS on the other? And then maybe secondly, could you help us on the pace of integration? How quickly can you integrate this technology into your -- into the businesses you want to integrate it to? And how dependent are you on that to deliver the revenue synergies?

Yes. If we start with the second, obviously integration is critical to deliver synergies. We don't expect that to be too dramatic. And we've done a lot of studying of this asset before we finally acquired it. So I think as of next year, 2022, we're going to start seeing revenue and profit synergies trickling through our P&L statement. The underlying growth for EAM is higher than the market growth. You're absolutely correct that Gartner believe the market growth at 6%, 7%. We're seeing a double-digit growth. And for the next 5 years, it's fair to say that we believe growth is going to be more in high-teens or even 20s.

And the next question comes from the line of Stacy Pollard at JPMorgan.

I guess, one of my questions was a little bit similar to Adam in when you look at the $100 million in synergies, I did the same, we sort of put that on top of the underlying growth of 10%, just to be clear, so that is on top of the underlying. And then secondly, my question about how should we think of the phasing of those synergies. You said to start by 2022. But is it fair to assume that it will be quite back-end loaded towards '26 as it really flows through? And then second question, what is the impact on EPS? You did mention accretive. I have to be honest, my first quick stab was that it makes my model slightly dilutive. So maybe could you clarify the PPA because I think that might be the difference?

Yes. No, we haven't included PPA in the model when we say it's accretive.

So can you say what PPA will be or approximately?

We don't know exactly because we haven't done the opening balance sheet but approximately $25 million per annum. So you would still get accretion but not the first year.

Got it. And then the timing of the synergies, what more can you say?

I think now we believe it's a fairly straight, it's a straight line realization of the synergies. So I mean, it's going to be less or around 10% of the total potential in '22 and then gradually grow up to $100 million by 2026.

And our next question comes from the line of Mohammed Moawalla of Goldman Sachs.

Congratulations on the deal as well. I had a couple as well. So Ola, as we think about sort of extracting that growth rate on a steady state, more in the kind of high-teens or 20s, is there anything from a go-to-market that you need to change? Because often the kind of the buyers can be different. And are there any specific verticals where you see the kind of the biggest opportunities around extracting those revenue synergies perhaps in the near term? And then secondly, could you comment a bit more how on the competitive landscape this changes? Because obviously, you have SAP, Oracle. IBM is in the space as well. Do you see this mostly as a kind of installed base up-sell opportunity? Or would you look at also kind of more greenfield opportunities?

I think you've got two things going on. First, you have the traditional business situation that EAM faced before Hexagon acquired it, where you had all those competitors that you've just mentioned. And EAM is faring well against them when they compete. It's a modern product, it's SaaS-based and it's very configurable and it's easy to implement. So I think it's fair to state that EAM is gaining market share in this market. Then on top of that, we open up new channels, new distribution channels through PPM, through SG&I, through Geosystems and through MI, to their customers, where we will sell it as a combination with our current product offering.

Okay. And can I clarify also in terms of you talked about now being -- the product being kind of modern, best-in-class? Infor had obviously done a lot of acquisitions. So has the product been completely rewritten? Or has there been sort of elements of it that have been transformed, just to better understand the tech offering?

No. This is a completely -- I wouldn't say rewritten, it's newly written product. The platform is brand-new.

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

So I wanted to just talk a little bit about -- I'll go back to this point, this integration point and ask just how you see it fitting in the portfolio. Where do we put it, I suppose, in terms of accounting? But also, it sounds like this business will end up touching across the whole of your portfolio. So the concept of your Autonomous Connected Ecosystems, this sort of really continues the integration of the portfolio that ACE strategy has started. So I just wondered if you could talk a little bit about how this accelerates the evolution of that, the delivery of ACE? And then just practically speaking, where do we model it in terms of inclusion in the portfolio? And then final point -- final question, I'm sorry, just to clarify on SaaS. It accelerates your transition to SaaS in the existing portfolio. I wondered if you could give us the number that, that is at the moment in the core portfolio.

Yes. So if we start with where it's going to reside, it's going to report into PP&M. So it's going to be within our industrial segment. Over time, obviously, it's going to find its way into geospatial as well. And I believe like 3 years from now, it's hard to say where the lion's share of the EAM business is going to be. Because we expect it to be integrated in our business model. So we don't -- we haven't disclosed the SaaS business in the core business today. But that's a great question for the upcoming Capital Markets Day in September. I think we'll come back to it then.

And our next question comes from the line of Sven Merkt of Barclays.

It looks like that SaaS over the last year was only driven by license substitution. And my question is should we expect the maintenance migration also going forward? And then secondly, I would like to come back to the integration examples you mentioned. It seems to me that EAM really will create work orders on top of your existing solutions. Isn't that something quite simple actually that you could build yourself? And why is that something you didn't want to do organically?

No, it's not simple if you start there, it's actually quite complicated. And that is a very good topic for the Capital Markets Day, how EAM is actually working and interacting with large operational assets. So we can come back to that. You are correct to the extent that, of course, both maintenance and perpetual licensing is cannibalized by the SaaS model, maintenance to a much lesser extent than SaaS -- sorry, than perpetual licenses. We believe maintenance might be flat for the foreseeable future.

Okay. So you're not planning to move existing maintenance capital over to the SaaS solution in the foreseeable future?

No.

And our next question comes from the line of Magnus Kruber of UBS.

Magnus Kruber, UBS. I mean, most of the customers would have bought EAM as a part of a wider ERP deal with Infor. So how are you going to unpick existing maintenance contracts and to upgrade in tandem with Infor? And will you go to market with them and so forth? Any thoughts around that would be interesting.

We will go to market with them, but it's actually a very small overlap. And it's very seldom you buy bundled with the ERP. This is typically a stand-alone decision with the customer base. So we are compatible with other ERP programs like SAP and the others in the market.

Got it. That's very good, obviously. And then secondly, I think you mentioned 40% operating profit margins in the release after integration. Just to be clear, is that before or after we deduct the PPA?

It's before PPA because we don't know the PPA today. But we estimate the PPA be $25 million per annum, roughly. But that's a guesstimate sitting here today in July.

Yes, that's good enough, obviously. And then just finally, obviously, the $100 million synergies is a quite punchy number. Could you give us a sense for sort of how you went about deriving that?

Yes. We do what we always do, we make a business plan. So it's synergies that are specific for manufacturing, industrial manufacturing. We have synergies for China, for EMEA, Geosystems, SI and PPM. And when you summarize it up, that's where we end up.

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

I have two questions, the rest have been asked and answered. The first one is on the sales potential in the strategic alliance. Is that in any way included in the $100 million? Or is that something that would come on top? And if you could sort of give a sense for the potential there. And then the second question, in your decision here how you split the funding of this between cash and new equity, was that coming from sort of a desire to bring in Koch as an owner or to keep a strong balance sheet? What were the levers you looked at when you decided how to fund this?

First of all, if we talk sales potential, no, there is nothing included from these strategic alliances. Koch Industries is a very interesting business. They span from pulp and paper into oil and gas and discrete manufacturing. And there are lots of areas. I think the value is roughly $100 million for the operations. So we really look forward to explore that potential. And when it comes to the split, we want to keep a strong balance sheet. We believe there are opportunities still in the M&A market to expand further for Hexagon. And we also believe that it's advantageous for us to strike this alliance with a very strong U.S.-based owner.

Did they express an interest to increase that stake further?

There is no such discussion right now.

And we have one further question in the queue. [Operator Instructions] And that question is from the line of Viktor Högberg of Danske Bank.

So on the pending approval, do you think it's just customary? Or could there be any amendments that you would have to make for this to go through in Q4?

No, I think this is just customary. But you never know in this world. But up to now, I mean, we don't have any overlapping businesses and there shouldn't be any cause for concern.

Okay. And the integration costs, is that going to be taken then in Q4 if you integrate the company? And what kind of level of costs are we talking about?

We don't know that at this stage. But since we believe that we'll have all necessary approvals by October, I guess, the fourth quarter is a good guess.

Okay. And could you say -- this being a SaaS business, could you say anything about their net revenue retention or share metrics or anything else which you could add on top of the presentation?

The retention is -- I mean, it's 115%, I believe, we state in the SaaS net retention on Slide 17, 110% to 115%. And that includes the churn. And the churn is less than 4%.

Okay. That is good. And what's the -- what would you say the scalability in this model would be when you approach the $100 million in synergies in a couple of years' time if it's above 40% today on an EBIT level?

I think we haven't said how much above 40%. So I think if we stick to 40%-plus in 2021, we can come back to that when we've realized the synergies.

Okay. And just a last question on the pickup in revenues in the SaaS-based revenues in 2021, what was the driver for that one?

It's a combination of market share gains and conversion from perpetual to SaaS.

And as there are no further questions on the line at this time, I'll hand back to our speakers for the closing comments.

There are no more closing comments. Thank you very much for listening in. And it's going to be exciting to start integrating EAM and welcome them to the Hexagon family. Have a good summer, everyone. Thanks. Bye.