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

Good day, and thank you for standing by. Welcome to the Hexagon Q1 Report 2025 Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Norbert Hanke. Please go ahead.

Good morning, and thank you for joining our first quarter 2025 conference call. I am Norbert Hanke, Interim President and CEO of Hexagon, and I'm joined by our Chief Strategy Officer, Ben Maslen, and our Chief Financial Officer, David Mills. In Q1, we delivered 0% organic growth, 67% gross margins and an operating margin of 26% and with a cash conversion of 71%. Recurring revenue grew strongly by 10%. So the quarter began well, but in mid-March, geopolitical uncertainties impacted the volume. March is the largest month in the quarter for revenues, so this had a sizable impact on our growth potential in Q1. The largest impact, however, was on operating margin. Here, we saw the combination of negative currency and the late decline on volumes on a cost base position for growth. We have seen demand stabilizing now in April. However, we remain very cautious of the uncertain market backdrop, and we'll continue to monitor this and adjust our cost base accordingly. Besides the challenging market, we have made good progress. The preparations to separate the ALI division are on track. And during the quarter, we did announce that the SID -- SIG division will be included in the new company. This reflects shared heritage and synergies between SIG and ALI and will further focus Hexagon core around precision measurement technologies. We have also announced that NewCo will be listed in the U.S., with the temporary SDR program. Finally, you will have noted, we launched a Robotics division during the quarter, which intends to leverage our skills in measurement technologies, AI and autonomy in the field of humanoid robotics. This will be a key focus of the agenda at HxGN LIVE in June 2025, and I encourage you all to attend. Turning to the next slide, please. Before we move into our usual presentation, I want to spend a few moments on the impact of the geopolitical uncertainty we noted during Q1, which was driven by tariffs. Starting with the indirect impact, which was by far the largest contributor to the drop in volumes and margins, we saw significant declines in Canada, Mexico in March, which were the first countries to be subject to increased U.S. tariffs. We then saw impacts in China and Western Europe later in the month as well. We have seen delays in shipments and orders, reflecting the very uncertain environment. Our cost base was built around an expectation of a return to growth. This expectation was underpinned growth in January of 1% and growth in February of 9%. March, which typically accounts for 50% of the revenue in Q1, ended with an overall decline of 6%. The timing of the impacts left us unable to address the cost base proactively, meaning we experienced a significant drop through from volumes to operating margins. As noted earlier, we have seen a normalization of demand in April. However, we remain cautious in our near-term outlook. Turning now to the potential direct impacts on tariffs. We expect the direct impacts to be more manageable than the customer uncertainties. In total, based on the current tariffs, we expect the impact on earnings to be up to EUR 15 million in the quarter, with the potential to mitigate some of these with proactive actions. This includes, for example, rerouting of shipping, alternative sourcing of critical materials, strategic inventory management and price increases. We are also investigating the feasibility of further localization of U.S. manufacturing. In response to the overall uncertain environment created by these tariffs, we will continue to monitor and adjust our cost base as needed. Turning now to Ben.

Thank you, Norbert. Good morning. If we go to Slide 6. Here we have the overview of divisional performance during the quarter. As Norbert said, we saw a weaker-than-expected development in terms of organic growth, reflecting the slowdown towards the end of the quarter. By division, ALI, SIG and Autonomous Solutions have delivered modest organic growth during Q1, but this was offset by continued weakness in Manufacturing Intelligence and Geosystems. Across the group, we continue to see good momentum in recurring revenues, including subscription software, which increased by around 10% during the quarter. This was offset by weakness in the sensor business and a slowdown in perpetual software licenses. We saw a weaker margin development during the quarter than the prior year period, largely reflecting the pause in demand seen in March, coupled with a weaker product mix in some divisions and currency transaction headwinds. If we go to Slide 7, that shows divisional performance over time. You have these numbers already. It's just shown for your reference. Slide 8. If we go to Manufacturing Intelligence, MI reported revenues of EUR 469.9 million, which was down 2% organically compared to the prior year. The quarter started solidly, but declined by high single-digit rates in March, with great uncertainty feeding into delayed customer decision-making. The division reported EBIT of EUR 117.1 million, and the operating margin declined to 24.9%. This reflects the weaker demand environment and currency transaction headwinds. Recurring revenues increased during the quarter, which was offset by a weaker trend in the sensor and robotic solutions portfolio. By geography, growth was negative in the Americas, particularly within Canada and Mexico, and there was continued softness in Europe, offset to a degree by growth in Asia and a stable development in China. If we go to Slide 9 on Asset Lifecycle Intelligence. ALI reported revenues of EUR 204.4 million during the quarter and 5% organic growth. This was slightly below our expectations, reflecting a slow development in North America and a lower level of perpetual licenses than we saw in the fourth quarter. We saw double-digit growth in the SaaS product lines, including EAM, with a weaker trend in services, reflecting a growing use of our partner channel to deliver certain product lines. EBIT declined to EUR 62.9 million, and the EBIT margin declined to 30.8%, reflecting the slower growth in perpetual licenses and additional investments we're making in products like SDx2, which we've just launched and are ramping up. If we go to Slide 10 on Geosystems. Geosystems reported revenues of EUR 375.7 million during the quarter, which represented a 2% organic decline compared to last year. By geography, we saw a stabilization in European demand, albeit at low levels, but we saw renewed weakness in China during the quarter. In the Americas, we saw an overall decline during Q1, which reflected the slowdown in March, particularly in Canada. Geosystems saw continued good growth in software sales and recurring revenues, but this was offset by weakness in the surveying tools business and a slowdown in the reality capture segment. EBIT declined during the quarter to EUR 102.8 million with an operating margin of 27.4%, which reflects a weaker product mix during the quarter, currency transaction headwinds and the weaker volume development. We go to Slide 11 on Autonomous Solutions. AS delivered revenues of EUR 151.5 million during the quarter, which represented 2% organic growth compared to the prior year. In the autonomy and positioning business area, we saw continued weakness in precision agriculture, but this was offset by good growth in the aerospace and defense segment. In mining, we saw slight growth in the quarter with a good performance in mine planning and operations software, offset by a slowdown in overall sensor shipments towards the end of the quarter, especially in North America. We also saw continued growth from the autonomous road projects in Australia. EBIT came in at EUR 47.7 million, representing an EBIT margin of 31.6%. This decline compared to the prior year reflects both the volume decline towards the end of the quarter, but also a different product mix to last year. Slide 12, if we go on to Safety, Infrastructure & Geospatial. We saw a mixed quarter from SIG, which delivered revenues of EUR 120.5 million on organic growth of 2%. Demand was very strong in the public safety segment, which delivered double-digit organic growth during the quarter, and this was offset by weakness in the U.S. federal business, which experienced some delays on a number of key projects. By region, Asia delivered the strongest growth led by implementations in Malaysia, whereas growth was slightly negative on the Americas side, reflecting the delays in federal mapping and services projects. SIG delivered EBIT of EUR 22.3 million and an EBIT margin of 18.5%, with the decline reflecting the underabsorption in the U.S. federal business and investments made to support the strong growth outlook that we see going forward in public safety. If we go to Slide 13 and the acquisition updates. We discussed the incoming acquisitions of Septentrio, Geomagic and CAD Service during the last call. So here, we focus on the acquisition of the UCRS software assets of CONET Communications, which we announced a couple of weeks ago. This software suite and related services is capable of integrating many different communication channels, including mobile phone networks, video surveillance, satellite and digital radio into our public safety suite of products, providing a more integrated solutions for customers. The acquisition is expected to close by the end of the second quarter. So we welcome UCRS to the Hexagon Group. And with that, I hand over to David.

Thanks, Ben. In the following slides, I would like to take you through the Q1 performance, which reflects the uncertainty experienced in the broad economy in the period and particularly in the latter half of March, which directly impacted the level of growth achieved in the quarter versus expectations and consequently drove a misalignment with the cost structure and the dilution of the EBIT1 margin. Cash flow was in line with the quarterly working capital cycle and represents a solid quarter performance, despite the wider challenges alluded to. Moving on to Slide 15. Starting with Q1 2015 (sic) [ 2025 ] income statement, stepping through the sales bridge, sales of EUR 1.3228 billion is a reported growth of 1.8%, with both a 1.1% impact from FX on sales and a 1% net impact from the structure, giving 0 organic growth. Positively, gross margin continued to improve up to 67.2%, and this was delivered by a strong performance, in particular within the software portfolio. Operating earnings decreased by 8% to EUR 344.7 million with a 290 basis point decrease to end the margin to 26.1%, the elements of which I will break out in the profit bridge. Interest expense and financial costs now decreasing year-over-year to EUR 33 million versus EUR 42 million gave a delta on earnings before taxes of minus 7%. Taxes being 18%, in line with prior year, bring us down to an EPS of EUR 9.4 and also declining by 7%. For reference, the EBIT1 including PPA includes EUR 28 million of amortization and so dilutes the EBIT1 percentage by 215 basis points to 23.9%. Moving to Slide 16 and to the gross margin. As we saw in the income statement, Q1 delivered a further improved gross margin year-over-year at 67.2%, and this brings the rolling 12 months to 67.1%, up from 66.1% by 100 basis points, continuing the strong upward trend. The positively quarterly performance being a continuation of the Q4 trend of resilient margins in the sensor business, coupled with improved margins in the software portfolio, enhanced by a positive divisional mix and only now moderately improved by the reduced impact of the structural divestment. Moving to Slide 17. In the Q1 profit bridge, currency has a moderate influence with a 0.3% dilutive EBIT impact. This is due predominantly to the net year-over-year transaction impact, which is a negative of EUR 6.9 million from a current year loss of EUR 5.8 million against the prior year gain of 0.9%, offsetting what would have otherwise been a positive impact from the translation, being a 1% positive EUR 15 million on sales with an EBIT impact of EUR 7 million. The positive translation movements this quarter were driven mainly from the impact of the appreciation of the U.S. dollar by 3% and the CNY by 2%, where sales exceed costs and offset marginally by a continuing but moderate appreciation of the Swiss franc by 0.3%, which has the opposite characteristics. The structural element was positively contributing, being above grew EBIT percentage and reflects the net impact of acquisitions less disposals. This being incremental acquired sales, of which the material elements were Septentrio in the first month and indurad in the AS division and Voyansi and Xwatch in Geosystems, exceeding the final month of the disposal of the hand tools business in MI. The uncertainty of proposed tariffs in the month of March is the main cause of the dilution of EBIT in Q1, which is reflected in the organic column. The market uncertainty impacted anticipated quarterly volume in the region of 3.5%. The resultant decrease of organic sales of circa EUR 45 million from our internal forecast, an average rolling margin of 67% is a loss of contribution in the region of EUR 30 million. This additional contribution and excluding negative transactional FX would have delivered an overall margin in the 28% range. The unexpected negative volume impact in conjunction with the usual Q1 dynamics with the cost base being 60% salary driven, and they're fully impacted by annual wage inflation in the quarter and already committed investments in the areas of expected strong growth, with offsetting pricing impacts being realized more gradually explains the negative drop-through. We will closely monitor the development of volume during Q2 and take a considered approach to cost and take a proactive approach around pricing where possible until the situation normalizes. Moving to Slide 18. On the Q1 cash flow, which shows a return to a more cyclically aligned cash generation and conversion for Q1 in comparison over the prior year, Q1 is a seasonally weaker quarter for cash conversion than the average for the year. The adjusted EBITDA variance of minus 4% demonstrates the continued stronger cash leverage versus the EBIT1 variance at minus 8% due to the natural increase in D&A add-back as the underlying depreciation is increasing, as we have seen throughout the prior period. Capital expenditure increased year-over-year due to the capitalized development expenditure. The movement in working capital is the main driver for the variation in operating cash flow, being a build of EUR 58.4 million versus a release in the prior year of EUR 12.7 million, which is consistent with the expected Q4 to Q1 cycle, which I will take you through in the following slides. This generated an operating cash flow of EUR 244.6 million, declining 27%, which is a cash conversion of 71% versus 88% prior year. Cash taxes and interest payments decreased, as did the nonrecurring items cash outflow to minus EUR 15.5 million versus the prior year of EUR 28.8 million, which brings an operating cash flow of EUR 138.5 million, equally down 27%. Moving to Slide 19. The Q1 net working capital being a build of EUR 58.4 million versus the prior year release of EUR 12.7 million and following on from the Q4 release of EUR 140.6 million increased the proportion of rolling 12-month sales to 6.9%, still below the prior year level of 7.3%, despite the working capital build and flat sales. The constituent elements of movement being receivables and prepaid decreased by EUR 9 million from Q4, resulting in DSO of around 87 days, which is in line with the prior year. Inventory increased by EUR 22 million, this being adversely impacted by the late reduction in realized shipments and by the movement of some inventory ahead of proposed tariffs. Liabilities decreased by EUR 45 million, with the trade DPOs at the level of 59 days versus 56 prior year, an increase in deferred revenue of EUR 63 million, which is reflective of the normal billing cycle in software. And finally, the accrued expenses are decreasing as expected from Q4 to Q1. Moving on to Slide 20 and the final slide. We see the usual seasonality where Q2 and Q4 are typically the stronger performance quarters, but this must be considered with the current uncertainty of the tariff situation. In conclusion, the challenging macro environment and resulting demand uncertainty in the key third month of the quarter resulted in a lower achieved sales volume. And despite the strong gross margin with no opportunity to mitigate the cost structure, the consequential misalignment of the cost base negatively impacted EBIT delivery. This situation will be continually assessed in the following quarter with proportionate cost management as appropriate. The cash conversion was in line with the expectations for Q1, which is cyclically the weaker and remains a focus. And with that, I'd like to hand back to Norbert.

Thank you, David. Before we conclude today's presentation, I will take you through some customer stories from the quarter before spending a moment on our new Robotics division. So the first story comes from our Geosystems division, where we have been using our reality capturing portfolio to help Netflix create a 3D environment to facilitate visual effects of one of their shows. This example demonstrates the breadth of our reality capture portfolio that is way beyond surveying and construction. Turning now to the next slide, please. Here is an example from MI division, where we have been working with a major European aerospace leader. We are providing software and services to design and build the next generation of commercial planes. This is an example of our key account management in action, allowing us to work collaboratively with a major customer to deliver this multiyear agreement. Turning now to our next example. Now from the ALI division, here, we are helping a major Korean engineering firm by leveraging Jovix. Jovix is our materials readiness application, which digitizes and automates paper-based data for the construction industry. At Hyundai, this has driven efficiency, improved decision-making and enable cost savings. Turning to my next slide, please. This is an example from our SIG division. Here, an AI agent and the reporting tools are helping to manage housing developments in Sao Paulo. By triggering notification of illegal practices and monitoring and analyzing collective data, we are improving the oversight to mitigate issues. Turning now to my next slide, please. Before I conclude, I want to spend a moment on our new Robotics division, which we launched during the quarter. This new division will focus on organic products designed to accelerate next-generation autonomy, in particular in the field of humanoid robotics. Why is Hexagon in this? We believe our position as a leader in measurement technologies, sensors and autonomous systems, together with our partnerships in AI places us well to access and guide the marketplace of humanoid robots. We will use our significant expertise and relationships to focus on industrial applications, building on our existing work to mitigate labor shortages, while improving quality and effectiveness. This division will be a key focus at the upcoming HxGN LIVE event in Las Vegas in June. I encourage everyone to join us there. Turning now to my concluding remarks. To conclude, in Q1, we saw a return to macro uncertainty, which impacted our financial performance. Demand stabilized in April, but we remain cautious of the uncertain environment and will monitor and adjust our cost base as needed. Outside of the macro environment, we have continued to make good progress. The separation of ALI with an expanded scope, which includes SIG is on track. We have confirmed that NewCo will be listed in the U.S. market with a temporary SDR program for investors not able to participate in the U.S. markets. We have a strong pipeline of new products in H2, which will make a material impact from 2026 and beyond. This includes the launch from our new Robotics division as well. We remain really excited about the future of Hexagon. With that, I will hand back to the operator to introduce the Q&A session.

[Operator Instructions] We will take our first question, and the question comes from the line of Daniel Djurberg from Handelsbanken.

A question though on the seen stabilization here in April. Can you give any more color on this after the April 2 event? This statement comes as a positive surprise to me at least. So mainly talking about the hardware sensors in China, in NAFTA, in MI or -- and Geosystem. Or is it more broad based, this stabilization?

Daniel, I think the way I'd characterize it, as Norbert described is, in March, we had some customer delays because of the geopolitical uncertainty, which impacted March. Then we've seen a bit of a catch-up in April. So we haven't fully closed the month yet, and it is the lowest contribution month for the quarter, but we have seen a return to growth in some of the business lines that were affected in March. But it's difficult to extrapolate that into a trend, given some of it is clearly timing differences of when these customer orders have been booked. So we kind of -- April has gone back to some growth, and then we'll wait and see how the rest of the quarter develops.

Perfect. And may I also ask you, perhaps it's for the Board, but given the current uncertainty, geopolitical unrest and less different in valuation in the U.S. versus Europe, for example, would it be not effective to have the ALI as a nontemporary listing in the Nordics, so in Stockholm?

Yes. I think, Daniel, that is a question for the Board. So that's something that we will come back to later in the year. I think the logic of the SpinCo being listed in the U.S. is as much the geographical location and heritage of the business where the customers are and where the employees are. So it is more of a U.S. company, and the SDR is intended to manage a smooth transition to the U.S. listing and make sure that all investors actually participate in the upside. So as we said in the release, we'll be speaking to investors over the next few months to get their feedback on that and come back later in the year with more details on how long the SDR will last for.

That's fair enough. If I may also, have you done any changes or adjustments so far in Q2 on back of -- you mentioned that you're closely monitoring the situation, the demand, et cetera. But so far, are there NRIs in Q2 that we should be aware of worth highlighting?

No, not at this stage, Daniel. But obviously, the divisions are closely monitoring the customers and the demand intake. And they will have, in the normal course, look to moderate costs where it's all possible. They will take a very cautious approach. Obviously, having seen the movement that we saw so late in the quarter, they're on notice to try to monitor and see where we go. But the situation is very variable. So we have to keep that under close watch and decide what is the appropriate action, and we've seen a sort of more considered direction of travel than we have after just like the last 6 weeks impact.

Your next question comes from the line of Balajee Tirupati from Citi.

Balajee Tirupati from Citi. Two questions from my side. Firstly, could you share how your conversation with customers evolved through the course of last month in terms of their prioritization of investment? And also in your strategy to mitigate the limited tariff headwind your business might face, how much would be near-term pressure on prices that you will see? And do you expect that being completely offset by price increases?

Let's start with the last one about the tariffs, for example. As I mentioned already, we are observing this very carefully and taking already approach with things, increasing price increases, for example, and as well rerouting already what we are doing in inventory management as well. So we do believe that we are on a good track to mitigate quite a bit of, say, the exposure so far from our point of view. And the first question, can you just describe a little bit more what you're looking for here because that wasn't clear to me from the get-go?

I was asking how your conversations with the customers evolved through the course of last month plus, and that is in context of how your customers are prioritizing their investment to address the current macro environment, vis-a-vis your portfolio.

Okay. So I mean, we have ongoing discussions, and I was personally involved in some of the things as well on trade shows and so on. So it's -- the uncertainties from the customers to say, "Okay, we are interested," so we have not seen any, say, cancellation on things, but we have delayed responses from our customer. And to a certain extent, I referenced what Ben was saying, we do have seen certain things come back beginning of April of delayed projects from our point of view. So we are in very close contact with the customers, but they have the same uncertainties as we have in the sense. And I think that is a little bit of, yes, all of us in the same boat here, honestly speaking.

Understood. So more of wait-and-watch approach from your customer rather than prioritizing the spend at this moment.

I would say so, yes.

Your next question comes from the line of Viktor Trollsten from Danske.

I guess, firstly, perhaps on the ALI's margin, if you could shed some more light on it. I must -- from my perspective, I'm a bit surprised about how that margin could fall almost 400 bps year-over-year, while the division was still growing 5% organically. So I guess, if you could help us with some details on that. And also in relation to that, could you give us the gross margin development in ALI in Q1 versus last year? That's my first, please.

Yes. Viktor, I mean, the gross margin we don't give, but there was no real change relative to last year. In terms of the margin drop overall, I would say there are 2 factors. One is that growth was a few percent weaker than we expected going into the quarter, and you obviously get a high drop-through in a software business, given where the gross margins are. We had a very good level of perpetual demand in Q4, and it was slower in Q1. And going back to what Norbert said about customers pausing to wait and see what happened, we did see some hesitation from customers in ALI around potential perpetual sales as well. So that's one aspect of it. The second one is that we are making additional investments, and we called this out last quarter as well around new products that we're ramping up like SDx2, and SDx is a new product. It's not contributing yet a lot to revenues, and those investments drag on the margin. And then finally, it is the seasonally slowest quarter for ALI. If you look at it from a revenue perspective, that's not -- that seasonality has not been so obvious over the last few years, but Q1 is normally the weaker margin over the year. So it's a combination of that.

Okay. Now it's -- but I guess, just from my perspective, I mean, earnings is down year-over-year. So I fully understand the drop-through comment, but to me, it seems to -- the vast majority be the cost, call it, issue. Or what we should call it, given that sales is up year-over-year. But fair enough, yes. Okay. And then I guess, also just if you could help me, at least, but compare the current situation a bit to what you saw in 2019, I guess that I'm a bit surprised on, let's say, the split of the weakness now in Q1 compared with what we saw in 2019 when it was mainly a China issue. I think China had negative 20% organic growth for a couple of quarters. So if you could help us, are there any similarities with that period this time around, which we should expect for the coming quarters? Or are there any clear differences?

Yes. I think, Viktor, if you -- it's a good question. If you look back to 2019, the trade issues were focused on China. What we've done since -- and that was where we saw the impact in our revenues. Since 2019, we've worked hard like a lot of companies to localize our business in China and make it a lot more self-sufficient. So in the current round of trade issues, it's more insulated. You see less impact from the tariffs, the reciprocal tariffs that are going on between the U.S. and China. As Norbert showed in one of his earlier slides, the impact this time around has been on other businesses where the tariffs weren't a focus back in 2019, but they are this time around like Canada, like Mexico, like Europe into the U.S., and that's where we saw the pause in demand in March.

And your next question comes from the line of Mikael Laséen from Carnegie Investment Bank.

I have a question also on the ALI segment. You mentioned that demand in North America for this segment was more subdued than in other regions. Could you maybe elaborate a bit more what's going on in North America where you saw the weakness maybe in your end markets or in different product categories or in your customer types or the operators or CPCs?

Mikael, I wouldn't call it out as a huge trend because, obviously, 75% to 80% of ALI's revenue is recurring. So it's very predictable. But we did see some delays in North America, in Canada, in markets like heavy process industries where I think, as Norbert said, customers decided to wait and see how things develop. So North America still grow -- still grew overall, but it was slower than in EMEA and Asia.

Okay. And do you also see a pickup there in April for the ALI segment?

We -- not dramatically, no, because 75%, 80% is recurring anyway. So -- and as I said earlier, we haven't -- the month isn't closed, so we haven't got full analysis of every business and every product line.

Okay. And I also have a question on the R&D side. It was EUR 175 million now in Q1 adjusted. And I also noticed that amortization increased sharply to EUR 72 million, 31% up. How should we think about R&D cost structure going forward? And can you also comment on the trend if you look at capitalization versus amortization? That would be helpful.

Sure. And you're right. I mean, we have talked on several quarters at us being at an elevated R&D spend at this moment in time. And obviously, with the sales not coming through in terms of volume, it does look a little higher as a percentage. But our projects are long term, and we have that investment over a long period with -- we've talked about a significant expectation of releases over this year. So we are at an elevated level, and we were along the lines of EUR 5 million quarter-over-quarter increase in the gross spend. The majority of that coming from the areas where we still see the growth with ALI and SIG, as Ben mentioned, with SDx and with SIG for OnCall. So we continue to see increase in those investments. The other area is in the AS division with the road train -- the automated road train. So those are the areas where we're seeing increases. In the sort of MI and Geosystems area, we're sort of seeing that more flat to slowly decreasing, just to give you some indication. But as we said, they are at a high level. So that's not unexpected that they would start to trend down over the period of time. And then obviously, with the IAS 38, you have the amortization coming back as we have releases of product, and we've mentioned a couple of them. And the likes of SDx2, the like of the ICON trades product, the like of the AST800, just to give you a flavor for the different divisions, all of those product releases are clearly moving into the amortization phase, and you're seeing that come back across through the P&L.

Your next question comes from the line of Joachim Gunell from DNB Markets.

So just help us bridge the commentary with the stable trajectory into April, and I would assume that the bulk of your deliveries in Q2 is also, call it, tilted towards June and the fact that you haven't made any adjustments to your cost base yet. So what's your line of sight when it comes to visibility to align your cost versus those deliveries? And then how will that be, call it, better captured in Q2 than we saw in Q1?

Yes. I will answer from my side. So the stabilization is, really, as Ben was talking about, we have seen come back. We have seen in various -- and it's not only one business. It's across all, but it's early stages. I would like to mention this as well. We have relatively good visibility. But at the end month, and it's important still. And then we can see and talk a little bit more about that, honestly speaking, how things have developed. So from our point of view, we have certain expectations that this will continue and that we are more or less back to the normal, say, growth rates, what we are looking for as well. Regarding the adjustments, as David was talking about, what we are having given clear out to the different management and the different divisions and even further down because, as you may recall, we are decentralized organization, and people know what they need to do now in this kind of circumstances because, let's say, we have not -- these kind of things happens on a regular basis. So we rely on the management and have visibility as well, to a certain extent, on the weekly to monthly basis as well and will act accordingly on it as well as we go.

And then on the tariff impact, you quantified here by EUR 15 million on earnings. Should we annualize that to say EUR 60 million as the potential tariff cost headwind you envision for the full year?

I mean, you can do that. I'm not holding you back. But honestly speaking, we need to see things because we will definitely change our behavior, that I can ensure you, because, I mean, we have seen things I already mentioned. And we are doing more and more localization we have done, but we will do an extra effort, let's call it like that, to do even more. And I hope that I can say you don't need to do it. At the moment, you probably -- yes, you can do it, but I hope that we don't need to do this.

Very clear. That's also encouraging. And just finally, on the spinoff, everything is progressing according to plan. It was alluded into your commentary.

Yes, absolutely.

But is there any sort of, call it, risk that in a more uncertain world that you would have to revise that decision?

No. I can't. I mean, at the end, it's a decision of the Board. I just need to be very clear. But from our view, what we have seen so far, there is no hesitation at all in sense from my point of view. But I have to admit, I rely on the Board to make the announcement then at the appropriate time, if there should be something.

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

And I have to add some patience with a couple of more questions, trying to understand the EBIT margin drop and maybe as a comparison, and I mean, you talked about 2019, also as a comparison to first quarter of 2020 there when you had a similar margin drop, but on a 7% organic -- negative organic growth rate, which is quite different. So I mean, the difference -- this is really the -- I mean, the pace of amortization of capitalized R&D and then the direction of investments. And if so, and I know you talked about it, you have been, at least, as I have understood it, signaling stabilization in investments. But is that now not the case? It's rather continuing up. That's the first question.

Yes. I mean, the dilution of the margin clearly is the volume impact that we've seen. I mean, we had an expectation of a significantly higher volume, and that would have given us through a contribution, which would have brought, as I mentioned, much more towards the 28%, which seasonally adjusted from Q4 at 30.3% without FX, 200 basis points from Q4 would have been in line with where our expectations would have been for the quarter. So clearly, the problem was the volume issue. We had -- that was exacerbated by the FX. Obviously, that's always a topic that we can't control. But a negative FX on transaction, 5.8% in the quarter, is another element, which gives us a drag on to the EBIT. In terms of linking that through to the R&D, yes, clearly, when we are investing, we're investing with a growth mindset. The development is to stimulate growth. And these are not one quarter investments. These are long-term investments that we need to keep moving and positive momentum behind in order to deliver the products and the software that will drive the future growth. So we continue with that investment strategy, believing in the product strongly, and they will come through in the future with the growth. But this quarter, it was the growth that we didn't foresee, the uncertainty that the tariffs brought, the drop-through to the EBIT margin.

And Erik, if I can add to that comparing to Q1 '20, I mean, in that situation, all markets went down simultaneously, and you had a natural hedge on your costs because there was no travel, there were no trade shows, there were government schemes to fund employees, there was furlough and so forth. And there isn't that this time around. And as David said, we did the cost base for a steady pickup in growth. It's a different scenario.

Then next question is on a follow-up on Joachim's question there. So set up for growth into Q1. And as I read it, I mean, you're monitoring situation, but you're still set up the same way into the second quarter, right? Nothing has really changed.

From my side, we have alerted the organization more, that's for sure, because as soon as we have seen the drop, we took some measures in the sense from our point of view. But we are monitoring -- as we said in the announcement, we are monitoring how Q2 is developing in the sense. We have certain measures locally as well.

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

Can I start with the tariff impact, please, in your profit line? Can I just check that the EUR 15 million impact from the direct impact, is it also included in the EUR 30 million miss against your internal forecast? And I understand that you haven't taken any cost actions today, but if you were to take any cost actions, how flexible level of protection that would it give going forward? Yes, please, if I could start with, and then I have a follow-up after this.

Okay. Yes. The EUR 15 million will be going forward. There is no impact of tariffs in the Q1 results because they were all put into the delayed mode. So there's no material impact of any form in the current results. And then your second question related to...

If you were to take cost actions going forward, what sort of protection level will you be looking at a EBIT level? So if we have another EUR 40 million miss in sales against your internal forecast, what level of EBIT impact would you like to limit it to?

Yes. I mean, I wouldn't give that. I mean, that's a complicated question because in terms of any implementation of any cost measure, there's a phasing to it, which means that you can't give a prediction on to a single quarter, and we don't guide to a single quarter in that form. What's important is we need to see the overall direction of travel of where the volume is going, and then we will take appropriate action and give visibility as we did with previous schemes to what we're intending and hoping to deliver from those schemes. So it's not something I would give as of what it may be on an uncertain volume at this stage.

Got it. Understood. And that makes sense. And then just last question from me. The increase in amortization from intangible assets, about EUR 17 million in Q1, should we annualize it for the full year as well? So it gives me about EUR 70 million. And then given the R&D CapEx in previous years, should we expect a similar level of increase in '26 as well?

Yes. The amortization, it will gradually -- it will stay in similar levels, but it will gradually tick up. That's the nature of the IAS 38 calculation when you've been investing, and the gap will come down over a period of time. That's our expectation and built into our planning. So that's what you would expect to see that over a period of time.

Your next question comes from the line of Ben Castillo-Bernaus from BNP Paribas.

Two, please. Firstly, the weakness in the sensor and robotic solutions, can you just give us a sense of for how long can -- reasonably can customers delay those transactions? To what extent are the maintenance schedules or device expiries that customers kind of must buy before a certain deadline? Or can customers delay for much more than just a quarter or 2? And then the second question was just on China. The trends have been quite lumpy around shipments and timings, I think you mentioned. But what is your sense on underlying demand trajectory? Is it getting better? Is it deteriorating, kind of stable and your expectations for this year on China specifically?

Ben, so on China, I would say it's a different outlook between the construction segment and what we see in discrete manufacturing. For our China business, MI is probably 75% of revenue. So we're more focused on that side of the market. And there, actually, we see a relatively stable demand. I think that automotive is a little bit softer. I think electronics, I think aerospace, general manufacturing are still okay. It's probably as much to do with the very strong focus of our local organization and their key account management program. So we're getting some very good wins with key customers that are offsetting perhaps some of the weakness you see in the China discrete manufacturing market. But there, I think, looking out as far as we can see, we see it as relatively stable. On the construction side, which is a smaller exposure and impacts Geosystems, there, that market is still very weak. It can be a bit volatile quarter-by-quarter, depending on projects and how our partners manage their inventory. But we're not seeing any pickup in the underlying construction market in China. It's still tough.

And regarding the delay you were asking how much is possibility to delay things, that's very hard to say because it depends really on the product itself, honestly speaking. Because some of them, we have seen immediately come back as well on other products. But there could be a delay as well for very not, easy to say, even months from my point of view in this sense. So I think this is a little bit looking in the crystal ball, honestly speaking, which I'm not doing at the moment because this is too much at the moment on uncertainties in the sense.

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

Maybe first, a question on managing costs. Hexagon has gone through a number of cost savings programs over the last few years. So I just want to get your sense how sensible is it to cut costs further from here. Are you confident that you are still far away from a point where cutting costs is potentially hurting not the growth prospect of Hexagon? And then secondly, it would be great if you could elaborate a bit further on what the Robotics division is about. What are the solutions you're planning to sell? Are you trying to develop robots yourself or you're selling solutions to develop over to third parties? Just to get a bit more color on what types of products you're actually planning to sell here.

Yes. Thanks, Sven. I mean, in terms of managing cost, it's clearly something you have to do in conjunction with the divisional structure that we have. The divisions are very close to their businesses. They need to be reviewing and analyzing where their cost structure sits in relative terms to their targets and in relative terms to their volume. It would never be our intention to damage the structure, and we have the divisional structure there to ensure that that's not something that we do. So I think that's not a concern I have in terms of where we sit from a sort of cost management. As in what is the relatively proportionate amount, that's clearly why we need to spend a little bit more time understanding the uncertainty that we currently face. It would be easy to knee-jerk reaction, but we need to understand where this uncertainty is and, therefore, put a proportionate amount when we have a better line of sight to what the impacts could be.

And regarding the robotics, as I mentioned already early -- earlier, I mean, we have very unique capabilities in the sense where we bring things together. So -- and I think from our point of view, the big moment will be HxGN LIVE, where we really reveal what we're doing. I can explain that it's in the ecosystem of humanoid robot, that I can say in the sense, but I -- please forgive me. I hope you're joining us at HxGN LIVE. There, you will see it firsthand yourself.

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

I wondered if you could just talk a little bit about the customer behavior through Q1. And I guess, what I'm getting out here really is that most of the other commentary from both your peers and the broader supply chain has been to the effect that there wasn't really any pre-buy and there hasn't really been any effects on behavior and activity. I think that if I look at your direct peers, say, FARO Tech, let's call it, appreciate that color and commentary does appear to be a little bit more aligned. But I just want to understand, if I look at February, up 9% and March down 6%, clearly, somebody prebought and then didn't buy. And I wondered if you could just give us a sense of what exactly we're talking about here in terms of the products or in terms of the end markets or customers and the supply chains. Because it is clearly a little bit more of a trend. And I think, perhaps, we have seen elsewhere. So that's really what I'm trying to get at here.

Yes. Alex, I don't think we saw prebuy. I mean, it's hard to tell, but I don't think our products are things that people -- we are components, right? They're finished goods. I don't think people were prebuying them. I think we genuinely saw through January and February an underlying pickup in demand. Relative to other companies, I think we have a little bit more book and bill business. Perhaps, they ship more from backlog, so you're not affected immediately. But in -- particularly in North America, we do have a situation where customers can order in March and have it delivered. And that, obviously, because it's the most important month, 50% or so of quarterly revenues, and it was in the epicenter of where the customer uncertainty was had a disproportionate impact on us relative to other companies. And I think the slide that Norbert showed on the geographical mix shows where that was in Q1 and particularly. But I think that could be why we were more affected by it than some of the other companies.

Okay. I think it's probably also worth saying that I think the original assumptions were probably that the sensors business took more of a hit than actually it seems to have done, given the software growth probably wasn't as strong as you'd expected either. Is that fair?

Yes. I think that is fair. I think, as I said on ALI, 75% or so is recurring, but you still have a portion which is discretionary. And I think because of the uncertainty, customers did wait and see, and that impacted ALI's growth by a couple of points. And I think for SIG, as we said, we had a very good growth in the public safety business. The federal services business was impacted by some of the delays we've seen this year coming out of the administration change. So that wasn't as strong as we were expecting either.

Okay. That's all helpful. And if I could just clarify one thing, David, the EUR 15 million tariff impact that you talked about direct cost, is that an annual number? Or is that a quarterly number? I wasn't quite clear on one of the earlier questions and the explanation.

No problem, Alex. That was a quarterly number.

Yes.

Thanks, Alex.

This concludes the question-and-answer session. I'll now hand back to -- for closing remarks.

Yes. I think appreciate that you joined us in the sense, and all the best going forward.

This concludes today's conference call. Thank you for participating. You may now disconnect.