Thank you very much. Good morning, good afternoon, or good very early morning, depending on where you are, to this review of the third quarter of 2018. I suggest that we start on page four, overview of the third quarter 2018. Organic growth amounted to 8% and recorded growth 10%, the difference is obviously acquisitions and FX movements. We saw strong organic growth in both MI, 12%, and Geosystems, 11%. PI, which is our positioning intelligence division, grew by a stunning 26%. We continue to see recovery in the oil and gas-related business, PPM, recording 6% organic growth. China, another stellar quarter, 13% organic growth. We also closed the acquisition of AutonomouStuff in the quarter. Growth margin amounted to 62% in the quarter, and EBIT margin came in at 24.5%. Slide five, seasonality in profit and sales.
Third quarter is the second weakest quarter in the year, but what we can see here is quarter-over-quarter, it's actually slightly stronger than the second quarter. This was a very strong quarter for us. We don't expect the seasonality to change, but it's just a reflection of the demand situation during the quarter. We move to slide six, we have the P&L statement. Operating net sales amounted to EUR 946 million, the EBIT came in at EUR 232 million, which is 13% stronger than the corresponding period of last year. Net earnings amounted to EUR 180 million. We post a net of minus EUR 3.9 million in the quarter non-recurring items, it's a mix of three things. It's the capital gain from our selling of shares in a Swedish company called BIMobject, it's laying off roughly 150 people and writing off overlapping technologies.
Slide seven gives you an overview of the first nine months. I'm not going to spend too much time on that today since it's history. Slide eight, cash flow. Cash flow from operations before changes in working capital, taxes paid, and interest amounted to EUR 293 million compared to EUR 240 million. As we can see from this table, we have a huge increase in working capital, minus EUR 91 million, we also have significant investments in tangible assets. We turn to slide nine, we've tried to reconcile the cash flow. What we can see here is that out of the EUR 91 million in negative change in working capital, EUR 50 million relates to expanded business opportunities with a few large select strategic customers, where we saw substantial growth in the third quarter.
They have an average longer credit terms than the average credit terms that we give to other customers, thus you get this impact. This is, however, expected to reverse in the fourth quarter. We then move to investments in tangible assets, we've spent EUR 75 million related to a new R&D facility in Canada. We've also started spending money on the new campus where we're going to move our activities in China in 2021. In Q4, we expect investments in tangible assets to be in the range of EUR 15 million-EUR 25 million. As we go into 2019, we expect to spend another EUR 40 million-EUR 50 million on the campus in China over and above the normal investment level for tangible assets, which you could put it at around EUR 11 million.
If we look at the adjustment for this working capital buildup and the facility, you can see what the cash flow would have been like. Working capital to sales, we still have a very positive trend in our working capital. In spite of this slight setback for working capital, we still expect the trend to continue. As you can see on slide 10, we have gone from 25% some six, seven years ago down to 15%. Market development. If we move to slide 12, the mix, nothing extraordinary. China is now 17% of group sales. North America, 31%, South America, stable 3%, Western Europe is stable at 29%, and Asia Pac, slight reduction from 14% to 13%. Roughly one could say that we have one third of our business in the three major regions of the world.
Slide 13, a quick overview of organic growth per geographic region displays good growth, really strong growth from the major markets in Western Europe. China, another stellar quarter. We do see a comeback in Brazil, and that made South America grow at double-digit. North America, growth between 0% to 8%, and Asia, excluding China, a bit of a slowdown. If we move to slide 14, I am not going to spend time on all these arrows. This is for you to study and come with questions after the call. We can only see that we had a good quarter for automotive in Western Europe, and that is related to large investments with the German auto manufacturers. We also see good growth for automotive in China, and that is actually related to new car makers.
In Asia, we see Byton, new energy vehicle manufacturers, VinFast, and a Malaysian local manufacturer starting in the auto industry, and that is giving us hope for the future. We also saw aerospace and defense that have been down in the first half come back, and that was also related to large orders in China from aerospace manufacturers. Electronics had another strong quarter, power, energy, and mining, especially the mining part, very strong quarter. Surveying, it is good to see surveying coming back in Western Europe. We move to EMEA, slide 15. As I just stated, Western Europe recorded 11% organic growth. We saw solid double-digit growth from the larger economies in Europe, like Germany, the U.K., France, Italy, and Spain. We also saw a strong recovery, continuous strong recovery in the Middle East connected to oil-related investments.
Russia has been recovering for us throughout the past few quarters. We had a slight setback in Russia in the quarter after several quarters with double-digit growth. Moving to Americas, slide 16. North America recorded 4% organic growth. We recorded strong growth in both construction infrastructure and manufacturing-related businesses, but we had a strong headwind in our public safety business and defense-related public safety business in the U.S. that hampered growth overall for North America. South America, continuous recovery. Brazil saw 49% organic growth in the quarter. Slide 17, Asia. Asia is dominated by the Chinese market that represents more than 50% of our sales in Asia. China recorded 13% organic growth, driven by strong growth in electronics, but also automotive and aerospace, where we see a lot of new products being designed for both aerospace and automotive.
South Korea came back, Japan has continued to grow. Both recorded good growth. India continued to be weak in the quarter. Reporting segments. If we move to slide 19, Industrial Enterprise Solutions, we recorded an organic growth of 10%, where MI saw 12% organic growth, driven by strong demand, as we've commented, from electronics, aerospace, and solid growth from auto, but also in our design simulation software portfolio. Hexagon PPM continued to recover and recorded 6% organic growth. That was mainly driven by good demand from construction and lifecycle management solutions. We didn't see a strong recovery in the oil and gas-related business yet. Sales EUR 489 million and an EBIT of 25.3%. Safety, Infrastructure & Geospatial, slide 20. Organic growth of 6%, where the large business Geosystems recorded an organic growth of 11%. This was driven by strong demand in construction infrastructure, Western Europe.
We had a good quarter for our Hexagon Content Program, and we also saw good reception from new product introductions that we did in connection to our June HxGN LIVE event. SI had a tough quarter with minus 13% organic growth, and we see continuous challenges in our U.S. federal business and a tough comparison from last year's large Safe City orders in China. We have an action plan in place, and it's going to improve the performance of the business as from next year. Positioning Intelligence, 26% organic growth, continued strong demand in defense, agriculture, and now with the consolidation of AutonomouStuff, also in the automotive sector. Sales EUR 457 million, an EBIT of EUR 114.6 million, corresponding to a 25.1% EBIT margin. Slide 21. Our growth margin continued to improve, and for rolling 12 months, it's now 62%.
If we look at the operating margin on Slide 22, our 12-month rolling margin is now at 25%, and of course, you should put that in relation to the targets we do have for 2021 of 27% or 28% EBIT. Orders and product releases. If we move to slide 24, we acquired a company called SPRING Technologies, and they make solutions for optimizing the machining workflow in CNC machines. We can do machine tool simulation, tool path verification and optimization, and machine tool management. This is an important step towards our vision to create the smart factory concept. Slide 25. We acquired a company called Guardvant in our mining division. An overriding theme for mining is efficiency improvement and safety improvement. What Guardvant does is it detects operator fatigue by monitoring the traits of a person's face and how it's changed as you get tired.
This helps us solidifying our already leading role in the mine safety segment. Slide 26. We hosted HxGN LIVE in Beijing 2018. It was a huge success. We had more than 6,000 key customers attending the event that spanned over four days. We had more than 400 breakout sessions, and we had a technology center that filled more than 11,000 sq m. We're going to do this every second year now. We've seen the negative impact on the cash flow, the positive is that we have the grand opening of our new state-of-the-art facility in Calgary. We have our primary R&D center for our Positioning Intelligence division's GPS and GNSS technology development in Calgary, and it's been our home since 1978.
We now have a brand new facility that can help us develop the next generation positioning technologies that are going to be needed, for example, autonomous vehicles. Slide 28. MI introduced the most accurate portable measuring arm in the world, a ROMER Absolute Arm in the quarter, and it's had good reception so far in the market. Slide 29. We got an order from a new player in the automotive field called Byton. They're headquartered in Nanjing, and it's a very exciting new technology. Their products are focusing on becoming smart, safe, and eco-friendly, and we're proud to be their partners in the development of this new concept. Similar development, COMAC, which is the equivalent of Airbus and Boeing in China, purchased the next generation laser trackers that we launched in the quarter for accurate measurements of fuselage, wings, and so on.
These trackers can measure up to 160 meters in diameter at a six microns of a millimeter accuracy. Phenomenal technologies. Slide 31, we received an order from MidAmerican Energy, that is a U.S.-based energy company, and they purchased our utilities asset management solution to be able to source location-based information such as outages and so on. They are also subscribing to the Hexagon Content Program to update information about their assets. Slide 32. This is a sad event that happened this summer where a bridge collapsed just outside Genoa. Early on, the Italy fire brigade used our radar monitoring solutions for 24/7 critical monitoring of the collapsed bridge so that we would not have any add-on accidents. Slide 33. We delivered laser scanners to the Indonesian National Police to investigate road traffic accidents.
What we do is we capture the scene in 3D, and then you can do an accident reconstruction. You can simulate and do data analysis in your office using our software. This is something that is becoming somewhat of a standard for crime scene investigations. Slide 34. We received an order in the quarter from Murphy & Sons, which is a global engineering company, and they use our underground cable locator solution to detect underground assets as you plan to excavate and so on, so you don't hit cables. This is also becoming a very popular solution with the construction industry. Slide 35. PPM released its EcoSys 8.3 to drive greater project predictability. What this release does is it's enabling you to, based on research-based predictability metrics, we can forecast accuracy and timeliness in large-scale projects. It's a bit of a breakthrough. Slide 36.
We're gaining traction with the shipbuilding industry in China. We received a large order for design tools from Shanghai Waigaoqiao Shipbuilding, SWS, and they bought the full suite of the Intergraph Smart Yard module, which includes PLM construction, materials management, and so on. Moving to slide 37. We had a good quarter for the mining industry in the quarter. We received orders from a Colombian joint venture between Anglo American, BHP, and Glencore, and they standardized on our radar solutions to detect any landslides in the mining walls. We got in Peru, there is another joint venture that also used that new radar technology that we've launched. We got follow-on orders for fleet management solutions in a silver mine in Mexico, and we also installed a collision avoidance system at multiple sites at Glencore. Slide 38. We received an order from GTAA, Greater Toronto Airports Authority.
This is the largest airport in Canada with some 50 million passengers annually. What they purchased was our industry-leading incident management system to follow up activity in an airport. It's a single point of reference for all emergency and non-emergency services. It enables GTAA to have an increasing situational awareness at the airport. Slide 39, we received an order from Madrid Police. They're serving more than 3 million citizens, and it's a command and control center that they're building for their new public safety and emergency management system that they purchased. That was it for the quarter. If we summarize on slide 41. Strong growth, 8% organic, 10% recorded in the quarter. Our largest businesses, MI and Geosystems, recorded 12% and 11% respectively, and China continued to grow at a stellar 13%. We saw continued margin expansion, 24.5% EBIT in the quarter.
We've concluded strategic investments in several acquisitions, like AutonomouStuff, SPRING Technologies, and Guardvant. We've also invested in new facilities in Canada and China. With that, I am ready to answer any questions as well as I can. Operator, we can start taking questions.
Thank you. If you'd like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star one to ask a question. We'll take our first question from Mattias Holmberg from DNB. Go ahead, sir.
Thank you. Hi, Ola.
Hi.
Could you please quantify for us how much of new product launches contributed to the organic growth in Q3, and also help us a bit on the normal seasonal effect of how the new product launches impact Q3 and sort of the later part of the year, if it normally accelerates in Q4 or declines compared to the third quarter. Thank you.
Thanks. It's hard to give a specific number, but it's more, it's at least 3% out of the 8% organic growth that stems from new product launches. The typical seasonality of these product launches is that we have a good reception because we receive orders already in Q2 for the new products that we launch in Q3. You have a bit of a catch-up effect in Q3, but Q4 would be the strongest quarter for new products.
Is there any products in particular where you're seeing good demand?
It is. We see really good demand for some auto-related products, electronics-related products, but also for the construction sector from Geosystems.
Great. Thank you very much.
Thank you.
Thank you. We will now take our next question from Adam Wood. Please go ahead, sir from Morgan Stanley.
Hi. Great. Thanks for taking the question. Maybe just a couple from me. Just first of all, another great performance in China with 13% organic growth, but probably the question we get most from investors is concerns about slowdown in that market. I wonder if you could just talk a little bit about what the feeling is on the ground as you move into Q4, and what the pipeline looks like, and whether from your point of view, those investor concerns of slowdown in the Chinese market are warranted. Maybe secondly, could you maybe just give us a little update on where smart connected factory is going? Maybe, I don't know whether Byton, for example, is a good example of that in terms of the technology that they're taking, and whether the roadmap you have there is helping things like MSC, Vero, and the metrology business.
Just an update on demand and where you are with bringing that type of system. Thank you.
Yeah. We haven't noticed much of the slowdown in China that is probably happening as we speak due to tariffs on trade and so on. One has to remember that we are not dependent on export-related activities in China. We are more connected to the local domestic Chinese economy and demand, and there should be a lag in a slowdown. I guess the export-led activities would be hurt first, and then you could see a ripple effect going into the local domestic demand if it's a prolonged and deep downturn for the export-related activities. Having said that, China is not a country. It's bigger than that. It's 1.4 billion people, and there is so much activity going on into new technologies, energy-related, vehicle-related, whether it's cars, planes, and so on.
We're benefiting from that investment surge, which indeed, as you pointed out, I would say that China is probably in the forefront in the world today when it comes to the new smart connected factory concept, and they're embracing that. Byton is a good example of that.
Could you maybe talk a little bit about in terms of what they've taken? Because I suppose one of the challenges for us is the opportunity for you versus what you would have sold in a brownfield site two, three years ago, versus what it's possible to sell into somebody who's adopting a lot of these new technologies all in one go on more of a greenfield opportunity.
What it's all about is to integrate information that you already generate in isolated silos on the shop floor. What's very interesting and encouraging in China is to see that many Chinese manufacturers are embracing this concept to connect measurement with a production machine and get a feedback loop.
Okay. That's very helpful. Thank you.
Thanks.
We will now take our next question from Stacy Pollard from J.P. Morgan. Please go ahead, madam.
Thank you, Ola. Three questions from me, two about divisions and then one about acquisitions. It would be as follows. Do you think the PP&M growth can get back to consistent double digits? If so, would there be some boost to the margin in the industrials division? Maybe I can do them one at a time, give you a chance to answer.
Yeah. We'll see. The one who lives will see.
I hope that's me.
Let's say I hope it's me too. I hope everyone stays safe. In theory, if that would come back to double-digit growth, it would have a positive impact on the division.
No certainty as to the visibility on that? Fair enough. How about this one?
Not a common venue
Can you elaborate on the actions that you're taking to improve the Safety and Infrastructure division? Is there still a pipeline for smart cities?
There is still a pipeline for smart cities. We've encountered a bit of, I would say, bureaucratic buildup, where it's simply not flowing as quickly as one might want. We simply need to split our product offering into smaller modules, put them in the cloud, and be more flexible when we offer these modules so that we can cater for smaller communities than only the big mega cities. That makes this business very lumpy and vulnerable if you don't have an order from a mega city in that quarter. That's in all essence the actions we're taking.
Okay. The last question would be really, how does AutonomouStuff get integrated into the Positioning Intelligence division? Or does it, I guess, or does it run more standalone for the time being?
It's getting integrated, and they had a good relationship before the acquisition, and that obviously continues. We're now expanding the footprint for AutonomouStuff into China and Germany. I think in six months' time, we should have a really good position within the autonomous industry to serve all our customers around the world.
That's great. Thank you.
Thanks.
We will now take our next question from Mikael Laséen. Please go ahead.
Thank you. I have a question about PPM. Can you sort of talk about that segment a bit more, if there are regional differences, and also what you see in terms of business activity in your different customer segments? You mentioned that oil and gas is not picking up yet. That's my first one.
We see increased activity in the pipeline. We haven't seen it as orders yet, but we do have hope that this business could actually perform quite well.
Okay. Oil and gas is still flat on low levels, or what have you seen there?
Oil and gas is still flat, the activity level in that sector is much more positive now than a year ago.
All right, great. Also the net working capital buildup. Just curious there, a EUR 50 million increase from these [30] customers. We can of course understand that timing effects and things like that, the underlying change was also negative. Anything that you can add there, comment on that underlying performance?
No. After several quarters of strong organic growth, I think the underlying working capital change of EUR 40 million, maybe we didn't have enough focus on accounts payable in the closing of the quarter and so on. I'm not too worried. I think this is going to come back to a good trend in Q4.
Okay, thank you.
Thanks.
We will now take our next question from Erik Golrang from SEB. Please go ahead.
Thank you. I have two questions. The first one is if you could give a bit more flavor on the development on surveying in Western Europe. It was a bit stronger now, you say. What's behind that, and how would you think about that strength continuing?
We see increased activity in most of the large markets in construction in Western Europe. Since we have a very strong market position, we benefit from that. It also comes from new products that we've launched in the second quarter for that industry. Yeah, it's just an increased activity in countries like Germany, Spain, Italy, France, and so forth.
Okay. Thank you. The second question. We realize I think it's only one quarter, of course, but the pace of margin expansion now, I guess a bit slower than what you would need to get to your 2021 targets. You can approach it from different angles. Is one of the key reasons for the bit slower margins that you still are investing quite heavily in the industrial division? If so, when do you expect those investments to return to some kind of normalized level?
I think if you do a 60 basis points increase, I think you reach our target. It's 2021. Secondly, this is not a linear activity. You are going to have good quarters, you're going to have bad quarters. It's a change of skin process that we're trying to do, where we're also setting up a completely new sales organization to sell solutions and systems, rather than discrete products. Some quarters, you're going to see an increase in investment in sales activities, for example. Some quarters, we're going to benefit from the incremental margin of the increased sales. When you give a plan for over five years, don't expect it to be linear.
Okay. Thank you.
Thanks.
We will now take our next question from Alexander Virgo, Bank of America. Please go ahead.
Yes, thanks very much. Morning, everyone. Ola, I wonder if you could talk a little bit about the U.S. Defense business in SI or the federal business, I'm sorry, in SI. Are we likely to see this at a new normal now? If we look at Q4 and think about the headwinds in Q4, is that something we need to think about, I guess, moving into 2019 as well? Are we at a sort of a new normal level, if you like, for the SI business in revenue terms? Second question, just on new products. The HxGN LIVE, I think, is quite a big number. That seems like it's at least 50% bigger, if not more than the Las Vegas event we attended earlier in the year.
How should we think about that playing into this penetration argument in China you referenced there in terms of serving domestic demand? Also how that might play towards enhancing that 3% contribution from new products as we look at Q4 and into 2019. Thank you.
Wow. If we start with the first question. Now, we have to restructure our federal business. This is the ring-fence business where I, for example, as an employee of Hexagon, is not allowed to enter. We have restructured that business. We have done a change of management, change of direction because the old business was becoming obsolete, serving basically U.S. defense. That's going to continue in Q4, but I do think that 2019 is the year when we turn things around, and we start seeing positive development from our federal business. We should be very close to the bottom, hopefully. When it comes to new products and China and our event in Beijing, you're absolutely right. This is an amazing vehicle to market Hexagon's capabilities to large international Chinese-based technology companies, but also these large state-owned conglomerates.
It's helping us an awful lot to open doors and sign orders and so on. We do expect that to have a positive impact on our Chinese business. Last time we did it was three years ago in Hong Kong. It was a smaller event, but the impact we had from that event was really positive.
Okay, that's super helpful. Thanks very much.
Thanks.
We will now take our next question from Mohammed Moawalla from Goldman Sachs. Please go ahead.
Great. Thank you very much. Ola, I just wanted to clarify firstly on that sort of 3% contribution from new products. Does that also include sort of some of the cross-selling and upselling you're doing from the acquired companies? If not, are you able to quantify that on top of the new product contribution?
Hello? Mohammed?
Hi, can you hear me, Ola?
Now I can hear you, but I lost you for a while.
Sorry. Okay, sorry about that. First question was the 3% contribution from new products, does that include also the cross-sell, up-sell of some of the acquired solutions and products like MSC? If not, how much did that also impact the organic growth? Then secondly, as we think of the cyclicality of your business, obviously it's been very cyclical in the past, but the business has changed significantly. As you think about how decoupled you are going forward around the slowdown, how do you sort of envisage that to change, and particularly how discretionary versus necessary is the spend on some of your products in key cyclical markets like autos and aerospace? Thank you.
Thanks. No, we do not include cross-selling of acquired products into new products. It's very hard for me. I've never thought about that. That's a good metric, actually. Maybe we should look into it, what the contribution could be from cross-selling acquired entities products. When it comes to cyclicality, you have to be a bit philosophical. Nothing is non-cyclical. If someone says that their business is immune to the economic cycle, they're lying. We all go up and down. As the tide comes in and goes down. Do we believe that we are less cyclical today than 2008? Yeah, I might have to eat this up, but I do believe that we are less cyclical. I think the structure and the way the business is performed is very different from 10 years ago. Hopefully we're much less cyclical today than we were 10 years ago.
Great. Thank you.
Thanks.
Thank you. We will now take our next question from Guillermo Peigneux-Lojo from UBS. Thank you. Go ahead.
Hi. Good morning. It's Guillermo Peigneux from UBS. Actually, a question on your working capital buildup, regarding specifically to the EUR 50 million. I was wondering, you mentioned large customers and business opportunities. Could you give us some granularity as to what industries, regions these items were related to? Also, if they're included in the revenues, are they basically one-offs, or do we see more of this going forward? Thank you.
It's yes and no. The problem is that I can't disclose what customers they are, but it's a handful of customers. Some of them are in the asset management industry, large plant installations, others are in electronics, and it's primarily in the U.S. and Europe.
Thank you. Would you say that this is just quite a one-off, so to say? Meaning that this kind of customer, kind of relatively large business opportunities will be coming every now and then. You will be obviously adapting the organization every now and then when they come. The shape of your customer base is not changing in any act or form.
Some of them are one-offs, where we received large orders and invoice very late in the quarter. Some of this buildup is actually recurring, where we hope that we're building a long-term relationship. Unfortunately, we have to accept longer credit terms than the average that we do have. In average, we typically have, if you look at our balance sheet, we have an average credit of 80, 90 days worldwide, and this is slightly longer. It goes over two quarters rather than one.
Yeah. Thank you. One more question regarding your investment in China. You mentioned 15 to 25, and then in 2019, 40 to 50 additional. I was wondering, again, could you specify the nature of the investments you put in there, which industries this is targeted to? If there's any particular skew to the investments in the sense of whether it's in a disproportionate amount of the investment going into any particular industry in China, or is it just basically broad-based investment? Yeah, sorry. Go ahead.
No, we're building a new campus in Qingdao, and that's going to host the lion's share of our R&D employees in China. We've outgrown our current facility. The way it's going to work from a cash flow perspective is we're going to invest this year, we're going to invest next year. We're hopefully going to move into the new campus by 2020, and then we're going to sell the old campus, and we're going to have a positive impact on cash flow as we sell the old campus. It's to our entire Chinese business. It's super important investment for us to have a showcase campus where we can bring our customers and show our solutions.
Interesting. Thank you, Ola.
Thanks.
Thank you. We'll now take our next question from Wajid Rizvi, from RBC Capital.
Good morning. Just a couple left from me. Firstly, I was hoping to get a bit more detail on the dynamics of your automotive exposed business in China, just to kind of understand where you think the penetration of manufacturing intelligence products are versus the rest of the world. Also what your split is on customers versus domestic versus foreign OEMs. The second one was, you ran through some of the acquisitions, but I was hoping to hear a bit more on Bricsys, actually. Is that perhaps strategic more important than the size would suggest? I mean, what are your plans for that? You haven't previously been in the CAD space, and now you'll be competing with people like Autodesk, who you previously partnered with quite successfully in various places.
Yeah. If we start with automotive and China, I would say that China, from a technical point of view, they have state-of-the-art factories, whether it's domestic or international transplants. I think China is definitely in the forefront of technology when it comes to automotive. We serve all accounts in China. There isn't a single auto manufacturer that we do not do business with in China. The split varies quarter on quarter. This quarter it was more domestic than international. I hope that give you some guidance. Thank you for bringing up Bricsys. This is a very important piece in our Smart Build strategy, to be able to add CAD. We will continue to work with Autodesk, where we have collaboration with them, but we also need to integrate CAD functionality into our Smart Build concept, and Bricsys will bring that for us.
Right. Okay. Just to follow up on that, is the ambition to be a market leader in that place, or is this just something you strategically need to have an offering in, and you not necessarily think it could be the number one in what it does?
I think that's another really good question. The difference between Hexagon and other software-based companies is that if we look at industrial software today, most of the companies are focused on the design process. Hexagon is focusing on the construction process or the manufacturing process. Our emphasis will be on developing seamless end-to-end solutions for information systems in the production environment or in the construction environment, i.e., on the work site, and the connectivity between the physical activity in the real world and the design activity. We actually see that we're building something that no one has targeted up till now.
Okay. That's interesting. Thanks.
Thanks.
We will now take our next question from Jawahar Hingorani from Bloomberg Intelligence. Please go ahead, sir.
Yes, Jawahar Hingorani from Bloomberg Intelligence. Thanks for taking my question. Real quick, Ola, the churn around in SI that you're planning, as of now, is the headwind causing any kind of drag? Can you characterize that as to are you losing any margin momentum as a result of that? Could the 24.5% been higher? I will follow up on the software and services percentage of sales, if you have an update for us, please.
Absolutely. We would have grown double digit without this business hampering the overall growth. Obviously since the margin is lower and it declined in the quarter, it was hampering the EBIT margin as well. I don't have an update on software as a % of total sales in the quarter. We have to come back on that. It outgrew the other businesses.
Would you say that it would definitely advance from the 55% that we had coming into the year?
I don't want to comment. This is a quarter, we simply don't follow up those metrics quarter by quarter. We do it annually. We will come back after next quarter.
Okay. Fair enough. Thanks.
Thanks.
We will now take our next question from Gal Munda from Berenberg Capital Markets.
Yeah. Hi, this is Joshua Tilton on for Gal. Can you maybe give us an update on your BIM strategy, more specifically, do you see yourself doing any more deals in the future to catch up in that space?
Sorry, I can't hear you. You're muffled. Can you repeat that?
Can you hear me now?
Yeah.
Hello?
Hello.
Yeah. Hi, sorry about that.
Now, much better.
Hello? Yeah. Hi.
Yeah.
This is Joshua Tilton on for Gal. Can you give us an update on your BIM strategy, and then more specifically, do you see yourself doing any more deals in the future to catch up in that space?
Well, as I just said in the previous question, we don't have a BIM strategy. BIM is very much about a static documentation in 3D of something that you already have or plan to build. We want to be more of an MRP system in the construction industry and follow up the activity on the construction work site. You can't rule out additional acquisitions in that space. I don't think we need to catch up because I actually think that we're doing something that nobody else is doing.
Thank you.
Thanks.
We will now take our next question from Max [Friden] from Danske Bank. Please go ahead.
Yes. Hi, Ola. Thank you for taking my question. The first one, just sort of looking at the OpEx increase from both SG&A and R&D here as well, I assume it was partly due to the investment in new product streams. You have a lot coming on here in PPM. You're reinvesting some of the savings you made from restructuring last year. Just could you give some granularity on where are we in that phase, i.e., should the investment in personnel and launch of new products continue to increase OpEx going into Q4, or is that sort of leveling out?
I think that OpEx in relation to sales is starting to leveling out. In absolute terms, I guess we're going to continue to see increased OpEx as we grow the top line. Whether OpEx to sales will come down a bit in the years to come, yet to be seen. Our margin expansion is more related to growth profit expansion rather than savings on OpEx. You can't rule it out
No. Fair enough. Thanks. Just a detailed question on the strong growth from automotive in Germany. You mentioned the large order to an isolated customer. Is that something isolated to the quarter having a material effect on MI organic growth in Q3?
No, it wasn't the automotive industry in Germany that shifted this pattern, so no.
Perfect.
It was a different industry altogether.
Okay. I just asked since you mentioned it in the presentation.
Okay. Finally, just a detailed question. Tariffs, you mentioned a marginal impact as a cost in Q2. Has that been a cost for you in Q3 as well? If you can give an estimation.
It's flat, around 400,000 impact in the quarter.
The same as in Q2. Okay.
Thank you. Thank you very much.
Thanks.
We will now take our next question from Alexander Kraus from Deutsche Bank. Please go ahead.
Hi. Thanks for taking the question. Just noticed in the slide on the different business units and geography that you have declines in EMEA and China, in surveying. I guess potentially that could be seen as an early indicator in the construction industry. Do you see it as such, and any concern about what you're seeing there, or is that just standard volatility in that part of the business? On 2019, appreciate you're not going to give us guidance, but what are you hearing from clients about their investment confidence at this point? Can you highlight any major differences across industries and business units? Thanks.
If we start with the arrows, I think you refer to slide 14. Is that correct?
Yeah, I think so, yeah.
China is a very specific thing. We had a large order for airborne sensors in the third quarter of 2017, and we simply didn't have that order in 2018. It's more the lumpiness of the airborne sensor business. An airborne sensor costs roughly one million EUR, and if you get a few of those, they can easily change comparisons. I wouldn't draw two hard conclusions on the Chinese arrow. Regarding EMEA, that is rest of Europe excluding Western Europe, and what we do see in the quarter is a slowdown in Russia, and that had an impact on the surveying business. If we move on, I think your second question was the sentiment going into 2019 from customers. We haven't noticed any change in behavior. I think that activity is good. I think that people are positive on new products and so on.
Having said that, this is an all-time high level for the global economy, and you simply have to be much more watchful going into 2019, what's going to happen to the global demand situation. Especially doesn't really help with these trade wars and tariffs that we're building up between the trading blocks either.
Are there any industries where you see the sentiment as particularly good, and any others where you see particular caution relative to the average?
I think surveying is very strong in general. I think the construction industry is booming. We have a good situation with electronics, and we have a good situation at the moment with automotive, with all the new products that are being developed from old and new suppliers of automotive products. Aerospace is more of a long-term game where you have a huge backlog. You're beginning to get the ABCs, as they call them, Airbus, Boeing, COMAC, and we serve all three, so it really doesn't matter which supplier that is successful in biddings. Aerospace is going to continue to grow. I think that's what we see at the moment.
Great. Very helpful. Thanks.
Thanks.
We will now take our next question from Agnieszka Ciechomska from Nordea. Please go ahead.
Thank you. I have a question on automotive again. You seem to be quite happy about the development in that segment. My question really is, does your growth deviate a lot from the, say, underlying car production? We also see some signs that some model launches are being postponed. Will that affect your growth in that segment? Thank you.
We're completely disconnected from the number of cars made globally. We're more related to new developments in powertrains, transmissions, new car models, facelifts, and so on. We haven't seen a slowdown in the new design activity for electric vehicles, hybrids, facelifts, new car models.
Okay, perfect. Thank you. On Geosystems, historically, the growth for that business correlated quite well with, say, leading indicators or PMIs, given your remark also that nothing is non-cyclical, do you expect a slowdown for that business in the coming quarters?
We'll see. I don't expect it right now. You never know. The good thing about Geosystems is it's changed its business model a bit as well compared to, let's say, 10 years ago when we had the last downturn. We have our Hexagon Content Program where we sell data rather than selling products. We're catering for different industries today with our new Leica BLK360 and Leica BLK3D products and so on. We'll see. No one is immune-
Thank you
to the cycles in the economy, that's for sure.
Thanks.
That concludes today's question and answer session. At this time, I would like to turn the conference back over to Mr. Rollén for any additional or closing remarks. Please go ahead, sir.
Thank you all for listening in, and we now look forward to the fourth quarter review. Have a good day, everyone. Thanks. Bye.