Good day. Welcome to the interim report Q3 2016 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Ola Rollén. Please go ahead, sir.
Thank you. Good afternoon or good morning or good very early morning, depending on where you are in the world. Welcome to this third quarter interim statement for the Hexagon Group. If we turn to slide four, organic growth was 2% in the quarter. The recorded growth was 5%. Growth is primarily driven by construction and infrastructure-related business in China, where we've seen a pickup, and a global acceleration generally in the manufacturing segment. We also had increased traction from our smart city solutions in the quarter. We invoiced our first order. We will come back to that. As expected, growth was muted and hampered by tough comparison numbers and poor sentiment in the oil and gas sector. The currency impact was minus 1% in the quarter. Acquisitions added 4% to the top-line growth.
Gross margin was 60%. EBIT margin 23%. We saw improved profitability from the GES segment, whilst we saw a reduced margin in the industrial segment due to a negative business mix. Just a reminder, Q3 is the second weakest quarter for the Hexagon Group. This year is no exception. Slide six, key figures in the third quarter. Net sales amounted to EUR 779.7 million. This is a recorded increase over the same period last year of 5%. It corresponds to an organic growth of 2%. The EBITDA margin came in at 30.4% compared to 29.5%. That is almost 8% improvement. The operating margin improved by 0.5%. This is the effect that capitalization amortization as a deviation is shrinking or the gap is shrinking. It actually shrunk by 20% year-on-year in the third quarter.
Earnings before taxes amounted to EUR 174.2 million. That corresponds to an earnings per share of EUR 0.39. If we look at the key figures for the first nine months, we've now reached EUR 2.3 billion in sales. We have an operating margin of almost 23% for the first nine months, which is almost 1% stronger than the corresponding period last year. Cash flow. The operating cash flow before change in working capital improved. It's really the working capital that is a bit of a disappointment in this quarter. The reason is we saw significant growth in MI, which grew our receivables. We saw a decline in PP&M, which reduced our deferred revenue reserves. You got this impact. I think, however, it's important to look at the full year, not just one quarter.
We expect the working capital to develop well in 2016. Looking at working capital to sales, slide nine, we can see that we had a slight uptick in the third quarter, but really nothing extraordinary. Slide 10, effects from FX movements. For the first time in a very long time, we had a positive impact from the Swiss franc. It shaved off CHF 0.8 million in net sales, but we had a positive impact on operating earnings stemming from our cost structure in Switzerland that was reduced due to the weakening Swiss franc against the euro. All other currencies, however, had a negative impact, where we saw the Chinese renminbi primarily and a few other, for Hexagon, large currencies weakening in the quarter. Market development.
If we look at slide 12, we can see that Western Europe has improved 1% of total Hexagon sales, and we also see a decline in EMEA stemming from primarily the Middle East. China 16% and Asia Pac 13%. It's also noteworthy to see that the decline in South America, where I think in one quarter they represented 5% of sales, has now stopped at 3% of sales. A similar analysis on slide 13. China is growing 8%, Western Europe moderate growth. Eastern Europe, Middle East and Africa, strong growth due to the smart city orders that we invoiced in the quarter in Saudi Arabia. Asia, excluding China, moderate growth. We see continuous decline in both Americas.
Looking at slide 14, this is really a too busy chart to comment or slide to comment on the earnings call, but it's more for reflections for you to study and see the differences to previous quarters. If we move to EMEA, slide 15, Western Europe recorded 4% organic growth. We saw growth coming back in the U.K. after the decline that we saw in connection to the Brexit by the end of the second quarter. Good growth in the U.K. in the third quarter. We also saw good growth in Spain and the Nordics. We saw negative growth in France and somewhat muted growth in Central Europe, Germany and so on. We saw continued recovery in Russia with double-digit growth from lower levels than we had pre the ruble or the Russian crisis.
We also saw solid growth in the Middle East, driven by the smart city order that we invoiced in Mecca. If we look at Americas, slide 16, North America recorded minus 3% organic growth. United States was flat, but we saw significant decline in Canada, which stems from a weak infrastructure market paired with the mineral and the oil and gas sector decline. We saw good growth from the manufacturing-related businesses in North America. South America continuously shrink, minus 8% organic growth in the quarter. Excluding Brazil, however, everything is not pitch black. Excluding Brazil, organic growth was up double digit. We see good growth from other countries in South America. Asia, finally, slide 17, 5% organic growth for the region, driven by strong demand in China, Japan and Australia.
8% organic growth in China. It's primarily a combination of recovery in infrastructure and construction, combined with the smart city, digital city development that we see. We also saw good growth from the electronic segment in MI that returned to positive growth due to new customer wins in the quarter. We saw a turnaround to solid growth in Australia, driven by primarily infrastructure and construction. If we move to the reporting segments and start with Industrial Enterprise Solutions, slide 19, we report organic growth of 2%. MI reports 8% organic growth. It's driven primarily by the aerospace and electronic sectors. Geographically, North America and Asia, parts of Europe grew significantly. Continued negative growth in PP&M, similar to Q2, minus 10% organic growth. It's a combination of tough comparison numbers and poor sentiment in the oil and gas sector.
The EBIT margin for Industrial Enterprise Solutions was thus down by 1%. It stems from the fact that we have more MI and less PP&M in the sales mix in the quarter. Moving on to Geospatial Enterprise Solutions. Geosystems report 1% organic growth. It's a combination of tough comparison numbers in the aftermath of last year's big product launch, the onboard software system, Captivate. In combination with a weak infrastructure market, primarily in North America, we do see a strong recovery for Geosystems in China. It's driven by a combination of infrastructure projects, construction projects, and the ambition to grow smart cities. SI report 8% organic growth. It was primarily driven by an increased demand for public safety and smart city solutions across all regions of the world. Positioning is suffering from the weak offshore oil and gas market.
We saw good growth in the GNSS or GPS-related business. EBIT margin, in this case, improved significantly from 21.2% to 22.7%. Looking at the growth margin, slide 21. We're now at 60% growth margin in the quarter, as well as the 12-month rolling average. Some people might react that we can improve the EBIT margin, which you see on slide 21, with a flat growth margin development. This has to do with the mix development, where MI primarily is growing very fast at a lower growth margin than group average. PP&M is losing 10% growth. Well, literally 100% of that sales is growth margin. What you're left with is a growth margin that isn't growing, but still, we improve the EBIT margin due to lower OPEX in the MI business. Orders and product releases, slide 24. Multivista.
We announced the acquisition of the Multivista group in the quarter. It's a Canadian-based company with operations in Canada and the United States. You should really regard this as an extension to our effort to grow the Hexagon imagery program and the SMART Build products. What Multivista do is they document using imagery, document construction projects, and then you embed these documentations in your workflow on the construction site. Slide 25, we made an acquisition of GIS Quadrant, that is a partner to us prior to the acquisition. They have a cloud-based solution that are built on our Hexagon SI software. We also acquired a small startup company that is going to grow into something exciting. That is Apodius. Apodius is a software company that specialize in measurement solutions for the composite materials market.
It's a startup based in Germany. We believe this could be something exciting going forward, since composites are growing. Slide 27. We've run a series of advanced cutting trials at Audi, where we actually improved performance by 47%. This is the first installation since the acquisition of the Vero CAM Group in 2014, where we actually combine software and technologies from Hexagon Metrology and Vero Software. We're thrilled about the results. We can see more to come in this area. Slide 28, increased traction for smart city solutions, where you saw the invoicing in the Middle East, where we saw significant growth. This stems from this project where Hexagon and Huawei announced a partnership in the fourth quarter of 2015 to collaborate on smart city installations. The first installation that we've undertaken, we've delivered a system to Mecca in Saudi Arabia.
Mecca is, as you know, a very special city. Normally, it's got 2 million inhabitants. Once per year, they add 2 to 3 million people due to the Hajj, which is a five-day pilgrimage period every year. We clock more than 60,000 calls to the police control center during Hajj in 2016. That's roughly double the rate of the daily call volume to rescue forces in New York City. The system delivered it with standing ovations. Slide 29. EcoSys has gained an order from Ontario Power. They will now standardize their projects, where they have 600 projects and a budget of EUR 8.9 billion, and EcoSys will be the follow-up system for Ontario Power going forward. Slide 30, we also got an order from Salt Lake Valley Emergency Communication. This is a multi-agency dispatch platform that we're delivering that will include both police, fire, and ambulance.
Slide 31. We won a project in Italy, which is basically a project where we've designed a solution to mobile map a 1,200-kilometer railway line between Rome and Genova. You put this camera that you see on the picture on a trolley. You run the 1,200 kilometers. What you're left with is a 3D map that you can use for maintenance purposes. Slide 32. The U.S. Navy will standardize on Hexagon's anti-jamming technology to protect the GPS signal on their vessels. This is a real breakthrough order for GAJT. For those of you who remember, we introduced this product first time at Hexagon LIVE in 2011 in Orlando. It shows the same cycles that we have to live through in certain segments of Hexagon's end markets. It's taken five years to get the first real big order for GAJT. Slide 33.
We continue to gain ground in a very depressed mining industry. More and more, the miners are focusing on productivity and cost reduction. They are turning to us to simply connect all pieces of a mining operation using our software platforms and our sensors to reduce manning, output yields, and so forth. Should be improving yields. Slide 34. We launched OEM7, which is our latest generation GNSS receiver cards. They can be built into many applications, but it will span from the defense industry to autonomous vehicles. The form factor is such that they are easily built into any device. What we've done here is we've made great advances on the back of the GAJT development that I talked about a few slides ago in so-called interference mitigation.
It's one thing to position a vehicle, a car, a vessel, or something, and many technologies can do that with accuracy today. The next challenge will be to protect that positioning from jamming. This card has the latest technology, and we believe that we are the world leaders in that field. Finally, slide 35. We have announced, and I will continue to push for, and make a bit of advertisement for our Capital Markets Day, which will be hosted on the 1st of December in London, where we will give an update to our growth plans, strategy, and financial plan. In summary, Q3 2016 growth was driven by construction and infrastructure-related businesses in China and the global acceleration in the manufacturing segment in the quarter. We saw increased traction of our smart city solutions, our collaboration with Huawei.
As expected, growth was hampered by both tough comparison numbers, but poor sentiment in the oil and gas sector. We continue to strengthen our operating margin despite the negative business mix. That was it. Now I'm ready to start the Q&A session. Please, if there are any questions, use your keypad.
Thank you, sir. If you would like to ask a question at this time, please press the star or asterisk key followed by the digit 1 on your telephone. Please ensure that the mute function on your phone is switched off to allow your signal to reach our equipment. If you find that your question has been already answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question. We'll pause to allow everyone an opportunity to signal. We can take our first question from Mohammed Moawalla from Goldman Sachs. Please go ahead.
Great. Thank you very much. Ola, I was wondering if you can comment on, I think what you said at the time of the Q2 call, that you anticipated some progressive improvement in the organic growth as we went to the back half, given that we saw a small dip relative to Q2. Now, what's your expectation? Do you still anticipate acceleration into Q4 and next year? I know the comps are a little easier. Then secondly, just on smart cities, on the back of the Makkah win, what are you seeing in terms of the pipeline and interest from other customers? Can you remind us on the potential size and scope of some of these contracts and how big an impact they can start to have on the growth rate?
Growth in the fourth quarter, we believe fourth quarter will be stronger than the third quarter. Going into 2017, I would like to save that discussion to the Capital Markets Day in December. We will have very good discussion about it, I promise you. Regarding smart city, Mecca added 1%-2% growth in the quarter, and these projects are typically multi-tens of millions of EUR in size. We have a fairly significant pipeline of projects. I don't want to disclose the full number, but we got a significant pipeline together with Huawei from several countries, primarily in the Middle East and Asia Pac regions.
Okay, that's great. Can I just clarify, the 1% is on the group level or for the S&I?
On the group level.
Great. Thank you.
Thank you. We will now take our next question from Daniel Djurberg from Handelsbanken. Please go ahead.
Yes, thank you very much. First, a question on PP&M and the organic growth. If you exclude last year's shipbuilding order, can you give us the number of the organic growth adjusted? Also, if possible, if you could say something about the visibility you see in entering Q4. If I look at the prepaid expenses and accrued income, we saw quarter on quarter-
Sorry, Daniel. Let's start with the PP&M order. Otherwise, I'll lose you.
Yeah, of course.
I believe it was slightly negative, excluding the order. If I recollect, the order was in somewhere between EUR 5 million and EUR 10 million last year. We would still have shrunk, even without it, but it would not have been -10%. Sorry, can you take the next?
Yes, coming to visibility for Q4, when I look at the prepaid expenses and accrued income in your balance sheet, I can see it increased quarter-on-quarter in Q3 2014 with 15%, well 11%, 15, but it's flat in Q3 2016 versus Q2. Should I be worried about the impact, i.e., the correlation with the revenues in Q4? Did you get the question?
No, you shouldn't, because there are two things that need to happen. We need to replenish, so to say, the deferred revenue with new long-term contracts, and we don't see any material deterioration in our long-term relationships. On top of that, we need to sell perpetual licenses in the fourth quarter, and they would not end up in that column in the balance sheet, because you invoice them in the quarter. That is what we're working at. What needs to happen in the fourth quarter is that we do land a few of these prospects that we're working on in order to see the improvement.
Yeah, I understand. Finally, if I may also on the oil and gas, is it possible to see any improvement in the outlook given what you've seen in the oil prices, et cetera?
What we've heard is that This is a huge market. Changes in direction take time, we do see that the rate of decline is diminishing. If we take the positioning market, which is huge for us, we actually see small growth. We see customers coming back, subscribing for positioning services of vessels and rigs and so on. That decline has leveled out. If it's a turnaround or we're at the bottom, well, your guess is as good as mine.
Okay. Thank you very much, Ola, good luck in Q4.
Thank you.
Thank you. We will now take our next question from Gerardus Vos from Barclays. Please go ahead.
Hey, good morning. Thanks for taking my question. Just a few, if I may. First of all, Ola, could you make some comments about the kind of inventories levels in the channel going into Q4? Secondly, from what I hear from the prior kind of questions, it seems that Q4 will depend on some larger sized license deals you need to sign perhaps in the Smart City. Is that a correct understanding from what I heard? Finally, on the working cap, again, going back to the deal in Mecca, should I read that you have invoiced that, you haven't received the cash yet, and therefore Q4 should normalize, and that this was a big component of that working capital built in the quarter? Thank you.
No, that had nothing to do. If we start with the working capital, my comment was MI, Manufacturing Intelligence invoiced a lot in the quarter. It grew by 8%, which built our receivables. PP&M did have an organic decline of 10%, why the deferred revenue was reduced. That is the impact in the quarter on the working capital. It has nothing to do with Mecca. Inventory levels, you talked about inventory levels in the channel, or what was your question?
Yeah, in the channel, yeah.
No, we haven't seen anything. First of all, we don't have much inventory in the channel. We invoice most of our products to an end user. We do have inventory in the channel for Geosystems, and we haven't seen any increases there. You had a second question regarding Smart City Q4. Could you repeat that?
From the kind of comments you made about Q4 to be stronger than Q3, but you need to land a few of those larger deals you're working on. I was speculating, does this relate to any kind of large Smart City deals, and should we expect for the coming quarters therefore, there might be some more volatility in the quarters because they're so large?
That comment was specifically to PP&M.
Okay.
In order to see PP&M grow, we need to land a few perpetual license deals in the fourth quarter.
Fair enough. I misheard.
Yep, thank you.
Thank you. We will now take our next question from Adam Wood, from Morgan Stanley. Please go ahead.
Hi, good morning, and thanks for taking the question. Just a couple, please. First of all, on North America, that was obviously a bit weaker in the quarter. Do you see any impacts there, like Brexit with the elections, that's slowing decisions on a temporary basis, and we might get a rebound in that market? Or are you more concerned about broader, slower economy there as you look into Q4 and into 2017? Maybe on the industrial side, on the metrology side, you were hopeful about iPhone 7 having an impact on that business as we look into the second half. Has that been a benefit for you, do we have benefits still to come from that over the next couple of quarters? Thank you.
Sorry, Adam, I'm going to dissect things a bit here. If we start with North America.
Yeah
my guess is as good as yours. Of course, the presidential election has an impact on the economy. Specifically, what we've seen is that the private construction sector actually is growing quite well, and we do see housing projects and so on. We've seen a very weak public spending, public construction center, larger infrastructure projects, office buildings and so forth. That might be linked to the political situation, but my guess is as good as yours. I think this is actually a broader question, and we will come back to this at the Capital Markets Day, where not much is actually growing in the global economy today, and we see more and more industries slowing down. Sorry, now your second question.
Was around the metrology side. I think you were hopeful that the iPhone 7 would have a beneficial impact on that business through the second half. Was that already an impact in Q3, and is there any more to come from that as we look over the next few quarters?
Absolutely. We saw electronics grow in the third quarter, and we're hopeful that that could continue into the fourth quarter. Whether it's just iPhone 7, or the fact that we broaden our base and have more customers in that segment, and they are quite successful as well, I don't know, actually.
Perfect. Thank you very much.
Thank you.
Thank you. We will now take our next question from Mikael Laséen from Carnegie. Please go ahead.
Yes, hi. I was wondering how the imagery program is progressing.
The imagery program had a week. We had a setback in the third quarter, and we were introducing something called elevation data, where we create a 3D image rather than a 2D image that we've been delivering up till now. Hopefully we can recover, if not all, most of it in the fourth quarter.
Okay. How much sales is that part generating roughly, in annual terms?
Right now, we're flattish. If we don't see a significant improvement, we will end roughly where we were last year, and we're hoping for an uptick in the fourth quarter. It's a bit weather dependent, so let's hope the clouds go away.
Yeah. I actually had the same question for EcoSys, how that part is developing.
EcoSys saw growth in the third quarter, and we reported on this Ontario order, among others. We do see good traction, but hopefully Q4 will be the breakthrough for EcoSys.
Okay. What's the size of that type of order for EcoSys?
EcoSys' orders, it's multi-year orders, but a typical order could be between EUR 500,000 up to millions of EUR.
Also, if I may, one question regarding the margins for FNI mining and positioning, if you can give some indication where they are, roughly.
No, we don't do that.
All right. Thanks.
Thank you.
Thank you. We will now take our next question from Erik Pettersson-Golrang, from Nordea. Please go ahead.
Thank you. I have two questions. Apologies if they've been asked. I've had a bad line on and off. First one is another question on product progress, and this time it concerns SMART Build. How's that developing? Second is on acquisitions, if you could say something about the landscape out there, if multiples are still too high, or what's holding you back. Third one is mining as a percentage of sales now. Where are we in Q3? Thank you.
Thank you. Let's start with mining. Mining is roughly 3% of sales. Smart Build. Smart Build is still in the development ramp-up phase. We're running two pilot projects with two construction companies, and so far so good. Still far away from being a significant product in our product mix, but this is a product that you should basically have the view that this is a big contributor to revenue over the next five years. It's not going to be significant in one individual quarter. If we move to M&A, yes, the multiples are as high as ever, and we see new records every day, what companies are spending on acquisitions.
Thank you.
Thanks.
Thank you. We will now take our next question from Stacy Pollard from JP Morgan. Please go ahead.
Hi. Thank you. Just a few as well, and I will break them up so you can answer them one at a time. Just in PP&M, the minus 10%, was that all from license weakness, or was there a reduction in recurring revenues as well?
No, that was all from license weakness. Remember the large order from the Italian shipyard in the third quarter of 2015, which also was a perpetual license.
Okay. Then Metrology, can you just discuss the automotive sector? Didn't really speak much about that.
You want to discuss Manufacturing Intelligence.
Sorry.
Well, I have my corporate communications director looking at me very sternly, we need to stick to the new names. We saw growth, it's actually quite robust, the automotive sector, given how weak other segments are in the global economy. Is there any particular area in the world you're thinking of, or?
No, it's just a general comment. If there were any geographies that stuck out, we'd be interested. It's just that you didn't comment on that sub-sector, often you do.
No, China is holding up in spite of the slowdown in the consumer car spending. Europe was fine and North America okay. It's not brilliant numbers, but quite okay given the situation, I think.
Okay, just my last question was, how do you now think about a probable operating margin for the full year of 2016?
I am thinking it's going to happen.
Any quantitative comment on there?
No. Let me put it like this. I think that we are closer to reach the consensus operating margin target than the top-line target for the full year of 2016.
Okay, that's fair. Thanks.
Thanks.
Thank you. We will now take our next question from Alexander Virgo from Merrill Lynch. Please go ahead.
Thanks very much. Morning, Ola. Wondered if you could answer a couple of questions on the progression that you've seen from Q2, and SG&I in particular, sort of accelerated despite a pretty tough comp. I think Geosystems slowed a little more than I'd expected. Given the comp swap, if you like, in Q4, that they get a bit easier in Geosystems and harder in SG&I think, can we see that those sort of growth sustained in SG&I, and would you expect Geosystems to recover a bit more?
I have to correct you again. It's SI.
I beg your pardon, sorry. SI. Sorry. Stone corrective.
Oh, these acronyms. Anyway, SI is correct. We do see an acceleration. We have a strong backlog in this segment. If there is one silver lining in the global economy, it would be that public safety services are investing more than ever. We're actually quite positive about the prospects for SI going forward. Regarding Geosystems, it was a bit of a disappointment, it came late in the quarter, the weakening of the organic growth sequentially. Let's see what happens in Q4, because one quarter doesn't make a year, so it's hard to say what the trend is given the numbers we have at the moment.
Okay, fair enough. Just on the chart that you skipped over and leaving to our reflection. I reflected on it, if I may observe that and say that the sequential deterioration in infrastructure and construction and surveying in North America, and I guess in EMEA as well, was quite striking versus Q2. Is there anything more sinister in that that you'd like to share with us, or it's just your comments earlier on talk more positively about infrastructure and construction? Just trying to square that. Vicious circle. Thank you.
I think if we start with North America, that was the discussion about the private construction.
Okay
versus public construction. As I said, my guess is as good as yours. Regarding Europe, we saw a sequential slowdown in the quarter from Central Europe, and it was countries like France, Germany, other markets in Western Europe like the Benelux, Switzerland, Austria, and so on. It's hard to say why that is. Middle East was weak for infrastructure and surveying as well. If we disregard the Mecca order, which gave us a 15%, one five, organic growth in Middle East, the rest of the infrastructure business was actually weakening as well. That is due to the budget constraints that the countries have in the Middle East at the moment with the oil price and so forth. Yeah, it's hard to give you a straight answer. It becomes more of a discussion and hypothesis.
Right. Okay. Thank you.
Thank you.
Thank you. We will now take our next question from Daniel Schmidt from SEB. Please go ahead.
Yes, hello. Good morning, Ola. I think most of the stuff that I wanted to know has been answered, but could you just give us some more insight to the new customer wins that you talk about in electronics? Has there been any impact at all from the recalls that Samsung has been forced to do on Galaxy Note7? In any way, is that impacting you going forward? I think we'll start with that.
I think the Samsung recall could have a positive impact. We've seen a negative impact year-on-year from Samsung. They've declined in orders for us. What happens when you have a recall like this is that you need to redesign the product, and you need to relaunch the product, and that is usually beneficial for Hexagon. Regarding the other customers, we got a handful, I would say we got less than 10 but more than five customers in the electronic segment, and it's all the large Asian and North American manufacturers of handsets.
All right. Those are the new customers. How many in total do you think you have now on that side of the business?
No, as I said, we think it's less than 10, but more than five.
Oh, okay. All right. This recall, which has been quite talked about, do you think that in any way is impacting the state of urgency to improve quality assurance overall in the sector?
As I understand it's about the footprint and the battery space in the handset. It was simply too cramped. That's the explanation I've gotten to these occurrences of fires. I guess that they need to redesign the space for the battery in a handset.
Yeah. I was just thinking it moves up the need for quality assurance on the agenda in general when it comes to the sector, but maybe that's already happening.
I think that is happening, but it is going to put more focus on dimensional measurements of a handset-
Yeah
to make sure that you have the actual space you do need.
Good. All right. Thank you, Ola.
Thank you.
Thank you. As a reminder, ladies and gentlemen, if you would like to ask a question, please press *1 on your telephone keypad. We will now take our next question from Alex Tout from Deutsche Bank. Please go ahead.
Hi. Morning, Ola. Thanks for taking the question. Just a few quick ones. What was the GES growth in China? Obviously, last quarter was very strong, 51%. You thought that maybe given the low base from last year, you might continue that sort of rate of growth. That's the first one, GES growth in China. Secondly, admin expenses seem to tick down quite nicely in the quarter to about EUR 60 million. Is that a sustainable rate that you're at there? That seemed to really help the margin this quarter, given the flat gross margin. Maybe if you could answer those two, I just have a quick follow-up.
I'll start with the admin question. We're running at roughly 7.5%, 8% to sales, admin expenses. We've done a benchmark over the summer, and best in class is 6.5% when we look at other companies. We have started to focus on our admin expenses. Whether this improvement year-on-year is sustainable or not is yet to be seen. We have definitely put more focus on the admin expenses. If we look at GES in China, it was double-digit growth. You had a third question, didn't you?
Yeah. It was just on the IES margin. Obviously, it declined. You said it was just the mix effect with MI growing and PP&M declining. Was there any decline in the PP&M margin as a result of the revenue decline, or have you managed to sort of offset that with cost cuts?
No, there was a decline. We roughly lost 4% margin in the PP&M business. MI improved its margin, and PP&M reduced its margin. It's very difficult when you have negative growth, and it's a pure software business where sales are 100% contribution to profit.
Great. Thanks for the answers. Thanks.
Thank you.
Thank you. We will now take our next question, which is a follow-up from Alexander Virgo from Merrill Lynch. Please go ahead.
Hi, Ola. Thanks. Last one, if I may. Just on M&A, I think the contribution to revenue is a bit higher than I'd expected, 4% on structure. Is that a similar sort of number for Q4, please?
No, I believe it's going to drop slightly because we got EcoSys, which is classified as an acquisition in the third quarter, and we acquired them in the third quarter of last year, and they will thus disappear as M&A in the fourth quarter of 2016, and they will add to organic growth.
Right. Okay. Thank you.
Thank you.
Thank you. There are no further questions in the queue at this time. I'll now hand the call back to Mr. Rollén for any additional or closing remarks.
Thank you, everyone, for listening in. We'll do the same procedure next quarter. Thank you, everyone. Bye.
Thank you. That will conclude today's conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.