Good day, welcome to the interim report Q3 2015 conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Ola Rollén, CEO. Please go ahead.
Thank you, Steffie, welcome everyone to this Q3 2015 interim report. If we turn to slide number four, the overview of the third quarter. Organic growth amounted to 6%, recorded growth to 14% in the quarter. Growth was primarily driven by a continued strong performance in the PP&M division, as well as Geospatial Enterprise Solutions that saw an uptick in its organic growth. Significant part of growth stems from recently launched new products. We guesstimate the contribution from new products and segments to a bit more than 2% out of the 6% growth that we record in the quarter. Asia was the fastest growing region. China improved to 5% organic growth. Metrology reports a negative book-to-bill ratio in the quarter. We saw continuous weak demand from the oil and gas sector. We improved profitability and cash conversion in the quarter.
Growth margin amounted to 60%. EBIT margin to 23%. Operating cash flow improved by 89% in the quarter. Slide five, just a reminder that this is the seasonally second weakest quarter in the year. It is usually in the second half that we also see our working capital releases. It has a positive impact on cash flow. Key figures, slide six. Net sales amounted to EUR 742 million, which is 14% recorded growth, 6% organic growth. Operating earnings, EBITDA, grew by 21%. EBIT won by 19% and amounted to EUR 167.8 million. This corresponds to an earnings per share, excluding non-recurring items, of EUR 0.36. That should be compared to the EUR 0.29 that we report, excluding non-recurring items, for the corresponding period last year, which is a 24% growth in earnings per share.
If we look at the nine months for the year, the calendar year 2015, we are now at 5% organic growth, EUR 2.228 million in sales, an operating margin, EBITDA margin, of 29.1%, and 22.2% EBIT margin. As you can see, the growth in EBITDA overshadows the growth in EBIT. That is simply because we have this reversion of depreciation and capitalization that we talked about for the past few years. Earnings before taxes amount to EUR 474 million. The earnings per share, excluding non-recurring items, is now EUR 1.04, which is 24% better than the corresponding period last year. Cash flow, slide eight. Cash flow from operations before changes in working capital grew significantly to EUR 221.7 million. As you can see, we had an increased taxes paid in the quarter which distorts the picture a bit.
We can see the improvement for the cash flow stemming from primarily three sources. We can look at cash flow from operations before changes in working capital. The operations are now generating more cash, but we also saw a positive change in working capital compared to a negative change the same period last year. Finally, we can see that investment in tangible assets is now dropping again, and this is to do with the completion of the new campus in Huntsville that we did last year and concluded in the third quarter last year. Working capital to sales continue to hover around 17%, but we definitely see now that the pattern repeats itself where we have a release of working capital in the second half of the year. Moving on to slide 10, which is an important slide to understand the margin improvement.
If we start to the left of this table, we can see the Q3 P&L statement as reported with a 22.6% EBIT margin. Now, savings amount to EUR 6.9 million in the quarter, and that corresponds to an improvement in the margin of 0.9%. Without this, the EBIT margin would have been 0.9% weaker. On the other hand, we have a negative impact of EUR 7 million in the quarter stemming from the appreciation of the Swiss franc. It's a wash between the savings program and the Swiss franc at the moment. We have a 0.6% positive impact from other FX movements if we compare the two quarters year-over-year.
To the right, we have Q3 adjusted for if FX wouldn't have happened and we wouldn't have deployed the savings program, and we can see how the business itself performed without any intervention from us, so to say, or currencies. Moving on to market development. If we go to slide 12 in the deck. This is the sales mix for the Hexagon Group in the third quarter, and we can see that North America gains 1% in the total mix, while South America is losing 2% on the back of the recession that we see in primarily Venezuela and Brazil. Western Europe maintains a 29% share of total sales, whilst the MEA, apart from Western Europe, is contracting by 1%. China is gaining one percentage point, and Asia PAC, excluding China, is also gaining one percentage point.
We have a fairly well-distributed geographic mix right now between the three major trading regions, MEA, Asia PAC, and Americas, one third each. Moving on to slide 13. If we just use the arrow analysis to see trends in certain regions, Western Europe is up. It's growing above 8%. Asia, excluding China, is also above 8% organic growth, while North America is showing single-digit growth, and so does China with its 5% organic growth. Contracting regions in the quarter were Eastern Europe, Middle East, and Africa, where we had tough comps in South Africa compared to 2014. We do see a slowdown in investments in primarily the automotive industry in Eastern Europe. South America is also contracting on the back of the recession that we just mentioned in Venezuela and Brazil.
Moving to slide 14, it's a busy picture, but it's noteworthy to see that surveying and infrastructure construction is now slowly moving into positive territory. We have less negative % ratios in China. We see that Asia is strong for construction and surveying. North America continues to be a strong market, and Western Europe has definitely been the positive for surveying infrastructure and construction. Moving to the other large segment, power and energy, we see Western Europe performing well, but we do see a muted market in North America, South America, and the rest of MEA. China and Asia is continuously investing in power and energy assets. Electronics and manufacturing was still a big quarter in China, which is the major market for us in that segment. Safety and Security had a good quarter in Asia.
Automotive, we see that North America and South America is now declining for us, Western Europe, China, and the rest of Asia is still robust. Aerospace and Defense, civil aviation is still investing, increasing its capacity all over the world, so it goes for all major players in that industry. Slide 15 is a recap of the long-term organic growth trends per region, where we can see that Asia is outpacing both Americas and MEA. We see the slowdown in growth rate in Americas for the past two years, and MEA picking up. Moving to slide 16 and talk about MEA for a while. Share of sales is now 37%, organic growth 7%, Geospatial grew by 5%, and Industrial by 10%.
Western Europe recorded 9% organic growth. The growth areas were really the recovery in Italy and Spain, coupled with good growth coming from Germany. Segments such as surveying and power and energy recorded very strong performance in Western Europe, and it was good to see Russia returning to 8% organic growth following four consecutive quarters of negative growth. Moving on to Americas, slide 17. It's now 34% of sales, and we reported a 2% organic growth, which is a slowdown. Geospatial growing at a healthy 6%, Industrial is contracting by 4% in Americas. North America recorded another quarter of positive organic growth, although we saw a deceleration compared to the first half of 2015. This deceleration was stemming from industrial markets. In the U.S., growth was driven by infrastructure and construction-related activities and home-generated growth stimulus, such as the Hexagon Imagery Program, which saw strong double-digit growth.
It was also good to see the public safety segment returning to mid-single-digit organic growth in the U.S. Sales in South America fell by 15% organic growth. Several key markets in South America contracted, but primarily our biggest market is Brazil, which contracted by 24%. Slide 18, Asia. Asia is now 29% of sales. Organic growth was 10% in the quarter. Both business segments, both Geospatial and Industrial, saw strong growth, Geospatial 8% and Industrial 11%. China grew by 5% organic growth in the quarter. IES showed an organic growth in China of 8%, and this is our, by far, largest segment in our Chinese business. It was driven primarily by demand from the Chinese electronic and automotive segments. Geospatial saw a 6% contraction, which is, of course, still negative, but significantly lower contraction rates than we'd seen in previous quarters in China.
Growth rates in Asia, apart from China, were strong in countries such as Japan, Australia, New Zealand, and India. Reporting segments, moving on to slide 20, Industrial Enterprise Solutions. Organic growth was 7% in the quarter. Metrology saw 4% organic growth, and we really see peak demand from all metrology areas. Solid demand in Western Europe and China, but we did see some softness stemming from the North American manufacturing industry. book-to-bill was negative in the quarter. I wouldn't highlight that too much because it's a typical trend in the second half of the year, but we do see a slowdown in North America. PP&M, 12% organic growth, and seven out of these 12% was normal business, whilst 5% was a strategic order to the shipbuilding industry. EBIT grew by 22%, and the margin was 25.7% compared to 24.9% in the same quarter previous year.
If we move to slide 21, Geospatial Enterprise Solutions, organic growth increased to 6%. It was good to see Safety & Infrastructure, formerly SG&I, return to growth. Safety & Infrastructure reported 5% organic growth in the quarter. Geosystems organic growth accelerated to 7% in the quarter, where we saw strength in primarily North America and Western Europe. We also saw benefits from the recent Captivate software launch and the Hexagon Imagery Program. EBIT growth 17%. EBIT margin improved to 21.2% from 20.1% same quarter previous year. Slide 22. Gross margin came in at 60%. That's where we are on a 12-month rolling basis. Next slide, operating margin is now at 23% on a 12-month rolling basis. Orders and product releases in the quarter and significant events, slide 25. We acquired EcoSys in the quarter.
EcoSys is a software company providing project controls software, and the flagship product is called EPC, which stands for Enterprise Planning and Controls. Our plan is to integrate the EcoSys offering into PP&M's software offering and offer a comprehensive package for project scheduling where we can talk about 4D, which would be cost management, and 5D, which would be project scheduling. This is an important piece in the puzzle to build and strengthen Hexagon's capabilities in the so-called building information modeling market. EcoSys was consolidated on October 1st. Slide 26. We rebrand SG&I, Intergraph SG&I, into Hexagon Safety & Infrastructure. We will launch and underline this rebrand at the Hexagon conference in November of this year. Slide 27. We got our first breakthrough order into the shipbuilding industry with the Fincantieri Marine Group in Italy.
This is the number 1 European shipbuilding company. I think it's the largest manufacturer of cruise liners. Fincantieri will replace its existing in-house software with SmartYard, Hexagon's integrated CAD PLM suite of programs. You could see this as the first step to create a so-called, sort of BIM in shipbuilding. Daewoo chooses Hexagon for a $4.1 billion refinery upgrade. If we move to slide 29, Hexagon is to power Woodside's master data project. Woodside is the largest independent oil and gas company in Australia, and they're undertaking a master data project to cleanse and organize its operating and engineering data across its onshore and offshore assets. This is also a project that underlines our move into what we could call integrated information flow solutions, where we connect the real world with the digital world.
We also got an order from AGCO to participate in being the supplier of their next-generation guidance technology. AGCO is the world leading manufacturer and distributor of agricultural equipment, and they got world-renowned brands such as Massey Ferguson, Fendt, and Valtra. This is an order we got via NovAtel, where we will provide the positioning technology for the AGCO group of brands. Hexagon Agriculture got an OEM partnership with Agrale. Agrale is a Brazilian manufacturer of agricultural and military vehicles. Slide 32. Hexagon Metrology got an important order in the quarter from Fermi National Accelerator Laboratory. This is a high-energy particle physics laboratory where efficiency and capability gains will support the lab's ability to perform pioneering research and operate world-leading particle accelerators and experiments. We're quite proud of this. Slide 33. This is a fun order, Bot & Dolly.
The Google-owned Bot & Dolly, which is based in San Francisco. It's a design and engineering studio that specializes in automation and robotics in filmmaking. They will use Hexagon Metrology's next-generation laser tracker technology to map coordinated robot motion for advanced cinematography. That's a difficult word in the morning. Well, it's going to come to a cinema near you very soon. Slide 34. Hexagon supports the phase 2 of the Shanghai General Motors Wuhan branch build-out. We're going to install our white light measuring systems, and it's basically going to boost the capacity in measuring for GM Wuhan. Slide 35. We got an order from the city of Quebec in Canada to install a modern 911 rescue system, and the benefits are really that we can integrate voice, text, and data to increase community safety. Slide 36. We got several geospatial software orders in India in the quarter.
We got from the Forest Survey of India to map India's forests and perform change detection. The National Centre for Sustainable Coastal Management is installing our software to do coastal area planning, and Larsen & Toubro is construing the metro rail networks across India, and they have also bought our integrated GIS and BIM workflows. Slide 37. It's good to see that our new technologies are gaining momentum and strength in the mining industry in spite of the downturn in the industry. We got several safety orders from De Beers and Norsk Hydro, and we installed several fleet management operation systems in Cortez Gold Mine and a mine in Kazakhstan. We also installed our modeling and mine planning software in an open pit copper mine in Bulgaria. Slide 38. We're currently involved in a big data integration project across hundreds of sources.
It says companies, but it should be sources in Italy, and it's about Italy's state-owned railways that are going to be privatized. In order to privatize the state railways, they need to improve the big data flow throughout the organization. Slide 39. We launched Leica Captivate, which is a new next-generation surveying software. It's a revolutionary software for a variety of measurement instruments, and we're being able to create the most realistic 3D renderings on board on these mobile platforms. In summary, if we move to slide 41, we saw 6% organic growth, and it stems from Asia and Western Europe, from PP&M and Geospatial. We saw continuous weak market for oil and gas and a slowdown in the North American manufacturing in the quarter. The operating margin was positively impacted by organic growth, acquisitions, and cost reductions, but adversely impacted by primarily the Swiss franc movement.
Savings program is on plan. We record a very strong cash flow that underlines potential for M&A going forward. I just want to turn your attention to slide 42. We are going to update our financial targets at the capital market day to be held in London on the 4th of December this year. You can find out more if you contact investor relations, either via email or call directly. Talking about investor relations, this is the final working day for Carl, who is leaving us, and I would like to thank him for good work over these past few years. Well done, Carl. By that, Steffie, we are ready to answer any questions there might be-
Yes, thank you
from the conference.
Ladies and gentlemen, if you would like to ask a question at this time, please press star 1 on your telephone. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Again, please press star 1 to ask a question. We will now take our first question from Sven Merkt from Morgan Stanley. Please go ahead.
Hi. Thanks a lot for taking the questions. Just two from my side. I'd like to square some of the commentary made on the outlook side. Clearly in the release, there's some commentary around a weaker book-to-bill on the Metrology side and weaker order intake on Industrial Enterprise Solutions. At the same time, we saw some comments around the demand environment being broadly in line with 3Q so far for the fourth quarter. Your commentary around Industrial Enterprise Solutions, does that relate more to the performance in 2016? I just have a quick follow-up on PP&M.
I think it's hard at the moment to comment on the outlook. What we saw, we could divide our organic growth into, let's call it the GDP-related growth and the internally generated growth stemming from new products, new applications. We see an increase in growth rates for new products, new applications, we do see an underlying deceleration in the general GDP-related growth. We just want to give caution and just say that it's a fantastic growth rate in the third quarter. Don't extrapolate it because the outlook is more difficult to predict going into 2016.
Okay, perfect. That's very clear. Thank you. Just on the PP&M side, we've seen now the second quarter where you've had, let's say, an outsized deal which has helped the overall growth of that division. I'd just like to get a sense of what the pipeline is there for deals of similar sizes, because at the end of the day, being a software business, you do tend to have these larger license deals, and you could almost see them as the normal course of business. Just to get a sense of how much more of these we should be expecting going forward. Also, especially related to the marine project, was this a competitive offer with some of the other players in the space, or was this just you versus the in-house software at that particular company?
It was the competitive offer. Yeah, I don't want to brag, I know why we got it.
Okay. Anything on the pipeline for those larger deals?
No, it's absolutely true what you're saying. We tend to almost regard them as non-recurring or extraordinary. Of course, you do get a string of these significant deals. I don't think this is the last deal we booked that we will regard as large and as exceptional.
Very clear. Thank you very much.
Thank you. We will take now our next question from Erik Golrang from Nordea. Please go ahead.
Thank you. I have three questions. The first one on PP&M, you talk about weak demand there on oil and gas. How much was oil and gas for PP&M down in the quarter, and how much does that now represent of PP&M sales?
Oil and gas is roughly half of the business. It wasn't down in the quarter. One must remember that more than 70% is recurring revenue. It's just that we see a weakness and a softening in the backlog of our large customers, the EPCs. We just have to draw the conclusion that we can't continue forever with these very strong growth rates that we see.
Okay. Thank you. The second question on the Hexagon Imagery Program, if you can give an update on the current sales growth or the current annualized sales level there in the third quarter.
Well, the annualized sales level, it's a lumpy business where typically you sell more. Third quarter is the strongest quarter. The fourth quarter and the second quarter are roughly the same. First quarter is almost nothing. This has to do that you simply can't fly and take pictures when it's winter. The growth and the sales pace annualized for this year is roughly EUR 40 million. We expect that to grow going into 2016.
Okay, thank you. The last question on M&A, you talked about some cash flows underlying that. I think if someone expected a bit more deals to be closed in so far in the second half, anything particularly behind the hold-up valuation and issue availability of targets? What's going on?
No, I think it just takes time. You have to give us till December the 31st before you judge the second half.
Okay, thank you.
Thank you. We will take now our next question from Stacy Pollard from J.P. Morgan. Please go ahead.
Hi, thank you. Just a few other divisions that perhaps you could touch on, power and energy. Can you talk about the demand there? Secondly, Safety & Infrastructure. There was a large deal in New York that you've spoken about before. Does that continue with a year in your benefit, or is there still good demand across the board, which I think I referred to? Thirdly, if PP&M growth slows at all, does that put pressure on your margin improvements, or do you have enough other divisional improvements, in other divisions, I guess, to keep the momentum there?
Power and energy, most of it stems from PP&M. It's the other part of the business which is not oil and gas-related, the other 50%. We do see good demand, primarily in Asia, but also we saw an uptick in demand from Russia in the quarter, which was positive. Regarding SG&I or Safety & Infrastructure, as it's called nowadays, it's true, we do have a large order from New York City, which we're currently installing. We did see many other projects. We saw several projects stemming from our relationship with Huawei around the world. We also saw Europe and projects in Australia, Singapore and New Zealand. Finally, what was your question on PP? If PP&M slows down, does it put pressure on the overall margin?
Well, of course, it's always beneficial if PP&M outgrows the group, but we have some juice left in the other businesses as well.
I guess we have to wait for the quantification of that for the capital markets day in December?
You have to wait in the fourth.
Thanks.
It's like Christmas.
Thank you. We will now take a question from Daniel Djurberg from SEB. Please go ahead.
Yes, hello. Good morning, Ola, and all the others.
Morning.
Great numbers. Just wanted to ask on the shipbuilding win that you had in PP&M, is that in the Chinese market?
No, the shipbuilding, that's Fincantieri. It's an Italian shipyard.
Okay. What really sort of drives the recovery in China continues to be the electronics and automotive then. Are you seeing any sort of deceleration when it comes to the automotive CapEx spending in China? It's been fairly elevated for quite some time.
No, CapEx is significantly down in general for automotive in China. It's just that the Chinese factories need to invest in quality and productivity and enhancing equipment.
Okay. Thank you.
Thanks.
Thank you. We will now take a question from Johan Sjöberg from DNB Bank. Please go ahead.
Thank you. I have three questions. If you look at the +2%, which new products and applications contributed to organic growth during the quarter, have you seen all the bulk of this impact in Q3, or will we see something now coming in Q4? My second question is regarding PP&M. If you could quantify a bit upon the organic growth, how much is growth through price increases and also if there's any change there? The final question when it comes to China, when it comes to the quality enhancing projects that you see in the automotives and also electronics, what is your visibility in those and how long do you expect that trend to continue? Thank you.
Regarding the 2% organic growth, if I was to guesstimate, because we can control that growth better than the general GDP-related growth, I think that could only increase. The big question mark at the moment is what the global demand in general will be. That's actually one of the positives in the quarter and hopefully in coming quarters. PP&M has its normal price increases, and we haven't really seen any difference in 2015 compared to other years. Then China and the sustainability in electronics and manufacturing, I might have to regret saying this, but we think that we've seen the worst of the weakness that we saw in China. We don't expect China to come back to strong double-digit growth that we've seen over the past 10 years. It's going to be a much slower growth rate going forward.
mid-single-digit growth is what we expect for the immediate future.
Just my final question also regarding the fourth quarter outlook. If you compare, you had 9% organic growth, if I remember correctly, in Q4 last year, facing tough comps. On the other hand, you faced tough comps also in Q3. Despite that, you managed to grow by 6%. I understand we are not going to extrapolate the trends here, but is it fair to assume now going into fourth quarter that the geospatial division will continue to show organic growth increases while the industrial side should point south? Should those even out, would you say? Do you dare to say anything about it?
I don't dare to say anything, but I'm so foolish that I will say the following, and that is, I think what we see is a shift of locomotives inside the group where industrial has been the powerhouse up till now, but it's only natural to assume that industrial will slow down its growth if you look at all the industrial and capital goods companies that have reported. We do see geospatial gearing up, and hopefully geospatial could provide growth where industrial will become slightly softer.
Great. I appreciate it. Thank you.
Thanks.
Thank you. We will now take our next question from Mikael Laséen from Carnegie. Please go ahead.
Yes, hi. A couple of questions from me. The Captivate software that you launched in June, I think, can you say how much that contributed to your growth in the quarter and what was sort of the driver here? Was it the software that drove the customers to upgrade the hardware also? Can you say something about that?
I think it's probably fair to say it was 2% of Geosystems growth. If we say Geosystems is roughly one-third of the group, it would have been slightly less than 1%, 0.6 or something % of the total growth in the quarter. It's definitely so that, yes, it drives hardware sales as well as software sales.
Okay. Just wanted to understand the sales drivers for the Imagery Program going into 2016 and the customer concentration there. If you can expand on that, please.
You have to be a bit more specific. What exactly do you want to know?
Well, as I understand it, one large customer is driving revenues this year. I don't know how much you have penetrated the sales channels that you have added this year, how much they are adding and so on. In terms of the database, how that is, the quality of it, and how far you have come in terms of adding new territories and so on.
We think that in next year we will expand geographically. We've covered Europe and North America once in 2015. There is a demand to do this twice per year. Also, certain customers are asking for 15-centimeter accuracy in large city centers across North America and Europe. That will also drive demand further. This is a very positive and good development for us. We have great aspirations and ambitions when it comes to the Imagery Program to continuously fuel growth.
Okay. Can you say something about the rev share that you have, the model that you're working with?
What do you think then? I'm not sure.
When you have sources of information, and they provide data to their database, and then you sell that in turn to your customers.
Yes. No, we see a continuous pickup in our recruitment of new sources for information. That's absolutely true, and it's going quite well.
Okay, just a final question, if I may. Could you explain the development and say something more about the development for Vero, for example, Veripos, and the recent acquisitions that you made, for example, New River Kinematics, how they perform?
Vero is performing well. It's not growing to the extent that we want it to. We wanted to see double-digit growth, and we haven't seen that in Vero so far. This, of course, has to do with the slowdown in the manufacturing industry. However, we're working on a project to be able to offer Vero in the larger MMS, the metrology software platform that we've recently launched. We think that will provide an uptick for Vero sales. When it comes to Veripos, we're making strides, and we have a lot of positive development on the land-based side, which was the reason why we acquired Veripos. Of course, to position oil rigs is not the best of markets at the moment. The traditional core market for Veripos has been hit in recent quarters.
Okay. Thank you.
Thanks.
Thank you. Our next question now comes from Alexander Virgo from Nomura. Please go ahead.
Thanks very much. Morning, all. A couple of questions, please. The first one, can you just talk a little bit about the thinking around EcoSys? I guess what I'm getting at here is, was the driver your belief that there was a gap in the market for combining the two types of products, so talking to the Enterprise Planning and also your original or existing capabilities? Was it driven more by the fact that you had customers asking for a more combined product, if you like? The second question, just I wondered if you could disaggregate North America for us a little bit, your comments on decelerating manufacturing. I guess that what I'm really getting at here is what customers are saying and what they're doing, with respect to the next, I guess, three to six months, et cetera, would be really helpful.
Lastly, you commented briefly on the strength of the cash flow. I wondered whether you could just talk about, I guess, the sustainability of the improvements that we're seeing there. You mentioned seasonality is stronger in the second half, I just wondered if we can continue to see that improve through the next 12 to 18 months. Thank you.
Thank you. EcoSys, yes, we believe there is a gap in the market, we believe that the penetration for design software is quite high, a lot of industries are using all sorts of CAD tools at the moment. We believe it's really the step beyond design, where you integrate the design process with the manufacturing process. When you do that, you could call it BIM or whatever you want. When you do that, you need strong project controls, software tools, where you control cost, time, and so forth. This was a gap that we saw that we had, with the EcoSys, we can now fill this gap.
Dissecting the North American manufacturing market, I think it's fair to say that the traditional manufacturing industries are slowing down, I'm thinking about capital goods equipment such as large vehicles, heavy vehicles, the automotive sector, traditional manufacturing sector, sort of Midwestern America. We do see good demand from the West Coast, where you have more electronics and software-related businesses. We also see good demand from the East Coast and Seattle, of course, where aerospace is located. I don't know if that helps you in any way.
Mm-hmm. Okay.
Cash flow, we've seen improving cash flow over the past three years. This has to do with our capitalizing of the software where we started this in 2010 and where depreciation and amortization is simply catching up with capitalization and thus improving the underlying cash flow. Well, it doesn't improve the cash flow, it improves the ratio between, well, the cash conversion.
Right. Okay. It's just the continuation of that. Can I just come back on EcoSys? Sorry. Forgive my ignorance, is this not sort of filled by PLM offerings? Is this a guess slightly to the right of that? I'm just trying to understand quite why it's different and why you think there was a gap.
No, it's not filled by PLM, because PLM platforms are typically deployed in, well, the traditional manufacturing industry. Here we're targeting project industries, capital project industries, such as large factories, large construction projects, and so forth.
Oh, I see. Okay. Right. Thank you.
Thanks.
Thank you. We will now take a question from Alex Tout from Deutsche Bank. Please go ahead.
Hi, guys. Thanks for taking the questions. Just drilling in on some of the geographic commentary. You mentioned the B2B and IES overall. I don't know if you mentioned the B2B and IES in China. How's that standing at the moment? Are you seeing any impact from stimulus measures so far by the Chinese government? Secondly, could North America, from a revenue growth rate, turn negative based on the B2B that you've seen and the trends that you're seeing in IES? Just lastly, what do you attribute your strength in Western Europe to outside of the PP&M deal? Is this spending, do you think, related to an intra-Europe recovery? Could it potentially be jeopardized by some of the trends we're seeing in emerging markets? Thanks.
Let me see now. Book-to-bill was positive in China. You had a follow-up question on North America. I can't remember how you jumped from China to North America, but maybe you could remind me.
Just whether the trends that you saw there, in IES and in the traditional manufacturing businesses you described, whether that could result in revenue growth turning negative there over the next quarter or a few.
At the moment, we don't see it turning negative. We're hovering around zero growth at the moment. Western Europe, if we dissect the growth, it's stemming from an uptick in infrastructure and construction activities across Central Europe, Central Western Europe, we should say. We saw the blue-chip companies continuously investing in Europe, the large companies such as Airbus, the automakers, and so forth.
Just whether you think that the trends in China and some of the other emerging markets might put that at risk, or does it seem like some fairly solid internally generated demand there?
I think the construction and infrastructure uptick is definitely internally generated within Europe. Of course, these large companies are dependent on exports to all areas of the world and are not immune by any way by weakness in other parts of the world. That's something we shall see in the quarters to come.
Very clear. Thanks.
Thanks.
Thank you. We now take a question from Gerard Foss from Barclays. Please go ahead.
Hi, thanks for taking my question. An impressive result given the backdrop of the macro market. Just two questions there. First of all, on the AVEVA-Schneider proposed kind of deal, have you seen some kind of disruption from a competitive angle in that space? Secondly, obviously, you had very tough comp from a consumer electronics perspective. How did that part of the business do, and how do you see that trending forward? Thank you.
No, we haven't seen any different behaviors in the market from any competitors, really, in the quarter. Regarding electronics, yes, the comps are becoming tougher and tougher, so it's going to be difficult in the near term to post double-digit growth in electronics. If we look over the longer term, let's say a couple of years into the future, we see more and more electronics manufacturers creating more complicated structures within their products, with rounded edges and so forth. This trend is very beneficial for Hexagon. Wearables is another trend where we benefit greatly from the launch of new products. Of course, short term, it's always hard to beat, but longer term, we still believe that this is a growth segment for us.
Ola, how big is this now for the group?
Well, it's 10% of metrology, and metrology is roughly one-third.
Okay. Perfect. Thank you.
Thanks.
Thank you. We now take a question from Gautam Pillai from Goldman Sachs.
Thanks for taking my question. Ola, specifically on this Daewoo E&C deal win, it seems like quite a large win. Was there a competitive bid here? When do you expect the organic revenue growth to ramp here? Is it fair to assume a nice tailwind to PP&M growth from this particular deal over the next 12 months?
It's definitely going to contribute to PP&M's growth. I don't know actually if this was a competitive bid or not. I can't tell you, but I can find out for you.
Sure. Just on this, the Geosystems product launches. Again, is it fair to assume, is there a potential to drive a major upsell cycle over the next few quarters from this which kind of offsets any sort of macro weaknesses you're seeing from an end market standpoint? Just a related question to that, are there any major product upgrades we should be aware of coming in the next couple of quarters?
You should always be aware of our product upgrades. No. Did you ask about GeoMedia? We're actually phasing out GeoMedia. GeoMedia is a desktop product. I think the next generation GIS products will be in the cloud. We had a teaser launch, we could call it, in Las Vegas. The true launch of Smart M.App, which is the next generation GIS, will be done in Hong Kong in November.
Sure. Finally, on the progress of Smart Solutions in the quarter, can you provide how much Smart Solutions contributed to organic revenue growth in Q3? Also, do you still feel good about the EUR 100 million-EUR 200 million revenue run rate in Smart Solutions in 2016? Do we need to wait until December 4th for an update?
Just to get you there, I say you have to wait till December the 4th.
Yes.
If you're not there in person, you will never know.
Contribution to the quarter for organic growth?
I think it was roughly 1%, but this is becoming more and more difficult to follow up since it's all over the place right now.
Got it. Thanks, Ola.
Thanks.
Thank you. Our next question now from Guillermo Peigneux-Lojo from UBS. Please go ahead.
Hi, good morning everyone. It's Guillermo Peigneux-Lojo from UBS. Yes, a couple of questions. First, regarding mobile assembly in Asia. One of your clients is starting to, or actually planning to move into India and add new 12 plants in India. I was wondering regarding metrology and mobile assembly, whether that could be potentially some additional help to mitigate that growth slowdown. I will do the follow-up later.
Yeah, we hope so.
Okay, thank you. Second is regarding the operating leverage in the quarter. I was a bit maybe underwhelmed by the operating leverage in the quarter, organic-wise. Did you feel the same way, or do you expect that to pick up in Q4?
It was 35%.
Okay.
I think that's what you should if you have a business that is running with a growth margin of 60%, and if the incremental margin should actually be quite high for a company like Hexagon.
Okay. All right. Thank you.
Thanks.
Now we take our next question from Markus Almerud from Kepler. Please go ahead.
Hi, Markus Almerud here from Kepler Cheuvreux. I'd like to come back to China, if I may. I was a little bit surprised about your comments when I saw them, some press comments as well, that you say that you think you've reached some form of bottom. The manufacturing is reviving. You repeated that now on the call. Can you talk a little bit more about that? How much of that is pure industrial demand? How much is just increasing productivity in the factories, et cetera, what gives you confidence to say those kind of things? Thanks.
I don't think it's general demand. I think it's the manufacturing industry is squeezed. They need to find productivity gains. Where we see our biggest growth in China with the traditional industries such as auto and so on, is really on our platform, MMS, where we can enable them to release a lot of productivity gains.
What you refer to is really your exposure to the structural growing segments such as robotics and things like that. That's what you're referring to?
It's not robotics. It's about basically tying together isolated islands of information within our customers' manufacturing, and make them visible so that you can then improve productivity.
Okay. Thank you.
Thanks.
Thank you. We now take a question from Charles Evans Lombe from Egerton. Please go ahead.
Yes. Hi, good afternoon. I was just looking through the results. One, your R&D, you've always been a very R&D intensive organization for obvious reasons. Over the nine months, your R&D expense increased by 16%. In Q3, they were down 7% year-on-year, and I was just trying to understand what had happened.
We did a restructuring in the third quarter of 2014. We posted part of that restructuring in the condensed income statement on page nine, where we can't have non-recurring items.
Okay. That was very clear.
If you see impairments, part of the impairments that we did in the third quarter of 2014, EUR 15.6 million, are actually booked on the research and development expense line. If you back that out, you have a 20% growth in R&D expense.
Okay. Very clear. Ola, since I'm on the line, you bought a chunk of shares about a month or two ago. There was some commentary that you didn't participate in the warrant program. Can you talk about your rationale for that?
Absolutely. It is so that if you are a U.K. resident, which I am, and you participate in a stock option program, the company must pay social charges on your capital gains. If I were to sign up for 2 million warrants, it would have been a substantial social charge for the Hexagon Group, I just felt that was not fair, I bought stock instead.
This was a change to previous warrant programs. Why was there a change, actually?
Do not ask me, ask Osborne.
Okay, fine. It was not previously.
It's a change in the tax legislation.
Okay, fine. It was a response to a change in tax legislation. That's very clear. Thank you very much.
Thank you.
Thank you. We now take a question from Jan Dworski from Handelsbanken. Please go ahead.
Thank you. I have a question related to the book-to-bill in Metrology. Can you talk about the book-to-bill for the entire group and how that compared to last year?
You can't talk about a book-to-bill in a business that is so software-heavy because we have contracts. You can talk about the backlog, you can't really talk about book-to-bill. Doesn't make sense.
For the non-software part, what's the book-to-bill if you look aside from Metrology?
For the non-software part, it was positive because that would be Geosystems, and Geosystems is the remaining hardware part, and they had a positive book-to-bill in the quarter.
Okay. Thank you.
Thanks.
Thank you. As there are no further question at the time, I will hand back to Mr. Ola Rollén for any closing or additional remarks. Thank you.
Thank you. Thank you for listening. I'm completely exhausted. I don't have any further closing remarks. Talk to you next quarter. Thanks. Bye.
Thank you. Ladies and gentlemen, this will conclude today's conference call. Thank you for your participation. You may now disconnect.