Ladies and gentlemen, welcome to the presentation of the Hexagon interim report Q2 2013. Today, I'm pleased to present Ola Rollén, President and CEO. For the first part of this call, all participants will be in listen-only mode, afterwards, there'll be a question and answer session. Mr. Rollén, please begin.
Thank you. Welcome, everyone, to this interim report second quarter of 2013. If you turn to slide number four, we have an overview of the second quarter. We have recorded an organic growth of 5% in the quarter. The mix was as follows: strong growth in the Americas, both South and North. We can see demand in EMEIA remaining mixed, but the region seems to have stabilized in growth. Primary growth contributor in Asia was once again China. Regarding segments, Geosystems growth for the first time in two years is accelerating from more or less zero growth on the back of newly launched products and strong demand from primarily Americas and China. On the other hand, after three consecutive years of fantastic growth, Metrology posts another record quarter, but comparison numbers are getting increasingly tough to beat.
PP&M continues its expansion, SG&I continues to suffer from sequestration in the U.S. defense budget, but also governmental budget cutbacks in Europe. Overall, strong profitability growth margins of 57% and EBIT margins of 22% in measurement technologies. Earnings grew by 9% quarter-on-quarter. Slide five, just a reminder of our seasonality in profit. Q2 is a strong quarter together with Q4. Q1 and Q3 are seasonally weaker quarters. Slide six, key numbers for the second quarter. Net sales amounted to EUR 635.1 million, over EUR 607.1 million for the same quarter last year. That is an organic growth of 5%, it's also recorded growth of 5%. It's 2% currency headwind, 1% acquisitions, 5% organic growth. Operating earnings amounted to EUR 131.6 million, that's a 4% growth.
If we analyze operating earnings, you could say it's somewhat of a disappointment when you look at the incremental margin. We have sales increases of EUR 28 million, EBIT increased by EUR 5.1 million, that's an incremental margin of 18.2%, i.e., slightly lower than group average. If we look at the details of the cost structure in the quarter, we can see that we've consolidated our share of the associated company, Blom, under group costs. That's EUR 1 million of negative results that we had to consolidate in the quarter. We also see that Metrology has cost overruns that I will come back to of approximately EUR 3 million in the quarter related to R&D projects.
If you back out these EUR 4 million out of the calculation, you will find that the EUR 28 million of incremental sales generated EUR 9.1 million of incremental EBIT. That corresponds to an incremental EBIT margin of 32.5%, which is more in line with what we expect from incremental sales. Earnings before taxes came in at EUR 122.9 million. That is a 9% increase over the corresponding period last year. Net earnings amounted to EUR 99.5 million. Once again, we approximate the tax rate for the first three quarters of the year. Then we assess it in the fourth quarter. The tax rate in the quarter was 19%. Net earnings corresponds to an earnings per share of EUR 0.28 in the quarter. Slide seven highlights the first six months, where net sales grew by 5% organic growth, operating earnings 7%, corresponds to an EBIT margin of 20.7%.
Earnings before taxes grew by 13% for the first six months. Net earnings grew by 13% as well. That corresponds to an earnings per share of EUR 0.53. Slide eight, cash flow. Cash flow from operations before changes in working capital amounted to EUR 167.8 million. Paid taxes were slightly lower than the corresponding quarter last year, but I think it is more fair to look at the first six months when we look at taxes paid, where you have an increase from EUR 26 million to almost EUR 32 million for the first six months. Interest paid during the first six months is also more relevant, where you can see our shrinking financial net, which has to do with the amortization of net debt. Cash flow from operations amounted to EUR 145 million, compared to EUR 120.7 million for the same period last year.
Changes in working capital is now back and more in line with what one should expect. We expect an outflow of cash in the first six months. Then an influx of cash from working capital during the remainder of the year. The first quarter, as you might remember, was a bit of a disappointment when it comes to the working capital. Cash flow from operations amounted to EUR 144.4 million. After ordinary investing activities, our operating cash flow grew by 27% in the second quarter and amounted to EUR 90.5 million. Talking about working capital, if we turn to slide nine, you can clearly see the disappointment and the so-called backlash in the first quarter where we were trading above 20% working capital to sales.
We have now managed to reduce that once again, and we are more in line with our long-term operating plan to reduce it to below 20% of sales. Slide 10, currency effects in the quarter. The Swiss franc weakened against the euro. That has a positive profit impact since we have more cost than revenue in Swiss francs. On the other hand, the US dollar weakened as well. That has a negative impact on our profit. The Chinese renminbi was slightly positive against the corresponding period last year. We had significant movements in the Japanese yen and the Brazilian reais during the quarter compared to last year. All in all, this resulted in a negative EBIT impact of EUR 2.1 million in the quarter, and EUR 3.4 million for the first six months.
The corresponding numbers for sales was a negative impact of EUR 9.6 million in the quarter and EUR 16.5 million for the first six months. Looking ahead at the current exchange rates, we must remember that the euro was weak against primarily the U.S. dollar this time last year, we see a negative FX effect of roughly 4% in the third quarter if currencies remain where they are today. Market development, slide 12. North America gained one percentage point of the total mix and represent 28% of our business today. Western Europe, on the other hand, lost 1% and represent 31% of sales today. South America, still 4% of sales. EMEA, excluding Western Europe, gained 1% and represent 9% of total sales today. China also gained 1% on the back of its growth in the quarter and represents 16% of our sales today.
Asia, excluding China, lost two percentage points, this is on the back of the deteriorated trading we see in Australia, it represent 12% of our total sales today. If we analyze the organic growth on slide 13, we can see that the major contributors to growth were North America that contributed with 50% of the total growth. China contributed with another 25%. South America was a big contribution as well. East Asia, led by expansion in Korea and Middle East, were big contributors to growth as well. Western Europe, which you saw on the previous slide, represent 31% of sales, hardly grew in the quarter. One third of Hexagon is growing at subnormal levels, whilst the rest are actually performing quite well. Then in the quarter, we had the same negative impact from the U.S. sequestration on our U.S. defense sales, roughly EUR 5.5 million.
Australia had a similar number. Those two have an impact of minus 2% organic growth on the group numbers, whilst the rest of the organization is growing at an average of 7%, which is 1% higher than what we saw in Q1. Slide 14. Developments in the second quarter per segment and per geographic region. If we look at the major regions and changes in the region, we can see that automotive and manufacturing have changes in the quarter. Manufacturing, we see a slight uptick, whilst automotive is going from a blue arrow to yellow arrow. We've seen significant investment projects from the major automotive players in the European market. They still invest, but not at the same rate as we saw by the end of last year and the first quarter this year.
If we turn to North America, our second largest region, we can see that automotive once again, manufacturing are highlighted as well. We have a similar trend as in Europe, where automotive companies are reducing its spending increase in CMM equipment, whilst general manufacturing is actually picking up in North America. If we move to China, similar trend in automotive, still growing automotive investments, but at a much lower rate. Manufacturing is also slowing down. The positive in China that we saw in the quarter was that infrastructure grew at a faster rate than it's done over the previous six months. If we turn to the various geographical markets and start with EMEA, organic growth for measurement technologies was 1%. Customer demand in EMEA increased in the second quarter.
Improved activity levels were primarily in Northern Europe, i.e., U.K., Germany, and the Nordic countries, but still weak in south, primarily Italy. Greece and France were weak as well. We had negative growth in Eastern Europe and Russia. That is not causing us a concern because it is simply tough comparison numbers where we had a huge airborne sensor order to Russia this time last year. Middle East continue to invest and grow. Slide 16, Americas. Americas was the star in the quarter, 10% organic growth. Apart from defense-related products, all market segments are now growing in NAFTA, particularly infrastructure-related products, but also aerospace, automotive, and residential housing products. Demand in United States has improved gradually over the past nine months, and it has been a steady improvement. In the quarter, United States grew at 15%, and this is the best recorded organic growth since the financial crisis in 2008.
South America reported 22% organic growth despite weaker macro environment in Brazil. If we turn to Asia is in an interesting situation. It is one third of group sales. Australia represents 3% of group sales, but Australia is actually causing Asia a 6% decline in organic growth. Asia, excluding Australia, will grow significantly faster. China grew by 9% in the quarter, and what we saw was what I have already alluded to, a shift from engineering companies growing their need for our products into infrastructure and construction companies buying our products. Rapidly expanding markets were also markets around the Chinese main market, Malaysia, Indonesia, Philippines, New Zealand, India, and Korea. As I have already stated, growth was held back by primarily the downturn in the mining sector in Australia, which used to be 4% of Hexagon sales, but is trailing at 3% of group sales at the moment.
Japan was also a negative factor in the quarter. We suffered from weak macro in our markets, in the Japanese market, also from a weakening Japanese yen. It is tough to compensate for the 22% drop in the Japanese yen. If we turn to slide 18, you have more of a long-term overview, pre the financial crisis and how these regions have developed over the past four to five years. We can see that Asia continued to grow and expand and is now at a bit more than 150% of the previous peak in the second quarter of 2008. Americas is recovering from the downturn and is now at 125% of the previous peak in 2008. EMEA has recovered, since the second quarter of 2011, we have seen very poor growth from primarily the Western European markets. Segment information, slide 20, measurement technologies.
Net sales amounted to EUR 614.2 million, that is a 5% organic growth over the same quarter last year, where we recorded EUR 590.3 million. Operating earnings came in at EUR 135.2 million, which is a 4% growth. If we now come back to the incremental margin and do a similar calculation as we did on the group numbers, we will see that sales increased by EUR 23.9 million, the incremental EBIT contribution was only EUR 5.3 million. The incremental margin from the increased sales was 22.2%, which is a bit poor. That has to do with OPEX in the Metrology division, where we had project cost overruns. That has been addressed. If we had addressed that in the quarter, the incremental EBIT would have been EUR 8.3 million, which would have corresponded to an incremental margin of 34.7%, that is more in line with what we expect.
Slide 21, organic growth visualize what we see. We see two years of non-growth for Geosystems in 2011, 2012, and we begin to see an upturn in Geosystems organic growth. On the other hand, we see the phenomenal growth that Metrology has achieved over 2010 to 2013, and it's now coming back to more normal long-term levels of growth. All in all, group numbers haven't changed much since the third quarter of 2012. Slide 22, growth margin came in at 57% for the first half, up one percentage point over the corresponding period last year. Operating margin came in at 22% for Measurement Technologies, which is in line with the second quarter of last year. M&A orders and product releases. If we move to slide 25, we made an acquisition in Brazil during the quarter.
It's a company called MAMFRA that has been a distributor for Leica Geosystems for nearly 30 years. MAMFRA has a strong installed base of rental equipment, renting out surveying equipment in the Brazilian market. We expect a contribution to sales of roughly EUR 6 million. Slide 26. Made a small software acquisition in Switzerland in the quarter, a/m/t software service ag, which is specialized in so-called cadastre software. Slide 27. We finally managed to divest a part of other operations. For you that followed us, we've been talking about this for the past seven years. EBP was divested as of July 22nd. EBP is a company that specialized in manufacturing car body components. In 2012, they contributed with EUR 23 million in sales and a negative EBIT margin of approximately 5%.
We will conclude a capital loss, non-cash, in the third quarter of between EUR 10 million and EUR 15 million realizing other operations. The hope is that we can, by the end of this year, conclude the disposal of the entire other operations. The remaining asset within other operations is now Swepart Transmission, which contributed with EUR 40 million last year and approximately 7% EBIT margin. Slide 28, engineering customer wins. We had a strong quarter for PPM Software, PETRONAS and Jacobs placed orders with us. Slide 29. In Brazil, we also received orders for platform constructions with Ecovix and development of mining activities with Vale in Brazil. Slide 30. We got several public safety contracts in Americas and in Middle East. We won the order for the 2013 FIFA Confederations Cup in Brazil, which is a warming up cup in front of the World Cup next year.
The Ministry of Health in Kuwait also placed an order, Phoenix Police Department invested with Intergraph in the quarter. Slide 31. Metrology had a good quarter for portability products. We launched two new products, a new Absolute Tracker AT402 and the ROMER gear measurement system. As a follow-up to that, on slide 32, we had several customer wins. Premier Composite Technologies, a construction company in Dubai, choose the Leica tracker. Nissan in Spain introduced portable arms in its production, Gestamp in Germany also automated using our new white light technologies. We had several follow-up orders in North America in connection to the booming aerospace industry in the continent. Slide 33. We signed a strategic partnership which will be of importance to primarily our Geosystems business, but also for longer term for Intergraph SG&I.
An agreement with Russia's Roskartografia, which is responsible for the official mapping of Russia and documentation to plan for natural resources and infrastructure development in the country. Slide 34. We measured the Maracanã Stadium in Rio in front of the World Cup championships in 2014. It's being refurbished. Slide 35. There was an important cable route laid in Sweden between Värnamo and Leby, 185 kilometers of cable laid into ground, and Skanska, leading Swedish construction group, used our machine control equipment to lay the cable. Slide 36. Mining might be shrinking in Australia, but in South America, we had significant orders from Chile and Mexico in the quarter. Slide 37. We talked about China's infrastructure development, and we haven't seen an uptick in high-speed rail. China is building out its underground network in major cities. So we got an order from Shenzhen for their subway.
This project actually started in 1999 and is expected to finish in 2020. All in all, they're building 20 subway lines totaling 720 kilometers. The Municipal Design and Research Institute have decided to standardize on Leica TS30 systems that will sit in the tunnels, monitoring the rail and tunnel structure. Now I'd like to talk about our major event in the year, our annual user conference, Hexagon Live, and highlights from that conference. If we turn to Slide 39, the conference was held between the 3rd and the 6th of June this year. We showcased more than 100 technologies in our technology zone, which this year was the size of three football teams. We had over 3,500 people in attendance, representing something like 72 nationalities. We held more than 400 sessions during these days, and it was a great success. You can actually watch the webcast on our website.
Slide 40. I'd like to talk a bit about our segmentation strategy that we launched in connection to our user conference. We're gradually introducing synergy solutions, products, and systems by drawing and pulling technologies from our four segments. We're primarily focusing on safety, infrastructure, resource management, and manufacturing. These are the four pillars when we now go forward with our market segmentation strategy. If we turn to Slide 41, you can see that we've introduced several new solutions for customers in these four pillars. The most known would probably be the H2O solution, the water management product. That is the safety system, but it's also managing infrastructure and resource management. So it spans over three out of the four pillars.
In connection to Hexagon Live, we also launched SmartPlant Fusion, which is a software product, Smart Agriculture, another software product, and Smart Assembly, which has to do with assembly of large structures. You will hear more and more about these products as we evolve in the near future. Slide 42. We launched two new software products in connection to Hexagon Live. SmartPlant Cloud, which is a cloud computing software where you can do the computing in the cloud and then basically distribute the computed algorithms into portable devices. SmartPlant Fusion is a collaboration where we make SmartPlant Fusion seamlessly compatible with our Leica scanners. It's a solution to accessing, organizing, and managing a so-called brownfield plant. If we turn to Slide 43, we find a quote from one of our first customers using SmartPlant Fusion.
It's a plant in Australia called Woodside Energy, the largest oil and gas company in Australia. They scanned, over eight months, the entire plant and managed to record the plant down to nitty-gritty details and then present it in 3D drawings using SmartPlant Fusion. They've now been able to capture 750,000 documents and record that so that they now have a platform to do productivity developments in this old plant. It costs 10% of what it would have normally done, and they did it, as I said, in eight months. It's a phenomenal success. It's to quote the customer. We have great hopes for this combination of products to penetrate the brownfield market for plant information and management. Slide 44.
One of the big novelties at Hexagon Live were Leica Nova, our new total station, which combines every significant measuring technology that we can think of into one device. This really open up the doors for a lot of new applications and synergy solutions that we've been planning for. We see an unprecedented range of applications for anyone working with rich point clouds and 3D data sets. It's compatible with all major software packages from day one. Of course, it has seamless integration with Hexagon's own software packages. Slide 45. We made a small acquisition that we integrated into another Leica product that we showcased at Hexagon Live.
In layman's terms, this is called the Google car, but what it is really mobile mapping where you combine GPS, laser scanning, and imagery technologies to capture the real world in 3D using a car, a train, or something that is terrestrial and moves. It's a total solution, hardware and software, and it's from one single supplier, Leica Geosystems, and you can use Hexagon's existing terrestrial scanners, so you can make the scanners that you've already bought mobile. We have already successfully mapped 425 kilometers of highway in Africa in nine days, which is a bit of a record from a productivity point of view. We've also started shipping the first system to the Chinese Highway Safety Institute that would like to standardize on this technology. Slide 46.
We also introduced a partnership with IB/E Optics, a UAV manufacturer for small UAVs. We see significant potential to introduce this mobile platform in the surveying, mapping area, and it's an integral part of what we talked about, which we call dynamic GIS development. Slide 47. We're starting to gain traction with the first synergy project that we launched, the Smart H2O solution. We now have commercial deliveries, first to the Lus hui Dam in China. We also have significant projects in Russia in connection to hydro power. Slide 48. Another product that we launched in connection to Hexagon Live was Smart Assembly, which is about assembling large structures in sometimes remote locations. Think of large sections that are construed in different locations under different conditions but are supposed to match once they come together at the site of assembly.
It's like one big puzzle that needs to fit together precisely and successfully. With Smart Assembly, suppliers can receive real-time information that allows them to do a virtual assembly before you start spending money on shipping these large structures around the world. The first order is already received, and we expect follow-up orders for this product in the third quarter. Smart Agriculture is another synergy product that we talked about, and we introduced that for the first time at the technology expo at Hexagon Live. The first orders have already been received in South America. It's a comprehensive web-based software solution that optimize the utilization of land, water, and fertilizers, drawing on all our technologies from GPS, image sensoring, airborne cameras, scanners, and machine control, as well as GIS software solutions.
We keep the farmers abreast of crop management and production through digital workflows that we create from geo-enabled data. In summary, if we turn to slide 51, Hexagon reports another strong quarter, 5% organic growth in the core business, 57% growth margin, 22% EBIT. 9% improvement year-on-year in net earnings, strong cash flow that generated enough cash so that we continue to strengthen our balance sheet, opening up for opportunities for expansion going forward. We come to the end of this presentation, and I would like to take the opportunity to thank Håkan Ahlén, Hexagon's Executive Vice President, that has decided to retire from his position after 12 years of service. For you that have followed us over this period of time, you know that he started as CFO, and then as Executive Vice President. He will leave the company on the 30th of September, 2013.
Thank you, Håkan, for your contribution over the past 12 years. We're going to miss you. By that, I open up for a Q&A session. Thank you everyone for listening.
Ladies and gentlemen, if you have a question for the speaker, please press 01 on your telephone keypad. Our first question comes from Mr. Gerard Foch from Barclays. Please go ahead.
Hi. Good afternoon. Thanks for taking my question. First of all, on the kind of new products around Nova. Could you talk us a little bit around the product cycle? I believe the product was sold out in the second quarter. How should we expect this to ramp in the third and fourth quarter? Secondly, on Europe, could you perhaps give us an update on the kind of construction and surveillance market? Thank you.
If we take the first question, Leica Nova, yes, it's correct, it was sold out in the second quarter. Having said that, we hadn't ramped up production volumes to where we expect it to be. We expect to sell approximately 1,000 units this year, and the average price is EUR 40,000, so that's what we expect from Leica Nova. I did not understand what you mean by construction and surveillance market, so maybe you want to develop that second question a bit. Which market do you mean in Europe?
Mainly the construction market in Europe, in the individual countries, there's always been a bit of a glass half full, glass half empty between kind of the western side and the southern side. Maybe you could give us a bit of an update, what you start to see in Southern Europe at the moment.
I absolutely think you're right when you say half full, half empty. Unfortunately, Southern Europe is half empty and Northern Europe is half full, and we can say that the water level in the half full glass outgrew the very empty level in the southern glass. For the first time in probably two years, we can see. You have a very busy line. Hello?
Hello. Hi.
You have to tell your colleagues to keep quiet. This is a serious earnings call.
I'll instruct them.
What I was going to say was, for the first time, you can say that the growth in Northern Europe for construction is starting to outweigh the decline in Southern Europe. Southern Europe is still declining, but there isn't much left to shrink. Northern Europe is recovering, and by Northern Europe, I mean Germany, U.K., and Scandinavia. France is recording zero growth in construction at the moment.
Okay. Thank you very much.
Our next question-
Thank you.
Our next question comes from Mr. Erik Golrang from ABG. Please go ahead.
Thank you. Three questions, please. The first one on the weak incremental margin there, and the reasons you cited, high cost in Metrology that you said had been addressed. Should we expect an immediate impact here already from Q3, or will it come further out in time? A second question on Metrology and what you think about growth rates here, given what you said you're seeing with your customers there on the automotive side. Is Q2 sort of a low point in growth rates, or are you signaling that you think the bottom could be further down? The final question, just to repeat on what you said on Australia, it was 2% of sales, I think you said, the impact there on growth in Asia. If you could repeat that, please. Thank you.
If we start with the incremental margin, it's roughly EUR 3 million, the cost problem in Metrology in the quarter. What I mean by it's been addressed, it doesn't have an immediate effect because we need to dismantle cost. You will have most of the impact in the third quarter, but as of the fourth quarter, we'll have 100% impact from the activities we've undertaken. Regarding growth rates for Metrology, we believe Metrology to continue to grow, but you can't expect the very strong growth that we've seen in the past. Long term, we've said that Metrology growth slightly below the long-term group average, which is 8%. Short term, it could be lower simply because we've had such a massive development and increase in sales over the past three years.
Regarding Australia used to be 4% of Hexagon sales, and with the current downturn in mining, it's now shrinking to 3%. Australia itself is shrinking by 25%.
Thank you.
Thank you.
Our next question comes from Mr. Lars Boisson from DNB. Please go ahead.
Thank you very much. Three questions all, if I could. On the cost overruns. If I look at your operating expenses, excluding D&A, excluding associates and one-off charges, you've been running at an average of about EUR 175 million in the past four quarters or so, and now you're jumping up to about EUR 190 million. That's some EUR 15 million above the level you've been running at with organic growth largely the same in mid-single digit. I appreciate the cost overruns in Metrology, is there anything else in there that's worth elaborating on in terms of the OpEx base in Q2?
No, not really to simplify the answer. If you want to dissect the answer a bit, you could say it's a mixed bag of acquired dealers where you can't expect incremental margins that we talk about because you buy a dealership and then you integrate it. They will obviously push up OpEx. Within those numbers, we're looking at the organic growth of entities that we had corresponding period last year, and we try to look at the growth rate of the cost there. That's where we've highlighted that we have a EUR 3 million per quarter cost problem in Metrology.
Right. I guess I'm struggling, as most others perhaps are, to see the margin expansion year-over-year coming in the second half of this year, if indeed your operating expenses are running some EUR 10 million above what they were last year.
No, I don't see that because part of it, as I said, is acquisitions. You can do very little if you add capacity via acquisitions. The gross margin has to continue to improve. If you add EUR 1 million from Blom and EUR 3 million from Metrology, you would have seen a margin expansion in the second quarter.
Just on Blom, secondly, if I could follow up on that. The EUR 1 million cost you're seeing in Q2, I'm trying to reconcile that with Blom's net loss in Q2 of less than a million EUR in less total. Can you remind me, is this consolidated with a one-quarter lag?
We have a quarter lag because they report before us, so we can't take their second quarter.
That's clear. Secondly, on the investment in Blom. At 2012 year-end, your equity investment was valued at about EUR 9 million, and I think you had a two and a half million loan receivable outstanding. Can you tell us what you're currently booking the investment at?
It's the same number.
Okay. That's clear. Thirdly, if I just could, on organic growth in PPM, can you give us a sense for what that was in Q2, and maybe give us a sense for whether the Las Vegas conference and related product launches had any, should say, adverse impact on sales in the first half as perhaps some customers decided to wait with spending on new products post the launch?
We don't think we had any negative impact from the Las Vegas conference. Not really. PPM is growing. It wasn't double-digit. It was strong single-digit growth in the second quarter, but it jumps up and down, and it hoovers around 10% per quarter.
Your expectation for the second half would be double-digit growth, would it?
Yeah. Nothing, no change, really. We have a lot of projects. If we land them, it could be more. If we don't land them, it will be less. It's roughly the same situation as it's been for the past two, three years.
Thanks.
Thank you.
Our next question comes from Mr. Mikael Laséen from Carnegie. Please go ahead.
Yes, thank you. Hi. I have a couple of questions also. First of all, Geosystems, if you could say something about the seasonality of that business and how much of the new product releases that affected Q2 already. That's the first part.
If we start with Q2, it had very little impact, the new product releases, simply because they were launched mid-June and shipments started immediately after that. We had 15 days of sales.
Okay.
Regarding seasonality, because Geosystems doesn't differ much from the entire Hexagon group. Slightly stronger second half than first half. Some years we have 49% of sales in the first half, 51%. Some years it's been 48% of sales in the first half and 52% in the second half, Leica follows that pattern.
Okay. The most significant product launch you had was the Nova product, or is there something else?
Short term, the Leica launches will have the most impact, I mean within the next six to nine months. Then I think about the Nova, the Pegasus, and so forth. I believe that longer term, if we look a year ahead and so on, I think these synergy solutions that we've launched, like Smart Agri H2O and so on, will have an even greater impact.
Okay. Second question is regarding SG&I, if you could talk about tender activity and profitability, perhaps what you can do there and the outlook for the federal services government side for the second half.
Well, we believe roughly the same pattern will continue as we've seen in the first half with very strong growth. We recorded 12% growth from the civil markets in the Americas, which is our home market for these systems. The sequestration, and in connection to that, the U.S. defense cutbacks will continue during the remainder of this year, we don't see any upturn in that market. What could improve the picture, and this is always difficult to say, is we participate in a few tenders right now, very large projects, and if we could land one of those, that would, of course, improve the situation quite a bit.
Okay, thank you.
Thank you.
Our next question comes from Mr. Daniel Schmidt from SEB. Please go ahead.
Yes, hello, good afternoon. Ola, can you just remind us or update us on where we are in terms of what the top-line synergies that we've talked about, and you recently mentioned again in terms of Smart H2O and Smart Agriculture, and so on so far?
What do you mean by update?
I know that you've stated historically that you took some orders towards the end of last year, and if I remember correctly, they summed up to something like EUR 1 million, and since then you've had a few more launches in other areas of these top-line synergies. How much do they stack up to so far?
We booked EUR 3 million in the quarter, and with order intake expected in the second half, we might be able to achieve something between EUR 7 million and EUR 10 million by the fourth quarter this year.
Okay, good. Is some of this going to be invoiced in 2013 as well, or is that more 2014?
I hope it's going to be invoiced this year.
All of it, basically.
Yeah.
Yes. Okay, good. Then most of my questions have been answered, I know that we put this question forward before, You mentioned the yen again and the weakness in the yen as a currency. Is there any sort of dynamic effects when it comes to Topcon's behavior?
Not outside Japan, obviously if you're strong in Japan and your competition gets 20% price disadvantage, you grow even stronger in the Japanese market. We haven't actually seen any aggressive activity outside of Japan.
Okay, good. The Japanese market for you guys has always been fairly small, right? Do you have any number to give us?
Yeah. It was EUR 1.8 million. I think it represents 2% of sales.
Okay
second quarter, Japan.
Thank you.
Thanks.
I remind you that if you'd like to ask a question, please press zero one on your telephone keypad. Our next question comes from Mr. David Cederberg from Pareto. Please go ahead.
Hi, I just wonder if you could give us some more flavor to Geosystems in Europe, drivers in the northern markets that you're saying are a bit better. Any changes in distribution or some end users are renting equipment, if that has any impact or what you're seeing?
No, as a matter of fact, that's been a positive for us with companies like Speedy Hire and so on in the U.K., setting up professional renting businesses around our equipment. That's actually positive, the rental development. What's driving growth primarily in northern European markets is very much related to infrastructure. It's road constructions, power lines, bridges, rail tunnels and so forth.
Okay. On automotive you write that this is a sequential decline in Q2. Is that something that we should expect, a further sequential decline into the second half?
It's difficult to say because we call it a two-speed market. We see the large OEM continue to invest, but their sub-suppliers are cutting back.
Okay, how does that fit with your more positive H2 outlook as you see continued improvements?
We believe that basically Geosystems will continue to improve whilst Metrology might decelerate a bit, and Metrology is smaller than Geosystems.
Right. Non-Europe, Geosystems outside Europe.
Even in Europe, we believe that Geosystems Europe is Geosystems largest market, and we're slightly more positive in Geosystems about Europe now than we might have been for the past year.
All right. Then just finally, I think you said last quarter that U.S. sequestration impact is some EUR 5.5 million negative per quarter. Is that still valid for our expectations?
Yep.
All right.
That's correct.
All right.
It's roughly 1% on Hexagon top line.
Okay, great. Thanks.
Thanks.
Our next question comes from Mr. Prasad Borra from Goldman Sachs. Please go ahead.
Thanks for taking my question. A couple, if I may. Firstly, on China, can you elaborate a bit more on what you're seeing with regards to general macro? You mentioned the comps are tough in automotive and related spaces, but you're seeing demand in infrastructure. How much of the perceived deceleration in growth is related to macro, and how much is it just more a case of comps? Second question is, you clearly comment in your release that the financial leverage is at historically low levels, and you might look at some options. Can you elaborate a bit more on that?
If we start with China is a bit unique for us because it's the only market where two-thirds of our business is with engineering companies like automotive, aerospace, electronics, and one-third is infrastructure, i.e., Intergraph and Geosystems. What we've seen in China so far is a slowing down of investment in our metrology equipment in relation to automotive startups, new plants, new models, and so on in the second quarter. The absolute level is still on record levels, so it's a very strong market, but the growth rate is coming down. Having said that, we see that the other third of the business is accelerating. We had significant growth when we had high-speed rail, then we lost high-speed rail, and now we see other activities coming back. Now it's primarily underground subway connections, it's roads, it's ports, it's airports, and so on, where we're involved.
We see an accelerating trend in connection to that. That's China. Regarding what we're going to do with our de-leveraging of the balance sheet, we have to come back to.
Yeah. I know. Any indication, that it would be in favor of M&A or small dividends or buybacks, and in case of M&A, is there a size limit you're putting yourself to, or you're pretty much open to expand?
No, when we talk expansion, we usually mean M&A.
Okay. That's very helpful. Thank you.
Thank you.
Our next question comes from Mr. Max Frida from Erik Penser Bank. Please go ahead.
Hi, Ola. You touched upon this a little bit already, but just if you can elaborate a little bit on the margin development in SG&I in the quarter. You mentioned an improved profitability even as the segment reported negative growth. Can you just give us some flavor of the mix or if it was just in regards to price increases in the quarter?
For SG&I?
Yes.
The U.S. sequestration drops 100% through SG&I's P&L, of course, that was negative. Western Europe was negative as well. What was really positive in the quarter for that business was the expansion in North America and South America. What we're beginning to do is we're gaining market share with utilities, i.e., electric utilities and telecoms, water, power companies, and so forth. We believe that that's probably a more stable market than doing business with pure government-financed organizations.
It's more regards to mix, I interpreted that. Thanks.
Yeah.
Can you just maybe give us a hint at least on where the margins are today within SG&I and also your ambition or vision, if you may, for the second half of 2013?
Second half of 2013. If we simplify, we could say we've improved gross margins within SG&I significantly than we did the restructuring in the first quarter of 2012. They used to be in mid-40s, and now they're in the mid-50s. Gross margins , which is a combination of product cost and pricing in the market, that's not the issue. Now we have under-absorption of fixed cost overheads, i.e., OpEx. The EBIT is roughly low teens, 13% at the moment. Our target is still to bring it up to group average. In order to do that, you can't do it with cost-cutting alone. You need revenue to start improving, and we're working very hard on that.
Okay. Thank you. Just a question, kind of completely off topic, but now you started to divest the other operations, and in regards to your segment strategy, does this in any way include in the future to disclose the profitability divided per segment?
You never know. We'll see.
Okay. I'll take that. Thank you.
Thanks.
Our next question comes from Mr. Ben Maslen from Merrill Lynch. Please go ahead.
Yeah, thank you. Good afternoon, everybody. Ola, just on SmartPlant Fusion and the very big savings you mentioned for Woodside, do you have any sense of how big the market is to model these brownfield facilities? I think you talked around about it a bit maybe when you did the Intergraph deal, I can't remember. Just maybe on the size of that market and how fast you think it could pick up from here. Thank you.
It's much bigger than the greenfield market.
Okay.
It's a significantly larger potential than what we've been doing up till now. Of course, it's less complicated because what you do is you document an already existing plant, whilst when you do a greenfield project, you obviously commission a new plant and the nitty-gritty details that go together with that. It's a significant potential. We have great aspirations and great hope for growth for SmartPlant Fusion, especially in connection with the new sensors we've now launched with the P20 scanner, the Leica Nova scanner, and the connectivity that we've created between the software and the hardware.
Thanks. Maybe a couple follow-ups. When you book something like this, do you book it in Intergraph, or do you book it in Geosystems? That's the first one. Secondly, if you take all the different synergy projects together that you've launched or in process, how do you feel that you're progressing relative to the EUR 100 million to EUR 200 million target that you laid out for 2015?
I think we're still on target. It's always frustrating with new products because you always have bugs and so on when you launch it, but I feel fairly good with what we've done, and I think we're all proud of what we presented at the Las Vegas show. Where we book it is basically, with SmartPlant Fusion, it's easy to tell you where we book it because we book the software sales with Intergraph and the hardware sales with our Geosystems. It's going to be increasingly difficult as we enter into, let's say, Smart H2O deliveries, significant Smart H2O deliveries, because they will probably book the order with Intergraph, but then Geosystems and Metrology will act as sub-suppliers. We'll also grow our intracompany sales.
Okay. Got it. All right. Thanks, Ola. Thanks so much.
Thank you.
There are no further questions on the telephone.