Earnings Call: Q2 2013

Aug 8, 2013

Ladies and gentlemen, welcome to the presentation of the Hexagon Interim Report Q2 2013. Today, I'm pleased to present Ulla Rolland, President and CEO. For the first part of this call, all participants will be in listen only mode and afterwards, there'll be a question and answer session. Mr. Rolland, please begin. Thank you. Welcome everyone to this interim report Q2 of 2013. If you turn to Slide number 4, we have an overview of the Q2. We had 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 EMEA 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 2 years is accelerating from more or less and strong demand from primarily Americas and China. On the other hand, after 3 consecutive years of fantastic growth, metrology posts another record quarter, but comparison numbers are getting increasingly tough to beat. PP and M continues its expansion and SG and 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 0.09% dollars quarter on quarter. Slide 5, just a reminder of our seasonality and in profit. Q2 is a strong quarter together with Q4. Q1 and Q3 are seasonally weaker quarters. Slide 6, key numbers for the 2nd quarter. Net sales amounted to 635 $100,000 over $607,100,000 for the same quarter last year. And that is an organic growth of 5% and it's also recorded growth of 5%. And it's 2% currency headwind, 1% acquisitions and then 5% organic growth. Operating earnings amounted to €131,600,000 and that's a 4% growth. And 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 €28,000,000 but EBIT increased by €5,100,000 and that's an incremental margin of 18.2 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 Blum under group costs. And that's €1,000,000 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 3,000,000 in the quarter related to R and D projects. If you back out these $4,000,000 out of the calculation, you will find that the $28,000,000 of incremental sales generated $9,100,000 of incremental EBIT, and 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 122 $900,000 and that is a 9% increase over the corresponding period last year. Net earnings amounted to 99 point $5,000,000 And once again, we approximate the tax rate for the 1st 3 quarters of the year and then we assess it in the 4th quarter. So the tax rate in the quarter was 19%. Net earnings corresponds to an earnings per share of €0.28 in the quarter. Slide 7 highlights the 1st 6 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 1st 6 months. Net earnings grew by 13% as well, and that corresponds to an earnings per share of €0.53 Slide 8, cash flow. Cash flow from operations before changes in working capital amounted to MXN 167,800,000. Paid taxes were slightly lower than the corresponding quarter last year, but I think it's more fair to look at the 1st 6 months when we look at taxes paid, where you have an increase from $26,000,000 to almost $32,000,000 for the 1st 6 months. Interest paid during the 1st 6 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 $145,000,000 compared to 120 point $7,000,000 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 1st 6 months and then an influx of cash from working capital during the remainder of the year. The Q1, as you might remember, was a bit of a disappointment when it comes to the working capital. Cash flow from operations amounted to 144 €400,000 and after ordinary investing activities, our operating cash flow grew by 27% in the Q2 and amounted to €90,500,000 Talking about working capital. If we turn to Slide 9, you can clearly see the disappointment and the so called backlash in the Q1 where we were trading above 20% working capital to sales. We've now managed to reduce that once again, and we're 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 and that has a positive profit impact since we have more cost than revenue in Swiss francs. On the other hand, the U. S. Dollar weakened as well and that has a negative impact on our profit. The Chinese renminbi was slightly positive against the corresponding period last year and 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 6 months. The corresponding numbers for sales was an 6 months. The corresponding numbers for sales was linked to a negative impact of €9,600,000 in the quarter $16,500,000 for the 1st 6 months. Looking ahead at the current exchange rates, and 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 Q3 if currencies remain where they are today. Market Development, Slide 12. North America gained 1 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, has 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 2 percentage points and this is on the back of the deteriorated trading we see in Australia and it represents 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, represents 31% of sales, hardly grew in the quarter. So 1 third of Hexagon is growing at subnormal levels, whilst the rest are actually performing quite well. And then in the quarter, we had the same negative impact from the sequestration on our U. S. Defense sales, roughly €5,500,000 and Australia had a similar number. Those 2 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 2nd quarter, particular 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. And we're 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 Q1 this year. If we turn to North America, our 2nd largest region, we can see that automotive once again and manufacturing are highlighted as well. We have a similar trend in Europe where automotive companies are reducing its spending increase in CMM equipment, whilst manufacturing 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 6 months. If we turn to the various markets, geographical markets and start with EMEA, organic growth for measurement technologies was 1%. Customer demand in EMEA increased in the 2nd 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, but Greece and France were weak as well. We had negative growth in Eastern Europe and Russia. That's not causing us a concern because it's 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 9 months, and it's been a steady improvement. And in the quarter, United States grew at 15%, and this is the best recorded organic growth since the financial crisis in 2,008. South America reported 22% organic growth despite weaker macro environment in Brazil. If we turn to Asia, Asia is an interesting situation. It's 1 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, grew significantly faster. China grew by 9% in the quarter. And what we saw was what I've already alluded to, a shift from engineering companies growing their need for our products into infrastructure Rapidly expanding markets were also markets around the Chinese main market, Malaysia, Indonesia, Philippines, New Zealand, India and Korea. As I've 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 it's trailing at 3% of group sales at the moment. Japan was also a negative factor in the quarter. We suffered from weak macro in the Japanese market, but also from a weakening Japanese gen. And with local competition, it's 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 4 to 5 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 Q2 of 2008. Americas is recovering from the downturn and is now at 125% of the previous peak in 2,008. EMEA has recovered, but since the Q2 of 2011, we've seen very poor growth from the primarily the Western European markets. Segment information. Slide 20, measurement technologies. Net sales amounted to 614 point $2,000,000 and that is a 5% organic growth over the same quarter last year where we recorded €590,300,000 Operating earnings came in at €135,200,000 which is 4% growth. And 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 €23,900,000 but the incremental EBIT contribution was only €5,300,000 And the incremental margin from the increased sales was 22.2 percent, which is a bit poor. And 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 EBIT incremental EBIT would have been 8.3 €1,000,000 which would have corresponded to an incremental margin of 34.7 percent. And that is more in line with what we expect. Slide 21, organic growth. Visualize what we see. We see 2 years of non growth for Geosystems in 2011, 2012, and we begin to see an up turn in Geosystems organic growth. On the other hand, we see the phenomenal growth that Metrology has achieved over 2010, 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 Q3 of 2012. Slide 22. Gross margin came in at 57% for the first half, up 1 percentage point over the corresponding period last year. Operating margin came in at 22% for Measurement Technologies, which is in line with the Q2 of last year. M and 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 Manfra 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 €6,000,000 Slide 26 made a small software acquisition in Switzerland in the quarter AMT Software Service AG which is specialized in so called cadastor software. Slide 27. We finally managed to divest a part of other operations. For you that's followed us, we've been talking about this for the past 7 years. EBP was divested as of July 22. EBP is a company that specialize in manufacturing car body components. In 2012, they contributed with EUR 23,000,000 in sales and a negative EBIT margin of approximately 5%. We will we will conclude a loss capital loss noncash in the Q3 of between €10,000,000 €15,000,000 realizing other operations. And 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 3 Part Transmission, which contributed with EUR 40,000,000 last year and approximately 7% EBIT margin. Slide 28, engineering customer wins. We had a strong quarter for PP and M Software. Petronas and Jacobs placed orders with us. Slide 29, in Brazil, we also received orders for platform constructions with Ecovics 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 and Phoenix Police Department invested with Intergraph in the quarter. Slide 31. Metrology had a good quarter for Portability Products. We launched 2 new products, a new absolute tracker AB402 and the ROAMER gear measurement system. And as a follow-up to that, on Slide 32, we had several customer wins. Premier Composite Technologies, a construction company in Dubai, chose the Leica tracker. Nissan in Spain introduced portable arms in its production. And 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 find a strategic partnership which will be of importance to primarily our Geosystems business, but also for longer term for Intergraph SG and 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 Macarena 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 Varnamo and Livy, 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've talked about China's infrastructure development and we haven't seen an uptick in high speed rail. But 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 7 20 kilometers. And the Municipal Design and Research Institute have decided to standardize on Leica TS-thirty 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 user conference, our annual user conference, Hex We showcased We showcased more than 100 technologies in our Technology Zone, which this year was the size of 3 football fields. We had over 3,500 people in attendance representing something like 72 nationalities. We have more than 400 sessions during these days, and it was a great success. You can actually watch it 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 4 segments. And we're primarily focusing on safety, infrastructure, resource management and segmentation strategy. And 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 mode would probably be the H2O solution, the water management product. That is a safety system, but it's also managing infrastructure and resource management. So it spans over 3 out of the 4 pillars. In connection to Hexagon Live, we also launched Smart Plant Fusion, which is a software product Smart Agriculture, another software product and Smart Assembly, which has to do with assembly of large structures. And you will hear more and more about these products as we evolve in the near future. Slide 42. We launched 2 new software products in connection to Hexagon Live, Smart Plant 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. Smart Plant Fusion is a collaboration where we make Smart plant fusion seamlessly compatible with our Leica scanners. It's a solution to accessing, organizing and managing the so called brownfield plants. If we turn to Slide 43, we find a quote from one of our first customers using Smart Plant Fusion. It's a plant in Australia called Woodside Energy, the largest oil and gas company in Australia. They scanned over 8 months the entire plant and managed to record the plant down to nitty gritty details and then present it in 3 d drawings using Smart Plant Fusion. And 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 own plant. It costs 10% of what it would have normally done, and they did it, as I said, in 8 months. So it's a phenomenal success. So it's to quote the customer. And we have great hope for this combination of products to penetrate the brownfield market for plant information and management. Slide 44. 1 of the big novelties at Hexagon Live were like ANOVA, our new total station, which combines every significant measuring technology that we can think of into one device. And this really opened up the doors for a lot of new applications and synergy solutions that we've been planning for. We see an unprecedented range of for. We see an unprecedented range of applications for anyone working with rich point clouds and 3 d data sets. And it's compatible with all major software packages from day 1. And 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, is really mobile mapping where you combine GPS, laser scanning and imagery technologies to capture the real world in 3 d 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 like a 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 4.25 kilometers of highway in Africa in 9 days, which is a bit of a record from a productivity point of view. And 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 IbeOptics, a UAV manufacturer for small UAVs. And 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 Luxuyi Dam in China, but we also have significant projects in Russia in connection to hydropower. 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. So it's like one big puzzle that needs to fit together precisely and successfully. And 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 Q3. Smart Agriculture is another synergy product that we've 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 censoring, airborne cameras, scanners and machine control as well as GIS software solutions. We'll keep the farmers abreast of crop management and production through digital workflows that we create from geo enabled data. So in summary, if we turn to Slide 51, Hexagon reports another strong quarter, 5% organic growth in the core business, 57% gross margin, 22 percent 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. And we come to the end of this presentation, and I would like to take the opportunity to thank Hakan Allian, 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 September, 2013. And thank you, Hakan, for your contribution over the past 12 years. We're going to miss you. And by that, I open up for a Q and A session. Thank you everyone for listening. Our first question comes from Mr. Gerard Foch from Barclays. Please go ahead. Hi, good afternoon. Thanks for taking my question. Just first of all on the kind of products around kind of Nova. Could you talk us a little bit around kind of the product cycle? I believe the product was sold out in the Q2. How should we expect this to ramp in the 3rd Q4? And then 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, like ANOVA, yes, it's correct. It was sold out in the second quarter. Having said that, we haven'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 €40,000 So that's what we expect from LIONOVA. 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? Just mainly the construction market in Europe and the individual countries. Always been a bit of a kind of glass half full glass half empty between kind of the Western side and the Southern side? And 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. So for the first time in probably 2 years, we can see that you have a very busy line. Hello? Hello. Hi. You have to tell your colleagues to keep quiet. This is a serious earnings call. So what I was going to say was for the first time, you can say that the growth in Northern Europe for construction is but Northern Europe is recovering. And by Northern Europe, I mean Germany, UK and Scandinavia. France is recording 0 growth in construction at the moment. Okay. Thanks very much. Our next question comes from Mr. Erik Kalleran from ABG. Please go ahead. Thank you. Three questions, please. The first one on the weak increment in margin there and the reasons you cited that high cost in metrology that you said had been addressed. Will the measures give should we expect an immediate impact here already from Q3? Or will it come further out in time? And then the 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? And then the final question, just a repeat of what you said on Australia. It was 2% of sales, I think you said, and then the impact there on growth in Asia, if you could repeat that please? Thank you. Yes. If we start with the incremental margin, it's roughly EUR 3,000,000 the cost problem in metrology in the quarter. And what I mean by it's been addressed, it doesn't have an immediate effect because we need to dismantle cost. So you will have most of the impact in the 3rd quarter. But as of the Q4, we'll have 100% impact from the activities we've undertaken. Regarding growth 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 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 3 years. Regarding Australia, Australia used to be 4% of hexagon sales. And with the current downturn in mining, it's now shrinking to 3 Thank you. Thank you. Our next question comes from Mr. Lars Borson from DNB. Please go ahead. Thank you very much. Three questions, Ola, if I could. Just on the cost overruns, I mean, if I look at your operating expenses excluding D and A, excluding associates and one off charges, you've been running at an average of about €175,000,000 in the past 4 quarters or so. And now, with organic growth largely you've been running at with organic growth largely the same in mid single digit. I appreciate the cost overruns in metrology, but is there anything else in there that's worth elaborating on in terms of the OpEx space in Q2? No, it's a very no, not really to simplify the answer. But 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. So they will obviously push up OpEx. But within those numbers, we're looking at the organic growth of growth rate of the costs there. And that's where we've highlighted that we have a EUR 3,000,000 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 €10,000,000 above what they were last year? No, I don't see that because part of it, as I said, is acquisitions. And you can do very little if you add capacity via acquisitions. But the gross margin has to continue to improve. And if you add €1,000,000 from Blum and €3,000,000 from Metrology, you would have seen a margin expansion in the second quarter. Just on Blom second, if I could follow-up on that. I mean the €1,000,000 cost you're seeing in Q2, I'm trying to reconcile that with Blom's net loss in Q2 of less than €1,000,000 in total. Can you remind me is this consolidated with a 1 quarter lag? We have a quarter lag because they report before us, so we can't take their 2nd quarter. That's clear. And just secondly on the investment in Blomat. At 2012 year end, your equity investment was valued at about €9,000,000 And I think you had a €2,500,000 loan receivable outstanding. Can you tell us what you're currently booking the investment at? It's the same number. Okay. That's clear. And 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 you 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. And PPNM is growing. It wasn't double digit. It was strong single digit growth in the Q2, but it jumps up and down and it hooves around 10% per quarter. So your expectation for the second half would be double digit growth, would it? Yes. I mean 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. But it's roughly the same situation as it's been for the past 2, 3 years. Thanks. Our next question comes from Mr. Nizsel Larsen 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, we've had very little impact, the new product releases simply because they were launched mid June and shipments started immediately after that. So we had 15 days of sales. Regarding seasonality, 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. And Leica follows that pattern. Okay. And the most significant product launch you had was the Nova product or is there some Short term, the Leica launches will have the most impact. And by short term, I mean within the next 6 to 9 months. And then I think about the Nova, the Pegasus and so forth. I believe that longer term, if we look a year ahead and so and I think these synergy solutions that we've launched like smart agri H2O and so on will have an even greater impact. Okay. And second question is regarding SG and 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, and we don't see any upturn in that market. What could improve the picture, and this is always difficult to say, is we have 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 Smit from SEB. Please go ahead. Yes. Hello. Good afternoon. Ola, can you just smart H2O and smart agriculture and so on so far? And 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 they if I remember correctly, they sort of summed up to Well, how much do they stack up to so far? Well, how much do they stack up to so far? We booked EUR 3,000,000 in the quarter. And with order intake expected in the second half, we might be able to achieve something between €7,000,000 €10,000,000 by the Q4 this year. Okay. Good. And is some of this going to be sort of invoiced in 2013 as well? Or is that more 14? No. I hope it's going to be invoiced this year. All of it basically? Yes. Yes. Okay, good. And then most of my questions have been answered, but I know that we've put this question forward before, but you mentioned the yen again and the weakness in the yen as a currency. Is there any of dynamic effects when it comes to top cons behavior? Not outside Japan. But obviously, if you're strong in Japan and your competition gets a 20% price disadvantage, you grow even stronger in the Japanese market. We haven't actually seen any aggressive activity outside of Japan. Okay. Good. And the Japanese market for you guys as always has been fairly small, right? Do you have any number to give us? Yes. It was EUR 1,800,000 in I think it represents 2% of sales 2nd quarter Japan. Thanks. Our next question comes from Mr. David Seadebay from Piraeus. Please go ahead. Hi. I just wonder if you could give some more flavor to Geosystems in Europe. Drivers in the Northern markets that you're seeing are a bit better? Any changes in distribution or some users end users are renting equipment, if that has positive for us with companies like Speedy Equipment and so on in the UK setting up professional renting businesses around our equipment. So that's actually positive, the rental development trend. What's driving growth primarily in Northern European markets is very much related to infrastructure. It's road construction, power lines, bridges, rail, tunnels and so forth. Okay. On Automotive, you're right, but this is saw 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 2 speed market. We see the large OEM continue to invest, but their sub suppliers are cutting back. Okay. And how does that fit with your more like 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. So Right. And then non Europe, geosystems outside Europe? Even in Europe, we believe that Geosystems might Europe is Geosystems' largest market. And we are slightly more positive in Geosystems about Europe now than we might have been for the past year. All right. And then just finally, I think you said last quarter that U. S. Sequestration impact is some €5,500,000 negative per quarter. Is that still valid for our expectations? Yes. That's correct. It's roughly 1% on hexagon top line. Okay. Great. Thanks. Thanks. Our next question comes from Mr. Plassel Boer from Goldman Sachs. Please go ahead. Thanks for taking my question. 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. So how much of the perceived deceleration in growth is related to macro? And how much is just more a case of comp? And second question is, you clearly comment in your release that you might the financial leverage is at historically low levels and you might look at some options. Can you elaborate a bit more on that? We'll start with China. China is a bit unique for us because it's the only market where 2 thirds of our businesses with engineering companies like Automotive, Aerospace, Electronics and 1 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 Q2. But the absolute level is still on record levels. So it's a very strong market, but the growth rate is coming down. Having seen that having said that, we see that the other third of the business is accelerating. We had a great 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. And we see an accelerating trend in connection to that. So that's China. Regarding what we're going to do with our deleveraging of the balance sheet, we have to come back to. Any indication, I mean, that it would be in favor of M and A or small dividends or buybacks? And in case of M and 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 and A. Okay. Okay. That's very helpful. Thank you. Thank you. Our next question comes from Mr. Max Friedea from Eric Pemcen Bank. Please go ahead. Hi, Olar. You touched upon this a little bit already, but just if you can elaborate a little bit on the margin development in SG and I in the quarter. You mentioned improved profitability even as the segment reported negative growth. Can you just give us some flavor of the mix? Can you just or if it was just in regards to price increases in the quarter? For SG and I? Yes. Well, the U. S. Sequestration drops 100% through SG and I's P and L, of course. So that was negative. Europe, Western Europe was negative as well. But what was really positive in the quarter for that business was the expansion in North America and South America. And 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. And we believe that that's probably a more stable market than doing business with pure government financed organizations. Okay. So it's more regards to mix I interpreted that. Thank you. Yes. Also can you just maybe give us a hint at least on where the margins are today within SG and I and also your ambition or vision if you may for the second half of twenty thirteen? 2nd half of twenty thirteen. If we simplify, we could say we've improved gross margins within SG and I significantly So gross margins, which is a combination of product cost and pricing in the market, that's not the issue. But now we have under absorption of fixed cost overheads, I. E, OpEx. And the EBIT is But 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. And this 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. Thanks. Thanks. Our next question comes from Mr. Ben Maslin from Merrill Lynch. Please go ahead. Yes. Thank you. Good afternoon, everybody. Just on the Smart Plant 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 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 will it could pick up from here? Thank you. It's much bigger than the greenfield market. So 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. So it's a significant potential. We have great aspirations and great hope for growth for Smart Plant 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. And maybe a couple of follow ups. I mean, when you book something like this, do you book it in Intergraph? Or do you book it in Geosystem? That's the first one. And then secondly, if you take all the different synergy projects together that you've launched or in process, I mean, how do you feel that you're progressing relative to the €100,000,000 to €200,000,000 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, we with Smart Plant 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, H2O deliveries, significant H2O deliveries because they will probably book the order with Integraff, but then Geosystems and metrology will act as sub suppliers. So we'll also grow our intracompany sales. Okay. Got it. Thanks, Ola. Thanks so much. Thank you. There are no further questions on the telephone.