Please begin.
Thank you. Welcome, everyone, to this interim report earnings call for the second quarter 2012. If we start with slide number four, overview second quarter 2012. We can only state the recorded growth was 12%, organic growth 6%, and I think the overriding theme this quarter is really currency movements. All geographic regions, however, display organic growth in net sales, and we have noted an acceleration in Asia and South America in the second quarter as compared to the first quarter. We've also seen more normalized growth in United States compared to previous quarters. Europe is still very much a two-speed story, with growth coming primarily from northern and eastern parts of the region, whilst the southern part of Europe still is very much in recession.
Geosystems is reporting growth, and I think they've had three or four consecutive negative quarters when it comes to organic growth, and this was the first quarter since we lost the high-speed rail business, where they are back in growth mode. Metrology and PP&M, the PP&M division of Intergraph continue to be the primary engines of growth for the group. We have, however, seen Intergraph SG&I picking up in order intake, and the same thing goes with, as mentioned, Geosystems. We report a strong gross profit of 56% in the quarter, and a corresponding EBIT margin at 22% in the Measurement Technologies business. We also report a strong cash flow in the second quarter. Just a reminder on page or slide five that we still have quite accentuated seasonal pattern, where Q2 is the second strongest quarter of the year, and the strongest quarter is obviously Q4.
Slide six, the P&L statement and key figures for the second quarter. Operating net sales, which equals reported net sales this year, I think you remember the revenue haircut of last year, amounted to EUR 607.1 million, and that's 6% organic growth, 12% recorded growth over the corresponding quarter of 2011. Operating earnings or EBIT amounted to EUR 127.5 million, and that is an EBIT margin of 21% in the quarter. Earnings before taxes, excluding non-recurring items, and we did not report any non-recurring items in this quarter, amounted to EUR 114.7 million. The tax rate was 19% in the quarter, so the net earnings came in at EUR 92.8 million or EUR 0.26, which is an 18% growth over Q2 2011. Slide seven, the first six months. We've had 6% organic growth for the first six months altogether for the group.
That has really to do with the weakening of the euro in the latter part of the second quarter. Our EBIT amounts to EUR 239 million, which corresponds to an EBIT margin of slightly above 20%. The tax rate is 19% for the first six months, while the net earnings amount to EUR 172 million, corresponding to EUR 0.48 per share, that is 17% growth over the corresponding period last year. Slide eight, cash flow. Cash flow from operations before changes in working capital amounted to EUR 121 million. That's a significant increase over and above the EUR 80 million we reported in the second quarter of 2011.
We also know that our prepayment model is beginning to kick in for the group, changes in working capital amounted to negative EUR 8.6 million, compared to EUR 25.9 million for the second quarter last year. You can also see for the first half that we've consumed less working capital, fueling growth in the first half of this year compared to last year. Another noteworthy comparison in this table is that the second quarter was somewhat stronger than what's normal for Hexagon in the second quarter. Typically, we generate 30% of our cash flow in the first half and 70% in the second half, as you can see from the outcome last year. Ordinary investment activities amounted to EUR 40.6 million, which is a significant increase over the second quarter last year.
We just want to highlight that one should expect an increased investment activity, which stems from two construction projects that we're undertaking at the Hexagon Group, that is we're building a new factory in Germany for metrology in the town of Wetzlar. We haven't seen the cost for it yet, or the expense, we've planned and we've agreed to build a new headquarter for Intergraph in Huntsville, Alabama, that is something we will come back to. It's going to be an expense over the next coming two years. Operating cash flow, however, amounted to EUR 71.5 million, that is almost three times the amount we generated this time last year. Slide nine, currency. You might have noted that on page 12 in our interim report, we've now added a table displaying average and closing exchange rates.
The FX markets and the currency markets have become so volatile that it's quite important to keep track of currency changes. From now on, we're going to report what exchange rates we're using when closing and calculating the EBIT in our interim statements. It was very much the same trend as we've seen over the past 12 months. The Swiss Franc, as compared to last year, has continued to strengthen. As you know, that has a negative profit impact and a negative margin impact. The US dollar and the Chinese renminbi have also strengthened significantly against the euro, that has had a positive impact on sales and earnings. The Swiss Franc impact is a one-off effect given that the Swiss Franc continues to be pegged at 1.20 to the euro.
We will see a gradual easing off of this negative impact on the group EBIT margin as the year progresses, given that the Swiss franc continues to be pegged to the euro, obviously. If we move on to market development, slide 11. Hexagon's sales mix per region has been fairly stable, but in the second quarter we can see some noteworthy movement, and that is that Western Europe is now shrinking its share of total business from 38% to 35%. The emerging markets led by Asia Pacific, South America, and China are now growing their share from 14% to 15% in China, 13% to 14% in Asia Pac, and from 3% to 4% in South America. Slide 12, the overview business trends noted in the second quarter, and we've highlighted the arrows where we see a different trend as compared to the first quarter of this year.
The organic growth is exactly the same in the second quarter as in the first quarter, 6% growth. The growth comes from different areas as compared to the first quarter, and is much more evenly distributed. What's worthwhile noting in the second quarter? Well, first of all, we have similar trends in the automotive industry on both sides of the Atlantic. Those arrows that are highlighted in yellow here were blue in the first quarter. We've seen a slowdown at very high activity levels for automotive investments in metrology equipment, both in North America and Western Europe. The other change is public safety in North America, where we see an uptick in order intake, which should lead to increased business in the second half of 2012.
We've also seen the negative trend for surveying in China easing off and actually turning to a positive trend in the second quarter. This has to do with that Q1 was really the last quarter where we had significant high-speed rail business in 2011. If we move to slide 13 and look at the various regions, EMEA grew at 3% organic growth. And as I said before, it's very much a two-speed market where we see good growth coming from Germany, Northern Europe, U.K., Eastern Europe, and significant negative growth from Spain and Italy primarily. But measurement solutions used in automotive and aerospace were growing at high single-digit rates in the quarter, and customers continue to invest in our enterprise engineering software, SmartPlant 3D. So we're converting customers to our 3D solutions. Construction-related activities and the governmental business remained weak, and that's quite natural given the bleak outlook.
As I just said, Eastern Europe, Middle East continue to grow. Slide 14, Americas. We continue to see a recovery in the construction markets in United States. The high demand in Canada, driven by the natural resources sector, continued in the quarter. And we see significant organic growth in South America as all end markets for Hexagon are growing in that sub-region. For metrology, automotive, aerospace, and general engineering continue to be the primary growth drivers. Slide 15, Asia. Asia grew by 10% organic growth, and China is roughly half of our Asia business. And China continued to grow and recorded strong growth in the quarter. It's primarily strong demand for metrology from the automotive, aerospace sectors. For Geosystems, we do have demand from the power and energy markets.
Geosystems returned to growth in the quarter. We expect further recovery as we start to receive orders in connection to the new business initiatives we initiated roughly this time last year in China. Other regions that report significant growth would be Korea, Japan, and Australasia, where we've had good growth in the quarter. On slide 16, we basically see what we've just verbally commented graphically in the graph. Slide 17, segment information. We move to slide 18, we have the P&L statement for Measurement Technologies. Measurement Technologies reported a 22.2% EBIT margin in the quarter and a 6% organic growth. Operating earnings amounted to EUR 130.9 million.
The strengthening of the Swiss franc is, of course, connected to Measurement Technologies. It had a negative impact on group EBIT margin of 0.4 percentage points in the second quarter and one percentage point for the first six months of the year. Slide 19, the segments within Measurement Technologies. We see the significant growth that Metrology generated in the aftermath of the crisis in 2009. We see it coming down to more normal pre-crisis growth rates. Technology hasn't recovered since the crisis. As high-speed rail was lost by the end of 2010, early 2011, we can see growth rates going down to zero, basically. We also see the improvement that we've reported in the second quarter. Technology has been with us since Q4 of 2011. Technology reported a 7% organic growth. Gross margin, slide 20.
I believe this is somewhat of a record for gross margins, 56% for Measurement Technologies in the second quarter. The corresponding EBIT margin on slide 21 was thus 22% in the quarter. Orders and product releases, slide 23. NovAtel received an order from the Chinese internet company Tencent. Tencent is a player in the Chinese market, very similar to Google and Twitter. They purchased the SPAN product to develop its social network services. Slide 24. We're quite proud that errors are not an option when it comes to manufacturing the largest Mars rover to date. I think it's the only one, actually. NovAtel and Hexagon Metrology have been involved in key parts of the solution to basically guide this rover remotely from Earth. Slide 25. We received significant orders for our enterprise software from Dow Chemical, Petrofac, NEIEP, and China Institute of Atomic Energy.
This is a trend. We do see Russia and China preparing to invest significant amounts in the nuclear power market. Slide 26. We also launched new software products in the quarter. We announced SmartPlant 3D Revision 1, CADWorx Plant Professional 2013. We expanded the Global Marine Center in Busan, South Korea to be able to support our Korean shipping customers. Slide 27. We also received a large order from Ireland from ESB Networks, which is a utility electricity company in the Republic of Ireland that will use our solutions to automate generation of reports, outages, and so forth. Slide 28. The City of Calgary has decided to invest in Intergraph's public safety solutions to support their 911 center. Slide 29.
The Ministry of Agriculture in Brazil has decided to standardize on Intergraph, ERDAS IMAGINE, and ERDAS APOLLO products. They will create a portal to boost and improve productivity in the sugarcane industry in Brazil. Slide 30, we got an order from the city of Lausanne in Switzerland that wants to document the entire city and create a 3D model using airborne scan data from Hexagon, as well as terrestrial laser scanning. Slide 31, we also got two orders in Switzerland from earthwork companies, Hess and GMS, in civil engineering, are now standardizing on our machine control guidance systems. Slide 32. This is a quite interesting order where Sinclair Knight Merz in Australia, it's a global EPC. They've since 2009, been a customer for Intergraph PP&M using SmartPlant 3D.
They've now decided to integrate new Leica sensors into their existing software solutions so that you can exchange files between the Leica solutions and the SmartPlant 3D installation. Slide 33. CISPDR is a large government institute that is responsible for hydropower management in China. They have now decided that they will invest in Hexagon technology in their hydropower station in the Yunnan province. This is a part of the so-called H2O project that we showcased at Hexagon 2012 in Las Vegas. Slide 34. We received two orders from miners in the quarter. Anglo American's Dawson Mine will now standardize on our fleet management guidance systems. Lumina Copper in Chile will also use our mine management solution. Slide 35. We announced a couple of quarters ago, a collaboration with Jigsaw Technologies of Australia.
We've now received an order where we combine Hexagon's technology with Locata's technology. Locata is basically a local GPS system where you can augment and enhance positioning signals in an open pit mine. Slide 36. We got an order from Lantmäteriet in Sweden. They will use Leica Geosystems products for their cadastral surveying division. Slide 37. We had a new product release in the quarter, the so-called Leica FlexLine was released, and we immediately got a significant order from a Mexican customer, Grupo Ginpro. Slide 38. Foxconn, which is a supplier of Apple products, has ordered hundreds of shop floor bridge machines to be able to manufacture the next generation Apple products. Finally, slide 39. During the quarter, we hosted Hexagon 2012, which is a user conference with over 3,000 attendees, representing more than 76 nations.
During our keynote speech, we had another 4,000 attendees that watched the live session via video stream. Summary. If we close this earnings call. We had another strong quarter sales growth, 12%, 6% organic, 6% inorganic. Gross margin record of 56% and 22% EBIT in Measurement Technologies. Our operating cash flow increased by 175%. Thank you everyone, and I am now ready to answer any questions there might be.
Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad and you'll enter a queue. After you're announced, please ask your question. First question comes from Mr. Lars Brorson from DNB. Please go ahead, sir.
Thank you very much. Good afternoon, Ola. A couple of questions primarily on the outlook in Metrology and Geosystems as we head into the second half of this year. Before we get there, a quick question on your gross margin. You continue to see fairly good development here in the quarter, some 200 basis points year-over-year. To what extent is that driven by mix shift, particularly to Intergraph PP&M, and to what extent do you believe that you're seeing an underlying like-for-like gross margin improvement in your Metrology and Geosystems segments?
I think in this quarter specifically, we start with the gross margin question. It was a mix shift where Intergraph weight in the total was slightly higher.
Specifically in Metrology, would you say the gross margins on an underlying basis are stable?
They're stable and they are improving. In this quarter, metrology's gross margin was not the reason why we saw a margin expansion. It was mixed between the divisions.
Understood. On the outlook into the second half of this year, in metrology, your business trends as you highlighted on slide 12 in your automotive segments in Europe and the U.S. have been revised down slightly versus Q1. That's perhaps less surprising. It's also revised down slightly versus your update in June when we met in Las Vegas. Can you comment a little bit on the order trends that you've seen in June and July, particularly in your automotive segment in Europe, and to what extent perhaps within that, you're seeing any order deferrals or cancellations?
No, we haven't seen that. We see order intake growth from metrology in July and August.
The book to bill in metrology in the quarter?
You mean Q3 so far?
No. Sorry. Q2 and so far in Q3.
It's above one.
Would it be your expectation that you can continue to see growth as you head into late 2012 and perhaps early 2013 this year in Metrology?
It's difficult to give you predictions, but let's put it like this. We haven't seen a negative trend, i.e., negative growth in metrology. It's not realistic to believe that a business like metrology would grow at strong double-digit rates like they have been growing for the past two years.
That's clear. Just finally on Geosystems, you talk in your report about new business initiatives in China, and we've talked about that earlier. Specifically at the capital markets day, there was a lot of focus on your dam monitoring solutions, and other initiatives that you're rolling out. What are the meaningful projects here in terms of revenue drivers in the next 12 months? What's your visibility on the revenue opportunity of these, specifically to Geosystems in China?
Well, it's not just Geosystems. It will also have a positive impact on Intergraph SG&I because these initiatives are really combination initiatives between those two businesses in China. Dam monitoring we've released, we presented the solution at Hexagon 2012, so I can talk openly about that. We expect to see a gradual increase in the activity, in the latter part of this year from that product portfolio. We also have similar initiatives alongside with dam monitoring, and I believe to see meaningful revenue from those initiatives next year.
How big do you think the dam monitoring solutions can be for you in revenue terms over the next 12 months?
We'll see.
Okay. Thank you very much.
Thanks.
Next question comes from Mr. Mikael Ejlertsson from Carnegie. Please go ahead, sir.
Yeah. Hi. I also had a question regarding the hydropower projects in China. You could perhaps talk about the growth rate in China organically ex FX, first of all. That's the first part, just to clarify that.
China grew by 10% ex FX. You probably noted that the renminbi has strengthened during the quarter against the euro. You have a significant positive currency impact.
Okay. I would assume it was rather 5%, but okay. On the SG&I development, if you could talk about the project's delays and how you have performed this quarter, and what we could expect in terms of growth going forward.
SG&I's restructuring is concluded, and we're now focusing on top line again. In this quarter, you didn't have a decline in the top line. You didn't have much growth to brag about either. We believe that we will see gradual recovery in the sales, in the second half for SG&I simply because we have good order intake, and we now are managing the delays in a professional way so that we can invoice.
Okay. Simply delivering in line or delivering these projects as you have planned.
What would that mean for the organic growth rates for that part of your business, roughly?
It's always been very modest growth in the SG&I business. Historically, it's grown at around 4%, 5%, 6% per annum. I think that we might see a return to those low single-digit rates rather than negative growth as we've seen for the past three quarters.
Okay. Could you also discuss perhaps the difference in demand for the CAD solutions and the GIS solutions in that part?
The demand is fantastic for our CAD solutions right now. We believe the GIS solutions have a good demand, but it's a bit harder to sell. It's larger projects. You negotiate longer. Typical negotiations can go on for a year, but then you get a significant installation, which you basically place in your backlog, and you can live from that installation over a three, four-year period. It's two very different business models.
I see. The competitive side for SG&I, has that changed in any way?
Not really. I think SG&I has improved. We typically don't have one competitor doing the same thing as we do. We team up with large integrators at times, and those integrators could, at other times, become competitors because they work out their own solutions.
Okay. Also, just a quick question on PP&M. The growth rate for that division, and if you could comment on the sales mix there and perhaps demand for Smart 3D versus the PDS products.
Of course, SmartPlant 3D is outgrowing the legacy products significantly. We do see both a conversion of our own customer base from legacy products into SmartPlant, but we also see new customers adopting the SmartPlant technology. Since technology as a division grew by 7% and we had very little growth from SG&I, you can figure out that we had strong growth in PP&M.
Okay, thank you.
Thank you.
Next question comes from Mr. Jon Hyltner from Handelsbanken. Please go ahead, sir.
Thank you. Can you hear me?
Yes.
Great. I have four questions. I start with the first one. On the cost savings impact from the restructuring in SG&I, could you give us a figure of that impact, please?
Yeah, $3 million US in the quarter.
Is that the rate you will reach, or will you come higher in Q3 and Q4?
I think it's safe to say that we will continue to deliver $3 million. Anything else would be a Christmas present.
Good. That's clear. On your EBIT margin, you had a very good gross margin, but still EBIT margin for the whole group was flat year-over-year. Is this due to that the mix shift with higher gross margin also comes with higher SG&A? Or is there anything else on the SG&A side that is somewhat of a one-off, so that you should expand the EBIT margin going forward when the gross margin improves?
I think that in the second quarter, I can't remember when the Swiss franc was pegged to the euro. I think you will have a Swiss franc effect. Most of our currency negative Swiss franc impact is actually sitting in the OPEX.
I would say that the reason why we didn't improve the EBIT margin when we improved the gross margin, I'd say 70% of that is because of the Swiss franc that has increased more than the other currencies and thus created a negative effect on our OPEX.
Okay. You get the positive impact on gross margin from FX, but the negative on your OPEX. All in all, that takes down the margin expansion in the quarter in spite of fairly good growth.
That's a good explanation. Don't hang me on this number, but as things stand right now with the current exchange rates as we see them today, it's not a one-off effect, but the revaluation of our fixed cost overhead in Switzerland has cost us EUR 25 million on an annualized basis. That could change if the Swiss franc continues to increase, which we, knock on wood, hope would never happen. That's the effect we need to absorb, and obviously, as top line grows, the new incremental margin will be much higher than the one that has to absorb this EUR 25 million increase, if that makes sense for you.
A little bit, at least. On the FX, if we have EUR 5 million positive in this quarter on EBIT, if we assume that rates will stay the same as they are currently, what do you expect on impact on EBIT for the second half?
Let's have a theoretical discussion on this one.
Yes.
We had a EUR 35 million FX effect on the top line. Typically, there's no reason in a balanced world why the EBIT wouldn't have increased by the reported EBIT margin, i.e., 22%. EUR 35 million, 22%, we should have reported an EUR 8 million positive FX effect. The difference between the EUR 8 million and the reported EUR 5 million, that's the absorption of these EUR 25 million that I talked about earlier over a 12-month period. Given that your company continues to grow and you add new revenue, and the Swiss franc stays where it is, the Swiss franc effect will have a diminishing effect on incremental margin forward.
Okay, it should decline in the second half?
Hopefully.
Good. Two more questions. On China, we have seen some news flow that investments in rail are picking up and that the investments overall might be picking up. Are you seeing these trends as well? If so, how strong could the impact be for you?
I think that you need to have a general discussion about the Chinese economy. Of course, the government of China tries to promote consumer spending, but it is not easily done since you do not have a social security system with pensions, healthcare, and so on. People tend to save anyway, as the economy slows down, you have these enormous reserves that China has in currency reserves and so forth, it is probably quite realistic to speculate that what they would do in the case of a slowdown is to push the button and spend money on infrastructure. I think we have seen some tendencies in that direction in the second quarter.
You are seeing improvement in that sense. Are we talking about slight improvements or significant improvements?
In the second quarter, we talk about slight improvements. I think that in the second half of this year, we might hear about more initiatives when it comes to infrastructure spending.
Okay. Then my final question on Americas. I read on a newsflash that you in an interview stated that growth in Americas would pick up, and approach high single-digit or low double-digit levels. At the same time, you write in the report that Americas' growth should come down to a more normalized level. What should one expect here going forward in terms of those comments?
I think that I was misinterpreted. I think you should read it like this. We grew by 17% in Q1 and 5% organic growth in Q2. You can't really determine a trend by measuring two quarters. Our belief is that Americas and U.S. is recovering from low levels, and we see increased activity in the U.S. construction sector, which is the single largest market for us in the Americas. We do believe in a recovery, a continuous recovery in Americas.
Whether it's going to be double-digit, single-digit, is very difficult to determine right now. We do believe that it's definitely going to outgrow EMEA.
Okay. When you talk about normalized levels for growth in Americas over time, are you talking about roughly 8% or is it lower or higher?
We'll see, but our long-term trend for the group is 8%.
All right. Very good. Thank you so much.
Thank you.
Next question comes from Mr. David Jacobsson from Pareto. Please go ahead, sir.
Hi. Just to follow up on the cost and currency discussion. I think a year ago, we were discussing measures to be taken to offset the Swiss franc impact. I was wondering if you could share some of your thoughts now in terms of cost streamlining and what you can do to adjust your cost base to the current FX landscape.
We've done quite a bit. We've renegotiated contracts with suppliers and so forth. I think that's why also we have a good gross margin development. We can do very little about our fixed cost overhead in Switzerland, which basically is our 1,000 engineers developing new products for us. It's impossible to do anything about it.
Okay, you're relying on the peg a bit?
We are.
Okay, thanks. Just to follow up also on the working capital, you have very low tie up. Any further comments on that? What should we expect going forward?
I think that what we see is the increased weight of Intergraph in the Hexagon Group is having a positive effect on the working capital requirement as we grow. We still had negative working capital buildup basically in Geosystems and Metrology, which have more traditional working capital models. I believe that we will continue to improve our working capital situation as Intergraph continues to grow.
Okay, great. Thanks.
Thanks.
Next question comes from Mr. Prasad Borra from Goldman Sachs. Please go ahead, sir.
Thanks for taking my question. I have just a couple of them.
Yeah.
Firstly, on the metrology business, you have indicated, and we've seen in the results that it seems to be a slight slowdown. Could you comment a bit more on the competitive landscape in this phase? With regards to the demand slowdown, is it just purely based on comps or you're seeing some incremental pricing pressure in the segment as well? The second question is on the PPM business. Geographically, can you provide a bit more color, especially on China? How does the order book look like, and are there any large customers where you're seeing upgrades coming through?
If we start with metrology then, yes, it's a slight slowdown, and the competitive landscape hasn't really changed. As a matter of fact, I would say that we're more and more moving into an oligopoly in the metrology market, where we, if you go back five, six, seven years in time, probably encountered five or six competitors at every bidding situation. Now it's really only us and the German company called ZEISS in most of the bids. We haven't seen a price erosion, and I would say it's more a comparative slowdown rather than an actual slowdown in the market. One must remember that we report significant growth in metrology on historical levels. We report EUR 180 million in one quarter, which is fantastic for that business.
If we move on to your question about PP&M in China, yes, we do see large operators moving towards our solutions. It's 2 areas where we've noted that for the first half. That is the oil exploration sector with companies like Sinopec and so forth. It's the initiative that the Chinese government has taken to build out its nuclear power sector.
The slowdown, which we saw after the Japanese earthquake, in a way you're indicating that the demand is coming back. Would that be a fair comment?
I don't think that China ever slowed down. I think they reconsidered where to build their nuclear power plants, maybe they don't build them along the coastline. I don't think there was ever a slowdown in the initiative to build out nuclear reactors in China.
Okay. Probably just 1 more from my end. Looking at the balance sheet and looking at the priorities in terms of dividends and acquisitions, are there any change of plans? Are you planning to probably accelerate your debt reduction, or do you think it's going to be as indicated earlier?
No, I think we follow our plan to reach two and a half times net debt to EBITDA by year-end.
Thank you.
Thanks.
Next question comes from Mr. Daniel Schmidt from SEB Enskilda. Please go ahead, sir.
Yes, hello. Good afternoon. I think most of my questions have been asked already and answered. Just a final short question on guidance and in terms of CapEx, you mentioned in your statement, you will see investments in Germany and the U.S. when it comes to a plant and also a new headquarter for Intergraph. Could you give us some more guidance in terms of numbers and also quarters?
The German investment should be concluded by the third quarter. The American investment hasn't started yet. We break ground in late 2012. It's going to have an impact on possibly the fourth quarter, but then stretching through 2013 into 2014. It's going to take almost two years to conclude that building that we're building. It's difficult to say what the cash flow impact will be. The total construction cost is $60 million. If you do a rough sort of on back of an envelope calculation, that's €48 million, and it's over eight quarters, so it would mean €6 million per quarter.
Okay
in additional investments.
Okay
because of that. Why it's difficult is because we are intending to sell land that we own around the building we want to build, and that will have a positive impact on investments. It would be a negative investment, so to say. To time the receival of payment for that parcel of land is also very difficult to determine now.
The German investment?
Sorry, I couldn't hear you.
The CapEx for the German plant.
That will be concluded this year.
Any figures or is it maybe not meaningful?
No, I think it's a EUR 15 million project that kicked in, part of it was last quarter. I think the lion's share is this quarter, and we're going to have a portion next quarter as well.
Okay. Thanks a lot.
Thanks.
Next question comes from Mr. Max Frydén from Erik Penser Bankaktiebolag. Please go ahead, sir.
Yes, thank you very much. I believe most of my questions have been answered as well. If you could just give some flavor on where we are in terms of margins in Geosystems, if it's closer to 25% rather than 20%. Secondly, if you could elaborate a little bit about the potential of bringing Metrology margins up to group level.
How do you know the Metrology margin?
Well, indications from former calls, I guess.
We don't comment margins per division, but I don't think that it's not in our plan that Metrology could reach 25%. I think that Geosystems stands a chance to do it, given a good mix and volume development in the next coming few years. Metrology, however, has a history where you basically came from breakeven, and we're now very close to group margins. There is still room for improvement in the Metrology business.
Thank you, just a quick follow-up on Asia. You say that you saw growth in all application areas. Could you just comment a little bit on the construction, what you have seen trends so far in the third quarter?
In Asia?
Yes.
Construction in Asia, we see a very sluggish market for. You have to distinguish between construction and infrastructure. When I say construction, I mean house building, basically commercial and residential housing. That market has been very sluggish, even in the second quarter. We've seen a growth in our sales, but that's simply because we're starting to introduce GeoMax, which is a low-end brand, a local Chinese brand that we have launched into that market. We're basically taking market share in a very weak market with our product GeoMax. In general, we do see a stabilization for construction. Infrastructure, however, if we disregard high-speed rail, there we've seen a pickup in the second quarter in China. I don't know if it was China or Asia you referred to.
It was Asia in general, that was very helpful. That was all f or me.
Rest of Asia, you could say construction sector is not very good in Australasia. In Japan, we do have some interesting projects in the aftermath of the earthquake you had last year and the build-up.
Okay. Well, thank you very much. That was all for me.
Thank you.
Next question comes from Mr. Mats Torgander from Nyhetsbyrån Direkt. Please go ahead, sir.
Yes, good afternoon. Hi. I'm not quite sure how to put this, but I can't help asking, since I was the one quoting you here. You spoke about Americas in Q3, and you said that it could possibly be a single-digit growth, maybe weak double digits. I simply wrote that, and it would be interesting to hear you clarify that now. As I understand it, you don't quite recognize that.
I recognize it. It's just that I'm getting cold feet.
I have a reputation to think about, so I have to ask you. Do you still stand by that then?
Stand by what?
What you said.
I stand by that. I said it, now I say double digit might be a bit tough in the second half if we talk organic growth. If you talk about euro and recorded growth, then I'm happy to concur.
Okay. Thanks for that clarification. Thank you.
Thank you.
Next question comes from Mr. Johan Eliason from Handelsbanken. Please go ahead, sir.
Thank you. I have three follow-ups, if that's all right. First, sorry to dwell on the EBIT margin here. I'm trying to get the numbers right. If I look at your operational leverage in the quarter and strip the FX impact, I get that it comes down to a bit below 30% after being very strong 45% in Q1 and the quarters before. If you recognize those numbers as right, can you explain them a bit why leverage in this quarter is not as good as before?
Well, it always depends on the mix within the various divisions. In Metrology, for example, it was a bit of a disappointment to see the actual outcome. We were expecting a slightly stronger EBIT margin for Metrology in the quarter. We shipped products with low margins or lower margins as compared to Q1. I think it stems from Metrology.
Okay.
I don't recognize your numbers. I've done a similar analysis, and my conclusion was that Metrology had a slightly more unfavorable product mix in the second quarter as compared to the first quarter.
Okay. When you look at the mix and the order activity right now, is this mix similar or are you coming back to the old mix, so to speak?
It's very hard to say because we have four weeks of this quarter. I don't want to give any answers on that. It's too long until we know the facts.
It's mix that is the reason for this. It has nothing to do with any eventual cost inflation or other factors?
No. Within metrology, you have products spanning from 1% EBIT margin to very strong double-digit margins. Of course, it depends on what you ship.
Sure.
Quarter.
Good. That was clear. On your working capital, you mentioned that seasonally it was stronger than normal in this quarter. How should we look for the rest of the year? Should we still expect a very strong working capital release in Q4?
I certainly hope that. If the world hasn't changed completely, that's what one should expect in the fourth quarter, but the one who lives will see.
The impact from Intergraph and that has gotten a bigger impact on your working capital. It doesn't mean that the strength in Q4 will be less clear than it usually was.
No, it shouldn't mean that because you have two different business models basically within Hexagon. You have the Intergraph model where the customer prepays before delivery, if we simplify things, which has a positive impact on your working capital. Then you have the more traditional model that Geosystems and Metrology adheres to, and that is you ship the product, you build accounts receivables, and then you receive the money.
Sure.
Now, we haven't seen any new pattern in the old business model, i.e. Metrology and Geosystems. They still have a cash outflow in the first half. The reason why the group looks better is simply because Intergraph is now a larger portion of the group business than it was a year ago.
If Metrology and Geosystems repeat what they've been doing, well, since inception basically, we should see a cash inflow from working capital from those two businesses. Whilst Intergraph doesn't have a seasonal pattern when it comes to working capital, they have a similar trend quarter-over-quarter. All in all, that should mean that we have a positive cash effect from working capital in the fourth quarter. As I said, we will see.
Sure. Great. That's helpful. Then my last questions. The orders that you get to hydropower and dams in China, what is the size of these? If you will get an inflow in one big project, what type of amounts are we talking about?
Typical order could be anything from EUR 100,000 up to EUR 10 million. It depends on the size of the project. What we try to construct is a scalable solution where local dam owners can buy one installation at the EUR 100,000 level. Then authorities can connect those local installations into a central monitoring system so that you basically, over time, create a system that connects all these subsystems into one central reporting system.
Okay. On the same question, but for rail, if we should get a sharp pickup in investment in rail, what type of order values are we talking about in this segment?
Well, the business at the peak, it was a EUR 50 million business, which now is Well, it's not zero, but it might be EUR 10 million annualized right now.
All right.
Don't bet on that.
Very good. Thank you so much.
Thank you.
There are no further questions at this time. Please go ahead, Mr. Rollén.
Well, I don't have much more to go ahead with, so I thank everyone for listening and asking very clever questions indeed. Thank you and talk to you next quarter. Bye.