Hexagon’s Q2 a mixed bag of good/bad, up/down

Many things went well for Hexagon in Q2, as the Metrology and Intergraph PP&M businesses returned to more robust growth and the new Solutions business, created to make offerings that combine products from across the portfolio, started to have an impact. On a geo and end-market basis, CEO Ola Rollén said that conditioned improved in Europe across all businesses; in  North America, especially construction market; but slowed year/year in Asia as the Chinese construction sector continues to work through corruption probes. Mr. Rollén also spoke a bit more about the Vero acquisition, though with few details.

But first, Q2:

  • Total revenue in Q2 was €636 million, flat as reported but up 6% in constant currencies (cc) and a constant group structure. In all, Mr. Rollén seemed pleased by the group’s progress — more than the raw data would imply.
  • Measurement Technologies (MT), the group’s core continuing business, is all that’s left of the “old’ Hexagon and accounted for all of the revenue in the quarter. Hexagon will continue to report revenue at the MT level for at least the rest of this year; let’s hope they offer more details on the individual operating businesses after that.
  • Geosystems revenue was up 3% on an organic basis, to €229 million, as the European construction market improved even as China stalled.
  • Metrology reported revenue of €197 million, up 10% on increased demand in Asia.
  • Technology, an umbrella division, reported revenue €210 million, up 5% on an organic basis. Hexagon does not break out specific brand revenue, but did say that Intergraph SG&I again reported only modest growth in the quarter, Intergraph PP&M reported double-digit growth, likely twice the recent growth rate. NovAtel agin reported a weak quarter because of delays in Unmanned Aerial Vehicle acquisition programs. Mr. Rollén didn’t give details, but it doesn’t sound as though the quarter was as bad as Q1, when y/y revenue declined 25%.
  • For the first time, Hexagon spoke about its Smart Solutions group, which had a “strong quarter in terms of revenue and profitability”, though it likely serves fewer than 20 customers at this point. But they seem to be mega-customers like Vale, which bought Hexagon’s Smart Asset Control to manage equipment (trucks, wheel loaders, flatbeds, etc) at its private port in Tubarão, Brazil. Vale has been a PP&M customer for years, so this is a natural extension of its relationship with Hexagon. It’s not immediately clear how many new accounts are coming to Hexagon via the Smart offerings.
  • Hexagon reports that revenue was up 7% in cc in Europe with revenue from Western Europe at €197 million and from the rest of Europe, the Middle East and Africa, €64 million. It was a tale-by-country: Germany up, France and UK down over a tough comparable a year ago; Spain and Italy reported double-digit growth y/y on easy comparables. In all, demand in Western Europe was driven by infrastrucx`ture, automotive and aerospace. Like other companies in our universe, there is concern over how the Russia/Ukraine turmoil, sanctions an other actions might impact revenue; Russia accounts for 3% of Hexagon’s overall revenue. Mr. Rollén declined to be more specific.
  • The Americas reported revenue of €205 million and 5% y/y organic growth. Revenue from North American was €173 million, down 3% y/y on demand from construction and residential housing, automotive, aerospace, power and energy sectors. The defense sects also picked up, with the exception of UAV-related business. South America (revenue of €32 million, up 26% y/y) continues to be a small but important part of Hexagon’s overall plan, reporting double-digit growth in Q2 as  all sectors except mining continued to be strong.
  • Overall, revenue from Asia was up 5% on an organic basis to €171 million, with revenue from China at €95 million, down 6% as reported but up 5% in cc, as the automotive, electronics, power and energy segments were up but surveying was down. The rest of Asia reported revenue of €76 million, roughly flat as reported, as India, Japan and Malaysia had strong quarters while Australia’s mining industry’s weak demand lowered revenue there.

Hexagon offers some color by end-industry, mostly in the form of this chart:

Hexagon-Q214-presentation
As you can see, it’s a roller coaster ride of regions and industries. Hexagon’s diversity makes it hard to track specifics but is encouraging to investors because there’s always a pocket or two of growth somewhere, even if the overall picture is gloomy.

PP&M continues to be a bright star in Hexagon’s constellation, though not too many details are given. As you can see from the end-industry chart, PP&M’s main verticals of power and energy are doing very well in most of the world and decently in the rest —no red arrows across the geos— though its sales into mining are likely as negative as the rest of Hexagon’s.

Probably the biggest PP&M-related news that came out of the earrings release was that a joint venture of Fluor, Daweoo and Hyundai has chosen Intergraph’s SmartPlant Cloud for a project for the Kuwait National Petroleum Company that will upgrade and expand refineries at Mina Abdulla and Mina Al-Ahmadi. Hexagon says Fluor and its partners will execute the project globally, in multiple offices, and will take advantage of the cloud apps’ 7X24 access.

Vero came up surprisingly little during the investor call — but then, it’s a small acquisition for this €2.5 billion company. No further details on purchase price (Mr. Rollén said he paid a “typical software multiple” for a company with revenue of €80 million in 2013 and an “ordinary EBITDA”), but Hexagon clearly sees this a sa strategic move. A quick recap: Vero sells a variety of computer-aided manufacturing solutions, all for programming and controlling machine tools. Mr. Rollén  sees the addition of Vero as helping Hexagon “extending the reach of or MMS (metrology planning software) to include CAM” — in essence, closing the loop to plug measurement into CAM to improve yield and cut losses during production.

Hexagon doesn’t give specific guidance per quarter,  but analyst consensus for Q3 is revenue of €619 million, an increase of 7% as reported. For the year, consensus is €2.56 billion.

Image courtesy of Hexagon AB, from its Q2 2014 investor briefing slide deck, which you can download from http://investors.hexagon.com/en.

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