Hexagon: strong Q3, ‘cooling’ China

Hexagon reported a solid third quarter 2011, with total revenue of €521 million, up a whopping 55% as reported and up 13% excluding acquisitions and foreign exchange effect — meaning Intergraph and other recent acquisitions accounted for about €150 million in revenue for the quarter. CEO Ola Rollén said that organic growth was driven by a recovery in Western markets and strong demand across the manufacturing sectors served by the company’s measurement technologies. Revenue performance by Intergraph’s two divisions was decidedly mixed, as PP&M reported “double digit” growth over a very strong third quarter 2010, while SG&I saw “negative growth” in Q3 2011 but strong order intake. According to Mr. Rollén, “this [order intake] should feed into revenue growth as projects are completed and can be invoiced. We are fairly happy with the situation.” Hexagon gave quite a bit of information on how its various customer segments performed in Q3:

• Problems continue with China’s plans for a network of high-speed rail lines and the halt in further construction has affected Hexagon’s revenue. Excluding high-speed rail revenue from both the current and year-ago quarters, the Geosystems business grew 6%.
• Surveying, which makes up 24% of the company’s revenue, saw a revenue decline due to the rail project and a general slowdown in construction in China. Surveying in general is “still not very strong but growing in mature markets; South America, Middle East/Africa and Asia are growing at above long-term trend lines.”
• Power and energy (18% of total revenue) reported very strong growth in all regions except North America, which was dragged down by sluggish performance in the US while “Canada performed quite well”.
• Aerospace and defense (13% of total revenue) saw good activity from all regions.
• Public safety & security (11%) had weak quarter in invoicing but strong order intake. Negative growth in western Europe, weak performance in North America but strong performance from South America.
• Construction (10%) is still sluggish in mature markets; while South America saw “significant growth”. Mr. Rollén sees a “cool down” in China, and the rest of Asia.
• Automotive (9%) is growing substantially for Hexagon, as Mr. Rollén sees “virtually all auto manufacturers investing in new plant and equipment for new models being introduced”.
• Manufacturing (7% of revenue) performed well in all areas but China, where the company sees a general slowdown due, in part, to government economic policies

Summarizing the overall geographic performance, Western Europe, the Middle East and Africa are “strong”; the only real problem the company sees right now is a general slowdown in China. Performance in the Americas was stronger than expected in Q3, and accelerated from Q2. Mr. Rollén said that Geosystems in general did not show impressive growth but that laser scanning and new technologies such as mobile mapping were growing significantly in North America. Too, he noted that a recovery in defense-related markets such as unmanned aerial vehicles presents a good opportunity for Hexagon. South America continues to grow at double-digit for all segments and was “probably the strongest region in the quarter”. Mr. Rollén also gave the first glimpse into the commercial possibilities presented by combining Hexagon’s traditional metrology offering with Intergraph’s public safety solutions. “La Grande Frana di Ancona”, in Ancona, Italy is a monitoring system to predict landslides that uses Leica sensors tied to Intergraph’s GIS database to provide early warning of disasters. The company sees the opportunity for this type of solution as “huge”. Of course, investors are giddy because of the bottom line results: third-quarter pretax profit was up 58% to €84 million, just 1% lower than market consensus. Net income grew 45% to €6 million in Q3 and 56% to €212 million in the first nine months of the year. Not much was said about Intergraph PP&M, other than that the division posted “strong double digit growth” in Q3 2011. That’s impressive, since revenue was up 23% in Q3 2010 to nearly $94 million. I’ve asked for more details and will update if anything new comes to light.