Hexagon’s diversity helped offset PP&M’s lackluster Q1

May 8, 2018 | Hot Topics

Hexagon, another big company getting bigger via acquisitions, announced results last Friday. Hexagon is the parent company of brands such as Leica Geosystems, (Intergraph but now) Hexagon Process, Power and Marine (PP&M), Vero and MSC Software — and is putting together a portfolio that spans manufacturing and AEC, and from early-stage simulation to machining and operations.

The main headline for Q1:  better than expected results from its Geosystems business (revenue up 11% in constant currencies, cc) and continued struggles in the PP&M business, as it has yet to see strengthening in oil and gas end-markets. All market forecasts seem to indicate that oil and gas will continue to recover (and the price of oil hovers at $70/barrel as I write this, so there’s incentive to invest) so PP&M should return to its prior 7%ish growth levels.

A few details –read the full announcement here:

  • Total Q1 revenue was €835 million, up 7%
  • By geo, revenue from Asia was around €242 million up 8% cc, led by strong growth of 13% in China because of solid demand from the electronics industry and orders for Hexagon’s safe city solutions. Business was also strong in Australia and South East Asia (up 28% cc organic); Japan and India continued to decline. China recorded 13 per cent organic growth. GES reported a 1% decline in cc organic revenue, whiles IES reported organic cc growth of 13%. (Hexagon’s data shows geo revenue as a % of sales, so the totals are approximate.)
  • Revenue from the Americas was about  €267 million, up 8% cc on demand for infrastructure, construction and public safety solutions in the US and Canada. Latin America showed signs of recovery and grew organically by double digits in the quarter. PP&M reported solid growth in the US in the quarter. GES reported 13% and IES, 2% cc and organic growth in Q1
  • Revenue from EMEA lagged the other geos, with total revenue of about €326 million, up 6% cc. In EMEA, Western Europe recorded mid-single digit organic growth with good growth reported in Germany, Italy and France but weakness in the UK. The recovery in Russia and the Middle East continued, with both reporting double-digit organic growth. Where there was growth, it was driven by infrastructure and construction related business and positioning solutions. GES was up 8%; IES, up 2% cc and organic in EMEA
  • By reporting segment, Industrial Enterprise Solutions (IES) revenue was up 12% to €423 million and up 6% on an organic cc basis. Within IES, Manufacturing Intelligence, MI, reported 9% organic cc growth driven by continued strong demand from the electronics industry while the auto and aerospace end-industries continued to improve. MSC‘s revenue was up 10% in Q1 due in part to a large aerospace win. PP&M revenue was up 1% organic cc, driven by demand for its project control solutions and recent order wins in South Korea and China. Growth expected to accelerate in the coming quarters — and 1% growth is certainly an improvement over a year ago, when revenue declined 11%. CEO Ola Rollen is usually very controlled on earnings calls, but seemed a bit frustrated when discussing PP&M, saying that while the company is seeing some rebound in PP&M’s end-markets, it was up to the sales force to translate this recovery into sales.
  • Geospatial Enterprise Solutions (GES) revenue was €412 million, up 2% as reported and 8% organic cc. Within GES, Geosystems reported organic revenue growth of 11%, driven by solid development in infrastructure and construction, mining and sales of new solutions. Safety and Infrastructure (SI) reported 5% organic cc growth, mainly driven by demand for safe city and public safety solutions — and on a very weak comparable last year. Positioning reported 6% organic cc growth,  driven by continued strong demand in agriculture and defense, and on a very tough comparable a year ago.

OK. That, above, is basically a word and number salad across businesses, geos and end-industries. What does it mean? I get a couple of takeaways: First, Hexagon’s diversification across industries and product offerings within those industries insulates it somewhat from localized dips in demand or lagging execution but, even so, can’t hide underperformance in big parts of the business, like PP&M. The fact that AVEVA, in the midst of the massive distraction that is its merger with Schneider Electric Software, reported in April that “Trading for the heritage AVEVA Group was strong during the year ended 31 March 2018. A sharp focus on sales execution, combined with a stabilisation of conditions in our Oil & Gas and Marine end markets, drove an acceleration of revenue growth in the second half, such that full year revenue grew at a comfortable double digit rate on a currency neutral basis, up from 5.9% in the first half.” It’s not real numbers, but it is hard to see that as anything other than stronger than 1% growth in the March-ending quarter.

But Mr. Rollen said that PP&M is also working to grow more independent of oil and gas. He said “We believe that oil and gas is near the bottom, which would be good. We have also worked hard during the downturn to penetrate new segments of the market and we expect good wins from these segments”. You may recall that PP&M announced its entry into the BIM world (construction, not design) a couple of years ago — I’ll be at HxGN Live next month to learn more about that and other segment offerings.

Second, Hexagon has bought growth in the past, and that may be tough to do right now. Mr. Rollen told investors that Hexagon “had to back out of 4-5 deals in the last 6 months purely due to valuations, which are out of control. There are still some good assets out there at reasonable valuations and the key is finding deals that give you good synergies.” To move the needle, it would have to acquire something big, and for it to have the right margins, it would need to be software. There are many options, but it’s hard to identify one with the right mix of fit, price, and margins.

Finally, the elephant in the room: Hexagon’s largest shareholder reportedly is interested in selling some or all of its stake. That might make Hexagon a takeover target. It’s got so many solid product assets, that parts of the company could fit into many industrial and strategic buyers’ portfolios — but it’s hard to identify one who could take it all. It’s taken time, but one of Hexagon’s strengths is combining parts of an acquisition’s portfolio and with others’ –Smart City, AgrOn agriculture and security portfolios come immediately to mind. Splitting this up could be challenging and would be a disservice to end-users.

More on all of this after HxGN Live next month.