Hexagon’s Q2 dragged down by troubles in China

Aug 1, 2019 | Hot Topics

Hexagon last week reported Q2 results that expanded on their preannouncement earlier in July. Weakness in China led to an overall revenue decline of 1% on an organic basis — though the company reports that revenue from China declined 25%, so clearly grew nicely elsewhere.

The details:

  • Total revenue for Q2 was €976 million, up 4% as reported but down 1% on an organic basis
  • By division, Geospatial Enterprise Solutions (GES) revenue was €497 million, up 3% organically cc, with Geosystems up 6% cc, Positioning Intelligence was flat and Safety & Infrastructure down 4% cc (though that’s actually good; a sequential improvement from being down 17% in Q1)
  • Industrial Enterprise Solutions (IES) revenues was down 4% organically cc to €479 million, with PPM showing up 3% even against a very good quarter a year ago, and Manufacturing Intelligence down 7%, reflecting the weaker demand in the Chinese electronics business. Without the negative effects of China, CEO Ola Rollén says MI grew year/year organically
  • By geo, the lead story was China: revenue down 25% from a year ago, from 17% of total sales to 12%. Mr. Rollén said that, undoubtedly, the decline was caused by uncertainties around global trade, and Chinese manufacturers’ ability to sell cell phones and other electronics in a global market. He said that customers are restructuring their supply chains, moving activities out of China
  • The sales mix has started to shift (because of the contraction in China). Strong growth in South America, in Asia outside China, in Eastern Europe/Middle East and Africa didn’t do enough to offset declines in North America (where PPM had very hard comparables in Canada and the US) and China
  • In the Americas, revenue was up 2% organic cc. Total revenue from North America was €312 million, down 1% organic cc, as strong demand for infrastructure and construction solutions couldn’t offset the very large perpetual orders PPM closed a year earlier. Mr. Rollén said that South America “continues to recover”, with total revenue of €39 million up double digits on demand from mining companies and in Brazil
  • Overall, EMEA saw organic, cc revenue growth of 5%. Revenue from Western Europe was €303 million, driven by France and Germany, and by demand for infrastructure, construction and positioning solutions. Double-digit revenue growth in Russia and high-single digit growth in the rest of Europe and Africa, and mid-single-digit revenue growth in the Middle East led to total revenue of €68 million for the region
  • Revenue from Asia was down 11% cc organic in total, though it’s clearly a story of two separate markets. Revenue from China was €117 million, down 25%. The rest of Asia Pacific reported strong to double-digit growth. Mr. Rollén posits that the Vietnamese, Malaysian and Indonesian economies are benefiting from the uncertainties around China, as manufacturers move there to diversify their Asian operations. Japan and South Korea reported double-digit growth in Q2; in total, Asia ex-China reported revenue of €137 million

In its preannouncement, Hexagon said it would restructure its businesses in an effort to meet profitability targets. During the earnings call, we learned that this means a reduction of 700 jobs and other cuts aimed at generating €51 million in annual cost savings after a €44 million one-time charge in Q2. While the weakness in China was the named cause for the restructuring, only 1/3 of the headcount reductions are in China, so we can reasonably assume that Hexagon is using issues there as a reason for a broader restructuring; indeed, according to Mr. Rollén, these cuts are “across the board… to safeguard our margins”.

Bottom line? Hexagon is a sprawling company, with operations in so many countries, end-industries and technology niches, that a blip in demand from one country shouldn’t be such a big deal. That said, Mr. Rollén showed how revenue from China has been steadily declining — and it’s not something they can fix with new leadership or packaging and pricing. Mr. Rollén told investors that demand that had come from China in better times is migrating to other countries, but that the effects from failed trade talks with China continue to ripple around the world.

It’s important to understand that the slowdown in demand from China isn’t product-related. I was impressed with what I saw at HxGN Live in June (overview here, MI write-up here; PPM when I can finally get to it) — it’s purely, as Mr. Rollén said, a power play between the two largest economies in the world and (paraphrasing here) above his pay grade to comment on. “Every one is getting hurt right now, no matter what nationality”.

The next logical question is: why aren’t the other PLMish vendors reporting problems in China? Because they don’t make hardware used in production. They make software, which is used wherever the products and processes are designed — and that may not be in China, even if manufacturing is in China. Siemens does make hardware and today reported that they, too, saw a negative impact in China’s electronics industry with sales down 5% year/year and orders down 11%. More on Siemens ‘ results when I can.

The bottom bottom line: The real question now is, how modern will the new manufacturing facilities being built in other parts of Asia, be? Will they be IoT-all-the-time or somewhat more modern recreations of the older plants they replace? Or simple replacements of older, perhaps inefficient processes? I really hope manufacturers take advantage of this green-fields opportunity to rethink their processes. That could lead to new revenue rather than just replacement revenue across all of PLM.

And that would be very, very good.