Hexagon AB (publ) (OTCPK:HXGBF) Q3 2022 Earnings Conference Call October 27, 2022 4:00 AM ET
Company Participants
Ola Rollen – President and Chief Executive Officer
Paolo Guglielmini – Chief Operating Officer
Conference Call Participants
Mikael Laséen – Carnegie
Daniel Djurberg – Handelsbanken
Alexander Virgo – Bank of America
Sven Merkt – Barclays
Joachim Gunell – DNB Markets
Nay Soe Naing – Berenberg
Nicholas Green – Bernstein
Johannes Schaller – Deutsche Bank
Magnus Kruber – UBS
Toby Ogg – JPMorgan
Operator
Hello and welcome to the Hexagon Q3 Report for 2022. [Operator Instructions] Today, I’m pleased to present Hexagon’s President and CEO, Ola Rollen, as well as the Chief Operating Officer, Paolo Guglielmini. Please go ahead with your meeting.
Ola Rollen
Thank you and welcome everyone to this third quarter interim report. And if we start on Slide #4 overview for the third quarter. We record a sales increase of 23% in this quarter. And 7% coming from structure, i.e., M&A activity, 9% is coming from currency tailwind and 7% is organic growth. And we saw broad-based demand across all geographies and industries in the third quarter. As you might have seen from the gross margin, our product mix continued to improve, strengthening both EBIT and gross margins. And we expect a resolution of the supply chain pressures by the end of the year. We reported an EBIT of €386 million, which is 24% stronger than the corresponding period for 2021.
If we move to Slide 5 just a reminder that Q1 and Q3 are typically our weakest quarters in the year, followed by strong second quarter and fourth quarter.
Slide 6 gives you an overview of the P&L statement. I won’t dwell over it. I can only just state that we record €1,320 million in sales, and that, that corresponds to an EBIT more 29.3%, which is 0.5% stronger than the corresponding period last year.
I think we skip Slide 7, you got the year-to-date numbers there and move straight to cash flow where cash flow from operations amounted to €385 million, a bit more than €100 million more than the corresponding quarter of last year. And this corresponds to a cash conversion of 78%, which is quite normal for the third quarter. We had 79% cash conversion last year.
Moving to Slide 9, over the years, we’ve reported on our working capital to sales ratio, where we’re now back on the trend line at working capital to sales. Market development.
If we move to Slide 11, that slide will give you an overview of the sales mix for the Hexagon Group in the third quarter where we see North America continue to expand. The Americas is now 40% of group sales. We see a slight contraction in Western Europe in terms of mix and also in EMEA. EMEA – rest of EMEA, excluding Western Europe, is obviously driven by the reduction of sales to Russia.
Slide 12, just a quick overview of the various markets and how they fare. We have strong growth in Asia, excluding China. We have strong growth in South America. We have good growth in the more mature markets of North America and Western Europe and China. And we see a decline in Eastern Europe, Middle East and Africa, where the war is obviously the culprit to the negative growth.
Slide 13 is for your reference, gives you an overview of what we saw in the third quarter per segment and per geographic region.
Now moving to Slide 14, EMEA. Western Europe recorded 6% organic growth. We saw solid demand for both surveying and positioning solutions as well as strong demand from the manufacturing industries across the continent. Power and Energy also recorded strong business development in the quarter. If we exclude Western Europe, Russia is obviously the headline with significantly decline in sales, minus 55% in the quarter. And EMEA, excluding Russia, is actually quite strong where we see strong growth from the Middle Eastern region.
Slide 15, Americas. North America recorded 8% organic growth. South America recorded double-digit organic growth, where the North American market for solid demand across most industries. It was – compared to Western Europe, it was significantly stronger demand in North America. South America is driven primarily by expansion in agriculture, but also the mining and power and energy sectors.
Moving to Asia, Slide 16. China recorded 5% organic growth. And this is in a market that is quite tough with lockdowns and weak construction market. It was primarily driven by general manufacturing in automotive. We did see some weakness in the infrastructure and construction markets in our Chinese business. Japan, Southeast Asia and India all recorded strong double-digit growth. It’s supported by strong demand for both surveying in the manufacturing solution. So both infrastructure and the manufacturing sector is expanding. Mining solutions recorded a very strong quarter in Australia.
Reporting segment, if we start with Geospatial Enterprise Solutions on Slide 18. Organic growth for this segment was 5%. Geosystems report 4% organic growth on the back of a quarter this time last year where growth was 15%. So it’s a very strong quarter in spite of the slowdown in organic growth. SIG report 5% organic growth, and it’s primarily driven by demand from defense. Autonomy & Positioning showed 9% organic growth, and it’s a combination of strong demand for defense solutions with autonomous driving solution and agriculture. Sales amounted to €642 million and the EBIT margin was 30.7%, a slight reduction compared to the corresponding quarter last year where we reported 31.3%.
Now if we move to Industrial Enterprise edition, Slide 19. Industrial Enterprise Solutions reported an organic growth of 9%, both the divisions. MI that grew by 8% and Asset Lifecycle Intelligence that grew by 12%, so strong demand in the quarter. We saw strong demand from all manufacturing industry, but we also saw a growing interest in starting to invest in energy solutions for ALI. Sales amounted to €678 million, and the EBIT margin improved by more than 2% to 29.2% in the quarter.
Slide 20, our gross margin. Our gross margin for the past 12 months is 1% stronger than this time last year. We report 65%. And if we look at the corresponding EBIT margin on Slide 21, we report 29.5% EBIT margin versus €28.7 million this time last year.
And with this, I want to hand over to our current COO and our incoming CEO, Paolo Guglielmini and he will present what happened in the quarter operationally. So Paolo?
Paolo Guglielmini
Thank you, Ola. Some highlights from the business line activity. In Q3, starting with the acquisition of iConstruct that we announced just a couple of weeks back. The company was founded in 2009 in Perth, Australia. It’s a great solution for the commercial infrastructure, industrial construction sectors is going to create opportunities across the customer base in Geosystems and in ALI, particularly. At the core, what iConstruct does very well is, it’s an automation tool that is utilized to call and integrate information that is held within different business models into a single 3D model that really enhances accessibility control of the design and the construction pace. The solution strengthened our SMART Build suite of solutions for the AEC sector.
Just as well as what we have announced a couple of weeks back from Slide 24, as joining forces with AVVIR. AVVIR based out of New York City, the 50 employees team, very specialized in building platform to leverage on-site reality capture data from a variety of sources, could be scan, could be images. That data ends up enriching and updating BIM models and therefore, improving project workflows, scheduled tracking, installation issue detection through analytics. And this is really us helping customers creating a constantly updated BIM through as-built conditions.
If we move on to the major commercial wins from the division in Slide 25, if we start from ALI, we see continued traction for our portfolio in those industries. We’ve had a very successful project with one of the largest global mining operator based out of Brazil. They provide iron ore, copper, silver, and the natural resources and the standardized on SmartPlant suite as the backbone for their engineering information management system, manage drawings and data document all the way across the life cycle from projects to operations.
The second commercial highlights on the slide, refers to a win with one of the largest public transit agencies in the U.S. They are moving aggressively towards a zero emission fleet of vehicles, adopting election buses, and they have adopted 30 different enterprise asset management EAM applications to drive operational performance, support auditing, compliance and tracking. The third case is the large deal we signed with an EPC operating in 49 countries globally. This is going to become one of our largest SDx SaaS commitments to date, a large multiyear commitment that is showing continued momentum in the SaaS transition for the ALI portfolio.
Moving on to Slide 26 to our Geosystems portfolio. In Q3, we have successfully installed an autonomous deformation detection system in Greenland. As you can imagine, this area, the tidal waves bringing instability to slopes, creating landslide, creating risks to the local population. This is a complex installation. Of course, in harsh conditions, a system that is powered by solar and fuel cells, we are developing this instance in cooperation with ETH, developed advanced analytics jointly. We are fusing sensor data from cameras, from geophones. And of course, we stream all the data for processing through satellite.
If we move to railways in Slide 27, we have announced a deepening of our partnership with CORYS. CORYS is a French dynamic simulation company. They develop technologies for safety training of operators in railways. And in this instance, we use our content program, our Metro HD program, we fuse all of that information with GoPro images that are captured by trains, and we build rich environment for operators to train with them. These are great technologies that we are deploying across other industries, and we’ll be increasingly available and accessible through HxDR.
Still staying within the railway industry in Slide 28, we referred to two commercial successes with Amtrak and one of our largest customers in Czech Republic, Amtrak is very large passenger operation in the United States, of course. They are planning to build a joint operation center between their train operations and their police departments, and they are standardized on Hexagon OnCall Dispatch and on connect to integrate the digital records across the three divisions. In the Czech Republic, this is a more widespread set of applications from our portfolio that support the state-owned company that is managing the national railway infrastructure, we help them not only managing documentation and managing the infrastructure from rail assets to utility assets, but ultimately building a complete digital twin of this infrastructure.
Back to the AEC sector on Slide 29, an update at our OxBlue. OxBlue joined Hexagon in 2020, that experienced very strong growth with their portfolio of high-definition photography and live video streaming services to monitor in real time what’s happening in the construction side. This is only valuable for AEC stakeholders. In this case, a sizable contract with Walbridge, that’s one of the largest construction companies in the U.S. based out of Detroit. From an innovation perspective, in Reality Capture, we have announced in the quarter the release of Stream DP, which is part of our high-end ground penetrating radar portfolio. Here, we capture data about underground utilities, cables, pipes, we enrich our Reality Capture dataset in HxDR with a special information and this particular solution is unique in the marketplace in terms of ease of automation and depth of measurement.
In Slide 31, an update about Leica DMC-4 release. This is the next-generation airborne frame camera offers increased productivity, optimized flight times and of course, feed data into the content program and HxDR. And of course, the data capture innovation helps support contracts like the ones that we’ve announced in the quarter in Slide 32 with the USDA Farm Service Agency’s National Agriculture Imagery Program. In this instance, we go and capture eight states, a high resolution that we support agricultural applications, biomass calculations, funding programs and the lights.
Moving to our manufacturing portfolio. As Ola alluded to, we have seen strong growth across automotive, particularly with our software portfolio. In this case, we increasingly support one of India’s largest automotive OEMs and not only through our structural simulation portfolio, but also in the design of their next-generation powertrain component in a push to electrification.
Staying within India that we’re seeing good growth across the group in Slide 34, an update about our activities with India’s largest space research center. In this case, we have adopted a broad portfolio of metrology equipment from high accuracy printed circuit board inspection all the way up jig measurement and Leica Tracker.
Ola Rollen
Thank you, Paolo. And if we then turn to Slide 36 in the pack. We announced some organizational changes on the 7th of October where David Mills as of the 1st of July 2023 will assume the position of CFO for the Hexagon Group. And I want to take this opportunity to thank Robert Belkic, that has been our CFO for 10 years and will leave the group, the 30th of June, for his services. So thank you, Robert.
And with that, I think we’ve come to what you will wait for, which is the Q&A. And we are now open to take any questions.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Magnus Kruber of UBS. Please go ahead. I stand corrected. We are going first to Mikael Laséen of Carnegie. Please go ahead.
Mikael Laséen
Hi, thanks for taking my question. Yes, first of all, a question on Asset Lifecycle Intelligence, which grew by 12% in Q3. Can you say something about the growth in different end markets? And if there were a large order driving this? And how we should – when this maybe going forward, if 10%, 12% is achievable also coming quarters?
Ola Rollen
That we can’t say. But what we can say is that this quarter, we did not have any large orders. It was a stream of smaller orders. And we definitely see a sentiment change for ALI, especially with the EPC, but also with the owner operators. So there is more investment plans for that part of the energy sector going forward. It looks quite promising.
Mikael Laséen
Okay. Good. Just a follow-up also on Infor and ETQ, if you can say something about the performance for those two companies and the growth rate they are delivering and what type of EBITDA they have roughly? Thanks.
Ola Rollen
They are both performing better than the group average in terms of both sales and margins. They are positive contributors to both growth and margin expansion.
Mikael Laséen
Okay, thanks.
Operator
Our next question comes from the line of Daniel Djurberg of Handelsbanken. Please go ahead.
Daniel Djurberg
Thank you so much, operator. Good morning, gentlemen. And my first question would be on – to Ola here. You have been a little bit ahead of the curve looking around the corner because you’ve been quite vocal about the need to adapt to a new geopolitical situation, especially between U.S. and China. And my question is how this has panned out so far, i.e., the – and what kind of adjustments that might be needed ahead with Hexagon too in terms of the specialty hardware-related solution in an ecosystem alignment, etcetera? Any comments there would be great.
Ola Rollen
I think we have to adapt to where technology can’t flow freely between continents and especially not between United States and China and Europe is probably going to take a similar stance as United States over the long-term. And that means that our Chinese operation needs to be self-sufficient when it comes to technologies and technology development. And we’ve been working on this for probably 5 years now to prepare the ground for this. And I think we’re in a very good position today. And I think the organic growth numbers show that we are doing well.
Daniel Djurberg
Certainly, I agree. So no major changes short-term. So you’ve been working on this for quite some time.
Ola Rollen
Yes.
Daniel Djurberg
Yes. And another question, if I may, would be a little bit on overall visibility in the market. Obviously, we have a higher interest rate than the cost inflation, etcetera. And if you see, where do you see the impact on larger project decision making, i.e., delays or any change in the visibility in markets or segments would be great to know about?
Ola Rollen
I don’t think anyone hand on heart have seen any big negative impacts on their numbers sitting here in October of 2022. But obviously, we all watch the same steps. So if you look at the purchasing managers indices, they tell a very different story. So I think it’s fair to say what we see right now is the manufacturing industry eating into its backlog, and that could continue through probably another quarter or two and then we will see what happens. When it comes to construction, we’ve seen a little weakness in certain markets for construction. On the other hand, there are a lot of infrastructure projects. So it’s hard to see where the overall construction market is having.
Daniel Djurberg
Perfect. Big thank you Ola and also Robert on amazing journey here, and yes, you will obviously stay on.
Ola Rollen
Thanks.
Operator
Our next question comes from the line of Alexander Virgo of Bank of America. Please go ahead.
Alexander Virgo
Thanks very much. Good morning to you both. I just pick up on that last point, Ola, thanks very much for all your help, at least in understanding Hexagon over the last several years and very best of luck as you made [indiscernible].
Ola Rollen
Thank you for the amazing words.
Alexander Virgo
Well, long way to continue with Paolo. So I had a couple of questions, if I could. Maybe slightly bigger picture on your SaaS businesses now. Wondering if you could just touch a little bit on strategy there? I know you’ve always adopted a fairly organic approach to SaaS and customers’ decisions around how they choose to consume what you’re offering. I wondered if you could just talk a little how you’re seeing those dynamics change, whether your strategy is evolving in that regard and whether or not the transition from existing customers on licenses to SaaS is something we need to be thinking about in terms of factoring into our growth assumptions? That would be my first question, and I’ll follow-up with another one, if I may.
Ola Rollen
Okay. Now, you’re absolutely right. Let’s recap where we are at this moment in time, 60% of our business is software or services. 35% is pure software and 20% is subscription. So those are the stats. What’s happening is it’s very difficult to take an old piece of software where you have established relationships and force customers into a subscription. But all new products that we launch or acquire are SaaS based. So if you look at EAM or ETQ they are pure SaaS-based businesses. And then there is no doubt about that SaaS is the future for software. So it’s really these old relationships where it might take some time to move towards that. But we also see a push in the market from customers where they want to sign up for SaaS rather than perpetual. So it’s happening, and you should factor that into our growth.
Alexander Virgo
Right. But I guess that’s incremental growth as opposed to where we’ve seen at some of the other industrial software companies have talked about headwinds as they convert and have to adapt to accounting changes, for example?
Ola Rollen
Yes. And no, it’s going to be incremental, but it’s going to have a negative impact on growth.
Alexander Virgo
Okay. And do you have any indication as to how much headwind we should be thinking about, I guess, is the question really.
Ola Rollen
I don’t know. I mean this is guesstimating, but I would say over the past 2 years, if it’s 0.5% annually.
Alexander Virgo
Yes. Okay, thank you. And second question was going to be on gross margins, which above 65% on a trailing 12-month basis for the first time. I think is a very strong performance. I’m just wondering if you could talk a little bit about the resiliency of that as we move into 2023 and have to face the various inflationary pressures that we have in the world today, in particular, I’m thinking from your perspective, wages.
Ola Rollen
No, I think we’re going to have quite resilient margins. If you back out the extraordinary events that we saw in the quarter, we would have we would have recorded an even stronger gross margin. So we’re definitely trending in the right direction when it comes to gross margins. And this is a prerequisite to be able to handle two things that are happening in OpEx. First thing is that we’re coming out of pandemic and our sales force is much more active, our organization is much more active, which is driving up travel cost expenses and so on. And we’re much more frequently visiting trade shows, which we didn’t do at all this time last year. So that is on our own expense, so to say, that we’re driving up cost. And then on top of that, you have inflationary pressure where a very, very active pricing policy needs to continue to happen to mitigate the cost that we can foresee in terms of salaries and some suppliers increasing cost.
Alexander Virgo
Okay. Great, thank you very much.
Ola Rollen
Thanks.
Operator
Our next question comes from the line of Sven Merkt of Barclays. Please go ahead.
Sven Merkt
Great. Thank you for taking my question. Good morning. Maybe we can quickly stay with the topic of – on pricing, just mentioned the active cost management. Obviously, it’s now broadly year since you talked to the first large price increases, but then you spoke in the past to potential further price increases. You just mentioned that price has to be carefully managed. So can you comment if you should expect step change in guesstimate [indiscernible] from pricing over the coming quarters or if this will fade away just gradually?
Ola Rollen
Definitely not to step change. We started implementing price increases, as you correctly said roughly a year ago. when we saw inflation coming. And this has to be a gradual process because we need to manage our customer base in a professional way. So I would say, if we guesstimate, I wouldn’t say we have 1.5% to 2% price increase in our numbers today, and that is going to continue to have a positive impact on sales going forward.
Sven Merkt
Okay. Great, thank you. And then secondly, could you also comment on your financial strategy, if you would go into a recession? In the past, Hexagon has cut costs relatively early to protect profitability. But now you called out also in the release that the business has become more resilient and you’re also closer to your midterm target. So does it make it maybe a bit less likely that you will cut costs to the same extent as in the past?
Ola Rollen
No way. You always cut cost in a recession.
Sven Merkt
Maybe you want to continue to invest in future growth?
Ola Rollen
No, no. No. That’s not how cost work. It’s an opportunity in a recession to take out costs that you’re not using and replace it with something more productive, and you should always do that. So we’ve already started planning.
Sven Merkt
Okay, great to hear. Thank you.
Operator
Our next question comes from the line of Joachim Gunell of DNB Markets. Please go ahead.
Joachim Gunell
Thank you. So on MI and the encouraging comments in China. Can you talk a bit or provide any commentary of the linearity of the improvement in that region if it is – if you saw that already in the beginning or in the quarter or it was weighted towards the end?
Ola Rollen
No. We saw already last quarter that Q3 would be stronger than Q2 in China. And it’s a combination of factors. We have decentralized our organization in China. China consists of several regions, and we have regional offices all across China. Those regional offices are allowed to travel to customers in the same region and that’s why we continue to service our customer base. And – no, so we saw already at the end of the second quarter that Q3 was going to be a stronger quarter than Q2 in China.
Joachim Gunell
Understood. And this has been a topic for the past quarters. But as you think about the potential for, call it, reassuring or increased domestic manufacturing, how has this played out for Hexagon thus far in terms of, call it, increased demand for software solutions [ph]?
Ola Rollen
I think it played a positive role. We can definitely state that it’s not reassuring, but you do see countries in Southeast Asia benefiting from the fact that large U.S. OEMs don’t want to rely 100% on manufacturing in China. So, they are not cutting back on their capacity in China, but they are expanding elsewhere. And I am thinking about countries in Southeast Asia like for example, Vietnam. It’s very hard to say what is reassuring and what is just good demand in Western Europe and North America. But with new technologies, we do see that maybe the cost advantage moving the manufacturing to Asia, it’s not as great it used to be. So, reassuring will definitely be a topic for the coming few years.
Joachim Gunell
Understood. That’s all for me. Thank you.
Operator
Our next question comes from the line of Nay Soe Naing of Berenberg. Please go ahead.
Nay Soe Naing
Hi. Good morning everyone. Thank you for taking my questions. I have two, if I may. Firstly, starting with the MI segment, the performance in there is actually better than what I expected. So, very impressive. Just wanted to get a bit more understanding on obviously, in MI, it’s more software driven, but you also have the hardware element. So, if you could add a bit more color on where the good performance, the strong performance is coming from. And then I will leave the second question for later.
Ola Rollen
It was good performance across the portfolio. So, we can’t say that we are disappointed with software or hardware. I see they both grew quite nicely in the quarter for MI.
Nay Soe Naing
Perfect. Very helpful. Thank you. And then the other question is on the Geosystems. Apologies if you have already covered this. And you mentioned that the – well, a low group average growth in Geosystems this quarter because of the tough comp last year. But when we look at it, actually, Q3 relative to H1, possibly in an easier comp, is that a best statement to make and any drivers that you will call out in terms of the performance in the quarter?
Ola Rollen
I think Geosystems had a really strong quarter. You can’t complain if you are delivering above 30% EBIT margins and growing 4% on top of 15% this time last year. But one also has to be realistic and Geosystems growth comes in spot. So, we have cycles with new development and as we launch those new products, we typically get to grow but again.
Nay Soe Naing
Very good. Thank you very much.
Ola Rollen
Thanks.
Operator
Our next question comes from the line of Nicholas Green of Bernstein. Please go ahead.
Nicholas Green
Hello. Good morning. Nick Green here of Bernstein. Thanks for taking my question. I am interested in your comment on the slowdown to come that we may perhaps have a quarter or two quarters period of growth before manufacturers finished working through their order books and that we saw Hexagon is already preparing for this. Hexagon was quite a lot larger today than it was during the last couple of downturns. Maybe just give us more opportunity to take costs out as you indicated. So, can you just maybe give us some examples, talk through how Hexagon is planning for this? Maybe there is more material footprint synergies this time around than previously? Maybe just provide some more color, please.
Ola Rollen
No, I think what you have to start with is to do the acid test, can you deliver the same profitability applying a 10% salary increase and let’s say, a 10% volume growth. What happens to your business and that’s what any business should do in this situation. And we have applied that. We have discussed the realism of that scenario, and we have done a few same scenarios.
Nicholas Green
Thank you. And then a follow-on to that, maybe then again, because Hexagon is large and diverse, can you give examples of which of your businesses you expect to be effectively most cyclical, most impacted by the slowdown coming ahead? And also, which ones do you expect to actually be countercyclical, where you are hoping that demand will continue to increase as we move into a manufacturing slowdown?
Ola Rollen
I think if you put it like this, we got roughly one-third of our business in the broader construction sector. And if you look at the broader construction sector, what’s likely to happen there. We do see a slowdown in, for example, the residential housing projects. So, that’s an obvious slowdown that is affecting Geosystems primarily, but also a bit A&P. And – but on the other hand, if you look at that broad construction sector, what’s going to happen to infrastructure, where we have seen a lot of governments talking about programs to improve infrastructure across both North America and Europe. So, that’s going to be a counter impact to maybe the residential housing market that might suffer a bit. And then you look at manufacturing, and that is obviously connected to the consumer spending. Right now, it’s almost impossible still to buy a car, so – due to the delays in the manufacturing chain. Eventually, that’s going to be resolved. But how long is it going to take, is it going to take three months, six months, no one knows. And what’s the general economy and what’s the shape of the consumer as those backlogs are gone, no one knows either. And we go to one-third there. And then our last third is the combination of infrastructure, energy, mining, agriculture and defense. And that is the contra-cyclical third of Hexagon that right now have a pretty good growth outlook.
Nicholas Green
That’s very helpful. Thank you. I will turn it over.
Operator
[Operator Instructions] And our next question comes from the line of Johannes Schaller of Deutsche Bank. Please go ahead.
Johannes Schaller
Yes. Thanks for taking my question. Good morning guys. I was just wondering if you could give us a bit more detailed update on the component shortage situation. Maybe just quantifying the impact of this quarter and what you then expect in the next quarter? Some of the actions you are still doing to mitigate the impact? And lastly, do you expect any residual headwinds on growth from component shortages next year? Thank you.
Ola Rollen
I mean what’s happening – we have seen an improvement across segments. Even the report, we stated minus 3% from component shortages, so that’s the impact in the quarter. But we do see a lot of improvements that is coming in two ways. First of all, there is an increased supply from semiconductor manufacturers. And then there is a slightly weaker demand for silicon wafers. So, it works in our favor. And whether we are going to see it not, our bet is that we are going to come out of this as of next year. But so many things can happen in the economy that it’s hard to give you a good and precise answer at this stage. But that’s our main scenario that this is over next year.
Johannes Schaller
And in Q4, you would expect a similar impact like the 3%, or should it be already quite a bit better situation?
Ola Rollen
We will see.
Johannes Schaller
Understood. Thank you, Ola.
Ola Rollen
Thank you.
Operator
Our next question comes from the line of Magnus Kruber of UBS. Please go ahead.
Magnus Kruber
Hi. I am Magnus Kruber with UBS. A couple of questions from me, but I just want to thank you all for your insight over the year and amazing story to follow. I am sure it would be the case still under Paolo’s governance. Thank you for that. First, could you give us a bit of color on the growth progress through the quarter, I think particularly in Geosystems and how October has started? And sort of within that, also Geosystems has obviously been there, is this most impacted by these shortages? And has there been some kind of catch-up effect in the quarter there as sort of supply got more increasingly available? I mean is the underlying growth actually weaker than before, or how should we think about that?
Ola Rollen
No, I think the underlying growth has been forward. I couldn’t hear you at first. What – did you ask about the gross profit or?
Magnus Kruber
No. Just growth.
Ola Rollen
Just growth. Alright. And it’s continued so far. I mean that’s not a trend, but we do measure our growth every day in Geosystems. So, so far, we have seen similar situation at the third quarter going into Q4. But the Geosystems is the one that we have to watch because it’s an early indicator of a slowdown, as I have said, with the construction industry, especially residential housing.
Magnus Kruber
Absolutely. Perfect. Thanks a lot for that. And maybe returning to China, could you comment a little bit on the outlook there and what you see sort of outside of construction, obviously, still quite weak. But is there any sort of particular end markets you want to call out as sort of seeing a notable pickup?
Ola Rollen
I think what we managed to do over the last 2 years is to move. There are two markets in China. There is the so-called international market, and there is the local market where you need Chinese content to be able to penetrate it. So, we have seen a weaker outlook for China in general. The Chinese economy has slowed down. But we have been able to start penetrating the local market, which is roughly the same size as the so-called international market, which has given us a lot of opportunities to continue to grow in a sequentially weaker market for China.
Magnus Kruber
That’s very interesting. Could you sort of comment a bit on how your revenue exposure at this point is balanced between the international and the domestic?
Ola Rollen
International, it’s hard to say, but I would say the international market is probably still bigger. But the local market is growing faster.
Magnus Kruber
Got it. Thank you so much Ola.
Ola Rollen
Thanks.
Operator
Our next question comes from the line of Toby Ogg of JPMorgan. Please go ahead.
Toby Ogg
Yes. Hi. Thanks for taking the question. Just a quick one on M&A. Perhaps you could just give us a quick update just on the M&A pipeline and just give us a feel as well for how M&A dynamics and those conversations are changing, if at all, given the sort of the significant de-rating we have seen in the sector year-to-date and also the incoming recessionary environment? Thank you.
Ola Rollen
Yes. We are going to spend €5 billion buying a company at [indiscernible]. I think to summarize the M&A market, you can say the sellers are still living in 2021 and the buyers are living in 2023. So, it’s a bit of wait and see in the M&A market. There are a lot of discussions going on, but very few closings of the deals. So, eventually I guess both buyers and sellers will live in the same year, and then you will see transactions happening again.
Toby Ogg
Understood. Thank you.
Operator
And we have no further questions at this time. So, I will hand back to our speakers for closing comments.
End of Q&A
Ola Rollen
Right. Thank you everyone for listening in. And I will not do this next time, but Paolo will. So, have a great day everyone. Bye.
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