Investor Update

Jun 13, 2014

Good morning, everybody, and welcome to this telephone conference that relates to Husqvarna's launch of the new brand driven organization. This is Kai Van. I'm the CEO of Rilskona. And on the line, we have Ulf Liljedahl, our CFO as well as our Investor Relations to Gas Norvie. It's our intention to cover the reasons why we do this, what we expect to get out of it, the purpose and objectives, the 4 divisions in the future structure, the new group management and the next steps. After that presentation that I expect will take about 15 minutes, we will open up for some Q and A. So let me start with relating now to the PowerPoint that has been distributed, Page 2. What we are looking for here is to aim at the next step beyond the Accelerated Improvement Program. The Accelerated Improvement Program is, of course, a priority as much tomorrow as it has been since I defined it, quarter 3 last year. And as you know, this program runs for 2014 2015. But as a new organization, the brand based organization is aiming at giving direction for the next coming years after the AIP program. And the aspiration we have is market leadership. So the fundamental piece here is we see a need to take a further step to differentiate our business more. And we also pretty much see the competitiveness depending, of course, to our ability to respond to the customer needs we have. And the brand constitutes the different business models. We are talking about the Husqvarna brand. We are talking about the Gardena brand. And we are talking about the consumer brands, all related to forest and garden. In addition to that, construction is maintained as is. There will be no change related to construction. So this fully relates to the forest and garden space. The brand based organization, as we see it, will be the vehicle to focus on the distinct and different end customers with different needs, and I give some examples of that when I introduce the divisions, but they are distinctly different. And we see the brand equity and recognition as a vital piece for the future and moving ahead and to continue building that and enhance that. For us, it's, of course, encouraging to look at construction. Construction has very consistently built the First Kona brand in that space and is today by most people in that industry known as the technology leader. And we see that as a role model for parts of this reorganization. I'll turn to Page 3 with the headline of the key purpose of the new organization. What we are looking to do, if I start with the key objectives, is to strengthen the end customer focus. We are looking to enhance the accountability and ownership, and we are looking to enhance also the speed of the decision making. Furthermore, we want to differentiate the priorities and offerings by the business models. We see that the differentiation of the business models as an opportunity to simplify the life of many people by being able to focus here on one specific brand and related business model. And of course, at the same time, as we do this, we want to maintain the leverage from our market positions and the scale. So the solution we see is very much relating to installing global profit and loss ownerships. We want to align the business models with their respective strategic direction, and we want to align also the business model, the strategy with the resources and the offering and the leadership structure. So that is how we see that we can bring and have been the very strong base for the future here. While at the same time, we are not giving up on the synergies that we see in the group to make the sum of the group more than the individual bits and pieces. And I'm talking here about aspects like technology, like sourcing, like logistics, sales and operations planning, just to mention a few of them. There are obviously other ones. But these are good examples of where we really do have clear synergies across these divisions that we are forming. So in brief, aligning the business model, which is brand based with the strategy, the resources and the leadership structure and with its distinct offering is the part of the solution here and thus giving us global businesses with strong leadership and ownership. I'm turning to Page 4, which is then the description of the 4 divisions, where our 3 Uphors and Garden related Husqvarna representing about 52% of our revenues. Husqvarna is a dealer centric brand and very much related to the professional and the demanding consumers. We talk a lot about product performance, specifications, services to those customer groups. Gardena represents about 13% of the group revenues. This is primarily retail centric, but it also has sales in other channels. It can be characterized as in retail terms as a must have position in mobile watering even though that the brand encompasses also electric hand tools and equipment in parallel to the mobile watering. The 3rd division, brand division within the Forest and Garden space is the Consumer Brands division. It represents about 25% of the sales. And in this area, this is, of course, retail centric. It is a lot about cost efficiency and scale and good enough specifications. You could characterize it in the retail terminology as a better position, where the trade events would be good kind of terminology and this would be the better and Gardena would be an example of a best category position. So 25% in the consumer brands, 13% in Gardena, Tisitru, Enniskuana and then Construction with 10% not impacted by this reorganization in Forest and Garden. But as you might be aware of, we are talking about professional customers in Global Construction and Stone Industries on the construction side. Moving on to Page 5. How do we see the organization with respective responsibilities for the future? Well, we have 4 divisions that we'll be reporting externally. And these 4 are the ones I have described Husqvarna, Gardena, Consumer Brands and Construction. Pavel Heiman will head the Husqvarna division. He joined recently from Assa Abloy in Asia. We have Gardena, who will be headed by Sasha Menjes. Sasha has been in charge of manufacturing and logistics recently and been with the group for quite some few years now. Consumer brands, it's going to be headed by Alan Shaw, who joined the group August last year and who has been responsible for the Americas business unit. Construction remains with undistributed. In parallel to these external segment reporting units, we have a group operations function, which will be headed by Valentin Dollhouse located in Stockholm later on. Valentin has been running the sales and operations planning for the group recently. Ulf Liljesdol remains CFO as is Ole Wallen also as is in legal affairs and Per Eriksson remains on the people and organization side. We have promoted Per Ostrom in business development to become part of the group management. We have installed a technology office, which Henrik Andersson runs or will have, I should say. And Henrik has been in charge of the product development and the category organization previously. So Kjakselsson is promoted now into group heading them branding and marketing, where she has been responsible for C4. And the accelerated improvement program with its program office will also be part of management during 2014 2015. To that, we have Frieda Nordbomssans, who has been heading EUAP EuropeAsia Pacific in her capacity as running strategic sales initiatives. So that pretty much makes up the group management going forward. I'm turning to Page 6 in the presentation, the next steps. The new organization will be implemented gradually and be fully effective as of 1st in January from next year. And that is also when we're going to start to do the reporting. So we foresee quarter 1 2015 to be the Q1 of reporting. Ulf will make some comments as to this to the 3rd sub bullet on this page. We will give, of course, additional details as we progress. And I think as you realize, this is a kickoff of the new organization, and there will be many steps of further detailization moving ahead. And we intend to report further progress in relation or connection to the quarter 2 interim report the 16th July. As you noticed, we postponed the Capital Markets Day from 10th June to September 25. And the reason was that we wanted to make sure that we had the opportunity to really go through the new organization and direction with the top management. And I have had this week more than 100 people gathered to do exactly that. We have, of course, reported 3 interim report October 22 where further details will be provided. Before I leave over to Ulf, I just want to emphasize that nothing has happened as to our judgment of the business situation since quarter 1. We talked about being cautiously optimistic about underlying demand, and we talked about the focus on the execution of the accelerated improvement program. So really, I want to end before I leave to Ulf with the same comments as I started, meaning this is a proactive step for us to give direction beyond the accelerated improvement program. That's what we're aiming for. So with that comment, I'll leave to Ulf. Thank you, Kai, and good morning, everyone. As a result and as you may have seen then in the press release, this reorganization will mean that the external business area reporting will now from January 1, 2015, comprise of 4 divisions, meaning the 3 Forest and Garland divisions, being Husqvarna, Gardena and the Consumer Brands and then the Construction division. In due course, we will provide you with pro form a figures and restated figures for 2014 per division when it comes to sales and EBIT. And also, I have the effort to provide you with sales numbers for 13,000,000 and 2012. As a result, also to be mentioned is that we will then, by default, default have new cash generating units, meaning that there will be new revenue streams, there will be new cash flow streams and as a result, we have to do a new asset allocation within the forest and garden. That may and please observe, that may create a need for impairments of intangible assets. However, that needs to be further scrutinized and that is a work that will take place as we go and we will communicate that when we know. And with that, I believe I hand back to Tobias. I think with that, we will be ready to open up for questions from the audience, please. Thank you. We now have some questions for you. The question comes from the line of Johan Dahl from Pensabank. Please ask your question. Yes. Hi there. Johan Dahl here. I was wondering, could you just add some data on the split up of the manufacturing operations? How is that done? Is that a complex operation as many of the factories produce for several of the various brands? And second question, if you look on the sales force, especially in the consumer brands segment, what detailed changes are being done there to promote price discipline towards your major customers in the consumer brand segment? Thirdly, I was wondering if Husqvarna and Gardena, is that 100% of the profits or more than 100% of the profits? Thanks. Okay. Let me see what I can give as a response to your question. I'll start, Johan, with the manufacturing piece. Yes, the manufacturing units are distributed allocated to the various brand divisions. That's correct. I'm not necessarily keen to be specific about that today. I think that is something we probably are open to communicate in connection to the interim report in about a month's time. But we have a hypothesis about it and we are working on validating it. And I think for the most of the plants, it comes fairly natural to allocate them to the brand divisions. There are some exceptions and those are the ones we are validating of the best. But at the end of the day, there will be intra division trade between the brand divisions. And of course, we need to set proper incentive structure for dealing with that. That was the first comment. The second one was related as understood to the sales of the consumer brands and the price discipline. Of course, price management is going to be a vital and it is and it will be remains on for the future a vital key component in creating value for the consumer brands. There's no question about that. But I think the real benefit here, I think that has been exercised with some good results though. I think the real gain is the opportunity for the resources in the Consumer Brand division to focus on specifically these brands with the business model of being very lean and mean work with the cost efficiency and the scale and go all the way, so to say, in that business model and also take that globally. So I think that's where I expect the biggest benefits from that structure as such. Then as to the third question, you were asking about the profit split. We are not in a position today to give you that level of detail unfortunately. So we cannot simply answer that. But it is fair to assume that it's a substantial piece of it. I will not comment whether it's 100% or 75%. You will not get that specific today. But of course, it's a vital part as we have communicated at previous in connection to pre build external occasions. Okay. Can I just ask you, should we read into this reorganization a significant more focus on buy versus make as it is brand centric? And secondly, I don't understand how the evaluation of the goodwill can change due to reorganization. I believe that impairment test was done at year end. How will that change to today? Thanks. Okay. I'll take the first one and then I'll let Ulf ask on the impairment. Will there be a radical change in buy versus make? I think for the first corona, I don't see any real change. I don't foresee that really. I'm not sure there will be any radical changes for Gardena either. I think the new model opens up to play the various brands in the consumer Brands division. We're talking about Makalov. We're talking about Poland Pro. We're talking about WeDeeper and Flymo, just to mention the most significant ones. It opens up, of course, to maybe more actively source certain categories of products for specific brands. So hopefully, we will be able to create a much better focus in this new organizational structure and open up some degrees of freedom, for example, for the Consumer Brand division as your question related to. I'll leave it to you, Olof, to comment on the impairment. Yes. And as I said here before, the change is related to that. Today, we have goodwill and other intangibles attached to a geographical approach. As we now change to a brand related approach, there will be new revenue streams. There will be, as I said, new cash flow streams. And as a result, we have then to reallocate also the assets. And that, as I said before, please observe, may imply an impairment. And again, it is a change of the so called cash generating unit that goes from a the unit that goes from a geographical approach to a brand approach. Yes. But you must have lowered the total. Is that correct, Ron? I beg your pardon? You must have lowered the total expectations then, I presume. No. It is really due to that you had a different allocation of the assets that you did not have before. And it was on a blended basis on a geographical approach. And now it will be more specific to a brand approach. That is the background. Thank you so much, Michael. And this is purely from an accounting perspective. Excellent. Thanks. Our next question comes from the line of Peneath Toale from Carnegie. Please ask your question. I think that's me. I have a question on the Husqvarna branded products. You say that it's very much oriented towards the dealer channel, but you also sell Husqvarna branded products through retailers in the U. S. And in some places in Europe. How will you handle that? Will that be a competitor to the consumer brands then? Or would you stop doing that? Yes. It is true, to start with, that we also sell Husqvarna through some very few retail retailers and predominantly in U. S. Is there a competition to the consumer brands? No, I would say it isn't really because we are talking about different end customer segments that we target with Husqvarna versus the consumer brand. And it's different specifications and it's a different value proposition altogether. So I don't see that really being a question for us. But of course, over time, we have reason to believe that our industry is not going to be that different from many other industries, I. E, we will see more of multichannel as we progress ahead. And these relatively autonomous divisions that we're talking about here will, of course, have the full scope in the go to market in terms of channels. It's up to their discretion, so to say, as long as we have the brand architecture being applied intended here in this structure to go to market with that offering. So and it's also part of what we think is important to open up for the future. But today, I'm talking specifically, Husqvarna, it is dealer centric, and there will be no imminent change of that in any respect. But don't you see a risk then for more sort of cannibalization if you have say Gardena branded lawnmowers and not only the irrigation products, but the other ones they could compete with the Flymo brands and the other brands in the consumer division? And how will you handle that competition? It's a very good question, first of all. But I think we have went through fairly thoroughly the homework of the customer segmentation and how it looks like on one hand. And we have worked through also the brand architecture, meaning what type of stretch do we want to have with the Husqvarna brand, what price points and specifications do we target and where does Gardena, respectively, the various consumer brands come into play. And with the distinction between the various targets group of end customer segments and the distinct offering differences, we think we can handle that and see that rather as something positive than necessarily something negative. Okay. And this split up, will it make it more easier just being one of the divisions off? I guess you could argue so in a certain sense, but it's definitely not the intention. And the reorganization is not driven by that. And as I emphasized, there are substantial synergies amongst these divisions that we want to remain capturing. And of course, it's obvious if you're talking IP and technology roadmaps and how we link them to product roadmaps, that's a very important area. And I think with the highest share electric and battery related products that pace of technology change will increase, meaning that this item and correlation is going to be even more important for the future. Sourcing is an enormously important synergy in the group, and we are, of course, going to make sure to maintain that, and we won't let anything of that go. Logistics, I mentioned that as well. So no, I think we I mean, this is really to really be seen as a proactive step to position us beyond the accelerated improvement program, which is running now 14% and 15%. We've aimed to deliver 10% in 2016. But it's to give the direction when we enter in more to the growth phase again. Right now, we're talking very much about selective growth. We want to grow our profit pools. But I guess there will be a slow turning towards more generic growth as we have, so to say, shaped the product offering accordingly structured, That said, it's more optimal. Okay. Thanks. Our next question comes from the line of Johan Eliason, Bonhoeffer, Jeanvenir. Please ask your question. I guess that was me. Do you want to leave us on that Kepler Cheuvreux? A question on these impairments. I can understand what you said that you're allocated and you would have different cash flow. A big chunk of your goodwill relates to Gardena. Is that the issue you see here now when you split out Gardena again as a separate unit? As said, I mean, we are only highlighting it May where and how much we have to come back. So I can't give you a definite answer today. But of course, there is, as you rightfully say, there is a big amount in our total intangible assets related to the Gardena trademark and goodwill. But we will come back and be more specific as we go. Because as we understand, this is something that has to be done when we have a clear picture on how those divisions will look like the next couple of years when we make our forecasting and not least our budgets of 20.15. So more to tell as we go. And then coming back about what you need to tell us, will there be any other charges? I mean, you're talking about quite a big reorganization here potentially with people leaving or plans reorganization and stuff like that? Should we have some cash impact as well from this? You can proceed if you want to. Yes. As you have seen from the press release as such, I mean, this is a forward oriented view. So I mean, this is not triggered by a restructuring per se. I mean, again, implementation costs as well as redundancies at this stage, we regard to be limited. So limited as you see it so far. Good. Yes. And then just finally, my next question. If I may comment, I mean, there is a fairly big shift of resources and orientation of the direction. And of course, we have a transition phase now until January 1 when this is fully effective. But we want to make sure that we have minimum disruptions in this period of time. And we are executing at this point in time also very successfully the improvement program. And we don't necessarily want to throw up too much stuff in there. Eventually, it is my belief that this is going to be a more efficient organizational structure, I. E, leaving potential for some rationalization at some point in time. But that's not the primary target of this now. So this is to set the direction for the future. That's what it's about at this point in time. Yes, it's good. I mean to me it looks like you're sort of going back to the old structure where you had consumer products and then professional products separated. Obviously, now you have Gareria and the construction business. Talking about the brands, you don't mention JUN, Sverigato, Kitho or etcetera, but they are not rationalized the way you're or they are just small parts of the Husqvarna brand, I guess? Yes. There are a couple of brands which we are validating at this point in time, where they fit the best and how we want to move forward with them. And those 2 are a couple of them, but I don't think we we don't have anything specific to say about it today. Excellent. And then I mean, obviously, you have the 10% margin target 20 16. I guess that's still valid. Now we will never know if you reached the 5% margin target in Americas, obviously, but I guess it's part of this 10%. Can you say anything about what sort of targets you will focus on going forward? First of all, I mean U. S, no, you won't see that as an external segment reporting. That's correct. But many of those activities that are related to the U. S. Turnaround will, of course, be equally important. And many of them relate the Consumer Brands division. And I'm sure Olsson and I will make it reasonably transparent for you so you can follow that. Even though we might not officially report, I think we will communicate such that you can get some references with the history here. So I think that we will handle and take care about. Okay, great. Thank you. Our next question comes from the line of Rasmus Einberg from SHB. Please ask your question. Yes, hi. I was wondering about the consumer brands division. To me, it seems like there's a huge number of brands that all essentially serve the same clients with the same product. Is it there that you see the more synergies that if one if that's managed under one roof, you make sure that Polan a handheld product business or whatever? Or how should we look at that? Because they seem now to be focused on who sells the product to decide for what brand it is. Is that the idea? Yes. That's it's correct that they will have some brands in their portfolio and it's for us to be specific about those and they need to make sense naturally in an overall brand architecture with well differentiated end customer segment target groups and offering. And that work is ongoing. We are quite far down the road with the validation of it. And that's also why we are talking predominantly about McCullough, Poland Pro and we're talking about Flymo and WeWe Eat Trip as probably what's going to plow that. But there are other brands not mentioned here necessarily, which we are validating at this point in time. And the second question, I mean, normally, when you have a company which has a very complex product line mix with too many platforms, normally that is an effect of having had a brand organized company. And I, to me, think that your company, to some extent, has that problem. And yes, you're going from a geographic to a brand specific stuff. I mean, how are you going to make sure that the Head of GARDENA does not think that we also want to make the highest specified product or the head of Husqvarna, which has already been the case, goes after the volume end of the market. How are you going to manage that that? Yes. It's a good question again. If you look at the group structure on the Page 5, you will find a branding and marketing office directly reporting to me. I think the brand based structure is the right way for the future, but it needs to be based on the brand architecture that is worked through from the customer segmentation point of view and the offering point of view such that the offering also really display a true differentiation. And I would say we are ironing that one out and there will be further steps to take on the product development side to really get it right. But in certain pressure points for the future, that will be resolved through the branding and the marketing office and my involvement if required. But I think the first point I want to make is with these brands of Husqvarna, one hand Gardena and the ones I mentioned on the consumer brands, they form the various business models in which we operate today and they are distinctly different. So they have distinctly different facilities. I'm very confident about that this to allocate the resources to them, leadership structure, The global P and L responsibility will give us speed in the decision making and accountability. I think the construction model proves the success of that. And I'm looking for releasing energy in that sense and simplifying life for people here. So we are confident that we will be able to handle those potential conflicts. Can I ask you also the sourcing, is that going to be on in each division? Or how is that organized now? The sourcing resources are allocated into the Brand divisions. But within the group operations, there is a person who's going to keep that together, and that's going to remain Martin Alterman, who is the group purchasing officer today. And we will have a lead buyer concept, meaning that it will be coordinated by Martin Alstomann across the brand divisions. And we have a very effective, in fact, program running, which we call X Sight. It encompasses about 150 suppliers, but almost 75% of the spend. And we will maintain that program going forward. So we will have the commodities and the lead buyers and the excite program. So from that point of view, to be very strict to maintain that situation. But not involving any resources from, so to say, group operations in the daily operations. There's no value in that. So we're talking about very few people in group operations, but more of a specialist character, a senior character to make sure that the structure remains and that we really capture the synergies here that there are to benefit from and they are substantial. Okay. Thank you. We have another comment from the line of Tyni Tull from Carnegie. Please ask your question. Yes. I have a question on the big success you have had on the robotic lawnmower in recent years. That has in my mind that is very much a consumer product and it has been branded Husqvarna. And now when you're turning Husqvarna even more to a dealer channel product, will you then sort of rebrand the robotic movers more into Flymo and Gardena and so on. And when doing that, are you not losing the investment you made into that product? I think it's a good example you bring up with the lawnmower because it's a fast growing segment. Husqvarna pioneered the category. We are by far the market leader, and we are determined to remain. You will find already today the robotics long mover under the beyond Husqvarna. You will find it on Gardena. And I think even Flymo has a version of it. Primarily, we are benefiting from technology synergies throughout the group. But again, distinctly different customer groups and channels to the market, whereas Husqvarna here is dealer centric. It's not more dealer centric in the future, but it is dealer centric today. It will remain so. But over some period of time, I think in general, we have to accept that the market is going in a more multichannel direction with or without Swisscrowners, so to say, I don't think we have the opportunity to influence that larger scheme of direction and changes. So we again, I'm coming back to the same point. The brand architecture on one hand and the product differentiation on the other hand, going with the target groups of the customer segment is the key to keep control of. And if we do that, I think we are better off bringing this lawnmover offering, for example, to the market in different channels and different brands. Okay. Thank There are no further questions. Please continue. Okay. So if there's no further questions, I'd like to say thank you for listening in. And as you have heard, we see this as a proactive move for the next few years to come beyond AIP, the Accelerated Improvement Program, which is still the shorter term priority for us. And we're looking forward to share more details as we progress and the next vacation will be then July 16. Thank you very much. Thank you. That does conclude today's conference call. Thank you for participating. You may now all disconnect.