Earnings Call: Q2 2021

Jul 16, 2021

Good morning, everyone, and welcome to the presentation of Husqvarna Group's report for the Q2 2021. My name is Johan Andersson, responsible for Investor Relations at Tuskone Group and I will be the moderator here today. On the call we have Henrik Andersson, our President and CEO and our CFO, Glen Instone. Henrik and Glenn will present the report and afterwards we will open up for questions. And let me also remind you that this session is recorded and will later be published on our website. So with this, I hand over to Henrik. Thank you, Johan, and also a warm welcome from my side. We delivered a record strong quarter here in the second quarter, is continuing to rebound from a quite challenging situation last year. Very good to see that we have a solid performance in all the divisions and in all main regions and in the vast majority of the core product segments as well. So it's a strong performance across the board. And of course, an important part of what we do is to execute our strategy. And today, I will take the opportunity to talk a little bit later about 2 very important product introductions that we did During the Q2, that really sets a new trajectory for us and opening up new opportunities in the future. With that very high level summary, maybe we zoom out a little bit before we go into the details and look at outperformance over time. It's important to bring things into context sometimes. And what is evident looking at this graph We have purposely built a stronger Who's Corner group over a number of years, where we have really increased our focus on the divided few brands and product segments And that has also led to us reducing our focus in certain areas and even to exit others. Looking at 2020 and the last 12 months rolling, we are clearly above our 10% which is our target to be clearly above 10%. And there's, of course, an element in this benefiting from the increased gardening interest stemming from the stay at home trend. Fundamentally, we have also improved the company over the years by changing purposely changing the mix responsible for the Q2. If we don't zoom in, looking at the quarter From a revenue perspective, we had organic growth of 14% amounting to SEK14 point SEK6 billion, and we have strengthened position our positions in general. We have strong performance in the main regions and in prioritize the strategic segments. Strong performance, as I said initially, across the different divisions. For a remarkable performance given that the weather has not been favorable in the core market when it comes to irrigation products comparing to an exceptionally strong quarter last year, and that's because of the really good and solid growth and the focus markets, primarily in Southern and Northern Europe. And we have delivered on this growth despite global supply chain constraints. Let's not overplay that, But of course, the growth could have been just a little bit higher if we wouldn't have had those situations. From an operating income perspective, we increased this by 21% to SEK 2,600,000,000 or just over 18% of largely driven by revenue growth, by price increases and improved mix. And this despite the pressure from higher raw materials and logistic costs. Our financial position is strong, and we strengthened it yet again during the quarter. The direct operating cash flow for the first half here is just above SEK 3,000,000,000 and we have continued to reduce our debt during this time. And if you look at the net debt EBITDA has now decreased to 0.7, which is a very strong position to be in. Very good to see is the development of Robotics and Battery. This very important segment grew 27% During the Q2, about twice the growth rate of the group average and now accounts for 18% of the total. We can see growth both in the residential and in the professional segments, and the professional segment is no longer Significant from a growth rate perspective, but also start to become significant from an absolute Absolute amount perspective as well. And we have here a solid pipeline when it comes to new product introductions, etcetera. During the period, We unfortunately also experienced a quality problem with robotics affecting a large number of customers. And this is something we take extremely serious and it's our number one priority to resolve this as quickly as possible. And we truly apologize for the inconvenience that we have caused our customers and trade partners inside of this. We are largely for each and every customer here. With that, as a summary of the quarter, I hand Thank you, Henrik, and welcome all. So a little bit more detail on the numbers as Henrik sales. So we start off with the Husqvarna division. Of course, we're extremely satisfied. Our net sales grew by 18% organically. And actually from a first half year perspective that was plus 20%. We had a strong growth in all our regions and all of the main product categories, notably in robotics and handheld products, both petrol driven and battery driven. All regions have strong as said, have shown a strong growth in the quarter, particularly strong in emerging markets and our European region. Responsible for the division. And despite the supply chain challenges that we've had this year, organic sales growth, as said, We managed 20% through the first half year. Susquehanna Siora was formally launched in the quarter. We've teased this a couple of times. We We formally launched our SIORA product in the quarter and that has been extremely well received and that is a pro robotic mower designed for demanding pro applications responsible for the Q2 of 2019. That functions with our EPOS technology, satellite based navigation system that enables us to mow with virtual boundaries. And that launch really truly emphasizes our commitment to sustainable The operating income for the division grew In the quarter, we went to 17.4 percent EBIT, actually going with 42% overall, coming up from 13.4%, so an impressive leverage on that sales growth from the division. Same across the board, we've increased prices and we've also had a strong product mix. There was a slight headwind in the division from FX, SEK 55,000,000 in the quarter and RMI was approximately SEK 75,000,000 a headwind and we also have further logistics headwinds. On a year to date basis, I could say it's a pretty much copy paste of what I said for Q2. Strong growth as already mentioned, growth in all regions. Operating income actually increased by 50% to 17.4% from 12.8% with a strong leverage from sales growth, price increases and product mix. On a rolling 12 month basis, the division therefore grows by 20 percent on a top line perspective and as an operating margin above 13%. Moving on to the Gardena division, Another strong performance. The division continues the growth journey that we have seen for several years now. Sales were strong in our strategic focus markets of Northern and Southern Europe, which offset the late start to the watering season in Central Europe. And still we managed to maintain a flat sales development comparing to a record Q2 last year for the division. We actually had strong growth in all product categories, not just watering. There we outside of watering, we had a strong growth in robotic lawnmowers and hand tools Where the division continues to strengthen its market positions. There was a decline in watering, I should add that given the late start to the season in Central Europe. The solid mix and price increases were partly offset by increased raw materials. Responsible for the division was approximately SEK60 1,000,000 in the quarter. And we've also continued our strategic investments, notably in brand and e Commerce activities during the quarter, but still we managed to generate an operating margin of some 25.2%. On a year to date basis despite the flat sales in the quarter plus 15% sales through the first half year, the earnings for the division by the headwinds of FX, which was SEK40 1,000,000 and raw materials at SEK80 1,000,000. Looking at the rolling 12 months Extremely pleased with that. Moving over to construction, a strong rebound as Henrik says for a continued strong rebound with an organic sales growth of 31% in the quarter. And actually, we had a further acquisition benefit from blast products that we acquired there at the year end that would have generated a further 13% of the generate further 13%, for organically 31% sales growth. The market has improved for the construction industry again during the Q2 and the division continues to improve its market positions in all of our main markets. The operating margin improved significantly to 13.7% from 9.9% in Q2 last year, driven from the strong sales growth, increased pricing and the improved mix, notably Power Cutters and Light Compaction Solutions. As per the other two divisions, we see headwinds in FX, SEK35 million for the division and also logistics headwinds with a slightly lower impact from raw materials impacting construction. Basis with sales are now plus 12%. And you remember we were at a somewhat flat position at the end of Q1. So we've gone from a flat rolling 12% to a +12% on a rolling 12% and the operating margin is now at 12.7%. Moving over to the EBIT bridges for the group, and hopefully these are well received. We actually had A very strong market driven improvement, a 21% growth overall in operating margin, but for the market driven improvements generating some SEK700 1,000,000. Pricing was also positive in the quarter SEK155 1,000,000 and that represents approximately 1.2% price increases, which is very much in line with our previous guidance that I'll come on to on the next page. We continue to expand in our strategic initiative areas. This is approximately SEK 165,000,000 in the quarter, somewhat similar there to the pricing figure I quoted of 1.2%. Just to put that into the gross profit and SG and A buckets, it was approximately SEK 70,000,000 second gross profit SEK95 million SG and A activities. Raw materials gave us a headwind in the quarter SEK140 million. Again, I'll come on to the full year guidance on the following slide. FX was negative in the quarter to the tune of SEK80 1,000,000. Again, that sits about SEK130 1,000,000 negative in the gross margin and a positive Our full year guidance is in line with previous expectations on FX, Well, we are thinking SEK300 1,000,000 to SEK350 1,000,000 and it's probably at the lower end of that guidance, as we see it today. Moving on to the half year bridge and then I can really flavor with the guidance. The big increase there of course is the market driven improvements SEK1.7 billion positivity, which we're really pleased and that's really the strength of the increased market positions, the strong growth, but also the profit pools, as Henrik alluded to, that have grown well during the first half year. Price increases, we are now at SEK270 1,000,000. That represents about 1.1% of sales, very much in line with our previous expectation. We would expect this can more or less offset our raw materials headwinds across the full year. So a guidance of something in the magnitude of SEK 500,000,000. Strategic initiatives, SEK 260 SEK 1,000,000 during H1. Again, just splitting that down into the two areas for you, SEK 95,000,000 in the gross profit and 165,000,000 in SG and A. Raw materials went negative in the first half year. It was €40,000,000 in Q1 and €140,000,000 in Q2, so €180,000,000 for the Q2, so SEK 180,000,000 on raw mats. We actually revised our previous guidance on raw materials upwards. We now think it is going to be more like SEK 500,000,000 to SEK 550,000,000 from the previous guidance of SEK 350,000,000 to SEK 400,000,000. That would leave us a headwind of €300,000,000 to €350,000,000 in the second half year. As said, we expect our pricing should more or less FX, EUR 2.15 negative in the first half year. I said guidance of €300,000,000 to €350,000,000 more likely on the low end of that spectrum. So a further €75,000,000 to maybe maximum €125,000,000 to come in responsible for the Q2. Just to remind, of course, 2020 was a special year for us in terms of seasonality, more so in terms of sales, where we had 22% of the annual sales going through in Q3. That was really a periodization effect. I just want to remind you of this, but also, of course, we had extremely strong earnings as a result of that strong sales. Responsible for the Q3 this year, especially comparing to We've actually generated over SEK3 1,000,000,000 in positive direct operating cash flow, comparing to SEK2.3 billion at the same point last year. It's actually a slight negative from the acquisition effect into this as well of about SEK270 1,000,000. So excluding that will be near a SEK3.3 Of course, the main movements are the strong EBITDA generating some SEK1.3 billion more than prior year. We have increased inventories During the period compared to the same period last year, partially because we put the brakes on last year when Q2 was very uncertain, we're also now increasing our component inventory ahead of our second half year and also preparing for the coming season. So we've increased componentry with SEK800 1,000,000. Accounts receivable actually lower than last year despite the higher sales and that is really down to the periodization of the sales in the quarter. Last year very strong sales at the end of the quarter, therefore still sitting on the balance sheet. For this year stronger sales in the first half of the quarter as per our normal seasonality and therefore that cash has been received already. Payables increase in line with our higher inventory levels ultimately we see that. CapEx I would say is pretty much identical to prior year at SEK830,000,000 and we will maintain our full year guidance on CapEx where we feel it will be around about SEK 2 SEK4 1,000,000,000 or around about SEK5 1,000,000,000 to 5.5 percent of net sales. Moving on to capital efficiency, extremely strong performance again, of course, significantly supported by the strong sales, but also strong improvements as I alluded to on accounts receivable, accounts payable in particular. We would expect this to start flattening out and probably increase a little bit as we go through the second half year, but certainly well within our 25% target levels that Just quickly on the balance sheet. Of course, extremely strong financial position. The main items probably to call out there are inventories. Inventories are up some SEK 700,000,000 as reported or 8%. Actually, a slight positive on the FX. It would have been slightly higher increase in like for like FX. But again, our inventory is very much in line with our plans. We are now preparing for Q3 and Q4 and also season 2022. And as said, we have increased SEK800 1,000,000 in component inventory and also around about SEK200 1,000,000 of blast track inventory in there. Receivables I mentioned is largely the periodization and payables also. Just on the debt situation, We paid down some SEK2.7 billion of debt in the quarter. And actually since the quarter end during early July, we've paid down a further SEK1 1,000,000,000 Moving over to the ratio therefore of net debt to EBITDA. Responsible for the Q2. As Henrik mentioned in the intro, we are now at an extremely healthy 0.7%. This leaves us in a good position going into the second half of year. And of course, the main benefit versus last year, really the result of the cash flow from operations generating some SEK 6,500,000,000 positive. So net debt in absolute terms down to SEK 3,400,000,000 and ultimately that is our pension and lease liabilities would make up that number. At that, I will pass back to you, Henrik. Thank you, Glenn. And let's spend a few minutes on the strategy and executing strategy. And I would say Our clear sentiment is that we're executing well on a winning strategy. I will not go through The components again since we have we've done that in previous calls, but to better responsible for the Q2. I gave quite some details as to what the product is. Let's now put it a little bit into context. Just like we have disrupted and transformed the residential market, we with this product set out to responsible for the professional turf industry, which is a very big market segment. We, of course, already now selling quite a few robotics into the pro market, but this platform is really the first truly dedicated platform that we have purposely made for that industry. We launched it And we have received very well, very good response from customers here. And they see the same thing as We see when it comes to how this can actually support several ongoing trends. I mean, there's clearly Cost pressure in this industry, this is a way to reduce operating costs. This is also a way to get to 0 emissions, Meaning that eliminate carbon in this market segment is also a way to provide a silent or low noise solution into these many times very public spaces. So there are several trends that this one will meet or responsible for the Q2 of 2020. Can really benefit from and that's also the response we get from the market. So pivotal introduction where we now set off to also disrupt and transform the commercial turf industry. The Other introduction that's very important is the K1 PACE. This is a new kind new standard of battery power cutters. As you might know, in the Construction division, the responsible for the Q2. Most important product is the power cutter and also the product that to a large degree has defined the brand in that market segment. It's also in an application that consumes a lot of energy. And here we have developed a brand new battery system, 94 volts that can complement our other professional a battery system that is 36 volts to basically enable us to to step into applications that require more energy, that are more demanding. And here we can actually bring to the market the 1st battery power cutter that have petrol like performance. So this is really now giving the Construction division the opportunity to build a strong battery offering. So two very important introductions, not just as products, but as how they have the possibility to open up new markets for us. And as you can see, with the looking at the strategy to the left, Shifting gears, when it comes to this value, spending a little bit time on sustainability and our commitment for sustainability. As you know, we have 3 targets: carbon, circle and people. When it comes to carbon, the target is to reduce our absolute CO2 emissions by 35% across our entire value chain, meaning Scope 1, 23, relative to our 2015 baseline, and this is also our science based target. Responsible for the Q2. Here, we are making progress and we can actually take the next slide immediately, I Thank you, Johan. And we are now at 30% reduction. Some of you might recognize that Why do you say that you're making progress when that number was 32 or whatever it was here in the last meeting? But this is just a natural evolution with product mix that was a bit artificial during COVID. For instance, construction that has more carbon still because they're we are not as far along with battery was depressed last year, is now bouncing back, those kinds of things. But we are Clearly progressing towards our 35% target. When it comes to circular, it's really about how do we reduce the extraction of virgin natural material. And we want to link this to our innovation capability and have made a commitment to launch 50 circular innovations by 2025. So far, we have no launched innovations, but that's also according to plan Yes, there is a little bit of a lead time from you launch this program until you start to see things come to the market. So this target will be a little bit Back end heavy, so to speak. And then we have the people target, which is about to empower 5,000,000 customers to make Sustainable Choices. And this is a target where we will have the measurement in place towards the end of this We experienced strong and increased demand for broadening products, and we can see that the construction market We have a strong performance in the quarter. It's a record performance. And it's across all divisions and regions. Rolling 12 sales growth is 17% and rolling 12% operating margin is 12.9%, so a very strong performance as such. And as we just briefly discussed here recently, we are making significant responsible for the progress in our strategy execution, and we had 2 very important product introductions here during the Q2 that opens up opportunities for us for the years to come. And before I hand it back to Johan here and we can have some Q and A, I would just like to highlight here a save the date for December 1, where we will invite And it will be a fiscal meeting. That's at least what we are hoping and aiming for. And with that, Johan, over to you. Thank you very much, Henrik and Glenn. And with that, we are ready to open up the Q and A session. So please, operator, start the Q and A session. Yes. Thank you. So we have our first question from Fredrik Avarsen. Please go ahead. Thank you very much. Good morning, guys. A few questions from my side, if I may. Firstly, I Yes, you mentioned pressure on the supply chain and that's not the first time you mentioned that, but I think it sounds like you're a bit more concerned about situation now. So is that correct? And has it become even more tangible over the last months? And if you could maybe talk a bit about the magnitude of that situation. I wouldn't say that it is necessarily more severe now Than before, we have really experienced quite some challenges throughout this entire pandemic. Of course, the challenges have very much changed in nature over time, but it's something that we have experienced all the time. And I must say that generally speaking, we have been very good at mitigating them. So they haven't become a strong demand and we are up 14% in the quarter. In Robotics and Battery, we are up 27% as an example. However, that could have been yet a little bit higher if we didn't have this situation. And also our backlog is higher than it normally is. Okay, good. And then on the SIora platform, if you could talk around Your capacity here, what does that look like if you would try to sort of quantify that? I think it's too early to quantify the ambition there. I think responsible for the Q2. Here early on, we need to zoom out a little bit and more look at a very big, very large commercial turf business. And we will try to disrupt that with something that's radically different. And of course, that will requires some quite some effort and some time just like it did on the residential side until you reach Sufficient penetration, so you reach a tipping point where the whole thing starts to snowball, if you see what I'm saying. So I think this is this has huge potential for us going forward. However, we need to have realistic expectations In the 1st few years. Okay. Fair enough. Thanks. And last Question from my side. I think you mentioned the European and Emerging Markets as the key drivers. A bit surprised not hearing strong words about the U. S. Market. Can you give some color on what you saw over there? Yes. We still have a growth in North America, absolutely, a double digit growth still, Frederic, but It was even stronger in emerging markets in Europe. So all double digit growth actually in Husqvarna division that was in relation to. Okay, great. Thanks. That's all my questions. Yes, sorry. We have a next question from Mr. Meinegrove. Please go ahead. Hi, Christian Mannebord from Geely. To start with on just the raw material costs Given that raw material prices and especially when steel are continuing to move higher, can you say anything about What we should expect for next year or the first half of next year at least? Is the 2.5% of sales, the proxy or could it be even higher than that? No. I think, Christoph, we've got 2 dynamics. Of course, This year in the first half year we benefited from the hedges we had particularly on steel. We had about 80% of our H1 steel consumption hedged, which was good. So we had limited impact. So now basically we'll take the H2 rates and flush them through the H1 next year. So So it can be a similar magnitude to what we talk about for H2 that could hit H1. We've had still impacts in H1 of course as you know, but I would probably, if we're going to guide, think about a similar magnitude to what we say for H2, for H1 next year. In terms of promotional activities in the first half year in 'twenty one, can you slip that into some kind of historical perspective Against the normal historical norm, Christa, then I would say it's probably a little bit lower. We had a very low level last year of promotional activities for obvious reasons, And then when demand came, there was no need to overpromote. This year, we wanted to do more promotional activities going into the season, which we did. As Q2 has come through, it's probably still a little bit lower than we've seen in or gains in 'eighteen or 'nineteen type year. Yes. A question on construction. EBIT margin was, of course, higher than in Q1, From a historical perspective, it was quite low compared to a normal Q2. Is it a result of No, you spot on the blast tracker integration where we've seen good sales there, contributing some 14% to 13% to the Q2 sales. And that is dilutive at the moment to the Construction division EBIT margin. It's still positive. Clearly, aim that it will be at the division average over time. But that is really the diluting factor, I would say, is Blast Track So far. Great. Final question then. Other costs have been higher both in Q1, Q2. I would guess that relates to both Higher activity and also variable compensation. Henrik, can you comment on how we should look at that row going forward? Yeah, it's you're right and that's why it's higher, Christie, you're spot on. It's higher due to both the short and long term incentive programs that we've been providing for. We would expect in the second half year that stabilizes to a normalized rate in the other cost line. What is the normalized rates? Well, we front I say front loaded, of course, we try to have revenue recognition and cost matching as best we can. So we're taking costs in line with the higher Q1 and Q2 sales. And therefore, we'd expect it to be in relation to the sales So we have another question from Gustor Jagieres. Please go ahead, sir. Thanks. Gustaf Gjerst, SEB. Good morning, guys. Two questions. Firstly, I think you mentioned in the report that your ability to supply the market was perhaps a bit lower than demand. Does this mean that you lost market shares It's always difficult to be precise on that comment, but I would say that We have a little bit of both. Depending on market and product segment, So I think there's an element of both, and that's why also we're bringing a backlog larger than normal with us into the Q3. And when you look at channel inventories, would you say that they are still low compared to normalized levels? I would say that on the low side versus what is normal, yes. Okay. And secondly, regarding capital allocation, as You mentioned basically no financial net debt historically low compared to EBITDA, while I assume your Borrowing costs are also historically low if you were to gear up. So could you talk a little bit about optimal capital Allocation in your balance sheet and where your priorities lie going forward? That's a question we were expecting Gustaf. So I guess I should take it. No, of course, we are at a low level right now. If we talk about our financial rating of BBB, Then we could probably have a net debt to EBITDA ratio of somewhere like 2.5 should we want to go that far from a leverage perspective. So it does leave us with a significant amount of firepower. I think ultimately it's a question you don't have with the Board. But of course, we as a management team will guide and give advice as we see fit. But I think we should come back to this, Particularly during the Capital Markets Day, how we see our future use of capital. Okay. I appreciate that. Thank you, guys. So our next question is if you can speak closer to your phone, if that's possible? It's better? Still a bit low. Okay. Okay. On the backlog on who's going to and You talked about the higher backlog heading into Q3. Can you talk Talk a little bit about what segment that is. Is that also relating to Cadena? That's And the second one is on Cadena and regarding the situation on in Germany and Belgium as how How does that play out now? I guess July is a pretty important month for the Watering segment. Thanks. When it comes to the backlog, I think it is fairly Well spread across the different product segments. There are few exceptions, but I would say generally speaking, we see something in all of them, also in construction. And therefore, we have a higher backlog than normal. Again, I do not want to turn this into a major problem. We have managed to take on significant accommodate significant growth, and we have managed to mitigate most of it. So it's not necessarily super material, It is there. And then when it comes to the Gardena and let's call it the core markets. The challenge has been that there's been a lot of precipitation in those specific markets, meaning that the customer sentiment when it comes to watering and irrigation products has been Lower than normal. And I must say that I think it is A very, very strong performance to be able to offset that by growing in Northern and Southern Europe And still match of a markedly high quarter from last year. No, I think you talked about you led it into Q3, etcetera. And I think We haven't seen any big changes in that in the weather, so to speak. And of course, it's going to be highly unpredictable. I mean, will it start to rain now or not? So We are planning for the worst and hoping for the best, meaning that we need to make sure that maximize sales in Northern and Southern Europe and that we are ready to react if the opportunity opens up in the core markets. Okay, great. Thank you. To time and we know that it's a very busy reporting day today here in Stockholm. So I think with that, if you have any further questions, just reach out to us on Investor Relations and I think with that we thank you very much for everyone participating today over the phone and over the Internet and we wish you all a great summer. So thank you very much.