Good morning everyone, and welcome to the presentation of Husqvarna Group's Q1 report 2020. My name is Johan Andersson, responsible for investor relations, and I will be the moderator here today. On the call, we have Henric Andersson, our new President and CEO, and Glen Instone, our CFO. Henric and Glen will present the report, and afterward we will have a Q&A session and happy to answer any questions. With that, I hand over to Henric.
Thank you, Johan, a warm welcome to all of you who have joined in this morning. For those I haven't been able to meet yet, I'm Henric Andersson, and since the beginning of April, I'm the CEO of the Husqvarna Group. Although I might be only a few weeks into my new role, I'm not new to the group. I've had opportunity to contribute to the development of this company for the past 20+ years in different roles and different functions. To say the least, I'm very humbled and proud of getting the opportunity to lead this fantastic company into the future. What a start it has been. We are experiencing one of the most challenging and disrupting health crisis in modern time.
Later on, I will try to reflect a little bit on this topic and talk about how we handle the situation, but first let's look into the first quarter. Q1 started in a good way with good listings with retailers, good pre-season sales to our dealers, and several successful new product introductions. Overall, a good start of the year. As you all know, it was negatively impacted by the outbreak of COVID-19. Initially, those negative effects were related to supply chain disturbances, especially from Chinese and to an extent, Italian suppliers. This turned out very much in line with what we communicated in early March, where we stated that the supply chain disturbances would affect top line by approximately three percentage points.
towards the end of the quarter, actually the very end of the quarter, the impact of lockdown measures accelerated and negatively affected our sales as our channel partners were forced to temporarily shut down. In total for the quarter, our net sales decreased by 4% if we adjust for currency effects and the exited consumer brands business. In Gardena, we actually grew by 5%, but sales were down in the Husqvarna and Construction divisions. From a product perspective, we succeeded to grow in the important robotics, battery, watering, and smart garden categories, just to mention a few. Our operating income in the first quarter amounted to SEK 1.424 billion, which was down SEK 220 million, compared to last year, resulting in an 11.7% margin compared to 12.3% in the prior year.
Of course, it was the combination of lower revenue and lower manufacturing volumes that put pressure on our profitability. We were at least able to partially offset this by cost-saving activities. One positive note as well in the first quarter was how we improved the direct operating cash flow. It improved by SEK 1.7 billion to SEK -132 million in the quarter. Our financial position is strong and Glen will further elaborate on that in the financial section here later. We also track our progress of our business strategy, and one of the KPIs there is of course, the share of robotics and battery sales as part of our group last 12 months total. As we don't use decimals, the 15% that you see here on the slide is unchanged from what we communicated at the Capital Markets Day.
In reality, these product categories outperformed overall group sales growth in the first quarter. If we then turn to the effects of the COVID-19 situation, this of course have, and it goes without saying, has the highest attention in the group and we're doing everything we can to limit the spread, to protect our employees, to minimize any impact on our business, and of course, contribute to and support society where we can. For instance, by producing parts for medical equipment, which we do in many of our factories. Being a global employer and an integral part of the local communities where we operate, we have a responsibility to ensure the long-term viability of our business and the jobs that we create.
We have a strong financial position and a clear mitigating plan to help manage the situation, which ultimately will help us to adapt to this new but challenging reality. Part of our channel partners are temporarily closed due to the local governmental lockdown actions. This ultimately means it will have a fundamental negative impact for us in the second quarter, but it is too early to speculate around its magnitude at this point, given the overall uncertainty associated with this situation. Our focus is therefore more on what the things that we can control ourselves. We have to be very responsive to any changes in the demand. All of our manufacturing and warehouse sites have been and are in operation, although at lower volumes.
What's good with this, of course, is that we are then able to swiftly ramp up production if we will see any increase in demand going forward. We have also introduced a number of additional cost reduction measures to at least partially offset the adverse impact from lower sales volumes. A few examples here are that we have a couple of thousand of our employees in time reduction initiatives at this point with the aim to bring that up to 30% of our number of employees globally, so to speak. Group management has voluntarily reduced their salaries by 10% to lead by example. We have reduced external costs in all different kinds of areas, and we have reduced and dialed back some of our Strategic Initiatives and our CapEx plans as well.
Given how fluid the situation is, we are continuously adapting our cost base and flexing volumes up and down. This is something that we're used to since we are acting in a seasonal and weather-dependent business, but it also makes it very difficult to quantify any specific actions at any given time since they are changing daily and weekly. With that as a little bit of an introduction, let me move on to the divisions with a few comments, and then starting with the Husqvarna division. Net sales ended up being down 7% compared to last year. That of course is when we adjust for the exit of consumer business and so on. Please also here recall that we are comparing to a strong quarter last year where we had an early sell-in to the U.S. retail channel that we also highlighted at that time.
Of course, the COVID-19 situation impacted the demand at the end of the quarter as the government lockdown measures started to impact some countries and the respective channel partners that we have. On a good news or positive note, robotics and battery performed better than average, whereas it was the wheeled products that experienced the largest decline here. Also on a positive note, I would say that the process of how we exit the legacy consumer brands business is according to plan, and we do it in a very disciplined and a structured way, and that represented a 12% sales decline for the Husqvarna division in the first quarter. Naturally, the effects of lower revenue and production volume contributed to a lower operating result, but we could at least partially offset this by increased efficiencies and cost savings.
In total, the EBIT margin was 12.2% this year compared to 12.9% last year. If we move on to the Gardena division, we can see here that we had an increase of sales, and if we adjust for the consumer brands exit, we were up 5%. Good growth despite the COVID situation. The main reasons here I would say is that retailers tend to repeat behavior, and what I mean by this is that they are very conscious of the prior year, and given that 2019 was a strong year for Gardena, and especially the watering products, retailers to a larger degree, decided to stock up on those products early on in the season here to make sure that they could meet any similar season to last year.
Of course, COVID-19 also impacted Gardena negatively, particularly in some countries in Southern Europe, but the core markets and then especially the DACH region had very strong sales for Gardena here in the first quarter. All in all, a pretty strong quarter for Gardena, with good leverage on the growth, resulting in an increased operating margin to 14.7% compared to 14.1% prior year. Finally, the construction division. As you know, construction is our most cyclical division. Also here we had a reasonable start, but that dramatically changed in the second half of March when the COVID situation actually also impacted the demand side here. Whenever there is uncertainty, spending on construction equipment tend to stop quickly. That's something that we experienced here, of course. On a positive note here, though, is that some of the markets actually have classified our construction products as essential.
In the majority of markets, that's of course not the case. Net sales for the full quarter ended up flat, or it decreased by 4% if we adjust for the changes in exchange rates. The operating income was down by 25%. Of course, this was partially depending on the lower sales and manufacturing volumes. We also had here negative mix effects, both in the geographical and in the product dimension. If we stay with the product dimension a little bit, I would say that some of our most profitable products were down, and we had to sell off some non-Husqvarna-branded acquisition inventory at lower margins here in the first quarter. On a positive note, though, is that we have fully integrated our most recent acquisition of power trowels that we acquired from Wacker Neuson.
Production is up and running, and these products are already now sold under the Husqvarna brand. We have made significant progress there and been very fast to the market with those very important products to us. With that, I hand over to you, Glen, to run through the numbers.
Thank you, Henric, and welcome everyone. Let's add some meat to the bones to what Henric has described around the numbers in particular. Starting with the consolidated income statement. As said, net sales as reported -11%, adjusting for FX then -14%. Then of course the exited business that we've talked about was just over SEK 1.4 billion in the quarter. Would mean an adjusted sales figure of -4%. On the exits, we guided full year at SEK 2.2 billion . That is still the case. SEK 1.4 billion in Q1, leaving roughly SEK 800 million for the remainder of the year, and that will largely come in Q2. On the gross income, in absolute terms, we've moved from SEK 4.1 billion down to SEK 3.8 billion, but the margin has actually increased from 30.4% up to 31.2%.
Main drivers in that, we do have a positive FX, roughly SEK 115 million positive FX in the gross margin, representing approximately 90 basis points. The exits are relatively low margin business, do give an upside, of course, on the gross margin. We continue with positive pricing activities. That's roughly SEK 25 million in the quarter. As described by Henric, we do have, in some of the categories, a move down on the mix. Of course, as we've been running with lower production levels during the first quarter, that is also driving a negative impact on the gross margin. Strategic investments, relatively low in Q1, that affecting the gross margin is roughly SEK 20 million. Moving down to SG&A, more or less flat in absolute terms, SEK 2.45 billion moving down to SEK 2.4 billion. However, increasing as a percentage of net sales.
Main drivers, we actually have a negative FX hitting the SG&A translation effect, by and large. That's SEK 70 million, representing about 0.6%. Of course, when we exit consumer brand business, that comes with a lower cost to serve, then we actually see a mix switch in the SG&A. Dropping out lower cost to serve, lower SG&A business and maintaining higher core SG&A business. Just to summarize there on the FX impact, we have a positive in the GP of SEK 115 and negative of SEK 70 in the SG&A, so SEK 45 million net positive effect in Q1. On the strategic initiatives in Q1, we've been running at a conscious lower rate for obvious reasons. Roughly SEK 30 million is hitting SG&A and SEK 20 million hitting the gross margin. SEK 50 million size in Q1.
Like-for-like operating income, excluding items that we had in the prior year, is 1,686 moving down to 1,424. 12.3% operating margin moving down to 11.7%, as Henric described. Moving down the income statement a little bit. As said, we have no items affecting comparability in the current year. Finance net is running some SEK 50 million lower than Q1 2019, and the main reason for that actually is a lower US dollar funding in effect, so a lower interest net. Tax rates at 24.6 versus 23.2 in the prior year, very much in line with our guidance and nothing unusual from what we see in Q1. Turning the page, direct operating cash flow, and we're particularly proud of this actually in terms of where we find ourselves in this current situation. That the cash flow has improved by SEK 1.7 billion.
We're more or less flat at the end of Q1, minus SEK 130 million versus minus SEK 1.8 billion at the same point last year. The main drivers of that, really, we've had a lower inventory build. Again, a conscious effort that's representing roughly SEK 400 million. We've also had a lower offset on the tables of that inventory build of a similar magnitude, SEK 500 million. The main driver behind the improvement is really the change in accounts receivable. It's actually SEK 2 billion lower on accounts receivable at the end of Q1 2020 versus 2019 March position. I think we're in a strong position now going into Q2 in the COVID situation. Good. Turning the page, and actually this chart is a little bit contradictory to what I've just described on the cash improvement, and therefore why do we not see it really in the capital efficiency.
This is a disappointment for us. Let's call a spade a spade. What we have seen now, of course, with the sales decline of 14% in total, of course adjusted for exits is minus four. That is very difficult to offset on the working capital in a quarter. When we saw that decline come quickly as we did towards the end of the quarter and of course it's difficult to adjust. This metric is one which has a higher tension. It is certainly trending in the wrong direction, one we are not proud about, and one which we quickly need to address during the remainder of 2020. I would say it is highly unlikely that we're going to hit our target of 25% during the course of 2020. This really will be a two-year program to get us back to the 25% levels that we've talked about.
Moving over to the balance sheet. I think a couple of items to call out. We start with the inventory. If you just look on there, it looks roughly like half a billion SEK of improvement. Actually, there's a negative FX effect of roughly SEK 550 million in the current year. If we strip out the FX effect, then we actually see a SEK 1.1 billion improvement in inventory, which is 9%. A continuation of the inventory improvement that we showed during the course of H2 of last year. Receivables, as described, down just over 2 billion, really as a result of the reduced net sales, but also a continued and aggressive management of our accounts receivable and past dues.
Liquid funds, well, actually, you see there we're up SEK 1 billion, and that is, again, I think a positive situation going into Q2, where we have a higher cash and cash equivalent sitting in the company. The other one that probably stands out there is actually the reduction in the interest-bearing liabilities. That actually is SEK 1.2 billion and really is the result of lower net debt. We have lower short-term loans, so again, a positive and mainly US dollar, by the way. The net debt of the group, we've actually moved from SEK 13.5 billion down to SEK 11.6. The lion's share of that improvement coming from the cash flow improvement from the operations representing some SEK 4.8 billion. The cash flow from financing, slightly negative, roughly SEK 0.9 billion. Currency effect on the net debt is around about SEK 300 million negative.
Of course, we paid a dividend during the course of 2019, which resulted in a SEK 1.3 billion payout, and then a pension liability is give or take SEK 400 million. I would call out at this point on the cash position that since the month end and the quarter end, we've actually managed to secure some additional financing, SEK 1.5 billion by way of loan finance and SEK 1 billion by way of raising an additional bond. We also have our RCF facility, which remains undrawn, and that is SEK 5 billion. Turning the page on the net debt EBITDA, not a great deal to say here. Slightly up versus the same point in 2019, 2.1 versus 1.9. This is a rolling figure.
Nothing surprising, I would say, the 2.1, that the net debt has been slightly higher on an average basis, and of course, slightly lower EBITDA given the Q1 development. All in all, looking at the balance sheet and looking at the cash position and the debt position, I would say we're in a solid position going into Q2. At that, I will pass back to Henrik to make some more forward-leaning remarks on how we see this.
Thank you, Glen. Although the coronavirus outbreak is, of course, reshaping the global economy, we can at the same time not lose sight of our long-term direction and priorities. As you know, last year, we presented an updated business strategy building on a sharper focus on our end customer segments, robotics and battery solutions, strengthening our winning core, and expanding our services and solutions offering. All of this paired with a strong focus on sustainability. This strategy is the foundation for accelerating our long-term growth and profitability. We will, of course, continuously to enhance it and refine it as we go along, but our key priorities remain the same, and our ambition does not change. Moving down to sustainability, it has always been a vital and integral part of our business strategy.
Early this year, we yet again made a strong commitment to this through the introduction of Sustainovate 2025, which is our long-term strategic approach to drive a sustainability transformation in the industry utilizing our innovation capability. We are mainly focusing on three opportunities here. It's carbon, circular, and people, each with very distinct aspirations on the difference we want to make. Our carbon target is recently approved as a science-based target, and it is in line with the ambition to limit the global warming to 1.5 degrees. We are now also certified as a Nasdaq ESG transparency partner, committing us to high transparency regarding to ESG disclosure. I think in the end of the day, it's all about the results, the tangible results, and I think we have a strong track record of demonstrating the business case for sustainability.
Over the last five years, we have reduced our absolute CO2 emissions by 25% while increasing sales by 17%. This is largely driven by battery-powered and robotics technologies. Speaking about innovation, I would say that our innovation capabilities is deeply ingrained in our DNA and is what really makes us stand out relative to our peers. We have leading solutions in our categories, and I'm very, very proud of the lineup that we have for 2020. Just to mention a few, we have new robotic mowers, consumer versions for Husqvarna and the Gardena brands, as well as the EPOS breakthrough technology with virtual boundaries that we introduced at the Capital Markets Day, which is truly targeting the professional part of the robotic mowing segment. We also have the AquaBloom, which is a solar-driven watering system for balconies and terraces.
City gardening is a growing segment, and with this AquaBloom, you don't need electricity, which is a major thing here. Another example is a new series of pro battery chainsaws for arborists that truly sets a new performance standard in the industry. We're also accelerating our innovation efforts beyond our traditional products and into digital solution. One example amongst many here is the Automower Connect, where we are interacting with more and more customers, reminding them to buy parts and accessories, and we give them lawn care advice and things like that. All in all, I would say that we have a very good lineup of products for the season and that we will leverage on going forward here. In closing, let me summarize the main messages before we open up for questions. The first quarters started out on a good note.
We have good sell-in, we have well-positioned new products, and we can also see the growth in robotics, battery products, and in watering solutions. Of course, in the latter part of the quarter, we were impacted by the COVID-19 situation. Initially, that was mostly supply chain related, but towards the very end of the quarter, it was also demand related, that was ultimately caused by the accelerating lockdown actions that affected our channel partners and therefore our sales. Our main priority above everything else is, of course, to make sure that our employees and stakeholders are safe and sound in this difficult time. We will continue to secure, of course, the business continuity here with a strong customer focus, and not losing sight of also that we need to prepare for standing strong also after this challenging time.
I would also say that we have a strong focus on protecting our cash flow through the swift, decisive actions that we are taking. Rest assured that we are well prepared and on top of the situation. It's ultimately a time for resilience, but at the same time, it's also about adapting to change. This is something we as a company have successfully been practicing for more than 330 years. With that, thank you for your time. We are now happy to answer any question that you might have. I'll leave it back to you, Johan.
Thank you very much, Henrik. Now we have come to the Q&A session. Before you ask the questions, so please state your name and company. Operator, we are ready to start the Q&A session, please.
Thank you. Ladies and gentlemen, if you do wish to ask a question, please press zero and then one on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing zero and two to cancel. We'll just allow a brief pause for questions to be registered. Okay, the first question is from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah. Hi, this is Johan from Kepler Cheuvreux. I looked at your excellent cash flow performance during the quarter. I was just wondering when you mentioned the very high focus on collecting the receivables and payables management, have you used any factoring or similar methods to move your cash flow forward from the receivables?
Hi, Johan. Hope you're well. The factoring that we're using during Q1 is on the same level as prior year. We do factoring. It's really against the larger accounts in Europe, and that has continued. We're at the same rates as 2019, so nothing unusual or out of the ordinary there.
And now if you look into Q2, a lot of the positive cash flow and the remainder of the year was obviously collecting those receivables. Have you done any sort of scenario analysis how the cash flow pattern will look like this year? How weak could it turn out, or anything that gives us the understanding on how you see the cash flow pattern this year, which obviously will be different from previous years?
I dream about cash flow forecasts, Johan. No, we're doing these all the time, actually, so it's very much part of what we're doing. We have a number of scenarios depending on how this COVID-19 demand situation plays out. I think we're in a good shape. We are in a good shape. We're strong going into Q2, and depending on how sales are fluctuating then, of course, it will need different measures. I think we're strong, and given that I mentioned we'd also secured some additional financing just post Q1. That's also important to note. I think very strong going in, but also we're mindful that we need to work with our channel partners, particularly on the accounts receivable and collecting that to make sure that we don't get any additional exposure.
Yeah. Finally, can you give us some sort of development on the retail sales now here in April with all the lockdowns? I think we had practice fly out yesterday indicating fairly okay developments. In Germany, I understand the DIY stores are allowed to open, I think a week ago, but only for professional users. Any sort of indications how the sales have trailed so far in April would be very much appreciated.
It's of course a very mixed picture, but I would say overall that we have been trading in line with how we ended the first quarter. We can see that it's of course heavily affected by the lockdown measures. If you look at Europe, for instance, the further south you go, the more of lockdown you will see, and the further north you go, the more open it is. It's very much a situation market by market. Of course, what we all are hoping for is, of course, that more markets will open up going forward, but that's of course very, very difficult to predict
What sort of numbers are you seeing? Is it minus 25%, 50%, 75% sort of average so far in April?
It was a fairly steep decline towards the end of March. It is of course significantly impacting us, but we refrain from giving an exact numbers there.
Okay. Thank you very much, and stay safe.
Next question is from the line of Olof Cederholm from ABG Sundal Collier. Please go ahead. Your line is open.
Hello, gentlemen. It's Olof with ABG. I hope you're all healthy and safe. A couple of questions. Given the good season so far, selling has been good, and you mentioned Gardena, that retailers were happy to take on inventories. What would you say the status of inventories in the sales channel is today? Is it higher than normal or is it normal?
We would say that overall, of course it can differ a little bit customer by customer, market by market, but generally speaking, we would say that inventory with our channel partners are on a normal level at this point in time.
Great. You didn't want to comment on your run rate at the end of Q1 and going into Q2 now, but is it possible to give us a little bit more color on how much of your channel is open? When we talk about Germany, is it 50% open, or could you give us any color on that?
If you look at this globally, it's of course extremely mixed, as you're aware of. As I said before, if you look at Europe, tendency of clearly much more closed in southern parts and more open in the north. A rough number would be that about one out of four of our channel partners are affected to some extent.
Okay. That's great. Lastly, M&A. You've been doing most of the M&A, I guess, in the construction division, going back a few years, but what do you think about M&A opportunities here and now? You have a fairly strong balance sheet, and we hope it will stay strong over the next couple of quarters. Do you think this crisis could open up opportunities for you also in the other divisions? What's your thinking on that? Thank you.
First of all, I think it's important to state that construction operates in a very fragmented market, so it's much easier to find good M&A opportunities in that segment. It's not necessarily a one-to-one comparison into the forest and garden industry, I would say. Just to have that said, so to speak. I think generally speaking, whenever you have a clear strategy and a clear vision as we have, you always look at both the organic opportunities and where you can complement that with any kind of M&A. I believe that also those kinds of opportunities within the forest and garden space. I would say it's too early to speculate on where and when and those things, but it should be part of any kind of plan that we have. Of course, if the right opportunity arise, then we will always look into it.
Excellent. Thank you.
Next question is from Carl-Oscar Green from Berenberg. Please go ahead. Your line is open.
Hi. Good morning. This is Carl from Berenberg. I have a question because last year we saw very strong Q1 with good order intake amongst the dealers and retailers, followed then by a weaker Q2 as the sell-through for the dealer channels were negatively affected by sort of a weakening gardening season. I appreciate that this is a kind of a different situation, but how should we think about Q2 reorder volumes now as you have a significant impact of the lockdown, and how are you working sort of proactively as opposed to just reactively to deal with this situation to ensure not just healthy cash collection, but also ensuring that you have sufficient stock if the turnaround comes, and gardening turns out to be sort of the pastime activity of 2020?
I think as you allude to there, the situation is very complex. Last year it was more or less the weather factor that played in. This year, we have at this point, no idea of what that weather impact will be. Of course, we have then the COVID and the lockdown situation on top of everything. It's extremely hard to predict what this second quarter will look like. Having that said, I think that's why it's extremely important that we really manage the things that we can control. I think one of the good things here is that all our factories and distribution centers are up and running even though at a lower pace. Because whenever you have manufacturing running, it's much easier to quickly ramp up if you see an uptick in demand.
I think the other piece that is very important here is that we are very agile to seize the opportunities that do arise because all markets are not the same. There are opportunities, there are pockets, and of course our job is to make sure that we fully exploit those. Part of that, this quickly fluctuating up and down dealing with the situation is something that we are used to, given that we are in a seasonal and weather-dependent business. At the same time, I think we need to have a sober view when it comes to the second quarter here that this situation with COVID is extreme, and the lockdown measures are extreme, and it will have an impact on our top line.
Even though we have been extremely decisive when it comes to cost avoidance measures, we will not fully be able to compensate for that shortfall on the top line.
In terms of if you look at the wide gardening space, it's my understanding that 10%- 15% goes through sort of the online channels. Are you able to offset some or mitigate some of the effects by turning to higher online sales?
We can see an uptick in online sales, of course, also in our business, and particularly so far in the Gardena division. Absolutely, the uptick is there.
Okay. Just lastly, you mentioned that some strategic investments will not necessarily be prioritized at this moment. Are we pushing out launch of strategic new, such as the robotic wireless robot lawnmower? Are you able to save a lot of cost on pushing out these strategic initiatives in R&D? If so, to what extent does this affect the longer-term EBIT margin potential of 10%? Are we seeing a postponement of this now in the outer years if you were to push out strategic new launches?
No, I think it's always delicate thing how you manage your short term versus your long term. What we are saying is that we are not stopping the strategic investments. We are dialing some of them back. Of course, one of the highly prioritized areas that we are not touching is of course, robotics, as you mentioned. There we go full steam ahead.
Okay. Thank you very much.
Next question is from the line of Christer Magnergård from DNB Markets. Please go ahead.
Hello. Firstly on inventories, did you have an under-absorption effect in Q1? If so, how much roughly?
Go away.
Probably guide on that. We did. If we look at how much inventory we took out in the quarter, roughly SEK 1.1 billion, and we've been saying it's 10%-15% type levels on the fixed cost. The under-absorption into the gross margin was of the magnitude SEK 130 million.
SEK 130 million negative under-absorption effect in Q1?
SEK 130 million negative effect, yes, in Q1.
Perfect. Great. You also mentioned they accepted some consumer brands. How much was that in Q2? I missed that, sorry.
It was just above 1.4, Christer, in Q1. We still guide at the 2.2 for the full year. We expect the majority of the remainder, i.e., SEK 800 million, will come in Q2.
Thanks. The cost savings and the pullback on SI you do this year, how much of that will actually be structural cost savings that you can carry over for 2021 and 2022?
Yeah. We talked certainly what we started last year that we had some carryover. We had a little bit of the carryover of the 2019 launch plan to the end of 2019 launch that was executed in 2019. In Q4 last year, we talked about the SEK 150 million of savings, which would, again, the majority would come this year. That is still the case. I think what's extremely tricky now is as we take down the volumes and we become reactive to the demand, that cost savings versus cost avoidance we need to be careful with. Really we're now into cost avoidance activities. We will take down the SIs, as Henrik said, it's not reducing them, it's dialing them back at a lower pace than what we had. It's hard to really guide on specific additional cost savings, Christer.
I think it's more cost avoidance is what we're around driving right now.
Sure. Sorry. It's not corona, sorry. If you can say anything about the season that obviously is weak now in Q2 because of the shutdown in April. Do you think that the season can be prolonged on the back of the stay-at-home effects going into Q3?
It's of course, Christer, very hard to speculate on, but since it's largely going to be weather dependent, we have had years where the season has been extended all the way through September. We have had years when the season has almost been over at the end of May. That's a little bit the thrilling part of the second quarter in our business that it is largely weather dependent. It's very hard. I think for us, instead of speculating about the weather, I think we have to make sure that we really manage the second quarter exceptionally well, so we seize any opportunity that is out there of course, we will do whatever we can to make sure that we also can sell some of these products in the second half of the year.
I think we need to have realistic expectations on it, and also realize that it is largely weather dependent whether there's a prolonged season or not.
On Gardena, how much of their business is e-commerce roughly?
To my knowledge, that's something that we have never disclosed before, but it's not a large share. It is a share, but it is a smaller share, and it is growing.
And finally on EPOS, given corona, can you talk about the rollout of the EPOS system that we see here in the 2020 test phase? If there's been any feedback this far, and also if you can say anything about the indication of demand and how you decided to sell the products going forward?
Actually, it's a lot of positive surrounding EPOS in general. We have decided to do a limited launch and more of a piloting thing here this year. We had a certain volume that we set up that this is what we will try to do, but that volume was signed up for very quickly. There's clearly a demand out there for the technology, and the feedback so far is very positive. Going forward here, we will actually start a little bit more experimenting with how we can sell these products and go to market, where we probably even will try some robot-as-a-service concepts and things like that to really make sure that we exploit all the opportunities in the market going forward.
Great. Thanks, Henric.
Next question is from Clara Ericsson from SEB. Please go ahead. Your line is open.
Hi, Henric, Glen, and Johan, and thanks for taking my questions. I have a few. First off, you said that all of your factories are up and running globally, but some at lower capacity. Could you say something about capacity utilization right now in comparison to where it's usually at? Does it differ between your divisions?
It's obviously lower than it was pre the demand decline here, but it is very different between factory, product segment, and market. On top of that, it is extremely fluid, meaning that it's changing all the time. That's why with a few of these questions, we today refrain from giving a specific number because it is literally changing day by day, week by week.
Okay. Is it moving in the right direction?
The question is what is the right direction? I think that We need to see that demand comes back and make sure that we quickly can respond to that increase in demand. We have, of course, brought down the production levels to make sure that we are not now just building inventory.
All right. Thank you. I have another question then on online sales, and you mentioned, of course, that this is growing quite fast right now. How well can online compensate for loss of sales in physical stores? I understand that this differs between divisions, but if we isolate, for example, Gardena.
I think the unfortunate thing is that there is a limited possibility, and we can also see that in other industries that most industries cannot fully compensate that, and that's also the case when it comes to our products. I would say, generally speaking, there's probably a better opportunity, and we have less of a gap with Gardena-related products than there is, for instance, when it comes to some of the larger and more expensive equipment.
Yeah. All right. Thank you for that. I have a question on the consumer brand phase out and the Husqvarna division. If I did my numbers right, you removed some 12% of sales year-over-year by phasing out consumer brands in Q1. How much did that impact the margin? Maybe you can just say what the margin of the phased out volume was.
I think what we've said on that one, Clara, and again, we'll just be fairly broad, is in 2019, we phased out negative margin business. In 2020, we're phasing out low margin business. there's a slight absolute EBIT hit, but from a margin perspective, it's an improvement. I don't think we should guide more than that.
Okay. Thank you. I have a last question, if I may, and that's for Henric. It's another long-term question on the construction division. You just started as a CEO and came from this division. How much synergies do you see for this division with the rest of the group?
I think there are synergies on different levels, and some of them are material and others may be less important. I would say generally speaking, that historically we had two cycle technology, engine technology on the very important power cutters that is very similar to chainsaws, and where we also make those products in the chainsaw factory. There is an immediate synergy. We see similar kind of synergies when it comes to battery systems and battery development, connectivity, and those kinds of things. Those synergies are very tangible and very real. Of course you have other kind of synergies like construction.
A construction division on its own would likely not be able to afford having sales companies in 40 countries, whereas now we can share the back office, and just by applying a few salespeople and some support people, you actually have a sales company you can get going. They are more generic synergies, so to speak. There are clearly synergies, even though ultimately we are in two very different businesses. One is in lawn and garden, one is in construction with different customers. In the customer dimension and the go-to-market dimension, the synergies are less.
All right. Do you think that there could come a time where this division is spun off?
I know that question has come up many times, and we have not changed our mind in that sense. We think that there's a benefit having them in the same company. One business is a bit more weather dependent, one is a bit more cyclical, but hopefully by having a larger construction division, we could balance some of those things out.
All right. Thank you very much for taking my question.
Thank you.
Next question is from Karri Rinta from Handelsbanken. Please go ahead. Your line is open.
Yes. Thank you. A follow-up on your previous comment on channel partners being affected. You said that globally it's roughly 25%, but if you would look more specifically on North America, do you have a rough ballpark number for that region?
Not that we feel like we should disclose today, because again, it's so fluid. There are so many changes all the time, so there's just a risk that we give you the wrong impression here. I wouldn't say that we today see that there's a huge difference between Europe and the U.S. in this regard, though.
Okay. Is there any difference between retail and distributors? Because as far as I have seen, the most hardware stores are still open for business even in the hardest hit states. Is there any difference between retail and distributors in the U.S.?
I think that in general, the dealer business might be a little bit worse off than the big retailers, even though they're both affected. Just to inject a third dimension into it, particularly important for the construction division is where we also have a large business into rental, where a lot of the large rental accounts closed down daily depots, which of course then had a big impact on construction. This is a little bit the challenge describing the situation, that it is so mixed, so fragmented, and that's of course, okay, and we need to deal with that. It's also changing all the time, and that's why it's hard to give numbers because the number might be wrong already tomorrow.
I understand. Can you share anything about countries and regions that have been less affected by restrictions like Sweden, for example? Do you have any anecdotes to share about demand and sales volumes in Sweden?
I think generally speaking, what we can be saying is that in the markets where the markets are open, we are doing well. That's a bit back to the original comment that we have a good position. We have good listings with retailers. We have good pre-season orders into the dealer network, and we have new products. Generally speaking, where the markets are open, we are doing well. Unfortunately, there are a little bit too many markets that are not open.
Fair enough. Finally, how is the typical seasonal pattern in the second quarter? Is it very back-end loaded or is it? If you're lucky and you have a good early season, then you get reorders in the month of June. How are sales typically distributed during Q2? Of course, now we know that April volumes have been low. Well, I guess the question is that how are sales typically distributed over the second quarter?
In the end, it is to a large degree weather dependent. If we look at a large number of years historically, you can say that typically the first two months of the quarter are relatively larger than the third month of the quarter. That's typically what it looks like. The question is if the old rules will apply in a COVID situation. If a market is in lockdown and then open, does that then change this pattern or not? I think that is the very difficult question to answer today, and I think we cannot even speculate on that today. The only thing we can do is to try to execute and take any demand that is out there.
Sure. Finally, in the March 5th, you came out with an estimate that COVID-19 would have a 3% hit on your first quarter sales, and that was pretty much due to the sourcing challenges from China. Now we saw that the first quarter sales went down by 4% organically or underlying. Should we interpret that one percentage point difference as the indicator of what kind of impact COVID-19 had on your late quarter sales? Which other moving parts should we take into account?
Yeah. Unfortunately, I don't think it is that straightforward. I think the supply-related issues, they were largely in line with the 3%. Other than that, there are a lot of moving things. A bad guy, of course, was the larger than normal quarter into retail in the U.S. That went one way. We had several segments here with very nice growth. We talked about robotics, we talked about battery products, we talked about watering and things like that. We have Gardena that has gone strong. Also we had the COVID impact, so it's not as easy to say three plus one is four.
The impact was more than that one percentage point.
Yes
of course, from COVID. Okay. All right, fair enough. Thanks.
We do have a follow-up from Carl-Oscar Green from Berenberg. Please go ahead, your line is now open. Carl-Oscar from Berenberg, please go ahead, your line is open.
Sorry. Could you please give us a split between the retailers and dealers in the U.S. or in general for the group?
Yeah-
More so we can get an understanding of typically who are directly affected by government-enforced closures and social distancing, who can operate as normal.
I think if we start, really, we're operating with two divisions in North America. If you start with the Husqvarna division, it's give or take 50/50 when it comes to revenues between the retail channel and the traditional dealer channel. That's how that business has historically been for us. Of course, as we take a position to exit certain segments, then obviously one channel, i.e. the dealer channel, will become a larger share of our business. The construction business is 100% in that respect professional, selling towards dealers, distributors, and the rental channel, and direct.
Okay. Thank you very much.
Thank you very much.
There are no further questions registered, just letting you know.
Exactly.
Go ahead.
Thank you very much for that final question, Carl- Oskar, and thank you very much for dialing in today and joining this call. We will, if not before, talk to each other in July. Thank you very much for participating today. Thank you