Earnings Call: Q3 2019

Oct 22, 2019

Ladies and gentlemen, good morning and welcome to Hysco owner Group's presentation of the Q3 2019. My name is Johan Anderson, responsible for Investor Relations and will be the moderator here today. Here in Stockholm, we have our CEO, Kai Van and our CFO, Ben Inso, that will take you through the reports with our presentation and after that we will open up for the Q and A session. First on the floor here in Stockholm and then over the telephone conference. So with that, please turn. Thank you, Joao. Good morning, everybody. Welcome to this quarterly announcement, which is, in a large extent, showing a lot of improvements in many aspects and I'll try to capitalize. But in short, let us jump straight into it. So to start with net sales adjusted for the exit consumer goods business and compared to currencies is up to percent, all divisions showing growth. Particularly noteworthy is that Europe is doing well. And again, after the start of Q2, which was a bit difficult on the rubber side, that one improved throughout the quarter was very satisfactory to see that the growth rates on Robotics as well as Battery Products was really good throughout the quarter. Well above medium term guidance we have given up 15% year on year. Relative to A little bit on the negative side though, we experienced a weak market for wheel products. This is very much related to Husqvarna division in North America, which was double digit and hence urgent by the Husqvarna division a bit. So that was just tough. But for the rest, I would point to good things on the case. I don't know if we have again, plus 2, and all divisions involved. If you look at the operating margin, we are now at 9.3% rolling 12 months and if you remember end of 'eighteen we were at 7.9%. It's quite a considerable improvement we have done in this period of time. We're actually talking about SEK700 1,000,000 of EBIT improvement of SEK3.5 billion in Q4.2 ish to give a magnitude to that. And in the quarter then, of course, it was an increase versus on the other hand, the low reference point of 18% plus 84%. But again, that reference was not nothing to be proud of, given the problems you would recall on the weather side in Europe at that time. Also satisfactory to see direct operating cash flow of SEK3.8 billion on the year to date versus SEK2.1 billion. So again, a considerable improvement. And going forward, we thought about now an increased cost focus to support the continued strategy initiatives and profitability improvement that we expect to see and aim to see. And that means, of course, just like previous years, efficiency program of profitable magnitude and also looking at particularly from cost structures as well to make sure we are competitive in all aspects. Looking at the sales growth to the right of this page, you will see then the to date, because they are not being treated. And all these numbers, by the way, are adjusted for the equity businesses. We account so far for give and take €1,200,000,000 to date of equity businesses. We foresee that to be about €1,500,000,000 billion for the full year. So on the lower side of what we said, on the other hand, yes, going a little bit ahead now into next year, that might be in the magnitude of SEK2 1,000,000,000 of exits in 2020 to follow this year. So the total of those years is pretty much the same, little bit skewed into 2020. But excluding those 6,000,000,000 or 3% construction 4% and Husqvarna then 1% and the group is on 2%, so a little bit behind what we were failing at coming into 'nineteen, but also remembering these two situations with the start of quarter 2 in Europe and now a little bit weaker in North America. Given those two factors, we are quite pleased actually to see where we are at this stage. We are from an absolute EBIT level at €39.43,000,000,000, which is actually the best ever absolute level we have had. And margin wise, as you have missed, say, the effects of 9.3%. So we have restored the profitability, which was, of course, usually covered and you will recall that was the priority 1 and net money after about 2019 and last year. So that would be yes, we are delivering on that improvement. Looking at the group financials, it's maybe like to draw your attention to the gross margins, may that be the quarter 3 or may that be the year to date you see pretty strong gross margin improvements and that's a sign of strength and you see the operating income improvement of 20% and the equivalent of €7,000,000,000 on the million that I mentioned. Those are the things I like to call out specifically to this page. Looking into the Husqvarna division, we see them plus 2% for the quarter and actually plus 1% to be to place on the top line. And again, back to the comments, good growth in Europe, good growth also for robots and battery based products. Europe is double digits, North America double digits down for the quarter last year, given the magnitude and within those numbers, our capacity products, as I mentioned, are well above the 15% target that we expect to be on midterm. So that's good. The rate of robot sales in North America hasn't really changed. I just want to be clear about that. So when we talk about we call that North America predominantly means factors, the returns because the fixed on. And the robust growth rate in Northern America remains close to the same as before on the doubling in Q and A. Nothing has changed on that. On the year to date, looking maybe then more at operating income, yes, we do have impact, positive impact on the price increases, of course, equally on the restructuring and efficiency programs as well as some positive currency effects. On the other hand, then we have higher raw material tariffs and particularly bad tariffs. And of course, the strategic growth initiatives also have hit further from that perspective. Not to forget, I think on the year to date, 60% up with operating income, which is I think still quite something. Moving over to Catena, of course, success story and you will recall that this time last year, they have given up 23%. Percent So they had to get there of 43 on the back drop of the fantastic weather that you might enjoy privately as well. So the result is that an increase from €10,000,000 in €17,000,000 to €66,000,000 for the quarter and now we're pretty much on the loop for almost double that €120,000,000 for 59 development actually for quarter 3. Quite pleased with that. And how is that then? Well, within the category of watching, we have all kind of favorable mix because washing is not washing, whether it's a whole package that we're selling or whether it's printers or cuttings, it's quite different margin. So the mix within the bottling category has been favorable. And we have also a very good result of restructuring of European cutting advance exits and as well as efficiencies actually. So the 3% to 7% adjusted for the exits is actually really a sign of strength. It is quite something actually remembering the last year of reference. Year to date also actually 3%, up 29% of taking income, which is driven very much by similar things, but also including price as a component beyond the restructuring and efficiency. Very nice story indeed. Construction, pressing on. Quarterly rate is pretty much the same on the top line as year to date around 4%. The quarter then up 19% in operating income and it will be 12% for year to date. Volume price, components efficiencies as well as some positive currency effects And we are, of course, pleased that we have now integrated the acquisitions in the right way that we have executed last few years. And we have added a smaller acquisition here in the shape of that renew some travel business, particularly sit on vehicles and this is the concrete flooring services. This was the gap we had in the concrete flooring services offering and you can say we now get a complete impact in space. Euros 150,000,000 not huge, but still really important to provide that complete offering. No effect this year because this is an asset deal, it's assets within R and D and manufacturing. We will start to see that business taking shape in 2020. But it's an important piece in the puzzle. All three divisions doing quite well. I think it's good to see. I'll do that connected to the Capital Markets Day September 17, we also showed some new innovations, notably that the virtual boundary assistance of robots aiming particularly active professionals, which brings a lot of advantages for that community as well as autonomous vehicles. And here we have projects ongoing with them amongst others. Sidoti are the Swedish aerospace authority, was looking into and they can automate these airports, both from Norway and the country as well as long Kapting. And you might have heard that we also took a share in a company called Jetty, which is a joint venture then with Semcom and also then every office is not the mobile piece. We have a long moving piece, Semcom. It's pretty good that the controls and planning software structures amongst others. So that is also an interesting piece for the future. With that, I think I need to Glenn to talk more about the income statement. Thank you. Good morning, all. So a bit more detail on the income statement for the quarter year to date. So as Kai mentioned already, I wanted some of the sales figures. I think we've reviewed them sufficiently. Looking at the gross margin, that was improving from some 25.6% to 28.2% to 2.6%. Within that, you've got roughly 1% of FX in the gross margin. And then we've continued to invest in strategic initiatives. And that's roughly SEK 50,000,000 in the quarter, so roughly 0.5% on the margin. GFX has more than offset the impact of the tariffs on raw materials in the quarter as well, compared to price growth. Out. And pricing has continued in a positive thing as well. Also in a like for like term, more than offsetting the negative impact of comparison raw materials. Moving through to the SG and A, that's moving up roughly 0.5 points in the quarter reflecting out items affecting the comparability, 22.8 times 23.3. Percent. That is negatively burdened by FX in this respect. That's a negative FX effect of Rookies, 7% 0.8% on the quarter and then we do see a higher rate with our logistics costs in the quarter. Fair to point out very little strategic investments hitting SG and A in Q3. Looking at, I'll jump on the other deck and talk about the items below the operating results. Again, a nice increase on the gross margin from 28.6% to 31.1%. Real positive impact from FX as per the quarter, actually 1.6% positivity in the 1st 9 months. And then of course, we do see the impact of strategic investments, roughly SEK100 1,000,000 in gross margin through the 1st 9 months, negatively burdening on 8.9%. Then we have a negative impact of the raw materials and tariffs, again, roughly offset by the pricing increases for this year. That's up to 3.7.8%, which is a plusminus 0 on a net effect. Moving down into the SG and A, again, just comparing excluding items affecting comparability given that we booked some costs last year of magnitude SEK40 1,000,000 of items affecting comparability into SG and A. In Q3 last year, That means we have an 18.5 percent SG and A rate rising to 19.3%. Again, delta there is really the negative FX, which is roughly 0.8% on a year to date basis. Looking below, well, before I go below, I think again just to reiterate what Kai said. Moving from CHF3.5 billion EBIT to CHF4.2 billion. So SEK700 1,000,000 improved EBIT, roughly SEK500 1,000,000,000 coming in H1. And again, roughly CHF200 1,000,000 coming through now in Q3. So up to a 9.3% rolling in this is pretty impressive. And reflecting comparability, very much in line with what we spoke about. Last year, we booked SEK1.171 billion and then we said we had roughly SEK40 1,000,000 to come and that was booked through the first half year. So the restructuring you talked about last year is now behind us and closed down from a P and L impact perspective. Financial items, we were guiding on €120,000,000 to €130,000,000 per quarter, so very much the guidance. You see we're sitting at €437,000,000 on a year to date basis and expect us to be at the magnitude €550,000,000 from year end. Income tax, we actually had a positive item in Q3 that was actually just affecting the hardship limitations on our tax item, which has been more of our subsidiaries. We had a release of £50,000,000 stock on the tax line in Q3. So year to date tax is at 22%, pretty much in line with our previous guidance. Cash flow, something we are pretty proud about, euros 3,800,000,000 coming up from €2,100,000,000 through the same period last year. Of course, we have the improvement from EBITDA, roughly SEK1.2 billion improvement. Worth calling us is roughly SEK300 1,000,000 at EBITDA, which relates to IFRS 16 for leasing adjustment here around here. Beyond that, we've actually improved the inventory throughout the 1st 9 months comparing to the 9 months last year we've released the SEK800 1,000,000 year on year in inventory. We've also increased a further SEK400 1,000,000 on accounts receivable and then our accounts payable is actually, if I'm slightly negative on the accounts payable, I'll try SEK700 1,000,000. So the net effect is we've improved from SEK2.1 billion to SEK3.8 billion. Percent. So we're pretty pleased with our cash flow performance. As said, and maybe it sounds a little contradictory and it's not meant to be, whilst we're happy with the cash flow performance, we're not fully happy with the working capital situation. So whilst I described the inventory has improved, GBP 800,000,000 compared to last year in the same period, we would have expected it to improve by even more. Hence, our working capital as a ratio of sales is still behind our target. Remember, we talked 25% of our real ceiling level. We're not currently low that. We're currently sitting at 27.2 percent, so significantly behind our expectations. And I come back to inventory in the coming slides. Moving to the balance sheet, of course it is inflated somewhat given the weak Swedish crown, roughly 5.9% weakening of the Swedish crown versus the dollar in the quarter. And about 9.7% weakening of the Swedish crown versus the dollar year to date. So of course, given we have a lot of operations in the U. S. Dollar, it does impact the balance sheet. The one to really call out, of course, is inventory. It's SEK1.1 billion higher than prior year. Within that, SEK600 million effects. Remaining CHF500 1,000,000 or 5% higher inventory in like for like currency is the true increase. What is driving the increased inventory? Not surprising to say, of course, we closed Q2 with a higher lawn and garden inventory, and we also closed Q2 with slightly higher construction inventory. That is still following us through as we see at the end of Q3. The other big swings on the balance sheet are really in relation to the IFRS 16 change, which is roughly GBP 1,800,000,000 but I'm hitting the LEAP line and hitting the long term asset line. Moving into net debt, you saw still at 1.9 level. And of course, our net debt has been moving a little bit, maybe it sounded out as far as on the previous chart. So if you look at the net debt, also had a significant cash flow from our operational improvements, CHF 1,700,000,000. IFRS is a burden to net debt of CHF 1,800,000,000. Whilst we continue to pay the dividend just below CHF 1,300,000,000 And then as I said, we have significant effects from FX, also hitting the net debt, actually, magnitude on the financing line, roughly SEK 700,000,000 on other debt lines, SEK 900,000,000. And then because of the lowering of the interest rates, of course, the pension liability has increased by roughly SEK 700,000,000. At that, I will hand back to Kai with some closing comments before questions. And this time we have to put up the slide which we used to report to as a season slide before we had the hit in 2018. But it's starting to feel a bit better now, recording absolute levels actually providing the best absolute level with the previous absolute was 7.9 something. And now we're putting 2.94. And you see the margin then improvement. You heard us talk about a lot of other aspects here, may that be anything from all the decisions in positive sense, may that be the full point of robotics and asset base being up at the right type of levels and also divisions like Garema being able to offset such a strong year that we experienced last year and that decision and some other few things. So I think all in all, we got leased with the quarter and we are executing on our strategy as we talked to and elaborated of course at the C and D recently. Nothing in that perspective has changed, which was I guess some of the numbers I'll leave it for Q and A. So thank you very much, Sven. And let's start with Q and A here in Stockholm. We have any questions. We have one here from Dion. Just a second, if I might on there. Thank you. A question on Husqvarna and the structure including the consumer brands business. I mean the outcome has been clearly below expectation at least since you changed the structure of that business. So can you have some color on the new seasonality with the remaining part of consumer brands? Or I guess somewhere where long has too long in forecasting the Iskuana earnings? And the second question is on the inventory situation, is that something that you would drag with you into the next piece and potential indications following that. If you've got with Husqvarna then, the seasonality has not changed at all. Actually, there's no seasonality impact to mention of the integration of the consumer. If anything, it could be a bit more front end loaded. But I think the largest scheme of things I wouldn't emphasize, but I think it is rather the disappointing North American country that we can refer to. And particularly this year, I think you're right, in respect of this year, this was a very strong quarter 1. But that was more very large account to choose to place orders early. And I wouldn't overemphasize that, that's not necessarily going to be the case. It's extrapolated into next year or something, probably seasonal is very large, similar actually. It's a pointing and we need to go back to my comments. Europe has started in North America down, but the digit making big swings. So that was, of course, a bit burdening the results with under absorption of production on the production side. So I think that's something which you might not have foreseen trying to get back to your perception. Also, I mean, very strong Europe and weak North America is also in favor of the regional mix, I would assume, upper margin perspective? There could be a positive mix from that, probably stronger in the first half than in the second half, but still yes, there's an element of that last year. I think what you see also is with the Husqvarna, we have actually added a bit of cost to that structure. And when the case fall through, you have less to balance it. So I think there is an element that we need to look at going forward. And I think that's also what we do quite when we talk about increased cost focus going ahead. So there's an element of recalibration. I wouldn't overemphasize it. And on the inventory situation, dragging into next season, it's Yes. First, we would have liked inventory as said to be lower than it is, so 5% FX plans is still higher than we would have liked. Last year, it was relatively high. We will have lower prebuilt inventory during the Q4. That is very much in line with our intentions. So we expect by the year end, we're much more of a like for like inventory situation versus last year. One should add to that, Bjorn, is given some questions I've had in recent months is how does the factory absorption impact maybe the inventory? And our assumption is taken to a figure now. So we're not dragging negative variances through as part of the inventory. Okay. Thanks. I think we had one question here in the back. Olof, please go ahead. Hi, thanks. Olof Sverdrup with ABG. A couple of questions. Starting with consumer dynamics, which is taking, I guess, longer or it's facing different ways from what you thought previously. What are the reasons for that? Is it more difficult to counter this business than you thought? And also, is there a mix difference here? Have you come farther in Europe than what you have in North America? If you stop with that, I have one other follow-up. I would say, while it is large, it is according to the total amount of exits we talked about into the summer of 2018 is what we see now. We see €500,000,000 sliding between 'nineteen into 2020. So nothing to really over advertise on that side. From a mix perspective, no big surprises either. So it's I wouldn't really emphasize anything along those lines actually. You can put in the €2,000,000,000 with a high degree of confidence. Yes. And it's in there. Right. It's quite a high number and not significantly. Perfect. Then maybe something that you might have mentioned, apologies for this. The robotics and handheld growth, did you mention what it has been for the full season? No, I didn't mention that. But of course, obviously, it improved somewhere in between the 5% 10% part of the combination of the robots and battery for the year to date. Thank I was wondering about this with products in the U. S. We've seen Tasland being introduced at Lowe's and I guess project that transition, if you have to with that development, is there a market share loss on your numbers as well for the U. S. Development versus this? And do you think? I won't say anything relative to craftsman. I know that there was another market behind craftsman introduction of those from the family side require that brand. So that's I would speculate this may be even more important for them on the tools front and on the parts and gardens. I said nevertheless, they are very active on the parts and gardens side. I can't exclude that we have lost share of the weed products. But if you look at larger numbers of that particular account, it's positive. So I don't think it's obviously the answer that they're looking for. But I would like to add though that in general, we have priced quality on our retail. And of course, that could lead to some loss of shares related to that. But others have priced at more aggressively, if it can be. That analysis is still to be made and concluded. And can you say anything about your sort of general listing and pricing into next season? Listings are looking okay for next year. Absolutely, pricing, we are sticking to a fairly strong position. And they don't want to, say to say, question that or give anything else. They're going to speak to that policy. So that should remain. If you would ask a question about quarter 4, I can't rule out that there will be, let's say, continued weakness in North America. But having said that, I don't think it's unnecessary. We should calculate that into 2020. So it's an annual season effect this year. But I wouldn't say it's unlikely, but I wouldn't take it any further. And then the robotics launch in the U. S. Considering the weakness or below your expectations, I guess, so far this year. Any changes to your strategy next year? Will you spend more on marketing? Or will you produce less ahead of the season, etcetera? Can you say anything on how you are thinking about that? That's a good question. And of course, we are spending some energy and time actually on accepting that question. So what do we learn from this season? And okay, if you can think of doubling date is not bad, but the condition is even higher, it's what we do differently. So I'm not prepared to be specific about that. But For sure, we are asking ourselves that question and there will be differences. But I will come back to that later. Thank you very much. Do you have any other questions here? 1 in the front, sorry, please. Yes, just a clarification, this double digit decline in North America Husqvarna, is that for the Husqvarna as a whole or was it for the wind No, it's as a whole. And then maybe the first maybe a part of that and all of your positive comments about Europe, then it must have been from a profit perspective standpoint, very positive for Europe and quite loss making in North America in the Q3 in the last quarter division. And you alluded to some structural changes. So can you discuss a little bit about what can you do beyond hoping for better season next year in terms of profitability for I don't mind starting. Of course, Andy, it's very early to say, but we need to the efficiency program is here to stay for sure, and we need the efficiency program to finance the transformation journey. We've talked about that. We need to really turn over every stone, as the saying is, and look at what further we can do. As Kai said earlier, we certainly when the sales are not coming through, then we're feeling that. So we do need to look at the structural cost within the organization. I think that's the perspective you need to have. I mean really, seasonality comes at third of the sales in the second half of the year. And of course, if you fix cost and it's relatively seen a bit higher, it will be hurting a lot more than the sales fallout. I mean that's what you see. That is probably part of the whole thing here. What I would like to add, Kari, and also Johan alluded to it earlier as well, maybe where the difference is between expectations and where we're actually currently trading is that we continue to invest in strategic investments, which is a gross margin burden in that respect. But we've fully come behind us, so sorry, the right thing to do, given the product launches you're seeing coming through. And then a final question. This left prebuilt in Q4, what should you think about that in terms of our expectations for Q3 sorry, for Q4? I don't think if you look at our product cost, what phase in from a product cost perspective, it's not a significant amount of our cost. I wouldn't call it out as a material item in our Q4. But we will be making sure that we build it lower than prior year. Thank you. Thank you very much, Thierry. Do you have any further questions during the call? At this point of time, should we check the telephone conference and see if we have any questions there. Please operator. Thank you. Ladies and gentlemen, we will now begin the question and answer session. Great. So back to the previous question on the North American market. How do you set up your customers' inventory levels here ahead of the stocking up? And then what's an awfully obvious end market here in this quarter? Or did this actually reduce inventories also? I didn't have the first part of your question. I heard the last part there. Can you please repeat it first? Yes. So I was talking about the more American market. How do you feel about customers' inventory levels here ahead of the stocking up system? I'm trying to figure out if it's just a market business or is Blue Telemetry is also going down? Yes. Limonforce and Trade, yes. I think it is our impression that some of the major retailers are actually pressuring quite substantially reduction of inventory and that is also connected to the lower rate of purchases starting quarter 3 that might be available into quarter 4. That's a good thing, Laura, actually, and that dynamic is playing into the whole equation here. Yes. Okay. So, okay. I understand. So we expect further destocking among your customers in Q4 as well? I wouldn't fill that out, no. Okay. Thank you. Well, AGM, very strong performance. You grew organically despite very tough comparable numbers. What was the strength driven by? And then was the retailers stocking up ahead of 2020 or was it end market strength? No, I wouldn't say it's stocking up for next season in quarter 3. So at the end of that might be the case if you look at end of quarter at core, where they typically start to order watering products. But quantity is sell through. And it's actually it's an expression and a reflection of good demand, nothing else. All right. Good. My final question is about inventories. You managed to reduce them by €490,000,000 between Q2 and Q3, which is more than we can potentially reduce them between this quarter. And we don't see a smaller deal that is in Q3 than Q4 than before, if I understand your end correctly as well. So are you satisfied with these levels that you will exceed 2019 loan when you enter that 2020? Will you continue to balance that within the next year? The questions are, are we happy with where we are now? Absolutely not. We should expect to have a lower inventory. Of course, when we came out of Q2, we carried much more than we expected because of the season. We are working in time during Q3, 6 months, roughly EUR 500,000,000 back and we'll continue to do so during Q4. We'd expect that at least by the end of the year, we are somewhat comparable to prior year. But still, we feel we have structural changes to continue making to actually reduce our inventory further, so we're not going to be happy to be on prior year levels. Is there any specific type of industry that you're trying to do? Is it North America, I mean, actually or European? No, I wouldn't look at the geography in this respect. I would just say that we need to improve our forecasting process. We're working a lot with our forecast you sort of lowered your guidance. You previously expected that full year margin of 9.6 percent to 10%. I mean, it's at the lower end of the range, but now moving more towards 9.2% to 9.6% you said. So I mean for Q4, this means that this whole lowered guidance is just to imply that we will see continue it under absorption? Or is there anything else behind this lowered margin? That's a good point, duration. So we are at 9.23 percent as we heard a couple of occasions that the guidance in July was really towards the point of 9.6. North America is going in a little bit of a range in a yield for us. It's just all the way there. That year run improved versus last year, the quarter before that is absolutely an addition. If you got to be sufficient to get all the way, that is uncertain. But you should be somewhere in between both points. And it is, Clara, it is North America that is And if the market continues to do this business like it is now going into 2020, did you say anything about what that will mean for your production? I think it's too early to say that, of course, to look at sensitivity and different scenarios on that, Clara, but I think it's too early to say. But we're very mindful of any I don't know what I understand. Thank you very much for answering the question. Thank you very much. I have one more question on the telephone conference. Please go ahead. Please go ahead. Your line is now open. Sorry, my question has been answered. Thank you. Okay. Thank you very much. I don't think we have any further questions on the telephone conference. Do we have any questions here from the floor or telephone? Okay. I think with that, we conclude the day here and looking forward for meeting you at the Q4 of Q1. Thank you very much. Have a good day. Thank you. That concludes our conference call today. Thank you for participating. You may all disconnect.