Ladies and gentlemen, good morning, and welcome to the Husqvarna Group presentation of the first quarter 2019. My name is Johan Andersson, responsible for investor relations, and will be the moderator here today. Here in Stockholm, we have our CEO, Kai Wärn, and our CFO, Glen Instone, that will take you through the reports with our presentation, and after that, we will open up for the Q&A session, first on the floor here in Stockholm, and then over the telephone conference. With that, please, Kai.
Thank you, Johan. Good morning, everybody. Welcome to this quarterly three announcement, which is, in large extent, showing a lot of improvements in many aspects. I'll try to cover those. In short, the results are straight interest. To start with net sales, adjusted for the exit Consumer Brands Division and comparative currencies is 30%. All divisions showing growth. Particularly noteworthy is that Europe is doing well. Again, after the start of quarter two, which was a bit difficult on the robotics side, then improved throughout the quarter, was very satisfactory to see that the growth rate of robotics as well as categories was really good throughout the quarter, well beyond medium-term guidance we had given of 15% year-on-year. That was positive. A little bit on the negative side, though, we experienced a weak market for wheeled products.
This is very much related to Husqvarna division in North America, which was double digits, and hence burdened that Husqvarna division a bit. That was a bit tough. For the rest, I was pointing good things on the trade side, and also again, plus two in all divisions involved. If you look at the operating margin, we are now at 9.3% rolling 12 months, and please remember, end of 2018 we were at 7.9%. It is quite a considerable improvement we have done in this period of time. We are actually talking about SEK 700 million tax EBIT improvement of SEK 3.5 billion before Q2, which, to give a magnitude to that. In the quarter then, of course, it was an increase versus, on the other hand, a low reference point of 2018, so +84%.
Again, that reference was nothing to be proud of, given the problems you will recall on the weather side in Europe, et cetera. Also satisfactory to see direct operating cash flow, SEK 3.8 billion compared to year-to-date versus SEK 2.1. Again, a considerable improvement. Going forward, we talk about now an increased cost focus to support the continued strategic initiatives and profitability improvements that we expect to see, and aim to see. That means, of course, just like previous years, an efficiency program of that considerable magnitude, but also looking at particularly some cost structures as well to make sure we are competitive in all aspects. Looking at inaudible growth to the right of this page, you will see the year-to-date with the inaudible increase. All these numbers, by the way, are adjusted for the exited businesses.
We account so far for give or take SEK 1.2 billion year-to-date of exited businesses. We foresee that to be about SEK 1.5 billion for the full year, on the lower side of what we said. On the other hand, just going a little bit ahead now into next year, that might be in the magnitude of SEK 2 billion of exits in 2020 to follow this year. The total of those years is pretty much the same, a little bit skewed into 2020. Excluding those exits, we are now 3% Construction core, and Husqvarna then 1%, and the group is on 2%. A little bit behind what we were failing at coming into 2019, but also remembering these two situations with the strong performance in Europe, and now a little bit weakness in North America.
Given those two factors, we are pleased actually to see where we are at this stage. We are from an absolute EBIT level at SEK 3,943, just beneath SEK 4 billion, which is actually the best ever absolute level we have had. Margin-wise, as you have me say, we are back to 9.3%. We have restored that profitability, which was, of course, hugely important, and you will recall that was the priority 1, and that when we talked about 2019 end of last year. I would say yes, we are delivering on that improvement. Looking at the group financials, maybe I'd like to draw your attention to the gross margins. May that be the quarter three or may that be year-to-date, you see pretty strong gross margin improvements. That's a sign of strength.
You see the operating income improvement of 20%, and the equivalent of SEK 700 million that I mentioned. Those are the things I like to call out specifically on this page. Looking into the Husqvarna division. We see them plus 2% for the quarter and actually plus one for year-to-date on the top line. 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, roughly similar magnitudes. Within those numbers, important battery products, as I mentioned, are well above the 15% target that we expected to deliver on mid-term. That's good. The rate of robot sales in North America hasn't really changed. I just want to be clear about that.
When we talk about wheeled products, North America, we predominantly mean tractors that return, basically it's based on. The robots growth rate in North America remains close to the same as before, probably give or take. Nothing has changed from there. On the year to date, looking maybe then more at operating income. Yes, we do have positive impact from the price increases, of course, easily from the restructuring and efficiency programs, as well as from positive currency effects. On the other hand, we have higher raw material tariffs, and particularly that tariff. Of course, the strategic growth initiatives also takes other burdens from that perspective. Not to forget, at least on the year to date, 16% up with operating income, which is, I think, still quite something. It's moving on.
Moving over to Gardena, of course, a success story. You will recall that this time last year, they had given up 23 to 10. They had a gap there of quarter three, on the backdrop of the fantastic weather that you might have enjoyed privately as well. The result is that an increase from [SEK 11 million] in 2017 to SEK 66 for the quarter, and now we pretty much on the route to almost double that [SEK 100 million] . It's a nice development, actually, for quarter three. Quite pleased with that. How is that then? Well, within the category of Watering, we have also had a favorable mix because Watering is not Watering, whether it's a whole garden package that we're selling or whether it's sprinklers or cuttings, it's quite different margin. The mix within the Watering category has been favorable.
We have also a very good result out of the restructuring of the European continent brands exits, as well as efficiency actually. The 3% here, adjusted for the exits, is actually really a sign of strength, that it's quite something actually, remembering the last year reference. Year to date, also actually 3% up, 29% operating 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 rates, it's pretty much the same on the top line as the year to date, around 12%. This quarter up 19% in operating income, and we will see 12% then for year to date. Volume price components, efficiencies, as well as from positive currency effects.
We are, of course, pleased that we have now integrated acquisitions in the right way, that we have executed in last few years. We have added a smaller acquisition here in the shape of Wacker Neuson, the trowel business. Particularly fits on vehicles, and this is the concrete flooring surfaces. This was a gap we had in the concrete flooring surfaces offering, and you can say we now take a complete impact in space. Under SEK 50 million, not huge, but still important to provide that complete offering. No effect this year because this is an asset deal. It's assets within R&D and manufacturing. We will start to see that it is taking shape during 2020. It's an important piece in the puzzle. All three divisions doing quite well, I think it's safe to say.
Through that, connected to the Capital Markets Day, September 17th, we also showed some new innovations, notably the virtual boundary assistant for robots, aiming particularly at the professionals, which brings a lot of advantages for that community, as well as autonomous vehicles. Here we have pilots ongoing with, amongst others, Swedavia, the Swedish aerospace authority, who is looking into how they can automate its airports, both from snow removal point of view as well as lawn cutting. You might have heard that we also took a share in a company called Yeti, which is a joint venture then with Øveraasen. Øveraasen is the snow removal piece. We have the lawn mowing piece, and together we have roles and planning, software structures, amongst others.
That is also interesting piece for the future, with that, I think I need to turn to talk more about the income statement.
Thank you. Morning all. A bit more detail on the income statement for the quarter and year-to-date. As Kai mentioned already, I won't touch on 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%, so 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. That's roughly SEK 50 million in the quarter, so roughly 0.5% on the margin. The FX has more than offset the impact of the tariffs on raw materials in the quarter as well, to point out. Pricing has continued in a positive vein as well. Also in a like-to-like term, more than offsetting the negative impact of increased raw materials.
Moving through to the SG&A, that's moving up roughly half a point in the quarter for blocking out items affecting the comparability, 22.8 to 23.3. That is negatively burdened by FX in this respect. That's a negative FX effect of roughly 7%, 0.8% on the quarter. Then we do see a higher rate with our logistics costs in the quarter. I've got to point out there's very little strategic investments hitting SG&A in Q3. I'll jump on the year-to-date and talk about the items below the operating results. 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 first nine months.
Of course, we do see the impact of strategic investments, roughly SEK 100 million in gross margins through the first nine months, negatively burdening 0.8%-0.9%. We have a negative impact of the raw materials and tariffs, again, roughly offset by the pricing increases for this year. That's roughly 0.7%-0.8%, which is a ±0 on a net effect. Moving down into the SG&A, again, just comparing, excluding items affecting comparability, given that we booked some costs last year. There's magnitude SEK 40 million of items affecting the comparability into SG&A. In Q3 last year, that means we have an 18.5% SG&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. Before I go below, I think I can just reiterate what Kai said. Moving from SEK 3.5 billion in EBIT to SEK 4.2 billion. SEK 700 million in improved EBIT. Roughly half a billion SEK coming in H1, and again, roughly SEK 200 million coming through now in Q3. Up to a 9.3% growing EBIT is pretty impressive. Restructuring comparability, very much in line with what we spoke about. Last year, we booked SEK 1.171, and then we said we had roughly SEK 40 million still to come, and that was booked through the first half year. The restructuring we talked about last year is now behind us and closed down from a P&L impact perspective. Financial items, we were guiding on SEK 120 to SEK 130 per quarter. Still very much in guidance.
You see we're sitting at 437 on a year-to-date basis. I expect this to be of the magnitude 550 from year-end. Income tax, we actually had a positive item in Q3. That was actually just recognizing the tax limitations on our tax item with some of our subsidiaries. We had a release of SEK 50 million on the tax line in Q3. Year-to-date tax is at 22%, very much in line with our previous guidance. Cash flow, something we are pretty proud about, SEK 3.8 billion, coming up from SEK 2.1 billion through the same period last year. Of course, we have the improvements from the EBITDA, roughly SEK 1.2 billion improvement. Worth calling out, there's roughly SEK 300 million in that EBITDA figure, which relates to IFRS 16, the leasing adjustments year-on-year. Beyond that, we've actually improved the inventory.
Throughout the first nine months comparing to the nine months last year, we've released a further SEK 800 million year-on-year in inventory. We've also increased a further SEK 400 million on accounts receivable, and then our accounts payable is actually negative on the accounts payable around SEK 700 million. The net effect is we've improved from SEK 2.1 billion to SEK 3.8 billion. We're pretty pleased with our cash flow performance. That 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.
Whilst I describe the inventory has improved SEK 800 million compared to last year in the same period, we had expected it to improve by even more, hence our working capital as a ratio to good sales is still behind our target. Remember, we talked 25% is our real ceiling level, and we're currently below that. We're currently sitting at 27.2%. Significantly behind our expectation, and I come back to the inventory in the coming slide. Moving to the balance sheet, of course, it is inflated somewhat given the weak Swedish crown. Seeing roughly 5.9% weakening of the Swedish crown versus the U.S. dollar in the quarter, and around 9.7% weakening of the Swedish crown versus the U.S. dollar year-to-date. 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 is SEK 1.1 billion higher than prior year. Within that, SEK 600 million is FX. Remaining SEK 500 million or 5% higher inventory in like-for-like currency is the true increase. What is driving these is inventory. Not surprising to say, of course, we closed Q2 with 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 exchange change, which is roughly SEK 1.8 billion, hitting the lease line and hitting the non-current asset line. Moving into net debt, as you just saw, still at the 1.9 level. Of course, our net debt has been moving a little bit.
Maybe it's better that I describe on the previous chart. If you're looking for net debt, also have a significant cash flow from our operational improvement, SEK 1.7 billion. IFRS is a burden to net debt of SEK 1.8 billion. We've continued to pay the dividends, just below SEK 1.3 billion. As I said, we have significant effects from FX also hitting the net debt, actually magnitude on the financing line, roughly SEK 700 million, on other debt lines, roughly SEK 900 million. Because of the lowering of the interest rate, of course, the pension liability has increased by roughly SEK 700 million. At that, I will hand back to Kai with some closing comments before questions.
If I may, I should put up the slide which we used to refer to as our season slide before we had the hit in 2018. It's starting to seem a bit better now. We're recording absolute levels, actually providing the best absolute levels since the previous absolute was 3.79 something. Now we're sitting at 3.94. You see the margin then improvement. As you heard us talk about a lot of other aspects here, may that be anything from all the divisions in positive shape, may that be the proof point of robotics and battery products being up at historical levels, and also divisions like Gardena being able to offset such a strong year that they experienced last year, that division and some other few things.
I think all in all, we quite pleased with the quarter and we are executing on our strategy as we thought to elaborate with, of course, at the CMD recently. Nothing in that perspective has changed. I guess with those few comments, I leave it for Q&A.
Thank you very much, Kai and Glen. Let's start with Q&A here in Stockholm. Do we have any questions? I think we have one here from Björn. Please go ahead. Just a second. Is the mic on there?
Thank you. A question on Husqvarna and the structure, including the consumer brands business. The outcome has been clearly below expectations at least since you changed the structure of that business. Can you add some color on the new seasonality with the remaining part of consumer brands? I guess somewhere where, Björn, what went wrong in forecasting the Husqvarna earnings? The second question is on the inventory situation, if that is something that you would drag with you into the next season and potential indications following that.
To be short with Husqvarna, the seasonality has not changed at all. Actually, there's no seasonality impact to mention of the integration of the Consumer Brands. If anything, it could be a bit more front-end loaded. In the larger scheme of things, I wouldn't emphasize that. I think it is rather the disappointing North American contribution that we can refer to, and particularly this year. You're right, Björn, in the aspect of this year, this was a very strong quarter one. That was more very large account issues with late orders early. I wouldn't overemphasize that. That's not necessarily going to be the case if you extrapolate into next year. I think seasonality by large is similar, actually. Disappointing, and I think we need to go back to my comments.
Europe, Husqvarna did it, North America down, that was the big swing. That was, of course, a bit broadening the results with under-absorption of production on the production side. I think that's something which you might not have foreseen. I want to get back to your perception.
Very strong Europe and a weak North America overall in terms of regional mix, I would assume, after margin protected.
There could be a positive hit from that. Probably stronger in the first half than in the second half. Still, yes, there's an element of that's true. I think what you see also is, with that one, we have actually added a bit of cost to that structure. When the case falls through, you have less to balance it. I think there is an element there we need to look at going forward. I think that's also what you reflect when you talk about increased cost focus going ahead. There's an element of recalibration. I wouldn't overemphasize it for this day.
On the inventory situation, dragging into next season.
Yes.
What?
Yeah. First, we would have liked the inventory itself to be lower than it is. Plus 5%, as explained, is still higher than we would like last year, was still relatively high. We will have lower pre-build inventory during the fourth quarter. That is very much in line with our intentions. We expect by the year-end, we're at much more of a light inventory situation versus last year. Whereas to add to that, Johan, is given some questions I've had in recent months, is how does the fixed absorption impact maybe the inventory? Our absorption is taken care of 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? Yes, go ahead.
Hi, thanks. Olof Fredriksson with ABG. A couple of questions. Starting with the Consumer Brands exit, which is taking longer or it's pacing differently from what you thought previously. What are the reasons for that? Is it more difficult to get out of this business than you thought? 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.
I would say by and large, it is according to plan. The total amount of exits we talked about into summer 2018 is what we see now. We see SEK half a billion sliding between 2019 into 2020. Nothing to really overemphasize on that side. From a mix perspective, no big surprises either. I wouldn't really emphasize anything along those lines, actually.
I'm comparing the SEK 2 billion with a high degree of confidence.
Yes. With high confidence. Anything that could be a quite higher number than that are not significant.
Perfect. Maybe something that you might have mentioned, apologies for that. The robotics and handheld growth, did you mention what it has been for the full season?
No, I didn't mention that. Of course, obviously it improved. It's somewhere in between the 5% and 10% mark from the combination of the robots and batteries for the year to date. You can take in the mid-range there somewhere. I think that's about it.
Thank you very much, Olof. Do we have any further questions here in Stockholm? Yes. One there.
Hi, Johan Eliason, Kepler Cheuvreux. I was wondering about this lead progress in the U.S. We've seen CRAFTSMAN brand being introduced at Lowe's and I guess from that perspective and they seem pretty happy with that development. Is there a market share loss on your numbers as well for U.S. development, let us say, brand, do you think?
I can't say anything relative to CRAFTSMAN. I know that there was a lot of marketing behind CRAFTSMAN introduction at Lowe's from the family side acquired that brand. I would speculate this may be even more important for them on the tools side than on the garden side. They are very active on the garden side with CRAFTSMAN. I can't exclude that we have lost share on the weed products. If you look at larger numbers of that particular account, it's positive. I don't think it's obviously the answer that we're looking for. I would like to add, though, that in general, we have priced all the tickets on our retailers, and of course, that could lead to some loss of share related to that. Others have priced more aggressively. That analysis is still to be made and concluded.
Can you say anything about your general listing and pricing into next season?
Listings are looking okay for next year. Luckily, pricing, we are sticking to a fairly strong quotation, and we don't want to question that or give anything else. We want to stick to that policy. That should remain. If you would ask a question about quarter four, I can't rule out that there will be a continued weakness in North America, but having said that, I don't think it is necessary that we should extrapolate that into 2020, for it's a temporal season effect this year that I wouldn't say is unlikely, but I wouldn't take it any further.
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, et cetera? Can you say anything on how you're thinking of doing that?
That's a good question. Of course, we are spending some energy and time actually on accepting that question. What we learned from this season, okay, if I think the doubling date is not quite what it is, and this season higher, what do we do differently? I'm not prepared to be specific about that. For sure, we are asking ourselves that question, and there will be differences. We come back to that later.
Thank you very much. Do we have any other questions here? One in the front. Gary, please go on.
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 wheeled products?
No, it's for Husqvarna as a whole.
All right, thanks.
Maybe the Husqvarna division.
The Husqvarna division, yes please. Maybe apart from that, in all of your positive comments about Europe, then it must have been from a profitability standpoint. Very nice profitability in Europe and quite loss-making in North America in the third quarter in the Husqvarna division. You alluded to some structural changes. Can you discuss a little bit about what can you do beyond hoping for a better season next year in terms of North America profitability for Husqvarna?
I don't know. Glen, you want to answer that?
I don't mind starting. Of course, it's very early to say, we need 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, certainly when the sales are not coming through, then we're feeling that. We do need to look at the structural costs within the organization.
I think that's the perspective you need to have. I mean, really, seasonality comes a third of the sales the second half of the year, and of course, if your fixed cost and it's relatively seen a bit higher, it will be hurting a lot more than the sales fallout. I think that's what you see. That is probably part of the whole thing here.
What I would like to add, Gary, 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. We fully stand behind it's the right thing to do given the product launches you're seeing coming through.
The final question, this less pre-built in Q4, what should we think about that in terms of our expectations for Q4?
I don't think, if you look at our product cost, what feeds in from a factory cost perspective, it's not a significant amount of costs. I wouldn't call it out as a material item in our Q4. We will be making sure that we build it well the entire year.
Thank you.
Thank you very much, Gary. Do we have any further questions here on the phone? No. Just checking on the 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. If you wish to ask a question, please press star one on your telephone keypad and wait for an automated message advising your line is open. Please state your person last name before you ask your question.
Yes. Do we have any questions?
We will now take our first question. Please go ahead. Your line is now open.
Hi, this is Clara Johnson from SEB. Can you hear me?
Yes. Loud and clear.
Great. Back to this discussion on the North American market. How do you feel about your customers' inventory levels here ahead of the stocking season? Was it only this end market here in this quarter, or did this actually reduce inventory also?
I didn't hear the first part of your question. I heard the latter part there. Can you please repeat it for us?
Yeah. I was talking about the North American market. How do you feel about customers' inventory levels here ahead of the stocking up season? I'm trying to figure out if it's just end market business or if the retailer inventory is also chilling down.
Yeah. The inventory trade, yeah. Actually, our impression that some of the major retailers are actually pursuing quite successfully reduction of inventory, and that is also connected to the lower rate of purchases starting quarter three, that might prevail also into quarter four. That's a good point, Clara, actually, that dynamics is playing into the whole equation here.
Yeah. Okay. I understand. We expect further discounts among your customers in Q4 as well?
I wouldn't rule that out, no.
Okay. Thank you. Well, very strong performance. You grew organically despite very tough comparable numbers. What was the strength driven by? Was the retailer 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 three. That might be the case if you look at end of quarter four, where they typically stock all the watering products. What you see is sell through. It's an expression than a reflection of good demand, nothing else.
All right. That sounds good. My final question is about inventory. You managed to reduce them by SEK 490 million between Q2 and Q3, which is more than you intend to reduce them between this quarter. You don't see a smaller build-up between Q3 and Q4 than historically, if I understand the question as well. Are you satisfied with these levels, then you will exit 2019 on when you enter 2020? Will you continue to balance levels into next year as well?
The question is, are we happy with where we are now? Absolutely not. We should have a lower inventory. When we came out of Q2, we carried much more than we expected because of the season. We are working them down during Q3, SEK 400 billion-SEK 500 billion back, and we'll continue to do so during Q4. We'd expect at least by the end of the year, we are somewhat comparable to prior year. Still, we feel we have structural changes to continue making to actually reduce our inventory further. We're not going to be happy to be on prior year levels.
Is there any specific type of inventory that you're trying to reduce? Is it the North American inventory or European?
No, I wouldn't look at it geographically in this respect. I would just say that we need to improve our forecasting process. We're working a lot with our forecasting, making sure we're more reactive to the market demand.
If I understand correctly, you lowered your guidance. You previously expected a full-year margin of 9.6%-10%, and you talked about the lower end of the range, but now you're more towards 9.3%-9.6%. For Q4, does this mean that this whole lower guidance, is it driven by that we will see continued under absorption, or is there anything else behind this lowered margin?
That's a good point you're raising. We are at 9.3, as we heard a couple of occasions, that the guidance in July was really towards the top of 9.6. North America is going in a little bit of a wrench in the wheel for us. If you get all the way there, that we are going to improve versus last year Q4, that is absolutely an addition. If you want to be specific and to get all the way, that is uncertain. We should be somewhere in between those two points. It is, Clara, North America that is the largest unknown for us this year, and we're not going to be able to answer this.
Yeah, thank you. A follow-up on that as well. If the market continues to do this rate that it is now going into 2020, could you say anything about what that will mean for your production?
I think it's too early to say that. Of course, we look at sensitivity and different scenarios on that, Clara, I think it's too early to say. We're very mindful of any impact that that would have from the overhead absorption if we have high reduced volumes. We'll continue to work with it, but too early to quantify.
I understand. Thank you very much for answering my question.
Thank you very much. We have one more question on the telephone conference. Please go ahead.
Hi, Julian. It's now open.
Hi. 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 in Stockholm? Okay. I think with that, we conclude the day here and looking forward for meeting you at the Q4 presentation. Thank you very much. Have a good day.
Thank you.
That concludes our conference call today. Thank you for participating, and you may all disconnect.