Earnings Call: Q2 2019

Jul 16, 2019

Here we have Rene Kaelinsson, President and CEO and Rolfo Glenn Instone, CFO. And as usual, we will start with a presentation by Kai Engelmann and then have a Q and A session afterwards. And with that, I warmly welcome everyone and leave the word over to Karsten. Also from my side, warmly welcome to this results presentation. Let's jump straight into the action here and conclude that we are quite pleased actually with the performance of the quarter. And the data is always a little but and the but there was the start of the season, which was disappointing. It was a weak off start, maybe that back out so we get the right perspective quarter mark, which is the call was very good. That's about selling to the same part of the quarter 2. Actually, the sell counts when customer starts. And that was delayed due to dramatic cold weather and gas not growing. And this is actually through proposed Europe and North America. So we were very burdened by that Q4. But the good news is the rate keeps up, it normalized and there was nothing to really that was negative to the end of the quarter, which is also, and I know some of you is thinking about that, which is also true for the start of July. So we have a normalized platform pace, let's say September the quarter, and Russia is actually what we see also right now as we speak. But that's good news. But the good news was the start of the quarter, this handout was not up to standard and that's caused a problem of course, in the sales overall. But despite that, we delivered a good performance as we said and all divisions have to basically improve operating income. So very much, very much relating to price improvement. We're talking about efficiency improvements. We're also talking about successful restructuring. And as you recall, we have said we want to run to EUR250 1,000,000 of the 2 seasons of 'nineteen and 'twenty as a consequence of the restructuring program that we envisaged last year. And we are very on plan if anything affects that. So that's also good. Margin, and then the important topic for us, needless to say, And you will recall we ended last year at 7.9 percent operating margin. We are now rolling 12% first half of the year up to 8.9%. So that's a good step ahead towards the levels where we want to be. We also have a good step ahead on the cash flow and Glenn will go through the details of that a bit more, but it's at €1,800,000,000 improvement for the first half year. And if you look at the D6, we continue to execute on the improvement rate of the operating margin and results, while also continue to invest in strategic initiatives for positioning the company for the future. So it's a balance, but we also continue on this path that we have grown since 2016. And it's quite nice actually to see how that helps us move to the front and leads in this industry. So looking at the sales, well, you see 2 pictures here. You see at the left the old structure that's referenced and you will see in that left picture that we we ended as a total of this division from 4%, net sales increase. And we also talked about that as a proxy verification for this year excluding the existing business. And now what you see here on the line you said actually for the first half we are at 2%. So we are behind our expectations. There are also variations here and has gone above and the most by the loan situation that I talked about beginning of 'twenty two. And they are now having some benefits from the extended season last year, I'd like to talk more about that. So the 2% is not in line for what we expect, but I do hope that we will see an improvement of that and we can expect an improvement in that number. So H2, that would be clear about that. But we hope that we get to 4% is not the question, but maybe a better expectation than where we are right now is 3% to 4% for the full year. Good. And this is our curve showing operating income in absolute terms as well as margin wise, you will see that we on the rolling 12 month basis are back to the previous peak levels around 3,750,000,000 on that level. That's what we have stated that we expect to make this year the best year from an absolute level point of view and that will hold true and that's the aspiration. And margin wise, we have talked about getting into the range of 9.6% to 10%. Given the development in Q2, I think it's more reasonable to expect the lower part of that sales. To still aspire to get there. And we realize that assumes competitive development in H2, but at this pace of stopping that indicates that that doesn't be feasible to expect. So yes, a little bit of headwind April is beginning on May, but still within the larger few more things we are according to what we have set out and discussed for the team. If you look at the group financials, Q2, we improved operating income at 10%, required the 7% decline. And if you've got 10% for consumer bank, you have minus 3 percent on the top line. And a very good improvement of the margin, as you will see. And one of the questions that I don't need to dwell around too much about it, because it's a good improvement surely. So if you try to understand then what I've heard the most really, of course, you do at the beginning. We're talking about the long term, but also including robotics. So robotics was flattish comparable to last year, which is not according to the base expectations we have. And I want to point out, the market has changed on the monthly on the case. We are still optimistic about the case, but 42 here is a negative. So all in all, we products, we believe categories was quite negative beyond the consumer restructuring, the adjusted EBITDA. I mentioned the efficiency program, the restructuring of the wind time and also as a reference here, the increased cost of products, the raw materials, both balanced by currency positive tailwinds. So if you look at the January 2, yes, we are up 2% for the group here excluding the executive business and occupancy modeling has increased 16%. So I think that's a pretty good leverage at least with that part. Looking then into the divisions, Husqvarna minus 6%, excluding the fixed business. If you look at the first half, it's actually plus 1, which is a bit better. And you have very pronounced on this dynamic that I explained with the selling quarter, planting strong and then sell out start of quarter 2 a week. But then normalizing throughout the quarter, pretty much the improvement items like how I described this for the group. What I would like to emphasize though is the North American turnaround and also the refocus of the business, which is working very well. So we're quite pleased to see how that turnaround has worked with the restructuring on one hand and also the refocus is helping us get a much stronger business position moving forward. And hardware ambition is continuing with the strategic initiatives, primarily meaning increased R and D. There is a particular marketing as well that predominantly we're talking about the lead cost. I can leave that. So I'm moving on to the PMA. It was yet another good quarter. Remember, there was a very strong reference in last year. Last year was pretty much the first 6 years of Sabrina under watering category positives. And that is warm summer, as you will recall, dry. And it wasn't obvious to actually beat that reference that we actually did. So plus 1% top line and we found quite plus 2018. And when we wondered on how is it possible to get that type of leverage, well, it was pretty much a perfect mix of products supporting us and the washing category carries quite some good profitability in that part we see coming through, of course, supported by efficiency improvements and restructuring. Now there is one comment to the top line I want to draw your attention to and that is we haven't had that type of heat rate in Europe this year, but still they have stocked up quite significantly. And I think that was kind of a backflip of last season, the extended season with the last year. People have been cautious to have a good, so to say, shelf availability. So they have benefited from that. That's quite clear. 2% is in top line increase for the first half year, excluding consumer brands. And we also say that we actually closed one plant in Europe, which belongs to the Vienna case, literally from 100 people were approximately affected by that. So it's a smaller plant, but that was also part of the initial restructuring that we announced last year. So now all right to elements of the restructuring are headed through that behind us also from the planned termination point of view. The 3% of my 25% operating income increased for the 1st half year was quite a while, but this is actually the 5th consecutive year of improvement in the general, that is solid top line growth. It's really a fantastic case in the next phase. Construction, good, not fantastic, but good. We see a 3% increase in the Q2 and then I always take off the comparative currencies by the way, somebody gets confused, I don't relate to this quarter but private currencies. And improvement of 7% of operating income, volume and price supported as well as efficiency, so pretty much the same story you can see across all three divisions. And we continue pressing on with 3 business facilities here, which is in this case maybe more related to services and market markets. And it's also nice to see now that we have the last of the country flooring services acquisitions by compaction is fully integrated. So that means we have a unit here, an entity which is really focusing now on the market and then customers in the right way. Having all the hard work behind us sorting out details that you need to have in order to be safe going forward. Europe from the first time point of view was turning the train a little bit. I should say disappointed, but some single percentage points of the design North America, whereas we are more optimistic about the North American side coming back into growth for the second half. And we have made quite some changes in North America in the organization during the course of this year and we expect to see results of that now in the second half. And you will remember also that North America has fully trained for a long period of time for us and done that very successfully. So we have the strength taken before this grouping and then come back. That's what we expect for the second half and going forward. And in the construction case, the margins in North America are actually over 100. So, important question. With that, I think we'll leave it to Glenn to talk about the margin you take about the P and L and the balance sheet. Thanks, Kai. So I think Kai referenced the sales pretty well. I won't dwell on that. As reported, we had a development error of minus 3 in the quarter or plus 3 year to date, currently shifting minus 7 and minus 2, respectively. If we look at the gross margin, as I said, developed very well. In the quarter, we've come up some 3.4 percentage points, also seeing the positive impact of FX coming into this roughly CHF200 1,000,000 positive FX hitting the gross margin in the quarter, which I think is important to call out. And then we have the focus of impact to price. Our pricing program is working very well. The pricing program is to offset the headwinds that we see from the raw materials and tariffs Combined like that is coming through. And of course, there is a negative impact to the gross margin in the quarter of roughly minus SEK120 1,000,000. And then of course, we have the positive impact of the efficiency program, which is there to support our strategic initiative investments, but also the restructuring. And just to say a word on the restructuring, I mentioned the further closure of the Balmadera plant on top of the closure of the Macraes plant earlier in the year, as well as also we have taken out some other FTEs that are historically supporting the consumer brand business. So restructuring, we previously said we would have savings of CHF250 1,000,000 full year effective 2020 And we said the lion's share would come already in 2019. We say 80% of that €250,000,000 will come in 2019. And we're very much on track with that. The benefit is slightly ahead actually on the restructuring side, all impacting the margin here. Moving down in the quarter into the SG and A, roughly CHF 90,000,000 higher than prior year, 80% of that rate to a negative impact, translation effects in Argentina. And of course we have further strategic investments, which is the remainder of that. It will take CHF20 1,000,000 Itching the SG and A line, culminating in an operating margin in the quarter of 15.4%, up from 13.5% in the prior year, a figure which we are pretty proud about despite relatively soft top line of the starting of the presentation with. Finance net increased marginally, that's really impacted our tax rates, a little bit on the interest rates impacting us relatively low. Small impact from IFRS hitting the quarter of about SEK7 1,000,000. Into the financial items, income tax rate in the quarter, I think it's better to look at year to date. However, the quarter was 24% versus 23% in the prior year. Year to date is still 23% as guided in previous announcements. Copy then going through the year to date, a similar margin improvement, actually magnitude GBP 880,000,000 in gross margin improvement, Positive FX, you could say, is roughly 50%, 55% of that improvement on the gross margin is positive FX, and a positive impact from the price and negative impact from the tariffs and raw materials, that is magnitude CHF300 1,000,000 in H1 and tiresome raw materials. And then we have the continued efficiency and restructuring measures that I referred to. That is really explaining improvements on the gross margin. Turning on the SG and A, we had an increase there magnitude, CHF370,000,000 of which you could say roughly half of that is negative FX, translation effects have an impact from the increased volume of costs and roughly CHF 70,000,000 hitting the SG and A from strategic investments during the 12th half year. Culminating in an improvement of 13.9 percent operating margin, our absolute improvement of over CHF500 1,000,000 in the first half year. And I think my comments to the finance net in the quarter on both items are pretty much reflected for the first half year as well. Moving on, a figure which we are also pleased with particularly in the quarter, but of course on a year to date basis is the improvement in our operating cash flow. We've managed to increase our direct operating cash flow by SEK1.5 and our operating cash flow by some SEK1.8 billion. If we just look at what the drivers are behind that, we have roughly SEK800 1,000,000 income and improvement in EBITDA. And then the relative improvement in working capital compared to prior year we've managed to improve by CHF900 1,000,000 through the 1st 6 months. So this is a figure we are pretty pleased with generating over CHF2 1,000,000,000 of direct operating cash flow. That said, we are still not happy. Maybe it sounds a little bit contrary to what I say now. We show a positive cash flow, but we're still not satisfied with our position when it comes to our working capital. We firmly believe 25% as a percentage in our sales is in the cards and is achievable. We were very close to that at the end of 2017 with a flat year in 2018 from an important historical perspective. And unfortunately, because of the slow start of the season that Tyre refers to, particularly in the lawn and garden space. And of course, the inventory reduction has not been to the pace we would have expected during Q2. However, we have taken a firm action during Q2. It did slow down the factory production rates. It did have a negative impact on the absorption to some extent, but it's the right thing to do. So we've taken actions during Q2 to slow down the inventory down and we'll continue that through the remainder of the year. The expectation of course turn this curve towards the 25% level, which remains our target. Looking at the balance sheet, I think the main one to call out is inventory, that's roughly SEK840 1,000,000 higher than prior year, SEK200,000,000 would be attributable to currency rates changing, those of the weeks reached Ghana and roughly AUD640,000,000 in fact could be higher like for like inventory rates and that is a few 6% or 7% higher than prior year. And that is roughly as a result of what I mentioned, the slower start of the season and also the relatively softer position in North America when it comes to the construction division. So slightly higher inventory in North America in the construction space. Of course, a couple of other positions have changed. We have the lease liabilities in the non current assets, which are both affected by SRS 16 and that's magnitude SEK1.5 billion affecting both of those lines. If we move down, of course receivables improved really as a result of the lower sales in the quarter and also slightly better management of our receivables process, I would say. And then moving on to the net debt. Net debt actually increased to $7,300,000 which shouldn't be so surprising coming up from $8,800,000 The main drivers, of course, we have improvement and improvement coming from the operating activities, improved operating results, etcetera. Then we have a negative impact from financing, a negative impact from IFRS and then a slight negative impact from an adjustment on discount rate, which affects the pension liabilities. That's the lower discount rate by the way. It's still worth 1.9 and we still feel this is at a reasonable level given where we're coming from and where we are at this point in the season. With that, I will turn back to Kai. Very briefly, we are pleased with how we have performed in a different context. We have operated, but what I could say is that in addition to what Roger already mentioned is that we have held our positions. So I think the whole industry as such has been burdened at that series of the quarter. So it's not an tough corona impact, but rather a general industry impact, I think it's our understanding and then we look at data from sellouts, that's what we see actually. So I think we have performed well, given the context and there's nothing that will give us hope for the second half of the year to be in line with previous statements. And I think I've heated that statement. Lisa, you're on The category has been also impacted by that slow start. And as I mentioned, it has been altogether been flattish, which is well done what you would expect to see. Of course, on the other hand, the rest of the loan will increase and cost is negative. So you still have that sell side to see. North America, second part of your question, Bjorn, I would say it's on one hand, it's a development and on another still a disappointment. I think maybe BMW can take it a factor of 2 doubling rate, but the expectation was to be way above that. So what we see at this stage is that market development takes more time than we expected. I want to be clear. It's us leading North American establishment for the category. So it's not such that somebody else is. It's a big thing. I'm unsure if that's not the case at all. But it's also market development across the category still for new for this market is slower than we would have liked. But how much the firm's rate continue is to pay that we want to see more. So it's more an organic conclusion, aggregated conclusion for the market. And can you say something about what you're expecting getting in Q3 with the odd comps, but now why it's very different and have some possibility quite easy. Yes. The RIM is, of course, meeting a fantastic in quarter 3. That's the question. So we need to be modest with the expectations. But I think what we have proven this year is that we're keeping up better than what we have expected just looking at last year. But I think the strategy phase of quite well. And what we should be aware of is that the season, what we normally say is that there isn't that one for a short period of time during the summer peak in Continental Europe, the Eastern Scandinavia, that's not always that's a value to what we are aware of. But confidently, we haven't seen that yet. So it could come and it should come, given historical and historical data. And if that comes, of course, they can tap up the quarter, but still I don't think we should be concerned about really weak quarter. I wouldn't expect that, but of course it's a very tough comp. So far they been up to it, pricing the well actually. Given the comp performance here in the first half, if I look at the second half and as we've got to see kind of average between 2016 and 2017, which is more normal years, then I have the CapEx. And comparing H1 'nineteen with H1 'sixteen 'seventeen, you actually delivered 1 percentage point above those years in terms of profitability. I just want to understand what is turning worse in the second half of twenty nineteen compared to those years? I think the main point, Chris, is to consider is we'll see a continued headwind from the tariffs in particular of roughly CHF 100,000,000 to CHF200 1,000,000. We've been fortunate in H1 that FX has countered the impact of headwinds, resulting in the same figure. In the second half of the year, we're not seeing any positive FX effect in our forecast, obviously seeing continued headwinds from tariffs. That would be a point to at least considering in your Q3, Q4 forecast. I would like to comment on delivering right now. The restructuring program, again, to recap, was SEK 210,000,000 and after results really of taking out the positions on petrol walk behinds in Europe and New York. 2 factory closures behind us, people are exiting. We are at least on track to some CHF200 1,000,000 restructuring savings this year. That's what I'd say. I'm very much on track at half year. Maybe adding to that in the general efficiency program, driven well from an activity point of view, have been heavily in logistics. And as you heard Glenn mentioned before, we are taking down the pace in some of the plans now to deal with inventory in the right by meaning, create a bit of undress option. But all in all, it's still living well according to activities. So those components should be okay even though as you hear a little bit, little bit from positive points, Peter. What part of that is structural? What part of that has been the new equity consumer brands? It's a good question. So I would say, Brian, I'll jump in. It's roughly SEK1 1,000,000,000 of sales reflected through the first half year, which is both the 21 impact. Of that, we've previously guided that the previous consumer brand business was a minus 3% business. The segments we exited at the lower end of that scale, so you could probably work on times 5. So you could say, based on those metrics, roughly €50,000,000 probability is coming in from the accident and impacting the debt you have spent. Thank you. And then on the cost What's the safety of that? How much do you actually see in the numbers in the 3rd part and what is that account in the second half? Give or take, we are, you can take that pretty much divided by 4 per quarter. That's it is and that's where I am. We're fairly confident that we're already just above 100 in the first half. Actually, the comment was what would be the full year number as far as the first half is 2 and then they need to be higher, the students get something between CD4 for the full year, remembering that close to 2 thirds fits in the first half of the year. So it's a bigger number. I would like to get to the 3% to 4% for 0.62%. I think we will see and I think the statement there has been, it's a normalized take off phase. And if we go back to some of these that has been really nice to see, for example, in North America, it's also more handheld equipment. It's more parts and accessories coming in. So it's a little bit for us to be less wheel and more accessories, but of course, the traditional, typically growing categories like the product should be different. That's the expectation. We don't see that issue. So we see that normalization returning to us actually in the quarter to 10,000,000. As I mentioned, being the case at this point in time and we don't see why that shouldn't remain for the quarter. And then Project 4, of course, is one of our extreme selling It will take longer if you have a chance. I don't expect to get this to go suddenly down to 25. By the end of Q3 or even by the end of the year, if we're being very clear. We've already taken the measures during Q2, slowing down the factors, impacting the absorption rates. And we'll continue driving that down in Q3 and Q4. It indicates that we've not said that much of what this year in the second half, is there a risk that we will enter certain retail inventories going into the semiconductor season? I don't think North America will change the scheme of things. And of course, the major part, obviously, it's normally come in the big task. There's no question about that. So from that perspective But beyond that, it's stable price levels by and large. Online is, of course, putting pressure on dealers. I should be saying that that's not there's no question mark about that. Then on the loan mover side, the slow feedback rate extends, how will you source the premium loan or which you expect to sell going forward? Is that sold? Certain models won't emphasize that we're going to remain producing or being moved to another manufacturing facility in South Carolina. Okay. South America, you want the next season at all. That's all taken care of. Excellent. Then on the Adena, they are doing very well. Heard somewhere that they've lost the whole house contract to more market? It's always difficult for me to stand and talk about FTT customer accounts and the gains and losses. We don't normally do that. And then in general, I think what you should know is that the particular retailer that you referenced has a large degree of economy in various countries, which means that what you might see in one country is not necessarily true in another country. And I think we need it here, everyone, I don't want to be too explicit on that, but you could see a particular setup for example Sweden, but that's a little bit of all the settlements in Germany. Could you just mention a few words on the German expansion you have been doing and it's like more to do. What about the UK, for example? It's always the definition a lot more to do, but I think they have been doing really well reporting position in Scandinavia, Latin, South of Europe. Moving into UK, if anything, UK, as I have reported before, is a bit of a disappointment, due to the fact that bank's retreated out from reposition. And we regrouped and have decided to go through the garden centers at the entry point of Verona, which is the value selling channel in the UK. But it's contract granted, so it's a slower rate, very difficult. So we are at the turn in to see the UK market because of the importance of the broadening in that particular market. But it's a more it is more endurance to get you to that point where we thought that we could have split it with short circuit and put the routes to scale and through partnerships that we have in other countries. But that changed. But we are absolutely okay with how this is moving ahead now. Okay. That's all for me. Thank you very much. Thank you very much, Johan. And I don't think we have any other questions on the telephone conference. No, right here. So if you have any final questions here on the floor in Stockholm. So I think with that, we thank you everyone very much for coming here. And we have a continued nice summer and then we have the next event at our capital market day in the 17th September and Q3 quarter on Q2 on Q2. So that's on there. Thank you very much. Thank you. Thank you.