Here we have Kai Wärn, our President and CEO, and also Glen Instone. As usual, we will start with a presentation by Kai and Glen, and then have a Q&A session afterwards. With that, I warmly welcome everyone and give the word over to Kai.
Also from my side, warmly welcome to this presentation. Let's jump straight into the action here, conclude that we are quite pleased actually with the performance of the quarter. But there is always a little but, and the but here was the start of the season, which was disappointing. It was a weak sell-out start. Maybe it was bad weather, so we get a type of second quarter one, actually the quarter was not very good. That's about selling to the trade part of the quarter 2, actually, the sell-out to end customer starts. That was delayed due to climatic cold weather, and grass not growing. This is actually true for both Europe and North America. We were burdened by that at the quarter-to-quarter.
The good news is, the rain kicked up, it normalized, and there was nothing really that was negative at 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. We have a normalized type of pace at the end of the quarter, which is actually what we see also right now as we speak. That's good news. The bad news was the start of the quarter for the sell-out was not up to standard, and that caused a problem, of course, to the sales overall. Despite that, we delivered a good performance, as I said, and all divisions contributed to improved operating income. Very much, by and large, relating to price improvements. We're talking about efficiency improvements.
We're also talking about successful restructuring. You will recall, we have said we want to take SEK 250 million of the synergies from 2019 and 2020 as a consequence of the restructuring program that we initiated last year, and we are well on plan with anything ahead of plan on that side. That's also good. Margin, then it's a really important topic for us, needless to say. You will recall we ended last year at 7.9% operating margin. We are now rolling 12 for first half of the year at 8.9%, good step ahead towards the leverage where we want to be. We also have a good step ahead on the cash flow. Glen will talk through the details of that a bit more, but it's a SEK 1.8 billion improvement here for the first half year.
If you look at the big picture, we continue to execute on the improvement trajectory of the operating margin and results, while also continuing to invest in strategic initiatives for positioning the company for the future. It's a balance, where we also continue on this path that we have been on since 2016. It's quite nice actually to see how that headstart moves to the front and leads in this industry. Looking at the sales, well, you see two pictures here. You see at the left the old structure, that's as a reference, and you will see in that left picture that we landed as a total of the three divisions on 4% net sales increase. We also talked about that as a proxy for expectations for this year, excluding the [Exited Consumer Brands business] .
What you see here on the right is that actually for the first half we are at 2%, we are behind our expectations. There are some variations here, Husqvarna burdened the most by the lawn situation that I talked about beginning of 2022. GARDENA having some benefits from the strategies from last year, I will talk more about that. The 2% is not in line totally with what we expect, but I do hope that we will see an improvement of that, and we do expect an improvement of that number for the page two. The degree of that, whether we fully will get to 4%, is maybe a question, but maybe a better expectation than where we are right now is 2%-4% for the full year. 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 level, around SEK 3.75 billion in case of that level. We have stated that we expect to make this year the best year from an absolute level point of view, and that's been held true. That's acceleration. Margin-wise, we have talked about getting into the range from 9.6%-10%. Given the development in Q2, I think it's more reasonable to expect the lower part of that range. We still aspire to get there. You realize that assumes a better development in Q2. At this stage, there's nothing that indicates that that wouldn't be reasonable to expect.
Yes, a little bit of headwind, April-ish, beginning of May, still within the larger scheme of things, we are according to what we have set out and we can only see. If you look at the group financials, Q2, we improved the operating income of 10%, despite the 7% decline. If you adjust them for Consumer Brands, that's -3% on the top line, and a very good improvement of the margin, as you will see from the perspective that I don't need to dwell around too much about it. It's a great improvement surely. If we try to understand then what was hurt the most, during Q2 at the beginning, we're talking about the lawn products and also including robotics. Robotics was sluggish, comparable to last year, which is not according to the base expectations we have.
I want to point out, nothing has changed fundamentally on the case. We are still optimistic about the case. Q2 here is a negative. All in all, wheeled products, wheeled categories, was also quite negative, beyond the consumer restructuring that has been mentioned, the efficiency program, the restructuring of during time, and also as a reference here, the increase of the public raw materials was balanced by currency positive tailwinds. If you look at the EBIT yearly, yes, we are up 2% for the group here, excluding the exited business, and operating margin has increased 16%. I think that's a pretty good leverage, at least with that part. Looking then into the divisions, Husqvarna, -6%, excluding the exited business. If you look at the first half, it's actually +1%, which is a bit disparate.
You have very pronounced dynamic effect that I explained, with the selling quarter one being strong and the sell-out start of quarter two being weak, normalizing throughout the quarter. Pretty much the improvement items, like how I described it 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. We're quite pleased to see how that turnaround has worked with the restructuring on one hand, and also how the refocus is helping us get a much stronger business position moving forward. Husqvarna division is continuing with the strategic initiatives, primarily meaning increased R&D. There is a bit of marketing as well, but dominantly talking about R&D costs. You can leave that. Moving on to GARDENA. Was yet another good quarter.
Remember, there was a very strong reference from last year. Last year was pretty much the perfect year for GARDENA on the watering category point of view. A very warm summer, as you will recall, dry. It wasn't obvious to actually beat that reference. We actually did. Plus 1% top line. This sounds like +18%. You wonder then how is it possible to get that type of leverage? It was pretty much a perfect mix of products supporting us. The watering category carries quite some good profitability that you see coming through, of course, supported by efficient improvements and restructuring. There is one comment to this top line I want to draw your attention to. That is, we haven't had that type of heat wave in Europe this year, still they have stocked up quite significantly.
I think that was on the back of last season, the extended season we saw last year. People have been cautious to have a good, so to say, shelf availability. They have benefited from that. That's quite clear. 2% top-line increase for the first half year, excluding Consumer Brands. Let me also say that we actually closed one plant in Europe here, which belongs to the GARDENA base. A little bit from 100 people were ultimately affected by that. It's a smaller plant. That was also part of the initial restructuring that we announced last year. Now all driving elements of the restructuring are carried through and behind us, also from a plant termination point of view. A 3% top-line, 25% operating income increase for the first half year is quite profound. This is actually the fifth consecutive year of improvement for GARDENA.
A very solid top-line growth, which really is a fantastic case in many respects. Construction. Good. Not fantastic, but good. We see a 3% increase in the second quarter. I always keep talking comparable currencies, by the way, if somebody gets confused, because I don't relate to this a lot, but comparable currencies. Improvement of 7% of operating income. Volume and price supported, as well as efficiency. Pretty much the same story you can see across all three divisions. We continue pressing on with strategic initiatives here, which in this case may be more related to services and the market. It's also nice to see now that we have the last of the Concrete Surfaces and Floors acquisitions by completion, fully integrated.
That means we have a unit here, an entity, which is really focusing now on the markets and the end customers in the right way, having all the hard work behind us, sorting out details that you need to have resolved in order to move it going forward. Europe, from a top-line point of view, was pulling the train a little bit. I should say disappointing that some single percentage points of the decline North America. Whereas we are more optimistic about the North American side coming back into growth for the second half. We have made quite some changes in North America in the organization during the course of this first half, and we expect to see results of that now in the second half.
We remember also that North America has pulled the train a long period of time for us and done that very successfully. We have this great case study before these groups and come back. That's what we expect for the second half and going forward. In the construction case, the margins in North America are actually over average. Important, of course. With that, I think we leave it to Glen to talk about the margin take, about the P&L, and the benefits.
Thanks, Kai. I think Kai referenced the sales pretty well. I won't dwell on that. As reported, we had a development there of -3% in the quarter or +3% year to date, current year to date -7% and -2% respectively. If we look at the gross margin, as said, it's developed very well. In the quarter, we've come up some 3.4 percentage points, also seeing the positive impact of FX synergies, roughly SEK 200 million of positive FX sitting in the gross margin in the quarter, which I think is important to call out. Then we have the positive impact of price. Our pricing program is working very well. The purpose of the pricing program is to offset the headwinds that we see from the raw materials and tariffs. I'm glad that is coming through.
That is a negative impact to the gross margin, in the quarter of roughly minus SEK 120 million. We have the positive impact of the efficiency program, which is there to support our strategic initiative investments, but also the restructuring. Just to say a word on the restructuring, Kai mentioned the further closure of the Värmdö plant on top of the closure of the McRae plant earlier in the year. As well, of course, as we are taking out some other SKUs that are not as strongly supporting the Consumer Brands business. Restructuring, we previously said we would have savings of SEK 250 million, full year effect is 2020. We said the lion's share would come already in 2019.
We say roughly 80% of that two fifty will come in 2019, and we're very much on track with that. As a matter of fact, slightly ahead actually on the restructuring side, all impacting the margin here. Moving down in the quarter into the SG&A, roughly SEK 90 million higher than prior year. 80% of that relates to a negative impact, translation effects impacting us. We have a further strategic investment, which is the remainder of that, in all take SEK 20 million, hitting the SG&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 of, despite a relatively soft top line as we saw in what the presentation is. Finance net increased marginally.
That's really impacted our tax rates a little bit on the interest rates impacting this relatively. Those of you who know, small impact from IFRS hitting the quarter for about SEK 7 million into the financial items. Income tax rate in the quarter having a better look on year-to-date. The quarter was 24% close to 23% in the prior year. Year-to-date is still 23% as guided on previous announcements. Quickly going through the year-to-date. Similar margin improvements, actually magnitude SEK 880 million in gross margin improvements. Positive FX, I'd say is roughly 50%-55% of that improvement on the gross margin is positive FX. A positive impact from the price, then negative impact from the tariffs on raw materials.
That is magnitude SEK 300 million in H1 from tariffs on raw material. Then we have the continued efficiency and restructure measures I referred to. That is really explaining the improvements on the gross margin. Coming on the SG&A, we had an increased magnitude of SEK 370 million, of which you can see roughly half of that is negative FX, translation effects. We have an impact from the increased volume, of course, and roughly SEK 70 million hitting SG&A from strategic investments during the first half year. Culminating in an improvement to 13.9% operating margin or absolute improvement of over SEK 500 million in the first half year. I think my comments for the finance net in the quarter on the items are pretty much reflective throughout that 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 1.5% and our operating cash flow by some SEK 1.8 billion. We just look at what the drivers are behind that, we have roughly SEK 800 million coming from the improvements in EBITDA, then the relative improvements in working capital compared to prior year. We've managed to improve by SEK 900 million through the first six months. This is a figure we are pretty pleased with in generating over SEK 2 billion of direct operating cash flow. That said, we are still not happy. Maybe it sounds a little bit contradictory 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 the 25% as a percentage of net sales is in the cards and is achievable. We were very close to that at the end of 2017. We had a bad year in 2018 from a working capital perspective. Unfortunately, because of the slow start to the season that Kai refers to, particularly in the lawn and garden space, of course the inventory reduction has not been to the pace we would have expected during Q2. However, we have taken firm action during Q2. We 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.
We've taken action during Q2 to slow down the inventory build, and we'll continue that through the remainder of the year. The expectation is, of course, turn this curve back towards the 25% level, which remains our target. Looking at the balance sheet, I think the main ones to call out is inventory. That's roughly SEK 840 million higher than prior year. SEK 200 million of that would be attributable to currency rates changing for those of you weak Swedish krona. Roughly SEK 640 million would be higher like-to-like inventory rates, and that is roughly 6% or 7% higher than prior year. That is roughly as a result of what Kai mentioned, the slower start to the season and also the relatively softer position in North America when it comes to the construction division. Slightly higher inventory in North America in the construction space.
Of course, a couple of other positions have changed. We have lease liabilities and the non-current assets, which is both affected by IFRS 16. That's a magnitude of SEK 1.5 million affecting both those lines. 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. Moving on to the net debt. Net debt actually increased to SEK 11.3, which shouldn't be so surprising. Coming up from SEK 8.8. The main drivers, of course, we have an improvement coming from the operating activities, the improved operating results, et cetera. We have a negative impact from financing, a negative impact from IFRS, then a slight negative impact from an adjustment in discount rate, which affects the pension liability.
It's actually a lower discount rate, by the way. Still we're at 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 hand back to Kai to summarize.
Very briefly, we are pleased with how we have performed given the context of what they said. What I should say is that in addition to what was already mentioned, is that we have held our positions. I think the whole industry got that hefty burden at that period of the quarter. It's not a Husqvarna impact, but rather a general industry impact, I think is our understanding. When we look at data from sell-outs and that sort of thing actually. I think we have performed quite well given the context. There's nothing that doesn't give us hope for the second half of the year to be in line with previous statements. I think I'll leave it at that, and leave to Johan here.
Good. Thank you very much, Kai and Glen. Let's open up for the Q&A session. Let's start here at the category in Stockholm. We have one question here at the top
Please state your company name and the three boxes.
Yes. Björn, can I come back? Can you give us some flavor on robotics that you are a little bit disappointed with during the quarter? Both European developments and also perhaps some word on the U.S.
Yeah. Robotics, the category has been all impacted by that slow start. As I mentioned, it has been altogether been flat-ish, which is well behind what we would expect to see. Of course, on the other hand, the rest of the lawn mowing equipment was quite negative. We still have that tailwind. North America, to answer your question, Björn, I would say it's on one hand a good development, and on another, still a disappointment. I think maybe the mowing season takes its act around too, doubling rate. The expectation was to be way above that. What you see at this stage is that market development takes more time than we expected. I want to be clear, it's us leading the North American establishment of the category, so it's not such that somebody else is taking a lion's share. That's not the case at all.
The total market development of the category, still is new to this market, is slower than we would have liked. For much of the term, great continue, it's okay, but we want to see more. Let me be clear about that.
In North America, is the sales to all your units that are
It's actually true for both channels. It's more a generic conclusion, aggregated conclusion for the market.
Can you say something about what you're expecting getting an issue with the order comps, top line, very different and has some possibility quite easily.
The dilemma is, of course, meeting a fantastic reference in quarter three. That's the question. We need to be modest with the expectations. I think what we have proven this year is that we're keeping up better than one could have expected, looking at last year as such. We expect it to pay off quite well. What we should be aware of is that the season, what we normally see is that there is that one peak period of time during the summer in continental Europe, for instance, GARDENA, that's not always. That is true that we are aware of that continental Europe actually, we haven't seen that yet. It could come, and it should come given historical and seasonal data.
If that comes, of course, that can dress up the quarter, but still, I don't think we should be concerned about a really weak quarter. I wouldn't expect that. Of course, it's a very tough comp for me. So far, they've been up to it surprisingly well actually.
Do we have a next question?
Christer Magnergård from DNB. Kind of question on e-commerce in the full year, the -6%-20%. You say that you probably would be in the lower end of that range, given the strong performance during the first half. If I look at the second half, now we just assume some kind of average between end of 2016 and 2017, which is more normal years, then I end up with 20%. Comparing H1 2019 with H1 2016, 2017, 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 2019 compared to those years.
Maybe Sven now.
I can maybe jump in. I think the main point, Chris, to consider is we'll see a continued headwind from tariffs in particular, of roughly SEK 100 million-SEK 200 million. We've been fortunate in H1 that FX has countered the impact of that headwind to roughly the same figure. In the second half of the year, we're not seeing any positive FX effect in our forecast. We're also seeing a continued headwind from tariffs. That would be a point to at least consider in your Q3, Q4 forecast.
On the cost savings in Husqvarna, how much of it will you achieve this year?
I wouldn't like to promise over-delivering right now. The restructuring program aims to reach upwards around SEK 250 million, that's the result really of taking out the positions on petrol walk behinds in Europe and the U.S. Two factory closes are behind us. People are acting. We are at least on track for some SEK 200 million of restructuring savings this year. That's what I'd say. We're very much on track at half year.
Maybe adding to that, in the general efficiency program, doing well from an activity point of view, better than in logistics. As you have, Glen, mentioned before, we are taking down the pace in some of the plants now to deal with inventory in the right way, meaning there is a bit of unrestruction. All in all, it's delivering well according to activities across both those components should be okay, even though actually we're a little bit caught by what you fix on the number of functions that you have. I think we have another question here from Henrik.
Yeah. Good morning. Henrik Christiansson from Carnegie. A question on the EBIT margin improvement that we've seen year-over-year, 119 basis points. The call-out effect, one positive contributor. What part of that is structural? What part of that has to do with you exiting Consumer Brands? How much of that is in the model now?
That's the first one.
I would say, Henrik, I'll jump in. It's roughly SEK 1 billion package sales we forecasted through the first half year, which is 4% impact. Of that, we previously guided that the previous Consumer Brands business was a -3% EBIT business. The segment we exited is at the lower end of that scale, so you could probably work on times five. You could say based on those metrics, roughly SEK 50 million package of profitability is coming in from the exited business and impacting the EBIT, you said.
Thank you. Then on the cost savings, it's SEK 200 million of cost savings this year. You're on track for that. What's the pacing of that? How much do you actually see the amount of in the first half and what is that become in the second half?
Give or take, you can take that pretty much divided by four for quarters. That's why we're fairly confident that we're already just above SEK 100 million in the first half.
Okay. Thank you.
I think we have another question. Klara?
I have no question. Thank you. This is my question. You said that you expected underlying growth for H2 to be from three point something.
The comment was what would be the full year numbers? On the first half, it's two, and then it needs to be higher, of course. We still then get to something between three and four for the full year, remembering that closer to two-thirds fits in the first half of the year. It's a bigger number, I repeat, if you get to the three to four from H2.
Okay. What products will drive that improvement, you think?
I think we will see the statement that has been, it's a normalized state of play. If we go back to some of the things that has been really nice to see, for example, in North America, is that we also sell more tempered equipment. It's more parts and accessories coming in. It's a little bit of both. Less wheeled and more of these categories. Of course, the traditional, typically growing categories, that's what we are seeing. That's what it should behave, that's the expectation. We don't see why this isn't. We see that normalization returning to us actually end of quarter two. As I mentioned, being the case at this point in time, and we don't see why that shouldn't remain for the quarter. Quarter four, of course, is much more stream selling quarter.
Okay. Sounds like those are categories that you have quite nice margins on or higher than other groups.
It's okay. Yeah.
Thank you. A question on [audio distortion]. You mentioned you were quite pleased with the mix of levels, and you wanted to take working capital to 30 some. You have taken some measures. When will we see the effect? Can we really see the margin Q2 or will it take longer?
It will take longer in [audio distortion]. I don't expect to get this suddenly down to 25% by the end of Q3 or even by the end of the year. It would be very clear. We've already taken the measures during Q2, slowing down the factories, impacting the absorption rates a little bit. We'll continue driving that down in Q3 and Q4.
Get on 25% maybe we see a recovery again in 2021?
The most probably we reach that in 2020.
Thank you.
Okay. Let me just follow up on the robotic statement. Historically, at least the way I understood it, you didn't sell much robotics at all onwards through the second half of the year, and not even maybe a little bit in July, but not much more after that. Is that dynamic changing now with North America on board? On the back, going back into inventory situation, if it is the case that you're not selling that much robotics through the second half, is there a risk that we would enter some retail inventory going into the 2022 season?
I don't think North America will change the scheme of things. Of course, the major part of the take normally comes in the first half. There's no question about that. From that perspective. Prices. There is some activation. There has been some cash back campaigns, for example, for GARDENA. Beyond that, it's stable at price levels by and large. Online is, of course, putting pressure on dealers, I should be clear about that. There's no question mark about that. That dynamic, I don't think you need to have that's really a generic type of dynamic that many people operate with.
I don't know, Johan, if that was a response to what you expected to hear?
I understood. On the lawnmower side, the closing McRae example, how will you sort the premium lawnmower we should expect to sell going forward? Is that sold?
That's sold.
Do you need to refer specifically then to what kind products that's sold? There will be certain models that will be sold. Certain models I won't emphasize, that we want to remain producing or being moved to other manufacturing facilities, in South Carolina.
Okay. That's one then.
It's not an issue you want to make decision at all. That's all taken care of.
Excellent. On GARDENA, they are doing very well, but I heard somewhere that they lost a contract to OBI Is that correct, or is it just for the market?
It's always difficult for me to stand and talk about specific customer accounts and gains and losses. We don't normally do that. In general, I think what you should know is that this particular retailer that you referenced, by and large, has the interpretive degree of economy in these countries, which means that what you might see in one country is not necessarily true in another country. I think I'll leave it there, Johan. I don't want to be too explicit on that. You could see a particular segment, for example, in Sweden, that doesn't necessarily look at all the same in Germany.
Good. Could you just mention a few words on the GARDENA channel expansion you have been doing, and it takes more to do. What about the U.K., for example?
It's always the definition a lot more to do. I think they have been doing really well, being 40% of the seven area that's in Northern Europe. Moving into U.K., if anything, U.K., as I have reported before, is a bit of a disappointment, through the fact that Bunnings retreated out of that position. We regrouped and have decided to go through the garden centers, as an entrance to GARDENA, which is the Bunnings selling channel in the U.K. It's more fragmented, so it's a slower but effective outlet. We are as determined to succeed in the U.K. market because of the importance of gardening in that particular market. We need some more endurance to get to that point where we thought that we could have a particularly short circuit across the route to scale, through partnerships that we have in other countries.
That changed. We are absolutely okay with how this is moving ahead now.
Okay. That was all from me. Thank you very much.
Thank you very much.
Thank you very much, everyone. I don't think we have any other questions on the telephone conference. No. I hear. If we have any final questions here on the floor in Stockholm? No. I think with that, we thank you everyone very much for coming here and hope you have a continued nice summer. We have the next event after a couple more today on the 17th of September, then a Q3 call on the 22nd of October. Welcome then. Thank you very much.
Thank you.