Good morning, everybody, and welcome to Husqvarna Q2 result announcement. We have a mixed quarter. We have good sales. We have a somewhat disappointing leverage on the result, but I think this quarter will be more remembered for the fact that we are now announcing decisive actions related to the Consumer Brands Division. I'll talk a lot more about that, as you can imagine, soon. If we try to summarize the quarter, we have had continued good growth from the profitable growth divisions, and improved EBIT, but lower margins from those division. The disappointment from the Consumer Brands Division result-wise continues. It's an underperformance.
If you look at the group all together, we have lower operating income as volume increase and efficiency improvements did not manage to balance the high raw material costs, a strained supply chain, and also continued investments in strategic profitable growth initiatives. This is, of course, a new situation. We have had a very strong machinery in terms of efficiency improvements for the last four and a half years, and we are now a little bit out of balance with that versus the cost additions we are taking for the growth initiatives, all together with these other components. Let me move over to the big announcement, which is that we have now decided to build on the strength of the group, which is then the Husqvarna brand, the Gardena brands, and we have decided to dissolve the Consumer Brands Division. It will be pretty much a two-step rocket.
Means a reduction of sales of SEK 2 billion for 2019, and there could be another up to equivalent step for 2020 to take. Why do we not do that immediately? All of it? The answer is we can't because of customer commitments we have for the 2019 season. We have to accept that that's a bit slower than we ideally would like to. I think altogether this is really a good thing. We are now looking through the commercial strategies and its implications on the footprint and the organization, because what this will give is also a lower complexity in the group.
It allows the resources to be reallocated to areas where we have much better chances to grow, and there are also parts of the consumer brands business which is more synergistic with the group activities as such, and where the SEK 4 billion that I talked about, up to SEK 4 billion altogether that we will exit, is then things that allow us to reduce brands, reduce categories, lower the complexity, allocate them to areas where we see we have strengths. May that be robotics in North America, may that be zero-turns, may that be handheld or parts and accessories, or for that sake, service offerings, which are becoming more and more important as well.
What we have said here is that we will review the impact of the commercial strategy and its impact on the footprint and organization during the course of quarter three, meaning latest in the announcement of quarter three, we will be back with quantifications of what this will mean in respect to various aspects. One-off cost being one element of it. Practically, the dissolvement will mean that we will fold the North American operations into the Husqvarna Division, and we will fold the European part of the Consumer Brands into Gardena Division, the remaining parts of it. I think that's the main key message around the change. Let me also put some perspective to the whole thing. You will recall that we made a larger reorganization in 2014 when we made the business model differentiated organization, which ended up in the brand structure.
The hypothesis was that with Consumer Brands being a separate division, we will also get the issues on the table. We will isolate them and deal with them and solve them. I think we had a good development in 2015. We had a good development in 2016. We had a break even in 2016. Then actually, I have to admit, it derailed a bit in 2017, and there's no credible path back to the target, which we were setting out as 5% EBIT within a reasonable near future term. Hence, I think we have given it our best try, and we have concluded that let's work on what has proved to be strengths of the group and not waste more energy on areas where we are not the appropriate owner for it.
I think that's a pretty clear situation, but it is of course disappointing, but I think it's a fair conclusion. Maybe not completely unexpected. Moving on to what we then usually look at, which is the EBIT development and the margin. We see we have a little tick downwards now with this year. I'll talk more about the quarter two and how we can describe that soon. It's a little bit disappointment also from us. But on the other hand, looking at the sales development, you will see that we are trending in the right direction with these divisions. We are now at, as an average of the three profitable growth divisions, at 6% growth. Of course, Gardena sticks out after two great quarters. If any division has benefited more from the strong season, of course, that's Gardena, not surprisingly to anybody.
Looking at then the financials, we have a 7% growth, currency-adjusted, SEK 14.2 billion, or SEK 27 billion. That's pretty good. We see then the EBIT result reduced from SEK 2 billion to SEK 1.925. You heard me comment about the main reasons, volume and efficiency did not balance the raw material, the strained supply chain, given that we also press ahead with a fair bit of cost additions for the profitable growth initiatives. There is a bit of positive currency impact. I will come back to that. Altogether, for the first half year, we are about SEK 130 million lower than last year, SEK 3.3 give and take billion EBIT versus SEK 3.43. Then you should remember that Consumer Brands then had lost SEK 254 million in that first half year. Eliminating that, which would be about one percentage point, which we lost in that.
The rest is moving in the right direction, however, somewhat weaker than before. Husqvarna saw good growth in both Europe and the U.S. following their late start of the season. You will recall we had a late winter, which pretty much turned into a summer without spending too much time in the spring phase. That put a lot of strain on the supply chain. Went from nothing to pretty much a lot all of a sudden, that, of course, is even more pronounced for the Gardena Division, that pattern. We have seen continued improvements of robotics, of battery-based products. However, living up in Scandinavia, that most of you sitting in this room do, you will have noticed that throughout the quarter, towards the end of it, the grass hasn't grown that beautifully as it normally does.
It's pretty dry, actually, without any rain during the course of May and June, by and large. There is a bit of a negative there. Still, on the overall scheme of things, it has been a good quarter in respect to demand. Somewhat higher operating income, SEK 11.80 becomes SEK 12.01. That's okay. You see the same comments as I made previously here, by and large, so I don't need to repeat them too much. 6% for the quarter, 3% for the half year of growth is still okay. Operating margin 17.8% for the half year versus 18%. Still on a good level altogether. Gardena, of course, has had and enjoyed very favorable warm and dry weather, which is good, which has put even more strain on the supply chain, we could probably have sold potentially even more.
12% in the quarter, 14% for the first half year of growth. Great numbers, of course, we see the operating income improving absolute numbers, being somewhat lower from a margin perspective. What's happening here is that we are expanding geographically as well as with categories into areas outside of the core markets, which is of course also relating to situations where the strength of the brand are not as reinforced as they might be in Germany, Benelux, Austria, et cetera. There is a certain pressure on margins, I think, from that respect in the expansion of Gardena that will make the leverage of the result going forward somewhat smaller. However, this quarter though, we see a lot of one-off characterized costs from the supply chain that we have taken.
Of course, to some extent, I think we can also reflect that what we see out there is some bottlenecks with suppliers. This is not a unique comment for Gardena. It's also applicable for other divisions. Some bottlenecks, we see higher logistic costs, typically inflation pressure that you see in the peak of the business cycle, or maybe slightly having passed the peak or somewhere around the peak. Hard to tell at this point in time, it's inflationary pressure in any way. That is an important aspect as we talk about going forward Also reverting back to Husqvarna and North America, pricing will be an important component moving into the 2019 season to compensate for the raw materials, further on, also other possible impacts like tariffs. Staying here, we are quite pleased with the development.
If you look at the half year, I mentioned the 14% sales growth. Currency adjusted, we have SEK 886 million versus SEK 816 million last year, and somewhat reduced margin, but still very good levels. Consumer Brands Division, I was fairly clear about the disappointment in the quarter and in the half year. It is SEK 254 million for the half year of deterioration versus last year for the same period. We have material prices which are difficult to compensate in the short perspective. It is generally, of course, a challenging retail. Construction Division, another good story, 16%, including the acquisitions. This is predominantly the last acquisition of Atlas Copco, and that is half of the quarter for HTC. 8 of those 16% of sales growth refer to organic growth, that is good. Good growth in all regions and particularly the dust and slurry segment is doing fine, but it is throughout doing pretty good.
There are some mixed aspects, we have pushed the integration of the Atlas Copco activity. That was a carve-out, which we have moved into our operations, we have also put a lot of energy and taken some cost actually to finalize that, because to safeguard that there is appropriate attention on the sales side to bring a transfer of Atlas branded products into Husqvarna, get them into the stock, we are talking thousands of articles that has been transferred here. That has had a negative impact. I think it is a really good result here that we have achieved, having done that activity. That is a good base going forward. Operating income somewhat improved. Similar pattern margin-wise, not fantastic, by the reasons I mentioned, still good levels. For the half year, we are at same level of sales growth, 16%, 14% margin versus 14.7%.
I think I will leave it there for Jan to take you through a little bit more of the financial details.
Thank you, Kai. Financially, a quarter with more headwind than tailwind, I will come back a little about that also related to balance sheet and cash flow. As Kai was into, one of the signals of Husqvarna the last years has been actually the good balance between efficiency improvement, delivering cost savings, and our investments in profitable growth initiative, increasing our cost base for future looking projects and initiatives. That balance does not exist that clear in 2018, the reason is, of course, what Kai was into, related to raw material cost increases. We have the general strained supply chain, where shortages of supply, both of transport, also from suppliers of material, also bottlenecks at those suppliers, all of these resulting in cost increases.
We have also, of course, the volume effect of scaling back of one of our major retail accounts for the season 2018 in U.S., whereby we lost or eliminated around SEK 1 billion of sales. The trend of improving sales and operating income in the three profitable growth divisions from the first quarter continued also in the second quarter, the sort of offsetting factor, the Consumer Brands Division with lower sales and deteriorating operating income continued also here in the second quarter and eliminating that positive effect from the profitable growth divisions. Net sales for the group, FX-adjusted and in the quarter, 7%. First half year, 3% up, both currency adjusted and in nominal terms, close to SEK 0.8 billion to SEK 26.6 billion.
Gross income in the quarter up some SEK 140 million, positively affected, of course, by the volume increase for the profitable growth divisions, as Kai pointed out, watering products, of course, robotics, and other battery products improved strongly, we also have a positive currency effect on gross income. That is then offset partly by higher raw material costs. We are talking about some SEK 80 million here in the second quarter, SEK 140, more or less, than for the first six months. The strained supply chain putting pressure on both manufacturing costs and transports, we also have the profitable growth initiatives, as we call them, in here related to the R&D cost that is accounted for in the gross income. Gross income margin deteriorated 1.7 percentage units to 30.1% in the quarter.
For the first two quarters, the gross income improved close to SEK 175 million, with the same explanations as in the second quarter, also when we take a look on year-to-date figure, adding the improved quality as one contributor to the improved gross income. Moving down to selling and administrative expenses, the SG&A, they increased in the second quarter with some SEK 250 million, SEK 100 million is then related to FX and also acquired businesses, where then we have the light compaction business in Construction Division and also the acquisition of HTC, which happened in May last year. The SEK 150 that is left is then mainly related to what we call then additional cost for profitable growth initiatives, we also have some higher IT costs.
For the first six months, we are up SEK 340 million, where currency had limited effect, excluding the acquired businesses, we are talking more about SEK 250 million in increase. Same explanation as in the quarter, more cost for profitable growth investments, also to some extent, higher IT costs. All in all, this means that we have an operating income that decreased by SEK 75 million to SEK 1,925 million in the second quarter this year, an operating margin of 13.5%. For the first two quarters, close to SEK 3.3 billion of operating income, some SEK 125 million lower than last year, an operating margin of 12.4%.
Financial items, both in the quarter and for the first six months, in line with last year. Taxes were some 23% of the income before taxes, somewhat lower than last year, and that is positively impacted by the lower tax rate in the U.S. Net income in the quarter, SEK 1.38 billion, some SEK 20 million lower than last year, giving a net margin of 9.7%. For the first half year, slightly over SEK 2.3 billion of net income and a net margin of 8.7% and earnings per share of SEK 4.05. That is SEK 0.10 less than last year. With a substantial part of our operations outside Sweden, and a substantial footprint in the U.S. and Europe, we get, of course, affected by the weaker Swedish krona and the appreciation of the dollar and the euro compared to June last year when we take a look at the balance sheet.
The non-current assets increased by some SEK 2.2 billion, whereof SEK 1 billion, more or less, is currency, and the rest is related partly then to the acquisition of the light compaction business, but around SEK 1 billion is related to the higher CapEx level we have seen the last 12 months. Adjusted for currency, the inventory increased some SEK 0.9 billion compared to June last year, partly due to late season, but partly also due to higher business activity in the three profitable growth divisions. Acquired businesses impacted somewhat negatively here, of course, as well on the inventory. Accounts receivable was close to SEK 1 billion higher than last year. 40% of that is related to FX.
The other is related to the three profitable growth divisions and the fact that we had a very strong sales in May, because what Kai described was sort of even if we had coming into the second quarter, the season really took off in May, actually. We had an extraordinary strong May. That, of course, not only impacted the costs because we were very strained in supply chain, but also the fact that we have around one and a half to two months of turnover of our receivables means that that strong month, and also an improvement in June, is still in our balance sheet. That's the reason behind the pretty high increase of receivables in the balance sheet, and as you will see, also a negative effect on the cash flow.
Accounts payable increased some SEK 750 million in local currencies, reflecting the higher volume in the three profitable growth divisions, and also here, of course, a small effect coming from the light compaction business that was included in Construction in February. All in all, we have an operating working capital that has increased SEK 1.3 billion. Half of that is currency. The other half is related to past and future volumes. The working capital that is higher is, of course, also reflecting in our net debt, but the main effect of our net debt that has increased now up to SEK 8.9 billion is actually currency, both direct and indirect effects of currency. Of course, the acquisition of light compaction from Atlas Copco impacted some SEK 0.3 billion on the net debt here in the first quarter.
We are some SEK 1.3 billion higher than we were on net debt last year in June. Moving over to our financial targets. Kai has talked about one of them. I will talk about two of them. The others are operating working capital related to net sales. That should be under 25%. That is our target measured at year-end. The net effect then of increasing net sales, but also higher operating working capital compared to last year, Q2, was slightly positive when we take the ratio here. It improves slightly with 0.3 percentage units from 26.8% to 26.5%. Of course, this is not where we want to be. We have really to improve our mindset around operating working capital questions in general as a company.
Operating cash flow, seasonal pattern as seen in the past is of course happening in 2018 as well. After a good start of the year from a cash flow perspective, where we saw the cutting back of business with a major retailer in the U.S. giving positive effects on Consumer Brands, but also improved or increased factoring in Gardena rendering results. We saw here a deterioration in Q2 compared to Q2 last year of some SEK 1.6 billion of cash flow. Accounts receivable is a big explanation here, but also we had a tax payment in Q2 related to a tax case where we have appealed but were forced to settle that amount for the time being. Operating cash flow adjusted for acquired businesses was some SEK 0.7 billion in the first half year.
That is half of what we saw in the first half year last year. We have an ambition to have an investment-grade rating at the company, so we are following very closely different key ratios. This is the one that is most important, net debt to EBITDA. The ratio increased somewhat from year-end in Q1 to 1.6x, and it has continued on that level in Q2. Still rather stable, but annoying that we cannot continue our trajectory of improvements. As you can see in the past, this is actually in Q2 where we make the improvements in the curve because that's our strongest earning quarter. That is not happening this year, which is very unsatisfactory.
Moving over to the key ratios, since we have a somewhat deteriorated capital efficiency and lower earnings, the return on capital employed and return on equity is around one to 1.5 percentage units lower than Q2 last year, or actually full year 2017. As regard number of employees, we are some 100 persons lower, or FTEs lower than last year related to a decrease in our U.S. footprint. Once again, related to the scale back of our major retail customers and also getting the full effect of some footprint changes done before 2018 here in the year. That is partly then offset by the increases in Europe and Sweden, reflecting the higher activity and the higher ambition we have in the company. Kai, for you to wrap up.
Thank you, Jan. Actually, I suggest we go straight into the Q&A. I would expect there are some questions here.
Operator, we start with questions from the floor here in Stockholm.
Yes. Hi. Johan Dahl at SEB. I was wondering, Kai, when you look on the growth divisions in Husqvarna and you calculate what normally has been the operating leverage in those divisions, there seem to be a fairly big deviation here in the second quarter. Could you just help us understand to what extent are these deterioration sustainable in Husqvarna? What can you fix? Primarily in terms of taking out productivity to meet the increased innovation cost, can you get that back on track? What's your view on these items?
First of all, we will get that back on track. I think it's short-term. We are committing, so to say, cost increases, may that be in R&D program, may that be to sales penetration. Brands and marketing and similar are easier to make a variable cost item. I think looking into 2019, we will rebalance, of course, the costs versus the efficiency improvements we can materialize. That's one component. The other component here, which is hugely important for 2019, I think I alluded to it, is the pricing to meet the raw materials and the inflationary pressure we have seen. The answer is yes, we will get back to the leverage. I don't think we should overread it, but in the short term, we are, so to say, committed on certain levels of costs.
I wouldn't say that we will see a fantastic leverage necessarily in Q3. It might be better. Let's see. Hopefully it should be. I think back to the more normal leverage is we have to see 2019 from an expectation point of view.
Are you launching new productivity initiatives or is it just getting old programs back on track?
No, I think we are actually on a yearly cycle introducing efficiency measures that might be SG&A related or COGS, cost of goods sold related, various types. That's an ongoing movement, so to say. I think we have, I shouldn't say excelled, but we have done that quite well, obviously, during the last four and a half years. Now we are a little bit off balance in that, and that, of course, brutally shown in the figures what it means when you get off balance in that point. We need to get back. There's no question about that.
Just one follow-up. On the Consumer Brands Division, what avenues have you pursued until you took this decision to scale back? What routes for this division are closed the way you look at it now? Secondly, as you can quantify the sales effect potentially, I'm pretty sure you have a NPV view of what this product is going to cost. Could you give some indications what cash flow is associated with this going out?
First of all, I've talked about after Q1 that we're turning all the stones, that is true. For me, it's of course very difficult to talk about any specific activities or trajectories that is involved in that. It pretty much means what I said. What we are doing right now is actually what we communicate, so I can't talk much more about the topic than that. What I maybe should have done even more clear is, I think I mentioned it though, that we will revert back during the course of quarter three with more details about what this new direction means. First of all, let's sort out all the details around the commercial strategy, the brands, the categories, then we take the implication on the organization and the footprint. It needs to come in that sequence.
You need to bear with us for another couple of months, but not necessarily much longer than that.
Is the sale ruled out?
I can't comment that. I don't rule out anything. If we turn all the stones, I can't rule out anything. I can't say much more than that.
What one can add, Kai, is of course that there will be a working capital effect of this. If we're talking about for the coming year, SEK 2 billion and then potentially SEK 1 billion-SEK 2 billion more in 2020. We have 25% of sales tied up in working capital. That will, of course, help cash flow going forward. That's the other side of scaling back, so to say.
Björn Johansson, Danske Bank. Coming back to Consumer Brands. You have been hesitant to take these kind of actions previously, and you are highlighting the contribution to fixed cost from that division. What has changed?
I think what has changed is what I was talking about, meaning that we were on an improvement trajectory for 2015. We were on that trajectory on 2016. We missed it 2017. There's nothing that supports in a credible way that we get back on the trajectory which is required. You end up with confronting the brutal facts, so to say, that are we prepared to invest all this energy into an area where we are not proving the results? Should we actually reallocate the resources, energy, the focus into areas where we do great result improvements? If you look at the profitable growth divisions, just since the Q4 2016, they have increased sales with SEK 4.4 billion. The result has improved SEK 750 million, and it's a margin improvement, EBIT margin improvement of 0.7 percentage points.
I think we have a success formula here, and we just need to work and put even more energy on that, and actually leave other areas and dare to do that decisively. Of course, ideally, I would have liked to have all this, so to say, done in one big go around. That's not possible, I need to accept that. I think we are clear about the direction. That's the important thing. I think, again, coming back to it, the reorganization in 2014 was hugely important for Husqvarna Group going forward. I think we've proven that this will be equally important to actually resolve this underperformance that we have displayed. Then, of course, we talked about is this synergistic for the group? There is scale, but I think what we've seen is also that specifications have drifted even further apart.
What we have seen is also that the petrol-to-battery shift diminishes some of the scale synergies that we saw historically. I think it's not a problem for us from that perspective. Of course, we need to work through the contribution aspect, and that's part of the calculation here now. How much of the contribution to fix is it that we need to compensate for with reduction in other areas? That, of course, includes also the group part of it. A group that has three divisions instead of four brings about also some scrutiny on that side. We have that exercise to go through as well.
Is there a big difference in gross margins for Consumer Brands in group?
Okay, can you repeat?
The gross margins for Consumer Brands, can you give some.
It's magnitude of half.
Yeah. On those
That's of course, if you try to understand, if you have weak brand equity, if you have low gross margins, it's not that easy to justify the R&D investment, the brand investments, as you also continue to try to create a little excitement and at the same time as doing the cost out. That's where we haven't proven to be capable to pull that off. Whereas we do that quite nicely, actually, with Husqvarna Division or Gardena Division.
Those categories that you are initially exiting within consumer brands, are those materially different from consumer brands in terms of profitability as well?
It's definitely categories which can be characterized as mature, low margin, and with not necessarily a positive prospect either. Walk behind push movers, petrol, lower price point tractors. Particularly if I would point at one of the brands or two of the brands, Poulan Pro in North America, we will depart. We are reviewing other brands as well.
Thank you.
Christer Salenius from DNB. We can maybe start with a follow-up on Johan Dahl's questions about inefficiency and maybe the bridge for the core brands compared to last year. Can you quantify the headwinds from bottlenecks, logistic costs, and the inefficiency in some way, so we can get an understanding for what kind of one-off to call it that way, effects were seen in the second quarter, and what was the poor performance internally?
We have quantified the raw material, even though a big part is, of course, consumer brands of the raw material. We also have the Husqvarna brand with a lot of movers that are affected by the raw materials as well. Logistics, it's very much related, of course, to Gardena. I won't say very much, but they have more logistic issue due to the extremely strong sales improvement, but also how this actually happened during the second quarter. The logistic problem is general, and it's existing both on this side of the Atlantic and the other side of the Atlantic. There is a shortage of transports. We have had some other disturbances related to suppliers, and of course, that is not helping either, because then you cannot optimize the filling of the trucks, et cetera, if you are having backlogs. There are different types of issues here.
We can also point on the product mix. We had it on Husqvarna, for instance, and we have it also on Gardena, or maybe it was Gardena, we have put it in there. They are selling more of hoses and trolleys in the watering business, which is, of course, good products, but compared to selling the more high-yield products, it is sort of dragging down the margin, the EBIT margin and the gross margin for the division. We have some headwinds on mix, but taking a look on the group, we have a positive divisional mix, which you can say is a product mix as well. We are decreasing Consumer Brands, and we are increasing the other division. That's a positive when we go up to the group level.
We have more of product mix headwinds in the profitable growth divisions separately, which is, of course, also a burden. We were into the weather in Husqvarna, and of course, Scandinavia and Northern Europe is one of our most profitable areas. We talked about it. It stopped more or less after the warm weather really started, we saw a June that was not very strong actually in that area, of course, naturally. We don't want to talk weather really. There are small bits and pieces here and there, which actually make the leverage not being where we want it to be for the profitable growth divisions.
It's a long answer, not necessarily what you asked for.
Okay.
If we would have taken one, I would have done that, but it is not one. That's the thing.
I think another way to look at it would be to say that the cost additions versus the efficiency improvement is the major component, still significant are these other aspects of inefficiencies. That's another way to tackle it, to give you some sense without being specific as you would like to, but still giving you a hint.
The problem with Consumer Brands and the work with that, has that had a negative impact on your focus for the rest of the group, which might have happened?
I think it's true. I think inevitably it's always the case that you end up spending more time with the problems than you ideally would like to, and I think we are not an exception, and this half year is not an exception. You will also know that there was unfortunate developments when the president passed away in March, et cetera. All that has created a lot of course, need for attention and time spent on that. It's not optimal, but it's a more generic, I think, situation.
The Atlas acquisition, did you have any extra cost? You mentioned the extra cost, but can you talk about that a bit?
No specific one-offs, so to say. In general, when we are accelerating to carve out and get it into our structure, of course, it's a lot of costs around that that is impacted, like IS/IT system, putting up things in our own warehouses, et cetera, which is not necessarily related to the light compaction business as is. It's more spreading out in other parts of the Consumer Division and also partly into the Husqvarna Division due to the shared logistical center, et cetera. There are some costs coming into that situation also here in the second quarter.
Just imagine if we have, for the sake of it, 10,000-20,000 articles that needs to be brought into storage warehouses and transitioned into Husqvarna products, R&D efforts, CATIA efforts in CAD, et cetera. There's a lot of value steps here that are impacted altogether. It's, as Jan says, no one-offs.
In media, you said this morning that 10% margin for 2019 is.
I can't remember exactly what you said, something that we should basically target or look for. Can you comment anything about the 2019 progression on margins or given the execution Consumer Brands?
Yeah. No, I think what we have said in the release is that the reduction of the SEK 2 billion, if anything, is margin accretive. That's what we expect. The question was, are you going to reach 10% the next year? I'll say that's a reasonable assumption, was my response. Give and take, that was the language.
Okay, thanks.
Okay. Olof, I'm ABG. Just a couple of follow-ups. On the pricing that you talked about before going into 2019, should we expect those to be fairly sizable then, if you need to catch up with cost inflation this year, and then maybe some cost inflation also next year?
I would say particularly in the U.S., since many of the raw material increases are related to the North American market. If you look at steel prices, they are significantly higher in North America than in Europe at the time. Very much as a result of the tariffs on incoming steel. The domestic suppliers from which we, to a large extent buy, have increased the prices in relation to the tariffs of imported goods. That needs to be dealt with, of course. There are later tariffs, which has been announced in the last month, which will need to be compensated for. This is almost like looking at the Reuters screen when it's a little bit of fresh air, which we need to deal with.
Of course, we're starting to look into also alternative sourcing routes for components, typically engines and other components, which to some extent come from Asia into North America, beyond the raw materials that we talked about. That will need to be compensated for. The answer is, depending on the category of the product, you will see a spread. Some are not going to be impacted necessarily at all. Others are truly going to be impacted. There can be quite a significant spread between the categories here.
What is your confidence level on being able to offset the underlying increases?
I think we have the strength to do that, and we are determined to do that. We're not going to absorb that at this stage.
Okay.
In many cases, this is generic, of course. Steel is steel, and we have more or less the same kilos of steel in our products as the competitor. There will be competitive issues to take care of course, where we are sourcing, how you are having your suppliers, et cetera. In the end, it's pretty generic if you take an average.
All right. Then a question about robotic lawnmowers specifically. How was the growth during the quarter? Is that business still generating similar margins as last year, or is there a pressure? Just your thoughts on that one.
The way I talked about this before is battery-based products and robotics combined, I talked about them growing well about 20%. I think that still is true. Number one, if you look through the quarter, we saw, of course, you can imagine up in Scandinavia, there hasn't been much of robotics sales in a month like June. A decreasing rate up here. We see other markets doing fine. If you look at the margin pressure, I would say the dealer channel holds up very well. If there is a pressure that's in the retail channel, where, of course, with an offering of some 20 actors fighting the space, not very surprising. There is price pressure on that side. I would still claim that Gardena, given the brand strength, given the functionalities and the future developments, is holding up pretty well.
It's not any large decline in that sense. On the Husqvarna side, I would say we don't see the erosion even.
Thank you.
Operator, can we please open up for questions from the telephone audience?
Thank you. Ladies and gentlemen, we will now begin the question and answer session. As a reminder, if you wish to ask a question, you will need to press star and one on your telephone keypad and wait for your name to be announced. Once again, star and one if you do have a question. Thank you. The first question of today through the audio comes from the line of Johan Eliason. Please go ahead.
A question. You mentioned this product mix towards lower margin type of products like hoses and stuff like that in Gardena. I think you also had some similar in the Husqvarna Division. Is that just because of this extreme weather pattern here, or is there a structural shift? We sell more of the low-margin products going forward?
If I kick off, I think what Johan talked about here, to be specific, was the example of the Gardena watering products, where the mobile couplings is, of course, one of the profit pools we have. Whereas hose boxes where you roll out hoses, or you have hose trolleys that you carry around in the garden have some more dense margin. We have seen a mix amongst those in this quarter. Whether that's a structural change. I think it might be, actually. More and more, we've seen an inclination to have a fixed coupling and hose arrangement, which you can mount on the wall of your villa or similar. There might be. I still think, given the scale that we have built up in this area, we also have ideas for how to improve that margin going into the 2019 season.
Yes, there is a structural change, but we will make sure to improve the margin on that side as well. I think that's a fair comment to the Gardena case. I don't know which Husqvarna case you referred to.
I mentioned that there was.
I think you.
There were some effects also on Husqvarna. You were into it, I was into it, talking about the northern part of Europe, of course, being affected by the warm weather. Thereby affecting also, for instance, the sales of robotics in that specific end of the quarter.
Yep. If I just continue then along those lines, of course, the Scandinavian region as such is a very profitable Husqvarna region. The average profitability is higher. There is a regional, let's say, mix component there. I think that's what you refer to.
Yeah. Can you say anything about these growth initiatives, launching the robotics in the U.S., and then Gardena into the U.K.? Is that all going according to plan?
Yes and no. I would say we are starting to build significant momentum in North America with robotics. Are we selling through according to expectations? I wouldn't say that, really. I think we are still building the momentum, and I think it takes quite a bit of time here to increase the understanding of this concept. If anything, I'm certain we will see the larger breakthrough for 2019 season, because now we also see in social media and e-com channels and other things that there is a huge raise of interest and visits. For example, one of the big retailers with which we work have seen more than 100,000 visits into this category on the webpage during the last nine weeks. Things are starting to happen.
Now we need to do the planning for expanding the amounts of floors, which will then be, so to say, equipped with robots for next season, whereas this was more still selective the 2018 year. We will also take some other consequences in respect of installation resources, et cetera. U.S. is, to a large extent, a service-oriented market. The answer to your question, it's not a fantastic sell-through, but a lot of momentum building in terms of robots in the U.S. Gardena in U.K., there has been a bit of a setback through the fact that the retailer chain that was applied or as an entry ticket has actually exited from U.K., that means we are reinforcing our garden center positions stepwise.
A little bit of a temporary setback, on the other hand, the garden center is the right channel for us and the most important one to sell the premium anyway. It just forces us to push that even harder. In the larger scheme of things, the right thing, temporary, maybe not as much of an increase in the U.K. as we would have liked to have seen this year. You have seen that the numbers are not bad despite this.
Well, that's fine. Just on robotics again, you are closing down consumer brands, but I saw that you have launched the McCulloch brands also for robotics this year, for example, here in Clas Ohlson. How is that doing? Will the strategy change regarding that, considering what you are doing to consumer brands?
I think the answer is still within quarter three, you're absolutely correct. The product is out in the market. The product is selling through. It has had, I should say, really good development, not only in Scandinavia but throughout Europe, and to some extent, e-channels in North America. No big numbers on that side just still. It shows that the idea of that category, and maybe it's a good question in the sense that I can use that as an example of talking about synergistic consumer brands business that makes sense and which has a future. If we would put on one hand the petrol walk-behind mover on one side and look at the robotics side of it's a completely different answer. It exemplifies, I think, in a good way, what makes sense to keep as a category.
The strategy to keep some new entrants off your ground will still work within the areas where you are keeping the consumer brands like in the robotics. Are there other areas where you want to still fend off entrants taking share in the mass market segment?
I think the message is we are determined to be in that part of the market and to that customer segment, whether that's going to end up being with the McCulloch or another solution, may that be a Gardena that is somewhat stretched downwards or not, that's still to be worked out in the review that I'm referring to in quarter three.
Okay. Just coming back to the tariffs and the price hikes and steel costs. Are you, in any significant way, differently positioned versus your competition in terms of your sourcing and manufacturing setup?
I don't know if I start, Jan, then if you add, if you want to. I think that to a large extent, if you look at components like engines, petrol engines going into tractors, zero-turns, walk-behinds, et cetera, I think they are sourced from low-cost countries, maybe even particularly China. I don't think we are more exposed on that side than anybody else. We have a fair share of that, but we also have some domestic manufacturing. No, I don't think there is reason to expect that we would be significantly asymmetric versus competition.
You can add also Construction Division are impacted as well. There it's more of depending on what category you are in, actually, how the competitors have their supply.
That's a good addition.
Okay, great. Many thanks.
Thank you. Our next question comes from the line, Rasmus Engberg. Please go ahead.
Yes. Hi. I had two questions. With regards to the sales, this revenue that you're stepping away from, the initial SEK 2 billion and then the second step. Is that sort of the U.S. only, or is it in Europe as well? Or
The proportion of the division is 80/20 North America, Europe, roundabout. Actually, the reduction in sales is pretty proportional to those proportions. There is a 20% something European, 80 sits in North America.
Mm-hmm. This stuff, the push movers and the cheaper tractors, they are made in the U.S., right?
Correct.
Most of them.
To the major extent. There is a little volume made in the southern part in Europe, in Italy.
Your comment regarding the manufacturing footprint, should we take that to mean that taking out SEK 3 billion, SEK 4 billion of sales from those factories means you need to redo your setup slightly?
I think you're correct, in the respect that these are significant numbers, and if they kind of disappear, it will have, of course, a fairly clear impact on the footprint and new optimizations needs to be reviewed.
Okay, thanks.
Thank you. There are no further questions at this stage. Please continue.
With that, I'd like to thank you for your attention. Thank you very much.
Bye