Earnings Call: Q2 2018

Jul 17, 2018

Morning, everybody, and welcome to Husqvarna Quarter 2 Result Announcement. We have a mixed quarter. We have a 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. And I'll talk a lot more about that as you can imagine soon. So 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 divisions. And the disappointment from the Consumer Brands division result wise continues. It's an underperformance. And if you look at the group altogether, 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 and 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 4, 4.5 years, and we are now a little bit out of balance with that versus the cost additions we are taking for the growth initiatives altogether with these other components. But 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 2 step rocket, means a reduction of sales of SEK 2,000,000,000 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, well, the answer is we can't because of customer commitments we have for the 2019 season. So we have to accept that that's a bit slower than we ideally would like to. But 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. So 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 SEK4 billion that I talked about, up to SEK4 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. So 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 3, meaning latest in the announcement of quarter 3, we will be back with quantifications of what this will mean in respect to various aspects, one off costs being one element of it. Practically, the dissolvent 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. I mean, 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. And 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 breakeven in 2016. And 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. And 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. And I think that's a pretty clear situation. But it is, of course, disappointing, but I think it's a fair conclusion and 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. And I'll talk more about the quarter 2 and how we can describe that soon. So 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. So we are now at as an average of the 3 profitable growth divisions at 6% growth. And of course, Gardena sticks out after 2 great quarters. And if any division has benefited more from the strong season, of course, that's Katina not surprisingly to anybody. Looking at the financials, we have a 7 percent growth currency adjusted, so SEK14.2 billion or SEK27 billion. So that's pretty good. And we see then that the EBIT result reduced from SEK2 billion to SEK1.925 billion. And 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. Joao will come back to that. So altogether, for the first half year, we are about EUR 130,000,000 lower than last year, EUR 3,300,000,000 give and take EUR 1,000,000,000 EBIT versus €3,430,000,000 And then you should remember that consumer then had lost €254,000,000 in that first half year. So eliminating that, which will be about 1 percentage point, which we lost in that. So the rest is moving in the right direction, however, somewhat weaker than before. Husqvarna then saw a good growth in both Europe and the U. S. Following the 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, And that puts a lot of strain on the supply chain. I'd say it went from nothing, nothing to pretty much a lot all of a sudden and that goes, of course, it's even more pronounced for the Gardena division, that pattern. But we have seen continued improvements of robotics, of battery based products. However, living up in Scandinavia that's most of you sitting in this room, you will have noticed that throughout the quarter at towards the end of it, the grass hasn't grown that beautifully as it normally does. So it's pretty dry actually without any rain during the course of May June by and large. There is a bit of a negative there. But I would say still on the overall scheme of things, it has been a good quarter in respect of demand. So somewhat higher operating income, 11.80 becomes 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% percent for the half year versus 2018, still on a good level altogether. Gardena then, of course, has had and enjoyed very favorable warm and dry weather, which is good and which has put even more strain on the supply chain. And we could probably have saw the potential even more. 12% in the quarter, 14% for the first half year of growth. Great numbers, of course. And we see then the operating income improving absolute numbers, but being somewhat lower from a margin perspective. And 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 then also relating to situations where the strength of the brand are not as reinforced as they might be in Germany, Benelux, Austria, etcetera. So 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. And 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. So some bottlenecks, we see higher logistic costs and typically inflationary 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, but it's inflationary pressure in any way. And that is an important aspect as we talk about going forward and 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 and then further on also other possible impacts like tariffs. But staying here, we are quite pleased with the development. If you look at the half year then, I mentioned the 14% sales growth. Currency adjusted, we have 886,000,000 versus 816,000,000 than last year and somewhat reduced margin, but still very good levels. Consumer, I was fairly clear about the disappointment in the quarter and in the half year. So it's €254,000,000 for the half year of deterioration versus last year for the same period. And we have material prices, which are difficult to compensate in the short perspective. And it's a general, of course, challenging retail. Construction, another good story, 16% including the acquisitions. Now this is predominantly the last acquisition of Atlas Copco that's in that and that's half of the quarter for HTC. 8% of those 16% of sales growth refer to organic growth. So that's good. Good growth in all regions and particularly the dust and slurry segment is doing fine. But it's throughout doing pretty good. But there are some mix aspects and we have pushed the integration of the Atlas Copco activity that was a carve out, which we have moved into our operations and we have also put a lot of energy and taken some costs actually to finalize that because to safeguard that there's appropriate attention on the sales side to bring a transfer of Atlas branded products into Husqvarna, get them into the stock and we are talking thousands of articles that has been transferred here. So that has had a negative impact, but I think it's a really good result here that we have achieved having done that activity. That's a good base going forward. So operating income somewhat improved, similar pattern margin wise not fantastic, but by the reasons I mentioned, still good levels. For the half year, we are at same level of sales growth 16% and 14% margin versus 14.7 percent. I think I'll leave it there for Jan to take you through a little bit more of the financial details. Thank you, Kai. Well, financially a quarter with more headwind than tailwind and I will come back a little about that also related to balance sheet and cash flow. And as Kai were into one of the signum 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. And the reason is, of course, what Kaj was into related to raw material cost increases. We have the generous strained supply chain where shortages of supply both of transport but also from suppliers of material, but also bottlenecks at those suppliers and all of these resulting in cost increases. And then we have also, of course, the volume effect of scaling back of 1 of our major retail accounts for the season 2018 in U. S, whereby we lost or eliminated around SEK 1,000,000,000 of sales. The trend of improving sales operating income in the 3 profitable growth divisions from the Q1 continued also in the Q2 and also the sort of offsetting factor, the consumer brands with lower sales and deteriorating operating income continued also here in the Q2 and eliminating the positive effect from the profitable growth divisions. Net sales for the group, FX adjusted then in the quarter 7%. First half year 3% up, both currency adjusted and in nominal terms close to €800,000,000 to €26,600,000,000 Gross income in the quarter, up some €140,000,000 dollars positively affected, of course, by the volume increase for the profitable growth divisions. And as Kai pointed out, watering products, of course, robotics and other battery products improved strongly and 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 SEK80 1,000,000 here in the Q2, SEK140 1,000,000 more or less than for the 1st 6 months. The strained supply chain putting pressure on both manufacturing costs and transports. And we also have the profitable growth initiatives, as we call them, in here related to the R and D cost that is accounted for in the gross income. So gross income margin deteriorated 1.7 percentage units to 30.1 percent in For the 1st two quarters, the gross income improved close to €175,000,000 with the same explanations as in the Q2, but also then when we take a look on year to date figure adding the improved quality as one contributed to the improved gross income. Moving down to selling and administrative expenses, the SG and A. They increased in the second quarter with some €250,000,000 but €100,000,000 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. So the $150,000,000 that is left is then mainly related to what we call them additional cost for profitable growth initiatives and we also have some higher IT costs. And for the 1st 6 months, we are up SEK 340,000,000 where currency had limited effect, but excluding the acquired businesses, we are talking more about SEK 250,000,000 increase, same explanation as in the quarter, more costs for profitable growth investments and also, to some extent higher IT costs. All in all, this means that we have an operating income that decreased from SEK 75,000,000 to SEK 1.925 in the Q2 this year and an operating margin of 13.5%. And for the first two quarters, close to SEK3,300,000,000 of operating income, some SEK125,000,000 lower than last year and an operating margin of 12.4%. Financial items both in the quarter and for the 1st 6 months in line with last year and taxes were some 23% of the income before taxes, somewhat lower than last year and that is then positively impacted by the lower tax rate in U. S. Net income in the quarter, €138,000,000, some €20,000,000 lower than last year, giving a net margin of 9.7 percent. And for the first half year, slightly over euros 2,300,000,000 of net income and then net margin of 8.7 percent and earnings per share of SEK 4.05 that is SEK 10 or less than last year. With a substantial part of our operations outside Sweden and a substantial footprint in U. S. And Europe, we get, of course, affected by the weaker Swedish krona and depreciation of the dollar and the euro compared to June last year when we take a look at the balance sheet. So the noncurrent assets increased by some SEK 2,200,000,000, whereof SEK 1,000,000,000 more or less is currency and the rest is related partly then to the acquisition of the light compaction business, but around SEK 1,000,000,000 is related to the higher CapEx level we have seen the last 12 months. And adjusted for currency, the inventory increased some SEK 900,000,000 compared to June last year, partly due to late season, but partly also due to higher business activity in the 3 profitable growth divisions. Acquired businesses impacted somewhat negatively here, of course, as well on the inventory. Accounts receivable was close to SEK1 1,000,000,000 higher than last year. 40% of that is related to FX. The other is related to the 3 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 Q2, the season really took off in May actually. So we had an extraordinary strong May. That, of course, not even not also only impacted the costs because we were very strained in the supply chain, but also the fact that we have around 1.5 to 2 months of turnover of our receivables means that, that strong month and also an improvement in June is still in our balance sheet. So 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 750,000,000 in local currencies, reflecting the higher volume in the 3 profitable growth division 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 1,300,000,000. Half of that is currency. The other half is then related to past and future volumes. And 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 SEK8.9 billion is actually currency, both direct and indirect effects of currency. And of course, the acquisition of Light Compaction from Atlas Copa impacted some SEK 300,000,000 on the net debt here in the Q1. And we are some SEK1.3 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 or 2 of them I will talk about. The others, I would say, 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's Q2 was slightly positive when we take the ratio here. It improved slightly with 0.3 percentage units from 26.8 to 26.5. And of course, this is not where we want to be. And 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 U. S. Giving positive effects on consumer brands, but also improved or increased factoring in Gardena, rendering results. We saw here a deterioration in the Q2 compared to the Q2 last year of some SEK 1 600,000,000 of cash flow. Of course, accounts receivable is a big explanation here, but also we had a tax payment in the quarter, in the second quarter related to a tax case where we have appealed, but we're forced to settle that amount for the time being. Operating cash flow adjusted for required businesses was some SEK 700,000,000 in the first half year. That is half of what we saw in the first half year last year. And we have an ambition to have an investment grade rating at the company, so we are following very closely. Different key ratio, this is the one that is most important, net debt to EBITDA. The ratio increased somewhat from year end in the Q1 to 1.6x, and it has continued on that level in the second quarter. Still rather stable, but annoying that we cannot continue our trajectory of improvements. And as you can see in the past, this is actually in the Q2 where we made improvements in the curve because that's our strongest earning quarter. And that is not happening this year, which is, of course, very unsatisfactory. And moving over to the key ratios. And of course, if since we have a somewhat deteriorated capital efficiency and lower earnings, the return on capital deployed and return on equity is around 1 percent to 1.5 percentage units lower than Q2 last year or actually full year 'seventeen. 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 down 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 and A. I would expect there are some questions here. And 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 sort of calculate what normally has been the operating leverage in those divisions, there seem to be a fairly big division here in the Q2. Could you just help us understand to what extent are this deterioration sort of sustainable in Husqvarna? What can you fix? And 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, but then I think it's short term. We are committing, so to say, cost increases may that be in R and D program, may that be to sales penetration. Brands and marketing and similar are easier to make a variable cost item. But 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 usually important for 2019, I think I alluded to it, is the pricing to meet the raw materials and the inflationary pressure we have seen. So the answer is yes, we will get back to the leverage. I don't think we should over read it, but in the short term, we are sort of committed on certain levels of costs. So I wouldn't say that we will see a fantastic leverage necessarily in Q3, it might be better, let's see, but hopefully it should be. But I think back to the more normal leverage is we have to see 2019 from an expectation point of view. But are you launching new sort of 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 and A related or COGS, cost of goods sold related various types. So 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 4, 4.5 years. And 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. So 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 sort of what routes for this division are closed the way you look at it now? Secondly, I mean, as you can quantify the sales effect potentially, I'm pretty sure you have an NPE view of what this project is going to cost. Could you give some indications what cash flow is associated with this going out? I mean, first of all, I mean, we have I talked about after Q1 that we're turning all these stones and that is true. But 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've said. But what we are doing right now is actually what we communicate. So I can't talk much more about the topic than that. And 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 3 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 and then we take the implication on the organization and the footprint. So it needs to come in that sequence. So you need to bear with us for another couple of months, but not necessarily much longer than that. I can't comment that. I don't rule out anything. If we turn all these stones, I can't rule out anything. But I can't say much more than that. What one can add, Kaj, is, of course, that there will be a working capital effect of this. I mean, we're talking about for the coming year SEK 2,000,000,000 and then potentially SEK 1,000,000,000 to SEK 2,000,000,000 more in 'twenty. I mean, we have 25% of sales tied up in working capital. So I mean, that will, of course, help cash flow going forward. That's the other side of scaling back, so to say. Bjorn and Son, Danske Bank. Coming back to consumer brands, you have been hesitant to take these kind of actions previously and you highlighted 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 'fifteen, 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 which is required. So 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 or should we actually reallocate the resources, energy, the focus into areas where we do great result improvements. And if you look at the profitable growth divisions just last since end of quarter 4 2016, they have increased sales with SEK 4,400,000,000. The result has improved SEK 7 million and it's a margin improvement, EBIT margin improvement of 0.7 percentage points. So I think we have a success formula here and we also need to work and put even more energy on that and actually leave other areas and dare to do that decisively. Then of course, ideally, I would have liked to have all this, so to say, done in one big go around. That's not possible. So I need to accept that, But I think we are clear about the direction. That's the important thing. And I think, again, coming back to it, the reorganization in 'fourteen was hugely important for us, Kvaerner Group going forward. I think we've proven that this will be equally important to actually resolve this underperformance that we have displayed. And 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. So I think it's not a problem for us from that perspective. But 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 fixed is it that we need to compensate for with reduction in other areas. And that, of course, includes also the group part of it. I mean, a group that has 3 divisions instead of 4 brings about also some scrutiny of that side. So we have that exercise to go through as well. It's a big difference in gross margins for consumer brands and group? Okay. Can you repeat? Gross margins for consumer brands, can you give some I mean, it's half magnitude of half. Yes. And on those So that's, of course, if you try to understand, I mean, if you have weak brand equity, you have low gross margins, it's not that easy to justify the R and D investment, the brand investments as you also continue to create that little try to create that little excitement and at the same time as doing the cost out. And that's where we haven't proven to be capable to pull that off. But whereas we do that quite nicely actually with Husqvarna Division or Gardena Division. And 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 are can be characterized as mature, low margin and with not necessarily a positive prospect either. So walk behind push movers, petrol, lower price point, tractors, particularly if I would point at 1 of the brands or 2 of the brands, Poland, Poland Pro in North America, we will depart. And we are reviewing other brands as well. Thank you. Keester Manikow 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. What exactly can you quantify the headwinds from bottlenecks, logistic costs and the efficiency in some way, so we can get an understanding for what kind of 1 off to call it temporary 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. But I mean, 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 sort of logistic issue due to the extremely strong sales improvement, but also how this actually happened during the Q2. But 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. Then we have had some other disturbances related to suppliers. And of course, that is not helping either because then you have to you cannot optimize the filling of the trucks, etcetera, if you are having backlogs. So there are different types of issues here. And 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 where we have put it in there. I mean, they are selling more of houses 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. And then I mean we have some headwinds on mix, but taking a look on the group, we have a positive divisional mix, which you can say is product mix as well. I mean, we are decreasing consumer brands and we are increasing the other division. Of course, that's a positive when we go up to the group level. But 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 I mean, of course, Scandinavia is 1 and Northern Europe is one of our most profitable areas. And of course, we talked about it. It stopped more or less after the warm weather really started. And so we saw a June that was not very strong actually in that area, of course, naturally. But we don't want to talk weather really. But of course, there are small bits and pieces here and there, which actually make the leverage not being where we want to be wanted to be for the profitable growth divisions. It's a long answer, Laudna, to sell what you asked for, Chris. If we would have taken 1, I would have done that, but it is not one. That's not one. 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. So 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. And the problem with consumer brands and the work with that, has that had a negative impact on, well, 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 there's we are not an exception and this half year is not an exception. And you will also know that we there was unfortunate developments when the President passed away in March, etcetera. So course, need for attention and time spent on that. And so it's not optimal, but it's a more generic, I think, situation. And the Atlas acquisition, did you have an extra cost? You mentioned the extra cost, but can you talk about that a bit? No specific one offs, so to say. But I mean, 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 ISIT system, putting up things in our own warehouses, etcetera, which is not necessarily related to the light compaction business as is. But I mean, it's more spreading out in other parts of their consumer division and also partly into the Husqvarna division due to the shared Logistical Center, etcetera. So there are some costs coming into that situation also here in the second quarter. Just imagine if we have for the sake of it 10000 to 20000 articles that needs to be brought into storage warehouses in transition or from oral transition into Husqvarna products, R and D efforts, CATIA efforts in CAFD, etcetera. There's a lot of value steps here that are impacted altogether. But it's, as Jan says, no one offs. Then in Media, you said this morning that 10% margin for 2019 is I can't remember exactly what you said, but something that we should basically target or look for. Can you comment anything about 2019 progression on margins or given the extra boost of consumer brands? Yes. No, I think what we have said in the release is that the reduction of the SEK 2,000,000,000 if anything is margin accretive. So that's what we expect. And then the question was, is 10 are you going to reach 10% next year? And I say, yes, that's a reasonable assumption was my response. Give and take that was the language. Okay. Thanks. Okay. Ulf Seyda, ABG. Just a couple of follow ups. On the pricing that we 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 U. S. Since many of the raw material increases are related to the North American market. If you look at steel price, they're significantly higher in North America than in Europe at the time, very much as a result of the tariffs on incoming steel. So the domestic suppliers from which we to a large extent buy have increased the prices in relation to the tariffs of imported goods. So that needs to be dealt with, of course. And then there are later tariffs, which has been announced in the last month, which will need to be compensated for. And this is almost like looking at the Reuters screen when it's a little bit of freshware, which we need to deal with. But 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. So and that will need to be compensated for. So 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. So there can be quite a significant spread between the categories here. But 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. I mean, steel is steel. And we have more or less the same kilos of steel in our products as the competitors. So there will be competitive issues to take care of, of course, where we are sourcing, how you are having your supplies, etcetera. But in the end, it's pretty generic if you take an average. All right. And 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 a little your thoughts on that one. The way I talked about this before is battery based products and robotics combined and I talked about them growing well about 20%. I think that still is true. Number 1, if we look through the quarter, we saw, of course, and you can imagine up in Scandinavia, there hasn't been much of robotic sales in the month like June, so a decreasing rate up here. But 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 this space, not very surprising. That there is price pressure on that side. So but I would still claim that Gardena, given the brand strength, given the functionalities and the feature developments is holding up pretty well. So it's not any large decline in that sense. On the Husqvarna side, I would say we don't see the erosion even. 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. Thank you. And the first question of the day through the audio comes from the line of Joanne Eliasol. Please go ahead. A question. You mentioned this product mix towards lower margin type of products like houses and stuff like that. I think at the end, and I think you also had something there in the Husqvarna division. Is that just because of this extreme weather pattern here? Or is there a structural shift to sell more of the low margin products going forward? If I kick off, I mean, I think what Jan 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 and whereas host boxes where you roll out hoses or you have host trolleys that you carry around in the garden has a more densed margin. So we have seen a mix amongst those in this quarter. Whether that's a structural change, yes, I think it might be actually, it might be. And more and more we've seen an inclination to have like a fixed coupling and hose arrangement, which you can mount on your on the wall of your villa or similar. So there might be, but I still think we have given the scale that we have built up in this area, we also have ideas for how to improve that margin going into 'nineteen season. So yes, it's a structural change, but we will make sure to improve the margin on that side as well. So 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 were some effects also on Husqvarna and I was you were into it. I was into it talking about the northern part of Europe, of course, being affected by the warm weather and thereby affecting also, for instance, the sales of robotics in that specific end of the quarter. And if I just continue then along those lines, of course, the Scandinavian region as such is a very profitable house corner region. So the average profitability is higher. So there is a regional, let's say, mix component there. I think that's what Jan referred to. And 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 recording 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. But 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 web page during the last 9 weeks. So things are starting to happen. And 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. And we will also take some other consequences as in respect of installation resources, etcetera. It's U. S. Is to a large extent a service oriented market. So not the answer to your question is not a fantastic sell through, but a lot of momentum building in terms of robots and U. S. Gardena in U. K, there has been a bit of a setback through the fact that the retailer chain that was supplied or as an entry ticket has actually exited from U. K. And that means we are reinforcing our garden center positions stepwise. So a little bit of a temporary setback, but on the other hand, the garden center is the right channel for us and the most important one to sell the premium anyway. So it just forces us to push that even harder. So in the largest scheme of things, the right thing temporary, maybe not as much of an increase in U. K. As we would have liked to see in this year. But you've 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 haven't launched the McCullough brands also for robotics this year, for example, here in Sweden in Klasogsson. How is that doing? And will the strategy change regarding that considering what we are doing to consumer brands? I think the answer is still within quarter 3, but you're absolutely correct. The product is out in the market. The product is selling through. It has had, I should say, a 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 there still. So 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 robotic side of it, it's a completely different answer. So it exemplifies, I think, in a good way what makes sense to keep as a category. So the strategy to keep some new entrants off your ground. We'll 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 segments? 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 McAllo or another solution, may that be 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 3. Okay. And then 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, and 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, returns, walk behinds, etcetera, 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. So no, I don't think there is reason to expect that we would be significantly asymmetric versus competition. And then you can add also Construction division are impacted as well. And there it's more of depending on what category you're in actually, how the competitors have their supply. That's a good addition. Okay, great. Thanks. Thank you. Our next question comes from Rainer Rasmus, Engberg. Please go ahead. Yes. Hi. I had two questions. With regards to this sales, this revenue that you're stepping away from the initial SEK 2,000,000,000 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 eighty-twenty North America, Europe roundabout. And actually, the reduction in sales is pretty proportional to that to those proportions. So there is a 20% something European, but 80% sits in North America. And this stuff, the push movers and the cheaper tractors, they are made in the U. S, right? Correct. To the major extent, there is a little volume made in the southern part in Europe and Italy. So your comment regarding the manufacturing footprint, should we take that to mean that taking out SEK 4,000,000,000 SEK 3,000,000,000 SEK 4,000,000,000 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 a, 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. So with that, I'd like to thank you for your attention. Thank you very much.