Good morning, everybody, welcome to Husqvarna quarter 1 result presentation. Let me start by giving a flavor of the total quarter and how we look at it. Actually, we are quite pleased with the quarter. To end up with an operating margin which is equal to last year, Q1, which was a good quarter, is a good result for us. You will be aware that there has been some headwinds this quarter. Talking about the weather, of course, what is particular about the weather this year, quarter 1, is that it has been cold both in Europe and North America. Talking North America, particularly the East Coast, Midwest, has been truly cold. Europe pretty much across quarter 1, even stretching a little bit into Q2, but not in any significant way.
Despite that, operating margin remained at 11.2%, which is good, we have seen now the three divisions in profitable growth continuing that trajectory of improvements of earnings, EBIT, and margin. That is quite pleasing. At the same time, we have faced quite considerable headwinds with the Consumer Brands division, I'll come back to talk a bit more about that. If you look at the margin development, we are flattish. We are remaining under 9.6% rolling 12-month operating margin, since some time. Still, it's a good trajectory by and large, you will be aware that we are expecting to continue the improvements. I'll move over to actually the profitable growth divisions, where we have talked about the organic growth being the primary focus. Profitable growth, margin accretive, but growth-oriented. You will see Gardena had a great start of the year.
They are actually now moving above 10% on the rolling 12-month basis. We see a downturn for particularly Husqvarna with a flat quarter 1, but still being above 4% on a rolling 12-month basis, just like construction. The average for the three division is actually a little bit south of 6%, give or take 5.7%. That has also been the guidance for the full year that we expected the growth rate to be cruising along 5%-6%. Quarter 1 didn't really give a great support to it, but we still remain with the belief that that's doable for the full year. That's a very positive signal. I would say we have underlying momentum in these three divisions, which is positive. We'll talk about that soon. First, let's look at overall group currency adjusted -1% from a sales perspective.
However, a gross margin improvement, as you can see from 27.7%-28.8%, which is a good sign. As I commented upon, we managed to maintain the operating margin at 11.2%. However, then that left us a little bit with the operating income then being slightly below last year all in all. Still, we think that's a good result given the situation we are in. Cash flow is improved, just like the net debt. Jan will talk a bit more about those in detail. If you allow me to get into the divisional perspective, I'll start with Husqvarna. Of course, we have the late spring impact here. You know this is pretty much a stock-up load in the quarter. Nevertheless, normally you do see some sell-out in March, end of March. That wasn't impressive.
It was pretty empty, actually, on the floor at the dealers throughout March, actually. There is a delay here as you will realize. Of course, now we need to see, and that goes of course for all the forest and garden divisions, that the sellout takes some pace pick up throughout April and into May. We see the replenishment orders come. I would say in April, at least we see that the season is in full swing, which is good news. We also need to see that maintained now throughout the remainder of April. We need to see it stay for May. If that is the case, we should be able to pick up what we have lost at the very beginning.
If there is some questions around the remainder of April into May, then there is probably a difficulty to pick up that volume through an extended season later. It would imply a loss. It's too early. I don't have the visibility to say in which of those two camps we're going to end up, you see the mechanism at least. We saw some growth in Europe, offset by the decline in U.S., and very much that growth was supported and fueled by the robotics lawnmowers, which is positive. Just like before, we also have support from the battery-based products. That is more equal, I would say, throughout the regions, but the robotics larger volume is, as you will be aware, of course, primarily a theme for Europe, even though we are starting to work on U.S., that has less significance there at this stage.
We had a favorable mix, geographic point of view, product point of view, and some positive effects supporting. We also do press on with the profitable growth initiatives, and we have added costs for those compared to last year. All in all, if you look at the numbers, you will see the margin improving from 16.8%-17.7%, SEK 1,032 million became SEK 1,070 million, and that on the flat sales, as you will see. A good result on that flat sales is my view. Gardena had an exceptional strong start of the year with 15% currency adjusted sales. Great, of course, and you see the operating income improve from SEK 251 to SEK 301, at pretty much stable margins.
This is primarily due to, if you look at the product dimension, many new product categories have been brought into the trade, may that be the new battery-based system, Heartbeat, modular system for handheld battery equipment. May that be also what you see in the picture, the SILENO city robot mower for smaller surfaces. There are also many novelties in other categories. Mobile watering, you have hose boxes, hand tool areas. There are examples across all the product dimensions. Well-received, good listings, in that respect. Of course, we are pressing on with the expansion in those markets we have talked about before and increasing the penetration of those markets. We also see an effect in the quarter one here of a fill-up into the online channel in expectation of the season. All those contributing.
I don't think you should necessarily look at the 15 as the new expectation for the run rate of the year. It's a bit exceptional, and it's related to those items I commented on here. Nevertheless, it's a very good start. Just like with Husqvarna, we are continuing the investments into profitable growth, which is, of course, from a P&L perspective, a burden of the quarter as such. Very nice start. Talking about the problem, which is Consumer Brands. We knew when we started this year that we would have a significant volume loss. That's not surprising at all. What we have seen is, of course, then the late spring putting more burden to this, making the big box retailers more defensive in their purchasing pattern, which is not necessarily great, and that goes beyond then that particular account.
That combination has brought us 17% of sales decline currency adjusted, which is not that easy to handle, particularly not given a situation where we also have raw materials increasing quite significantly as a consequence of the tariffs. Even though we might have domestic suppliers, they have, of course, adjusted their prices in expectation and anticipation of that tariff increase. We also have some effects headwinds for the Consumer Brands. All in all, it is a little bit of the perfect storm for that division at this stage. Due to the contract structure with a big box retailer, it is very difficult to make some negotiation around the price increases in a given situation in the season. We need to work with that, of course, with a little bit longer time horizon and set the stage for next year.
We are pressing on with the footprint efficiency measures. We are pressing on with bringing new products into this division. Of course, it is a serious situation when you lose SEK 63 million in the quarter. That's far from great, and that's not what I would have expected should we have talked about it four or five months ago. It's a tough start, no question. -2.2% operating margin. Construction, a lot more pleasant to talk about. 16% currency-adjusted sales increase, which is nice. Remember then 12 of those being acquisition-driven. We're talking about the Pullman Ermator primarily. It's doing fantastic. HTC, and then now lately, Atlas Copco light compaction. Where we have said that there is no significant EBIT component related to the Atlas Copco acquisition for 2018.
There might be, let's say, a little bit less than half of those 12% related to acquisition that allocated to Atlas Copco, and that doesn't bring any margin content. You could say there is a margin dilution maybe in the magnitude of half a percentage point there due to the Atlas Copco top line and no result contribution. Positive development, particularly in Europe, actually, where we rarely see the correlation between weather in Construction and the forest and garden, we actually have seen it. Particularly in North America, where there has been delays of some projects in the quarter, East Coast, Midwest, but where we expect that to pick up again in quarter two. It's more a delay between quarters than anything about the underlying pace that has changed. We still see a good momentum in the underlying business in all the geographies, actually.
11.8% margin was increased to 11.9% margin then. I think with that, I'll leave the divisional comments and let Jan talk more into the details of the financials.
Thank you, Kai. Moving over then to the group, whereas the divisions have experienced a fragmented and diverse start of the year, the group is, as regards financial, in general terms, in line with the first quarter last year, where we have pluses and minuses more or less offsetting each other. We have higher sales and EBIT in the three profitable growth divisions, and those are offsetting then the lower sales and EBIT in the Consumer Brands. We have negative effects from the raw material price increases, but we have positive effects on FX offsetting each other. If we take a look on the top line, as Kai mentioned, it decreased slightly, 1% currency adjusted. The currency effect there from minus three to minus one is related to the weaker dollar that was partly offset then by a stronger euro.
Of course, then the lower sales in Consumer Brands offset by the very strong start in Gardena and in Construction Division, where we have both acquired businesses contributing and organic growth. Gross income, slight improvement, positively affected by product mix, but also, of course, of the divisional mix as we have Husqvarna and Gardena and Construction growing combined and Consumer Brands with lower than average profitability, decreasing sales. Also we have an impact across the division of improved product quality. On the negative side, offsetting these positive ones, we have additional costs for profitable growth initiatives. When we talk about gross income, that is R&D costs. We also have, of course then, the hit on raw material costs mainly related to steel and for this group as well related to packaging material as well. We have a negative effect related to the lower volume.
We also have an effect related to adapting our provisioning of bad debts for accounts receivables to IFRS 9. That started to be valid from January 2018 and then affected this quarter negatively with some minus SEK 25 million, whereas last year were unaffected since we did not adapt to IFRS or it was not introduced in 2017. It was introduced here in the beginning of 2018. Gross margin all in all improved by 1.1 percentage units to 28.8%. Moving over to our indirect cost, the selling and administrative expenses, the SG&A, some SEK 85 million higher than last year. Also here we have an impact then related to the additional cost for profitable growth initiatives and also, of course, an effect of the acquired businesses. When we talk about acquired businesses, in comparison with first quarter last year is both HTC and Atlas Copco deal related to Light Compaction.
That was offset partly then by the weaker U.S. dollar that impacted positively. Operating income, SEK 50 million lower than last year, SEK 1.373 billion, and as Kai mentioned, 11.8%, that is the same operating margin as we had last year. Financial items in line with last year, no big difference to what we experienced that quarter. Net income SEK 50 million lower than last year, SEK 940 million, giving a net margin of 7.6% and an earnings per share of SEK 1.64. Moving over to our balance sheet and some comments related to that one. Here, of course, we have a currency effect because we have a big part of our operations outside Sweden, both in the U.S. and, of course, a big part of our business and sales is related to Europe.
By that, we get an effect of the appreciation of the dollar and an effect of the depreciation, sorry, appreciation of the euro and depreciation of the dollar. All in all, net, very few effects if we take a look on each balance sheet row. Starting with the non-current assets, that has increased with close to SEK 2.2 billion compared to March last year. SEK 0.2 billion is related to currency. SEK 1 billion is related to the acquisition of HTC and Light Compaction, and SEK 1 billion is related to higher CapEx level reflecting our higher ambitions compared to where we were first quarter last year. Moving over then to inventory, of course, related to the weather, we had an increase of some SEK 1.1 billion currency adjusted on our inventory compared to March last year.
Late start of the season in both Europe and the U.S., also that we actually had expected higher volume for our profitable growth divisions, and that has not still yet then been turned into sales and accounts receivables. Talking about accounts receivables, they were some SEK 750 million lower in local currencies than last year, mainly related to the Consumer Brands, reflecting the decision to cut back sales on a major retail account, and also increased factoring in the Gardena division. Whereas acquired businesses in construction division impacted with some SEK 100 million. Accounts payables, some SEK 700 million higher than last year in local currencies, mainly reflecting the pre-build for the season, and also the effect of the acquired businesses in construction division.
All in all, that meant that despite the impact of the late start of the season, operating working capital last year, currencies on the total operating working capital had a very limited impact. With the improvement of operating working capital and the weaker U.S. dollar, that also meant that we got a lower net debt end of March this year, decreased SEK 0.6 billion compared to what we experienced in March last year, down to SEK 9.2 billion, and included here is also, of course, the effect of acquisition of Light Compaction here in February, Atlas Copco, SEK 0.3 billion, and also the acquisition we made in May last year for HTC, if we compare it with the SEK 9.8 billion, which we had March last year.
One of our three financial targets, as you remember, Kai showed two of them, the net sales growth in our profitable growth divisions, the EBIT margin, then we have the operating working capital in relation to net sales. Should be under 25% measured at year-end. That is our target. With the improving operating working capital, it was enough to offset the lower sales that we experienced. Meant that we continued, even though not short, but we continued the improvement trajectory, moving down 0.6 percentage units from 28.1% first quarter, down to 27.5%. As you can see, there is a seasonality effect in those first quarters.
The seasonal pattern can also be seen here in operating cash flow, where we have a buildup of working capital in the first quarter and in the beginning of the year, where we have demand and deliveries, that was also valid this year. Operating cash flow adjusted for acquired businesses was slightly over SEK -1.3 billion. That is an improvement with SEK 700 million compared to last year, that reflecting the lower operating working capital. SEK 500 million of that improvement of SEK 700 million was directly related to Consumer Brands and their lower volume mainly. Net debt to EBITDA. Our ambition is to have an investment-grade rating as a company, to be able to have that, we need to have strong earnings and cash flow from the operation in relation to our net debt.
To keep track of that, one important key ratio is, of course, net debt to EBITDA, it increased somewhat from year-end to 1.6 times, following normal seasonality in the first quarters, but was still slightly lower than the first quarter last year. Continuing to decrease quarter by quarter. Ending with something about our key ratios and key figures. We have seen somewhat deteriorated capital efficiency, measured here as capital turnover rate, we have more liquid funds in our balance sheet, that affects our return on capital employment measure. That was slightly lower than what we had first quarter last year. On the other hand, return on equity was slightly higher than last year.
We have a somewhat lower average number of employees, some 400 employees lower than last year, that is related, once again, to the U.S. footprint and the scale back of a major retail account, as well as some structure changes from last year, giving a full effect in this year. With that, Kai, summing up.
Yeah, summing up briefly before we start the Q&A. As you've heard, we are quite pleased with the fact that we kept the operating margin, given the circumstances of the late season start. We continued the growth trajectory with our profitable growth divisions, the improvements of the income and the margins. We are facing tough headwinds, as I mentioned, related to the consumer division. Talking about the volume decline, the raw material that's hard to compensate for in the given season, and the FX. I think that's pretty much it, but that we also have an underlying strong momentum. I'd like to leave you with that before I open up for the Q&A. Operator, we can please open up for questions from the telephone audience. Thank you.
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 comes from the line of Johan Dahlén. Please go ahead.
Yes. Hi there, Kai. Johan at SEB. Could you talk a little about the product mix improvements that you experienced in the first quarter? Perhaps a little bit detail and color on that, especially in the Husqvarna division, what's driving that?
Johan, the mix improvement is pretty much driven by primarily, I would say, the robotics category and the statement that I have used before is along the lines of 20%, or actually I've talked about well above 20%. I can at least talk about 20% without any exaggeration in this quarter. That is actually also true for the battery-based products, which is probably supporting to some extent as well here.
Okay. Also, just to follow up on your inventories. Have you shifted your production schedules looking in Q2 and possibly Q3, just due to the inventory situation? Are you expect to move those in follow-up orders here in April and May, basically?
Of course, we are carefully following what is happening with inventory and demand. As Kai was into it's about also how much of the replenishment will happen and when will it happen in Q2. We are following that. We have not made any major changes to our production schedule, but of course, we are more cautious now, and we have been so coming into the end of the first quarter and beginning of the second.
Yeah. In addition to that, of course, with the sales we experienced in quarter one, we are well-stocked, so to say. There might be things coming up as Johan points out, as we see the replenishment kick in or alternatively to higher or lower degree.
Of course maybe stop producing earlier than we had planned from the very beginning, especially if we think about the U.S. footprint and tractors and walk behinds.
Got you. Just finally on the cost out actions in Consumer Brands, can you update us on where you stand currently? You talked about footprint planning, et cetera. What's the visibility there for savings in the remainder of 2018 and possibly 2019? Thanks.
If you look at the cost outs the last few years, I think we have been around two percentage point of improvement on a year-to-year basis. I think that's a good proxy for what that should be. With the understanding that when I talk about cost out, by the way, so I'm clear, I'm talking about product costs and footprint cost altogether. Of course now with the raw materials, that is a burden on that improvement rate.
Maybe, Kai, then we should also give a little guidance for the coming year on raw materials because.
Yeah
As we mentioned, we are more or less offsetting the raw material price increases with FX. We will have more of headwind coming from raw materials than we have tailwind from FX coming into the remaining three quarters of this year. We are still talking about the negative net of around SEK 100 million net of FX and raw materials. We have still a tough headwind to take actually on raw materials, and the main part of that is actually unfortunately hitting Consumer Brands and their products.
Thanks.
Thank you, ladies and gentlemen. Once again, star and one for question. The next question of today comes from the line of Johan Eliason. Please go ahead.
Yeah. Hi. I was just wondering about this raw material again. You mentioned it had been, I think, already now in Q1 for Consumer Brands. Have you changed your hedging policy in any way? Isn't it so that because of your short manufacturing period, you would typically hedge most of it? Have this lost turnover from maybe retailers sort of impacted your visibility on what you could hedge? Thank you.
No, it has not changed, of course we are comparing hedging levels first quarter last year and hedging levels first quarter this year. Of course there is always timing differences here. No change there. What you can say is that maybe our hedges has been a little longer than we anticipated due to the lower volume. No change in general talking about raw materials.
Okay. Then financial costs, could you give us any indications on where they should end up going forward?
Well, we started the year in line with this year, and the best guess will be in line with 2017 also, for the full year 2018. Maybe there will be some positives, but if there is a risk or a possibility, it's more on the downside. If you are putting it into a spreadsheet, use 2017 numbers.
Okay. Thank you very much.
Thank you. Ladies and gentlemen, once again, star and one for question. The next question of today comes from Rasmus Engberg. Please go ahead.
Yes, hi. Can I ask you what do you see for the coming quarters for Consumer Brands? It seems that you're saying that there will be continued worsening of earnings there as the raw material is more heavier in coming quarters, or am I misunderstanding it?
No, Rasmus, I think you're not misunderstanding it. I think the point is exactly that it's hard to be that optimistic about the rest of the year quarters, talking quarter two, three, four, versus last year. Last year, we actually lost something like SEK 90 million to SEK 100 million in those three quarters combined. I'm not optimistic about improving that actually, this year, given the situation where we have to absorb those higher raw material cost FX. We have that scale back of volume to deal with. It's all in all, if we guided last time a sideways move with a risk of a downside, that downside is actually a fact at this stage for those quarters.
If we think about that division for next year then, is it feasible to expect that you will be able to push those costs on to the retailers, or how do you deal with that for next year?
I would say the raw material burden is nothing unique for Husqvarna. I think everybody is struggling with that in this season. Everybody's probably in some kind of pain, versus the retailers with the contracts. I cannot see anything else than that there will be a pressure upwards for next season on that topic. There's no question about that.
All right. Okay, thanks.
Thank you. Ladies and gentlemen, once again, star and one if you wish to ask a question. Thank you.
Okay. With that, I see there's no further questions. I'd like to thanks for your attention. Thank you very much.
Thank you