Earnings Call: Q4 2015

Feb 5, 2016

Welcome to the Husqvarna Quarter 4 and Full Year Announcement. We are quite pleased as we look back to 2015 in several respects. First of all, of course, related to the result improvements, which is quite substantial. But beyond that, I also like to comment on, as you're aware, we have made quite a significant reorganization in the 'fourteen that became effective 1st January 'fifteen. And as you can imagine, many things can go wrong when you make large restructurings as we did. We introduced a brand based organization, and I'm very pleased to see that the new organization is running with stability, energy and is full with good ideas of how to develop the business going ahead. But let me get into the summary of the year, respectively, the quarter 4. Starting with the quarter, we see a continued trend of improvements. The seasonal loss that we still struggle with, even though I think over time we would aim to balance that out, but in the near term, the next couple of years, we probably need to accept that we are going to remain in losses. But we reduced it to CHF 212,000,000 from the CHF260 CHF 5,000,000 excluding items affecting comparability. 2 things in favor, the sales volume on one hand and cost reductions on the other hand. From a divisional perspective, Gardena and Construction was supporting the improvement the most. So full year, 27% of EBIT improvement, close to SEK3 1,000,000,000 compared to reported SEK2.3 billion previous year. And operating margin, as you can see, was 1 percentage point uptick. The main driver of the improvement throughout the year has been the accelerated improvement program. And we actually closed the program with the end of 'fifteen, even though we will see some full year impacts from the program as we move into 'sixteen. We see improvements on the cash, the net debt and the solvency ratios, quite satisfactory and pleasing. And we have defined further initiatives to keep the improvement momentum going into 'sixteen as well as 'seventeen. And we need to do that because we have a fair bit of currency headwinds in 'sixteen, what we can see. And we also want to, to a larger degree, support a lot of good ideas for profitable growth initiatives. So we need to balance these forces, and we want naturally to offset these negative forces from that perspective with the improvements in other areas. From a dividend point of view, we remain with the €165,000,000 as the proposal from the Board. And I think that should be seen in the light that we have a lot of good organic growth IDs predominantly that we want to push steam ahead with and we want to reinforce our position as we continue into 'sixteen. The financial highlights for the group is that all divisions were in positive, excluding the consumer brands, and I will get back to some specific comments. We will see on the gross margin here quite a hit from the transactional currency impact. So that is a clear negative here. We have had hedges, and John will talk a bit more about the mechanism around that. But we see very clearly the positives from the cost reduction program and AIP. Full year, as mentioned, a lot of positives here on the cash and the net debt as well. Adjusted for the FX, sales was down 1% for the full year, but you see the inflation on the top line, we reported 10% up. So quite a difference considering that we all in all haven't had that much of currency impact on the result in the year, a little bit positive, but not from the early part of the year. EBIT margin wise, minus 3.7%, excluding items affecting comparability, and Jan will talk about them a bit more later compared to the 5% previous year. And the 2% in the quarter from the sales perspective adjusted for currencies. Moving into the divisions. Husqvarna, good sales development, mainly driven by North America. All in all, 6% currency adjusted for the quarter as well as, by the way, for the year. So quarter 4 remained on the pace we saw for the year. Maybe not so impressive result wise in the quarter compared to last year, but bearing in mind then that we have had the growth in some lower margin segments. We have had a lower production volume all in all, and we have some negative impact hitting the EBIT line. I think for the full year though, we are satisfied remaining on a good EBIT level of 13%, some NOK276,000,000 then of EBIT improvement to NOK2.284 €1,000,000 Gardena had a fantastic quarter 3. You will recall some of you a good weather season down in Continental Europe, which brings also the positive into quarter 4 that the inventories and trades are a bit below average. So the pre season sell in started quite nicely. And also we have some in season regions on the Southern Hemisphere, predominantly New Zealand and Australia here, driving improvements. Beyond that, I think from the volume perspective, affecting the result is improved productivity, but we have also throughout the year aimed at matching cost with the revenues in a somewhat better way, which has also supported the result improvement here, which looks quite good. And of course, it is, but I rather emphasis and look at the total year with an 8 a 8% sales increase and a fantastic result development. Of course, we get the leverage from the volume development here. And remember, this is on the back of a great season. We see the margin and the result development. That's very pleasing. And there's a lot of good things here as we look into 2016 season. I'll comment on that a bit later. Consumer, again, we are quite pleased in fact with a couple of things here. First of all, the decline is somewhat smaller for the quarter. But still we are managing to to be comparable despite the 10% sales reduction to be comparable in result development compared to last year. And there is a fair bit of currency burdening the quarter as well. I think it's a little bit more than SEK 40,000,000. So we are on the right path. And if you look at the full year, maybe that's better from a result point of view, €155,000,000 became minus €120,000,000 percent. Given the minus 16% on the sales development, that's quite an achievement. I think that's how you should see it. And you will hopefully recall that we have given priority to value before volume. So this is a conscious move. Maybe we even took a bit more than I would have expected a year ago, but it was the right thing to do. I mean, we have been into a mode of shrinking to the profitable core. And as we move into 'sixteen, looking at this comment, I can say that the main share of the value before volume priority is behind us. So you will not see these type of declines when we go through 'sixteen. We might still be in a somewhat negative territory, but it will be like single digits, so from a sales perspective. And the target is still to make a breakeven for 2016 for the consumer brands division. So nothing has changed and we remain with ambition of 5% for 2018. It's tough, but it should be doable. So we stick to that. And at the core of the improvement throughout the year has been the accelerated improvement program, a lot of cost out activities, a lot of account activities as well naturally. And related to the minus 16 percent is also some management of what I would describe as risk accounts. All in all, looking a lot better as we start to look into 'sixteen. Construction, continuing on the favorable path, good margin improvement, result improvement. This is the division that is supported by the currency development in contrast with other 3. And if you look at the full year developments, it'd be going from some 10.6 percent to 11.8 percent EBIT margin, quite satisfactory on the back of some 6% sales increase. Now backing into the quarter, North America remains the driver for the sales development, just like for the rest of the year, whereas Europe has in the quarter had a mixed development. Some countries like U. K, Switzerland are slowing down quite significantly, whereas others have maybe bottomed out like France. In fact, Sweden is doing fine, Poland, etcetera, is also doing fine. We get the impact on the result from the volume, the mix and the currency as well in the quarter as on the full year. And you will probably also recall that we have invested throughout the year in sales resources to build a market penetration. So you could say talking profitable growth, construction is the unit that is the furthest ahead of the division, whereas we then are looking to bring Husqvarna and Gardena respectively then into the profitable growth mode throughout 'sixteen and accelerating that stepwise into 'seventeen as well. With those comments, I'll leave to Jan to talk about the financials. Okay. Thank you, Kai. I think we should start with what Kai was mentioning before that in the beginning of Q4, we actually made a press release relating to restructuring in some of our countries and restructuring then relating to manufacturing footprint and our logistics footprint mainly. And that was then referring to things that were going to happen in U. S, in China and in Sweden. And we were provisioning or assessing that, that would be around SEK 150,000,000 of provisions that we were going to account for in the Q4. Now when we are detailing this out, we can see that it is SEK153 1,000,000 that is hitting then the 4th quarter and is accounting for like an as an in item effect in comparability. Last year, if you remember, we had the write down of or the impairment of goodwill of SEK767 1,000,000 in the 4th quarter. The restructuring provision and costs are hitting mainly then the construction division with around SEK 70,000,000 and Hovsgone division with around SEK50 1,000,000. And we expect savings from these measures coming in gradually but fully implemented as of 2018. So when I talk about operating income going forward, it is excluding these items affecting comparability. Okay. So summarizing the Q4 from a financial point of view. Except for the improved volume, which we have not seen earlier in the year when we make the quarter to quarter analysis, we are seeing the same underlying trends as being valid for the 1st 3 quarter also here in the 4th quarter. As you remember, we experienced a shift from currency tailwind for the first half of twenty fifteen into a currency headwind as from the 3rd quarter, and that is also valid here in the Q4 where we have had currency headwind of some minus SEK 45,000,000. The normal seasonality as regards lower sales in the 4th quarter is, of course, also reflected here in the financials. So starting from the top. And in the Q4, we saw an increase of 7% in nominal terms on the top line. As Kai mentioned, 2% currency adjusted. And for the full year, we were up to some SEK 36,200,000,000, a 10% increase and where major or everything was actually related to currency, taking out currency In local currencies, we were actually down with 1% on the top line. In the 4th quarter, we saw a slight improvement of gross profit. And of course, if we take out then the currency effects, which was very negative and as Kaj mentioned, impacted substantially. But if we take out that, we can see that the underlying effect of the volume increases and also an impact from the shift in divisional mix with an increase of 6% for Gardena, for Construction and for Husqvarna and a drop of 10% in consumer is impacting positively. But we also had some headwinds from underlying from the mix related then to high sale in U. S. Of wheel products and also to some extent to customer mix. AIP program continued to deliver. We are seeing quite substantial improvements on the direct material. Of course, on the manufacturing costs, it's a little bit more difficult with the drop of volume that we are seeing in our U. S. Footprint. Total selling and admin, somewhat lower this year and also that currency effect, but also underlying a slightly decrease of logistical costs. Operating income, excluding then restructuring goodwill, improved SEK55 1,000,000 in the 4th quarter, SEK265 1,000,000 down to SEK212 1,000,000, currency negative of SEK45 5,000,000 meaning that the underlying improvement was €100,000,000 and as I said, increased volume and net operational improvements. Operating income for the full year, CHF 29.18, over CHF 600,000,000 better than last year and similar trends as I described in the Q4, but of course, with more sizable amounts. And the biggest effects comes actually from the mix, being then the divisional mix and also, to some extent, the product mix. And then we had, as we mentioned before, better or lower direct material costs. We had slightly better prices, but that was, to some extent, offset by the volume, the 1% currency adjusted lower sales and the higher ambitions reflected in somewhat lower R and D costs and higher somewhat higher development costs and higher SG and A costs. Operating margin went from minus 5 percent to minus 3.7 percent. And on full year, operating margin improved 1 percent, is units to 8.2%. Tax rate in the 4th quarter high, which is positive since we are in a negative territory, and that was an effect of losses in high tax countries and gains in low tax countries. For the full year, a tax rate of 24%. And net losses in the Q4 was SEK 239,000,000 whereas the net income was close to SEK1.9 billion for the full year, giving a net margin of 5.2%. Balance sheet, normally affected by currencies if you are a company like Husqvarna with a big operation outside Sweden. But as the euro depreciated from end of 'fourteen to end of 'fifteen and the dollar appreciated, those effects are more or less offsetting each other. We see noncurrent assets being then the intangibles plus the property, plant and equipment more or less on the same level as last year despite then having a higher CapEx compared to the depreciation. That is an effect of slightly a positive or what do you call it, currency effect, but also the fact that we have been selling 1 of our factories in China. For adjusted for currency, we can see the inventory increasing with around SEK100 1,000,000. That is related to finished goods and the Husqvarna division, whereas we saw a decrease in the consumer division, of course, reflecting then the lower demand and the lower sales in consumer. The receivables decreased actually less this year in Q4 than it normally does or did in 2014. And one reason for that was that we had high sales in towards the very end of the year, and of course, that was left in the receivables. Then as the accounts payables were some SEK 75,000,000 lower than last year, we got a quite substantial increase of our working capital. As the inventory increased, the receivable increased and we also had a decrease on accounts payable. So we were actually up with SEK 500,000,000 on working capital compared to the end of 'fourteen. This was offset by higher provisions and also higher current liabilities. Net debt all in all decreased some SEK 850,000,000 compared to the end of last year, and that was due to a decent cash flow and also to the fact that we had lower pension liabilities. And it was down to SEK6.4 billion towards the end of the year. And in the Q4, the net debt improved with SEK300 1,000,000, which meant that the net debt to equity ratio, since we had a dividend also in the 4th quarter, went down to €0.49, which was €0.1 lower than last year. Moving over then to cash flow. So even though that we have improvement of the earnings, it was not fully recognized in the cash flow since we had that increase of the working capital that impacted negatively with SEK 550,000,000 on the cash flow. Investment for the full year was more or less the same as last year, SEK 1,400,000,000 and that was, as I said, similar level as last year and in line with at least our expectation. And that meant that our cash flow for the full year was somewhat over SEK 1,700,000,000, an increase with SEK 300,000,000 compared to last year. And in here in the Q4, we saw the normal seasonality pattern when the receivables are coming down, which meant that we had an operating cash flow of close to CHF400 1,000,000. Net debt to equity. Despite the net debt reduction of some SEK 300,000,000 in the 4th quarter, the net debt to equity level was more or less at the same level as in September, but as I said, resulting in a lower end of the year level than we had in 'fourteen. Last year, we must remember though that the equity Moving over to key figures. We have the positive effect from the improved earnings and also the positive effect from higher nominal sales, but also partly offset then by a deterioration of capital efficiency as we are seeing the working capital increase. But all in all, we have a positive impact on the profitability ratios, return on capital employed and return on equity with, if we take out items affecting comparability, with 2% to 3% ish units compared to last year. And this has also been done, as you can note on the bottom of this slide, with less average number of employees. We are talking about close to 800 less average employees in the Husqvarna Group for 2015. That is mainly a consequence of the lower demand in U. S. And also to some structural measures that has been taken during the year. Kai mentioned something about the hedges. I talked about the SEK 45,000,000 in the Q4 of currency. When we discussed this in the Q3, we were talking about the effect of the hedges being some €350,000,000 negative. And we're also indicating that it would be more since we have some transaction exposure on top of that. Since we are not hedging all flows, it's not the hedges is not between 75% to 100% for the coming 6 months. Now when we are closing the year and take a look on the exposure we have, of course, still the hedges are the big effect, but we are talking about around SEK 500,000,000 of currency headwind that will hit us in 2016 and it will hit us with around 50% in the Q1. So that is a pretty heavy currency headwind starting the year with, And it's also the division that are having the majority of this negative effect is Husqvarna division. So I think that's important to state for your assumptions going forward of these divisions and the company. Kari, please. Thank you, Jan. Summarizing a bit. The last couple of years and the accelerated improvement program has been quite which we are quite which we are quite pleased with, of course. We have seen deliveries in terms of what we call the profit pools, the product leadership areas. We've seen the direct material costs and we've seen a complexity reduction in the magnitude of 30% in terms of stock keeping units and platforms. So all in all, very successfully executed. If we would take the currency rates we had at the time of the launch of the program and just adjust for the translation effect on the top line, we would be at 9.7%, and we stated 10% in 2016. So I think versus the assumptions we could oversee at that time, I think we are even ahead of what we said. So we're quite pleased with that. But as you have heard, there is an interesting situation right now with the big FX headwind and, of course, our desire to also steam ahead and support some really good growth initiatives in the division. So the ambition is to continue the strong improvement momentum in 'sixteen as well as 'seventeen that we have had the last couple of years, even though for 'sixteen that will be utilized to balance the negative influence. So we hope to be able to balance that for the full year. As you heard from Jan, that might be a tough challenge for quarter 1, particularly where we have half of the SEK 500,000,000 to burden us. But for the year, that's our ambition to balance it. So we will see the result kind of leveling off. And then as that year kind of comes to them, we will see the improvement pace then supporting next step result improvement. And what we are doing then is, of course, nothing has changed. We are working with ambition of 10% EBIT margin, as we have talked about. We continue the material cost out that we have done successfully. We have the indirect materials and logistic costs that we're going to take under heavier scrutiny. And we as well as rightsizing on the footprint and some optimization of SG and A. So it's a fairly broad spectrum of activities we will do on the cost side. But I want to draw your attention also to the fact that we expect to get some support from gross profit from the divisional profitable growth plans that we start to execute. That work was done end of 'fourteen, beginning of 'fifteen. And as we progress into 'sixteen and even more pronounced in 'seventeen, we expect that to materialize, but it should support. So the 10% margin target remains. As you can hear, it's not in the cards for 'sixteen, and we made that pretty clear in quarter 3. But we still work with it and we'll see when we get there. Last page, maybe avoiding to repeat what you have heard, I jump to the point here, which is an indication about quarter 1 and how we're doing with the preseason sell in. Actually, we describe that as stable to slightly positive. And that may go from a divisional perspective, that may go from a regional perspective. So we don't see anything else than that should come out stable here. And of course, as always, in an array of different scenarios, but maybe where Gardena is going to benefit the most from the strong quarter 3 last year, meaning that the trade inventories are going to be lower than average, implicating that they reasonably will go in heavier in quarter 1. And 2, that comes also the launch of what we call a Smart Garden initiative where we have connected through Internet of Things and then robotics lawn moving with the automated watering. So that is under the headline of SmartGarden. We will launch that selectively, particularly in Germany, Austria, Switzerland, Netherlands for the 'sixteen season and then go broad 'seventeen, but we see quite an interest in that as well as some expansion with some channel partners. So Gardena is probably on the higher end of the spectra, but we expect everybody to be on the right side here for the Q1, including consumer. I think I talked sufficiently about the scenario about the improvement activities and the challenge to offset the FX. So I leave that for the moment. And with that, I open up for questions. Operator, we will start with questions from the floor here in Stockholm. Yes. Hi, Johan Eliason, Kepler Cheuvreux. Just a few questions. Pricing into the season, how does that look? I'm normally a bit shy talking specifically about pricing, but I can say it has been positive throughout 'fifteen. We expect it at least to be stable for this year. So you will keep some benefits from probably lower raw materials? That's again, it's a spectra of different categories, regions, and we will see occasions where that works to our benefit. We will see occasions where that's going to be neutralized by aggressive customers. And you had lower manufacturing in Q4, which I thought was or understood was mainly related to Husqvarna. You talked about a pretty good pre season. What's the reason there for the lower manufacturing volumes? I think if you looked at the cash, the operating working capital development, we are not overly proud. If you try to understand why we are a bit higher in 'fifteen compared to 'fourteen, I would say it's probably related to some glitches in the organizational setup and the processes that we established at the beginning of the year. So we walked into 'fifteen being a bit heavy on the inventories. And if you start on the wrong foot in our seasonal world, it's difficult to compensate it at the end. So we left it a little bit too heavy, I think it's fair to say. And then just housekeeping. Of this SEK 153,000,000 in the quarter, how much is cash impact? Pretty little in the quarter actually since these are both personal layoffs and they are materializing mainly in the beginning of the year. So it's very limited in this quarter. Going forward, you can say that the big part of this is related to cash flow out in the beginning of the year. You have some write offs of impairment of assets as well, but Yes, because I thought the depreciation was fairly high in the Q4, wasn't it? Well, since we have had CapEx increasing, we will, of course, gradually see increasing depreciation as well. So it's not that effect. Okay. Thank you. Natalie Falkner from Carnegie. I have a couple of questions. First, on the FX. You mentioned after the Q3 when you had €350,000,000 indication that you will manage it and neutralize it. And now you say that you neutralize even the €500,000,000 How much of that is coming from the gross savings? I guess you have gross savings, net savings. And how much of that is coming from what you believe will be better volumes? That's a good question. Again, I'm a bit cautious being too explicit about it, but the assumption is probably that the major part, a little bit more than half at least should be from the costs side. And the other half from improved? Ore price, of course, we are all affected. There are others with the similar structures we have, and they also need to increase prices. So of course, we try to make some price management as well. Then I have a question on the organic growth initiatives. Could you just elaborate a bit more how it looks like on the ground? And also when you expect to see there? Because you have solid growth in majority of your divisions. Do you see another improvement leg up because of your current? And should we see it in 'seventeen? Or should we already see it in 'sixteen? I think we will see a gradual increase given equal conditions in the market, which there never is really. But assuming there would be, you will see a gradual increase of the growth rates of the 3, let's say, profitable growth divisions, excluding consumer from that for the time being. Again, it's an array of different activities that are going on in Husqvarna Gardena, respectively, construction. And it's hard to really pinpoint that particular initiative that is the significant one. I think that is rather something we can elaborate around. We have the intention to have a Capital Market Day in September. And I think then we get the time to actually be a bit more elaborative about something like that. It's hard in this format to make it justice, in fact. Okay. And the last question, if I may. The robotics, do you see an increased competition in the robotics pressure from the low price producers? Just how you see that because it's positive for your mix when the volumes goes up there. And the short answer is yes. Of course, we see an increased competition. There's probably some 20 people out there trying to have success with the products. Luckily enough for us, we are the market leader. We are the benchmark when it comes to reliability and see these products working throughout the seasons. And more and more of the people who test these products have realized that you cannot test them like it was and gas walk behind type of push mover product that you go out and cut with once a week. This is a different type of setup and concept. But yes, on one hand, increased competition, but on the other hand, we are feeling we have a very strong product range. We have a good penetration of the market. We have not seen that we have lost any shares tentatively, I have to say, because we haven't fully summarized it. I have Sofia here who will do that for us. But we have no reason to believe we have lost any share throughout 2015. So we have managed to maintain it. We have managed to maintain price stability despite all that increased competition. And it will take its toll at some point in time, but we are also doing our best to keep ahead of the game. Operator, we have no more questions from Stockholm. So open up from the telephone audience, please. Operator, are you there? And your first question comes from the line of Rasmus Enberg. Please ask your question. Yes. Hi. I was wondering if you could give us an update on the chainsaw chain factory. Where are you in that process? And are there any key dates ahead for that project? Yes, Rasmus, that's another good question. We are aiming to start to introduce chainsaw shades by the second half of this year. That's the plan. And we are a little bit delayed versus the initial schedule that was done end of 'twelve, early 2013. But on the other hand, there's a huge amount of manufacturing process steps to get right, and there is no compromising around the quality. So we accept that time. And that's, of course, the priority also now. Whatever gets out there has to be good. So but the plan is for the second half of the year to start to ship. And the second question, you have, I think, talked before about the sort of earnings improvement of SEK 500,000,000 to SEK 700,000,000 as an average. How does that look going forward? And can you sort of give some sort of feel for what it looks like 2016 versus 'seventeen? You're talking about the chains specifically? I can't remember. You called it earnings improvement, I think, or something. Okay, Erasmus. I misunderstood you. You're talking about the improvement pace, so to say, of the okay, yes, that's correct. We have talked about we talked about 500 to 700 asset pace we have had a couple of years. After quarter 3, I was a bit more cautious and said something along the lines of maybe we will not fully be up to that speed for 16. I think, in fact, the underlying pace will remain at that level, and it will need to remain at that level to accomplish what we talked about to compensate for the FX and these other activities. So we have, if anything, become a bit more bullish about that. And again, a lot of activities, a lot of good initiatives in the divisions here will support it. So we believe we can hang in there. But the problem for me, as I mentioned before, is you will not see that in the year to year comparison here. But I think you understood that by now that that's the trick for us this year. Yes. Thank you. There are no further questions on the phone line. Okay. Then I'd like to thanks for your attention and thanks for coming here. Thanks.