Good morning. Warmly welcome to Husqvarna's Quarter Two and First Half Year Report. We are pleased with the progress of the first half year and obviously Quarter Two. We have very strong trend of improved performance and operating income is up 22% for the quarter, equivalent to 1.3 percentage points. We see all the high margin divisions delivering positive contributions, as well as also the Consumer Brands. From a sales perspective, we have a negative development in the Consumer Brands, whereas all the other three are having positive developments in the quarter. We also see very clearly a contribution from our Accelerated Improvement Program, particularly from what we call the profit pool/leadership product areas, as well as material cost reductions, which is developing in a favorable way.
In order to safeguard a further margin improvement with expected currency headwinds we are facing going forward, as well as to support investments for profitable growth initiatives in the market, we are defining further measures to be taken. Those are primarily intended for 2016 and 2017. You might be aware that we finalized our Accelerated Improvement Program from an an activity point of view by end of this year, then there will be some full year effects benefiting 2016. Beyond that, we see this need to take out some further costs to support those two purposes of the margin and the market investments. That's pretty much the summary. If you look at the numbers, you will see that the net sales development is in comparable currencies, -1%. You will hear soon the details of the divisional split.
Despite that -1% on the net sales top line development, we have improved then the EBIT from SEK 1.373 billion to SEK 1.675 billion, equivalent then to 22% versus the reported. If you adjust for translation, 12% up. We are quite pleased with that, and that result improvement is then driven by the AIP program. Also to be noted, there is, in the quarter, a positive contribution from the currencies with about SEK 100 million. Jan will say some words later as to how that looks more in detail. Of course, whereas in absolute money, it is a contribution from an EBIT point of view in the quarter, it's still a margin dilution overall. As to the margin, 1.3 percentage points, as you can see for the quarter. That leaves us for the half year with an EBIT margin then of 12% versus last year, 11%.
Close to SEK 2.8 billion for the first half year, EBIT-wise. Moving on to the divisional split. We will see then that Husqvarna developed with 4% from a sales perspective. Quite satisfactory, we think, and we're pleased with that. Good development in Europe, driven very much by the robotics product category and by the handheld products. Asia Pacific, Latin America also doing fine. We are somewhat lower in the quarter in North America. All in all, for the first half of the year, we are improving. Just commenting shortly on the season as such, we think it is rather somewhat lower than average in North America for the quarter, whereas Europe could be described more as average all in all. Obviously with a better ending of the quarter than the start, and that is particularly true for Gardena, as you will see soon.
EBIT-wise, a great improvement by the Husqvarna division, moving up from SEK 808 million to SEK 1 billion. That's very pleasing to see. We see the sales volume of course, and you heard me talking about the product mix supporting that as well. In line with the group, the EBIT margin improved 1.3 percentage points for the quarter. Moving on to Gardena. We should just keep in mind that Quarter 2 2014 was a very good quarter for Gardena under Watering. The season started early, we are very pleased to see that we in fact could beat that from a sales perspective. We have seen expanded listings. We have seen expanded customers to Gardena. From a product point of view, particularly the robotics area has done well, but also I'd like to emphasize the Mobile Watering and the hand tools giving good contributions.
Coming back to the weather a bit. First half of the quarter, I would say all the way into almost mid-June was fairly average. Towards the end, it improved a lot down in continental Europe, and we left the quarter with a very good pace, which is also carrying into the start of quarter three from that perspective. EBIT is in line with previous year on a very high level. We are cruising around the 22%-23% margin, which is very pleasing. Also, I'd like to draw your attention to the effort we are doing within the area of smart garden. Gardena is a pioneer in the gardening space since the 1960s, and we have had for quite some time automatic watering in the gardens, and for some few years, the robotic mowers.
What we are doing now is for the 2016 season to connect these over wireless IoT functionality through smart applications. This is, of course, a unique offering which nobody else really is capable to present in the market, and we're very glad for that, of course. We believe this will be providing a lot of convenience for the end users, a lot of inspiration, and you could say degrees of freedom that we haven't seen before in this space. Related to the effort within the smart garden, we have made an acquisition of a Swiss company, Koubachi, who is a pioneer in the area of plant care and IoT applications. Koubachi has vast experience of wireless connected garden devices and a lot of competence that will be hugely important for us going forward. They have a huge library of plant care information.
If you add to the automatic watering, robotic mowers, also the plant care ability, we are starting to form something and shape something that is completely new in this market. The launch is 2016, and as you can hear, this is seen by us as a very strategic area to develop further. Consumer Brands, we had -12% in the sales, and that is really you could say attributable to lower sales in both North America and Europe. Generally, as you have heard me say before, we prioritize value before volume. There is a clear impact of that, but there's also maybe a bit of disappointment to some extent that we expected the retailers to build up inventory somewhat more, but they have managed the inventories very cautiously also throughout quarter two, and we see lower inventories in the trade.
At the same time as we also experience a very aggressive behavior from some of the competitors in the market. All in all, a little bit larger decline than we expected, maybe a third or so, but in line by and large with what we had foreseen. EBIT wise, very satisfactory to see now that the previous year SEK 97 million were increased to SEK 178 million, margin wise then going from 2.8% to 4.9%, despite again, this huge sales decline. I think that is a sign of strength. However, with the development being in the magnitude of minus 12%, we see that we will increasingly have a problem to keep up the margin improvements for the coming quarters because production rates will inevitably have to go down, leading to under absorption effects in the production for the second half of the year.
This is a matter about how quickly can we adjust the cost structure to the volume development, and it is hard to be fully on par with that. We will see that have some impact in the second part of the year. From the AIP point of view, we have support of the AIP material cost reduction as well, and also for the quarter, some favorable currency impacts. Turning to Construction, you might recall that we were impacted by some external factors in quarter one last year, for example, the harbor conflict on the West Coast in U.S., which was hampering us a bit. We see that we rebounded in a very nice way, and all in all, net sales is up 9%, and North America is even up 16%. Not very surprising.
We said we would come back in the quarter two, and we see that very clear. We also see Europe doing fine in their sales as well here. If we would point at any of the product areas, floor grinding is very interesting from a growth point of view, but also from the consumption of diamond tools point of view. Strategically important for us, very positive development. EBIT wise, of course, we benefit from the sales volume, but we also do invest quite substantially in sales, services, and product developments, and you will see that. All in all, the result including these effects and also some currency effects, which were positive for the quarter, went from SEK 117 million to SEK 160 million. 13.2% became 14.6% for the quarter. That's pleasing.
We expect also going forward that Construction will maintain very good growth rates. That leaves it over to Jan to talk about the consolidated income statement.
Okay, Kai. Thank you. In general, we see the same business trend as we saw in the first quarter, also here in the second quarter, as Kai has described, meaning that we have a first quarter that was good financially and followed by a strong second quarter as well. Net sales, as Kai said, up nominal terms 11% in the quarter, but minus 1% if we adjust for the SEK 1.4 billion of currency effect on net sales. First half, similar pattern, 12% up in Swedish krona, adjusted for currency is minus 2%. Gross income in the quarter of the group, we saw an improvement of close to SEK 400 million compared to second quarter last year.
Main effect is the positive mix effect, improved sales in what we call Profit Pools product, where we saw robotic volume up with strong double digits, whereas Watering, parts and accessory, and pro handheld were up single digits. All in all, a very favorable product mix. If you remember, we had a little unusual high wheeled products in the first quarter, and by that, also that gave an effect into the second quarter as regard the mix. Furthermore, we have a divisional mix, of course, since we are seeing growth in Gardena, Husqvarna and Construction, where we have a higher margin, an increase of sales around 3%-9% currency-adjusted, whereas Consumer Brands, where we have lower profitability, decreased sales with 12%. A remark, of course, is the strong improvement of the result despite losing 12% of sales. AIP program continues to deliver.
We talked about the Profit Pools, but also related to direct material, whereas, as Kai mentioned, difficult to fully mitigate the loss of volume in consumer as regards value-added costs with cost-out activities. We have a positive currency effect also this quarter compared to second quarter last year of around SEK 100 million, similar more or less to what we have in the first quarter. Furthermore, a slight impact also from improved prices in this quarter. On the negative side, of course, we have some items, the loss of volume mainly related to consumer brand. We have somewhat higher selling and admin expenses, some SEK 75 million more compared to the second quarter last year, and that is mainly related to currency effects net of hedges. We have a positive one, and that is the logistic costs.
They were somewhat lower in this second quarter, partly related to lower fuel prices that we start to see an impact from. On the other hand, we had an increase in SG&A, mainly related to higher ambitions and activities on the IS/IT side and also to personnel expenses. We also have a little shift in the way we are matching costs against revenues, which is impacting slightly here in the second quarter. All in all, operating income of SEK 1,675 million, an improvement of SEK 300 million compared to last year, where SEK 100 is currency, SEK 200 is net operational improvements. For the first six months, SEK 2.8 billion, an improvement of some SEK 500 million compared to last year.
Operating margin increasing now in the quarter from 12.4% to 13.7%. Net income, again, an increase of SEK 175 million, similar to what we saw in the first quarter, meaning that we had the second quarter with SEK 1,143 million, giving us a net margin of 9.3%, some 0.5 percentage units better than last year. For the first six months, SEK 1.9 billion of net income, an improvement of close to SEK 350 million. One remark on FX. We have had two quarters with positive effects net of around SEK 100 million each. This is turning, and half of that will go away during the third and fourth quarter. We will sort of say, in comparison-wise, stop having a positive effect of currencies going forward, comparing them to the third and fourth quarter last year. Comes a little more technical part of the presentation, gross margin development.
From an optical point of view, it looks like the nice trend we have had the last two and a half years of each quarter be a little better as regard the percentage of gross margin compared to the corresponding quarter the year before, that trend is sort of flattening out now. Considering then the diluting effect of the gross margin due to the increase of the net sales of SEK 1.4 billion, which is then currencies, and then we have a negative transaction effect hitting gross margin due to the fact that we are producing and have big operations in hard currency countries and factories selling into more soft currency markets. That impact is actually compared then to the second quarter 2014, around 1%. If we take away that, we can see that we are continuing with the improvement.
We are that also in nominal terms, but with just a slight improvement of 0.1%. That is the technical part of it. If we take away currency and currency-adjusted, we can say that the main reason behind the improvement we see currency excluded is then the positive product mix and the divisional mix effect. Talking about currencies, if income statement is affected, balance sheet is actually even more. There exist substantial currency effects in the balance sheet, especially if we compare to the situation one year back in time, the end of June 2014, but also if we have the full year as a comparison. That is, of course, related to our strong footprint in U.S. and thereby U.S. dollar denominated. The increase which you could see on non-current assets is not an increase, it is more or less stable.
Inventory is then, in local currency, up around SEK 500 million. The rest is currency compared to June 2014, and that is mainly related to finished goods in the divisions that are increasing sales. We see the same effect on receivables. It is actually a slight decrease, and that is then reflecting the lower volumes in Consumer Brands. Subsequently, we have an operating working capital, i.e., inventory trade receivables minus accounts payables. That is what we call operating working capital. That is slightly higher this year compared to end of June 2014. If we take a look on the debt and equity side, that is balanced by increased interest-bearing liabilities. We have a net debt that has increased since year-end, some SEK 0.9 billion to SEK 8.1 billion at the end of June.
Second quarter, we had actually a decrease of net debt of SEK 2.1 billion, that is, of course, also a consequence of the operating cash flow that was positive in the second quarter, that is a seasonal pattern, which we see, of course, when we have the seasonality we have, we get a windup of the working capital in the second quarter. That was valid this year as well, besides the strong earnings. All in all, an operating cash flow of SEK 2.2 billion in the second quarter. If we take a look on the first six months, we can say that despite improved earnings, the group showed a deteriorating operating cash flow.
That is mainly related to the working capital that increased with over SEK 2.9 billion, which is a seasonality phenomenon, it was some SEK 600 million more than we saw last year. Net investments, slightly higher this quarter, SEK 350 million, moving us up for the first six months to SEK 0.6 billion, that is in line what we saw last year. That means also that we have a situation on the net debt to equity ratio, being a consequence of increasing net debt due to the weaker Swedish krona, among other things. We have an impact of not getting the positive translation effect on the equity due to equity hedging. We should remember we had an impairment of goodwill towards the end of 2014. That is of around SEK 800 million. That is impacting this key ratio on the equity as well.
Taking a look on the debt to equity ratio, moving up slightly to 0.63% compared to June 2014 when we were at 0.61%. Key figures. Positive effect, of course, on the key figures of improving operating income, being offset by deteriorating capital efficiency. Also these numbers are affected by balance sheet items being then inflated by the Swedish krona, the weaker Swedish krona. We should also remember, if we take a look on the profitability targets, return on capital employed and return on equity, that they are also affected by this impairment of goodwill last year, since it is rolling 12-month calculations. If we take away that effect, we are between 3 to 5 percentage units, depending on what kind of measure you would like to take, higher than we are right now.
Average number of employees, slightly or 1,900 lower than the average number in the first six months last year, that is a consequence of the lower demand in U.S. By that, Kai, I think it is time for you to round off.
Thank you, Jan. I guess we leave the presentation part and move over to the Q&A session.
Thank you, participants. If you wish to ask a question, please press star followed by one on your telephone keypad and wait for your name to be announced. If you wish to cancel that request, please press the hash key. Once again, that's star one for a question. The first question today comes from the line of Christer Magnergård. Your line is open.
Hi, good morning. Sorry, I missed the beginning of the presentation, you might have said this, but when it comes to the Consumer Brands division, you have lost volumes here in Q1, Q2, and you exit unprofitable segments, as you say. How much can we assume over the next two years that you will lose in terms of volumes compared to the base, let's say, in 2014, before you are satisfied with the structure of that division?
Christer, that's a good question. I gave a hint that maybe a third of this decline was not expected, 80% very much relate to our priority to value before volume. Of course, also managing some elements of the customer base, which is more a risk channel structure point of view. Going forward, there will certainly be some further decline into 2016. I would expect them to be potentially somewhat smaller than we see this year, they could be up to the magnitude of what we have seen this year. That would be most likely then leveling off from that kind of level, turn for the increase then onwards 2017, 2018. You will probably see the bottom next year.
If you have the 10% margin targets by 2016, you have talked about this three, four percentage points improvement in profitability for Consumer Brands, can you achieve that profit improvement for Consumer Brands despite that volumes in 2016 will decline as well?
I think we are, as I've tried to verbalize increasingly challenged, particularly in the short-term perspective, because of the fact that the volumes have declined quicker than we expected. It actually means that we will need to reduce inventories, which means we need to overcompensate with even lower production rates for the second half of the year, for example, leading to more under absorption. In the short term, it is a pressure on us. I think the further volume decline will, of course, put pressure on us to keep pace of the cost reductions with the volume decline. It is a tough one for 2016, surely is, especially knowing that we expect also the currency headwinds going forward from this point onwards. It will be a tough one. I think we should recall, though, that we never expected Consumer Brands to be up on 5% by 2016.
We said rather give and take, we hope to be about plus one to two percentage points. Right now it's a tough one. Yes, it is a tough one. We need to do the right thing, and if that leads to even more cost taking the curve, we will need to do it, of course. You can hear that there is some pressure on this side, yes. Let me also be clear, there is no hesitation whatsoever as to the fact that we can turn this into the 5% type of level for 2018. We still believe that, but taking the curve, we might go a bit deeper for 2016 than we initially thought.
You mentioned FX. If you could clarify what you said, I didn't really follow you there on the guidance for second half of 2015, what the absolute number on FX on EBIT is expected to be?
I'll leave this to Jan.
We didn't give an exact number, but more or less we did. We said that we have had SEK 200 million plus, and that is, of course, all the FX effects, translation, negative transaction as I was into relating hard currency production into soft currency countries and then hedges. Of course, what is disappearing in this equation is gradually the hedges. We will go from a plus SEK 200 and, as I said, lose around 50% of that plus for the first half year, i.e., some minus SEK 100 for the next two quarters in FX compared to last year.
That's great. I know it's a bit early now, but since the types of margin target, of course, is dependent on the currencies, what kind of FX effects do you see now for 2016? Is that possible to give a rough estimate?
What will happen is, of course, for us is that if we don't do anything, that we are left with a negative transaction effect, and no hedges, because we are doing hedges, but at a higher or more unfavorable rates, since we are around 12 months of hedges out in the time, so to say. That is what is happening, and we have said the guidance before that will mean a further pressure for us to increase EBIT to be able to come to the 10% margin of some SEK 300 million-SEK 500 million, and that is, of course, depending on what kind of currency effects we will have this last half of the year and also into next year.
Okay. I'll let other people ask questions as well. I guess I can hang.
The next question comes from the line of Rasmus Engberg from Handelsbanken. Your line is open.
Yes. Hi, good morning. I was wondering with regards to the impact of the Accelerated Improvement Program, obviously, we have only really talked about Consumer Brands here. If I look at the other divisions, or at least Husqvarna and Gardena, should we expect some support from savings in the second half of the year in those divisions?
Let us recall that AIP also encompasses the profit pool. The profit pool is a vital part of the Accelerated Improvement Program, I hope you heard me talking about that, Rasmus. As to your question as to specifically cost out, there are elements of contribution of cost out and productivity improvements For sure in Husqvarna, and as well as you will see effects of that in Gardena going forward. Yes.
Just to follow up on that. Are you a little bit surprised with regards to Gardena's performance? I think the earnings were both Q1 and Q2 were pretty much as last year.
I wouldn't say surprised. I think particularly for quarter two, we knew we were up against a very good quarter, historically seen. There has been, as also Jan gave a little hint of, some periodization of the cost, which has burdened the first half of the year to some extent, which we will see come in for the second half as an upside. I wouldn't extrapolate that too much, we are in good shape. Yes, we are taking some costs for vitalizing the product offering. We have made introduction of the new Original GARDENA System for the hose couplings. There are other investments materializing on the product development side that has put some pressure on the cost side. We feel comfortable that we will see a continuous progress of the Gardena division margin development.
This acquisition you acquired, is it fair to assume that it's more like a technology that you have bought rather than sales and costs, and what is the price tag? Is there any sort of figure that we could include in our numbers for Q3?
The sales, I would say for Gardena overall is insignificant. This is very much about the technology and the competence of these people from the Koubachi side. It's going to give an accelerated capability going forward and bringing the smart garden offering a further dimension, so to say, through the plant care, also I would say in general, the Internet of Things knowledge that this group of people provides beyond the pure plant care capabilities and knowledge and libraries, so to say.
Since you haven't given a price, should we assume it to be relatively small then?
Yes. That is yes.
Okay. Thank you.
One remark there. Also, even though there will be costs of integrating and develop this company, you will not see it. We will see it here when we take a look on the numbers, but it will not be material on the Gardena division level.
Your next question comes from the line of Anders Trapp. Your line is open.
Yes. Hi. I just have one question, actually. I'm a bit curious on the good growth in robotic mowers. Of course, we've seen it for a long time, but I know it's very uneven penetration of this product. Could you enlighten us a bit on where you see this growth and where you see the greatest potential going forward regionally or country-wide?
I think we have, in fact, seen the growth very much in the more mature countries, if you look at the overall volumes. Of course, we see good growth rates in less mature countries, but in absolute numbers, the real impact comes from the mature companies. I am talking about Germany, Switzerland, Austria, Benelux, Scandinavia being the core. From a growth rate point of view, we see very good progress into a country like France. We are optimistic about broadening the penetration, and we are, of course, putting pressure on our organization to utilize the technology and the market leadership position to a larger extent than we actually have done historically. Given the strength we have, we also should pursue an even more aggressive market development on a broader scale.
That's what we are gearing up to do, and for sure, we should see some impact of that for next year.
Looking at the markets where you have a low penetration, would that reflect also the level of penetration of robotic mowers in those markets? Are there other competitors who have been early in capturing the underdeveloped robotic market in Europe?
No. Anders, your first assumption is correct. It's more an expression of the maturity of the robotics application in those markets than us being weak versus other competitors. I think the competitive landscape is pretty much the same. I would say by and large, our impression is this is no fact, but it's the impression. Our impression is that we are maintaining the market share position, and we're not losing out. There might be channel-specific changes, but by and large, we are keeping our very strong market leadership in this area.
Okay. Thank you.
There are no further questions at this time. Speaker, please continue.
Okay. If we have no more question, we wrap up over here and say thank you everyone for calling, see you on October 21st when we report the Q3 numbers. Thank you.
Thank you.