Earnings Call: Q2 2015

Jul 17, 2015

Good morning. Warmly welcome to Husqvarna's Quarter 2 First Half Year Report. We are pleased with the progress of the first half year and obviously quarter 2. 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 poolleadership product areas as well as material cost reductions, which is developing in a favorable way. However, 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. And those are primarily intended for 2016 2017. You might be aware that we finalized our accelerated improvement program from an activity point of view by end of this year And then there would be some full year effects benefiting 2016. But beyond that, we see this need to take out some further costs to support those two purposes of the margin and the market investments. So that's pretty much the summary. If you look at the numbers, you will see that the net sales development is in comparable currencies minus 1%. And you will hear soon the details of the divisional split. Despite that minus 1% on the net sales top line development, we have improved then the EBIT from SEK 1,373,000,000 to SEK 1,675,000,000 equivalent then to 22% versus the reported and if you adjust for translation 12% up. So we are quite pleased with that. And that result improvement is then driven by the AIP program. But also to be noted, there is in the quarter a positive contribution from the currencies with about €100,000,000 Janne Berri will say some words later as to how that looks more in detail. But 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. And as to the margin, 1.3 percentage point 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%. So close to €2,800,000,000 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. But 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 and 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 the €800,000,000 to €1,000,000,000 So 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. So 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 Underwatering. The season started early. So we are very pleased to see that we in fact could beat that from a sales perspective. And we have seen expanded listings. We have seen expanded customers to Garena. And 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. But then 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 3 from that perspective. EBIT is in line with previous year on a very high level. So we are cruising around the 22%, 23% margin, which is very pleasing. I pleasing. Also like to draw your attention to the effort we are doing within the aerial Smart Garden. Gardena is a pioneer in the gardening space since 1960s. But we and we have had for quite some time automatic watering in the gardens. And for some few years, the robotics lawn movers and what we are doing now is for the 2016 season to connect these over wireless IoT functionality through smart applications. And 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, Cubati, who is a pioneer in the area of plant care and IoT applications. So Kobachi has vast experience of wireless connected garden devices and a lot of competence that will be hugely important for us going forward. And they have a huge library of plant care information. So if you add to the automatic watering, robotics lawn mover, 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 have minus 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. So there is a clear impact of that. But there is 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 2 and we see lower inventories in the trade. At the same time, as we also experienced a very aggressive behavior from some of the competitors in the market. So 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 €97,000,000 were increased to €178,000,000 margin wise then going from 2.8 to 4.9 percent despite again this huge sales decline. So 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. So 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. And we will see that have some impact in the 2nd part of the year. But from the EBIT point of view, we had support of the AIP material cost reduction as well and also for the quarter some favorable currency impacts. Turning to construction. We as you might recall that we were impacted by some external factors in quarter 1 last year. For example, the harbor conflict in on the West Coast in U. S, which was hampering us a bit. But 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%, so not very surprising. We said we would come back in the quarter too and we see that very clear. But 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 tool point of view. So 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. But all in all, the result including these effects and also some currency effects, which were positive for the quarter went from SEK 117,000,000 to SEK160,000,000 30.2 percent became SEK 14.6 percent for the quarter. So that's pleasing. And 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, Thijs. Thank you. In general, we see the same business trend as we saw in the Q1 also here in the Q2 as Kai has described meaning that we have a Q1 that was good financially and followed them by a strong Q2 as well. Net sales as Kaj said up nominal terms 11% in the quarter, but minus 1% if we adjust for the SEK1.4 billion of currency effect on net sales. And first half similar pattern 12% up in Swedish krona adjusted for currencies minus 2%. Gross income in the quarter of the group we saw then an improvement of close to SEK400 1,000,000 compared to Q2 last year. Main effect is then 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. So all in all, a very favorable product mix. And if you remember, we had a little unusual high wheel products in the Q1 and by that also that gave an effect into the Q2 as regard the mix. Furthermore, we have a divisional mix of course then since we are seeing growth in Gardena Husqvarna and Construction where we have higher margin an increase of sales around 3% to 9% currency adjusted whereas consumer brands where we had lower have lower profitability decreased sales with 12%. But a remark of course is an improvement 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. And then we have a positive currency effect also this quarter compared to Q2 last year of around SEK100 1,000,000 similar more or less to what we had in the Q1. And 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 SEK75 1,000,000 more compared to the Q2 last year and that is mainly related to currency effects net of hedges. But we have a positive one and that is the logistic costs. They were somewhat lower in this Q2, partly related to lower fuel prices that we start to see an impact from. On the other hand, we had an increase in SG and A mainly related to higher ambitions and activities on the ISIT 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 Q2. So all in all operating income million, an improvement of SEK300 1,000,000 compared to last year where SEK100 1,000,000 is currency, SEK200 1,000,000 is net operational improvements. And for the 1st 6 months SEK 2,800,000,000 an improvement for of some SEK 500,000,000 compared to last year. So operating margin increasing now in the quarter from SEK 12.4 billion to SEK 13.7 billion and net income again an increase of SEK SEK175,000,000 similar to what we saw in the Q1, meaning that we had the 2nd quarter with SEK143 1,000,000,000 giving us a net margin of 9.3 percent, some 0.5 percentage units better than last year. And for the 1st 6 months SEK1.9 billion of net income, an improvement of close to SEK350 1 remark on FX. We have had 2 quarters with positive FX net of around SEK100 1,000,000 each. Now this is turning and half of that will go away during the 3rd and the 4th quarter. So we'll sort of say in comparison wise stop having a positive effect of currencies going forward comparing then to the 3rd Q4 last year. Now comes a little more technical part of the presentation, gross margin development, because from an optical point of view, it looks like the nice trend we have had the last 2.5 years of each quarter be a little better as regard to percentage of gross margin compared to the quarter corresponding quarter year before that that trend is sort of flattening out now. But considering then the diluting effect of the gross margin due to the increase of the net sales of SEK1.4 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 Q2 2014 around 1%. So if we take away that, we can see that we are continue with improvement. We are that also in nominal terms, but with just a slight improvement of 0.1%. So that is the technical part of it. But 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 1 year back in time, the end of June 2014, but also if we have the full year as a comparison. And that is, of course, related to our strong footprint in U. S. And thereby U. S. Dollar denominated. So the increase, which you could see on non current asset is not an increase, it's more or less stable. And inventory is then in local currency up around SEK 500,000,000. The rest is currency compared until June 20 40 and that is mainly related to finished goods in the divisions that are increasing sales. And you see the same effect on receivables. It's actually a slight decrease and that is then reflecting the lower volumes in consumer brand. So subsequently, we have an operating working capital, I. E. Then 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. And 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 SEK0.9 billion to SEK8.1 billion at the end of June. But second quarter, we had actually a decrease of net debt of SEK2.1 billion and that is, of course, also a consequence of the operating cash flow. That was positive in the second quarter and that is a seasonal pattern, which we see of course when we have the seasonality we have, we get a wind up of the working capital in the Q2. That was valid this year as well besides then the strong earnings. So all in all, an operating cash flow SEK 2,200,000,000 in the quarter. If we then take a look on the 1st 6 months, we can say that despite improved earnings, the group showed some showed a deteriorating operating cash flow and that is then mainly related to the working capital. That increased with over SEK 2,900,000,000 which is a seasonality phenomena, but it was some SEK 600,000,000 more than we saw last year. Net investments slightly higher this quarter, SEK 350,000,000 moving us up for the 1st 6 months to SEK0.6 billion and 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. Also we have an impact of not getting the positive translation effect on the equity due to equity hedging. And we also we should remember we had an impairment of goodwill towards the end of 2014 that is of around SEK 800,000,000 that is impacting this key ratio and the equity as well. So taking a look on the debt to equity ratio moving up slightly to 0.63% compared to June 2014 when we were to at 0.61%. And key figures, positive effect of course on the key figures of improving operating income, but being offset by deteriorating capital efficiency And also these numbers are affected by balance sheet items being then inflated by the Swedish kronor the weaker Swedish kronor. But 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 its 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 1900 lower than the average number in the 1st 6 months last year and that is a consequence of the lower demand in U. S. So by that, Kai, I think it's time for you to round off. Thank you, Jan. Yes. I guess we leave the presentation part and move over to the Q and A session. The first question today comes from the line of Christa Magnaud. Your line is open. Hi, good morning. Sorry, I missed the beginning of the presentation. So you might have said this. But when it comes to the Consumer Brand division, you have lost volumes here in Q1, Q2 and you exit unprofitable segments, as you say. But how much can we assume over the next 2 years that you will lose in terms of volumes compared to the base of, let's say, in 2014 before you're satisfied with the structure of that division? Yeah. Christi that's a good question. I think we I gave the hint that maybe a third of this decline was not expected. But then 8 ish percent very much relate to our priority to value before volume. And of course, also managing some elements of the customer base, which is more of a risk channel structure point of view. Going forward, there will certainly be some further decline in 2016. I would expect them to be potentially somewhat smaller than we see this year, but it could be up to the magnitude of what we have seen this year. And then that would be most likely then leveling off from that kind of level and then move turn for the increase then onwards 2017 2018. So that's probably you will probably see the bottom next year. So if you have the 10% margin targets by 2016 and you have talked about this 3%, 4 percentage point improvement in profitability for consumer brands, Can you see achieve that profit improvement for Consumer Brands despite that volumes in 2016 will decline as well? I think we are as I try to verbalize, increasing these channels, 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. So 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. So it is a tough one for 2016 surely, especially knowing that we expect also the currency headwinds going forward from this point onwards. So 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 1 to 2 percentage points. And but it's right now it's a tough one. Yes, it is a tough one. But 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. So you can hear that there is some pressure on this side, yes. But 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 twenty fifteen, what the absolute number on FX on EBIT is expected to be? I'll leave this to Jan. Well, we didn't give any exact number, but more or less we did. We said that we have had SEK 200,000,000 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. And of course, what is disappearing in this equation is gradually the hedges. So we will go from a +200 and as I said lose around 50% of that plus for the first half year I. E. Some minus €100 for the next two quarters in FX compared to last year. That's great. And then I know it's a bit harder now, but since the 10% 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? Well, 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. So that is what is happening and we have said the guidance before that that will mean a further pressure for us to increase EBIT to be able to come to the 10% margin of some SEK 300,000,000 to SEK 500,000,000 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'll get back in line. Your next question comes from the line of Rasmus Eiberg from Handelsbank. 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 Susquehanna 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. So the profit pools is a vital part of the Accelerated Improvement Program. And I hope you heard me talking about that Rasmus. But then 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 a follow-up on that. Are you a little bit surprised with regards to Gardena's performance? I mean, I think the earnings were sort of both Q1 and Q2 were pretty much as last year. I wouldn't say surprised. I think particularly for quarter 2, we knew we were up against a very good quarter historically seen. But 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. So I wouldn't extrapolate that too much. And we are in good shape. Yes, we are taking some costs for vitalizing the product offering. We have made the introduction of the new original Gardena system for the host couplings. There are other investments materializing on the product development side that has put some pressure on the cost side, but we feel comfortable that we will see a continuous progress of the Gardena division margin development. And then just 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 or 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 Kobachis side. So it's going to give an accelerated capability going forward and bringing the Smart Garden offering further dimensions so to say through the plant care. And 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? Yes. Yes. The answer is yes. Okay. Thank you. And one remark there. Also even though there will be cost 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, I'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 volumes worldwide regionally or countrywide? 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. E, talking about Germany, Switzerland, Austria, Benelux, Scandinavia being the core. But from a growth rate point of view, we see very good progress into a country like France. And 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, because given the strength we have we also should pursue an even more aggressive market development on a broader scale. And 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 sort of have a low penetration, would that reflect also the level of penetration of robotic movers in those markets? Or are there other competitors who have sort of been early in capturing the sort of underdeveloped robotic markets in Europe? No. Anders, yes, 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. And I would say by and large our impression is this is no facts, but it's the impression our impression China specific changes, but all by and large, we China specific changes, but all by and large, we are keeping a 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 questions, then we wrap up over here and say thank you everyone for calling. And see you on October 21st when we report the Q3 numbers. Thank you. Thank you.