We recently had a Capital Markets Day, it was less than a month ago. This is a seasonally smaller quarter for us, we'll try to keep it short and sweet. If you go to the summary, we have a very good continued trend of performance improvements in the group. You have seen that the net sales have increased about 3%, currency adjusted, we had a good leverage on that result-wise. We were 46% up EBIT, we tell you the story of where that comes from. At the same time, we have strengthened the balance sheet and the solvency ratios. A good trend of improved performance. On a flat revenue basis for Europe & Asia/Pacific, we have managed to improve the results, there are quite some swings and roundabouts behind those numbers.
I'll give you a little bit insight of what's related to that as we get into the presentation. We have also seen that we have improved the efficiency in the supply chain in North America, we have seen an improved demand in North America, that has allowed us to reduce the seasonal loss by about a little bit more than 50%. At the same time, we have seen a continued good development, I should say, of the dealer channel development. Construction continues the journey of profitable growth. That pretty much sums up the top message. Let me move over to the financial highlights. You can see there that the EBIT went from SEK 206 million to SEK 301 million, 3.2 percentage points, margin became 4.4. You can also see that the last rolling 12 is now at 7.1%.
If you look at the EBIT, of course, we have a positive influence of the volume, we also have a positive impact of the Accelerated Improvement Program. I'd like to point that material cost reductions. For the first quarter, we now see that the engineering-driven cost reductions start to become imperative with the purchase-related ones. We have also productivity improvements relating to predominantly North America. Solvency ratios, both net debt/equity ratio as well as net debt, EBITDA ratios are showing good progress. Ulf will give you some more insight into that in his part of the presentation, I'll leave it for the moment being. I continue going over to Europe & Asia/Pacific. A flat sales situation, still an improvement of the result from SEK 285 million to SEK 309 million, 8.9 percentage point became 9.4.
If you look at the sales, we had a good development in the handheld area. We had also a good development in electric, we had a big swing with watering being down, remembering that watering had a good year last year. It was a strong seasonal year which did not repeat, the variance between the two years is significant, in fact. We were quite pleased to see that we could have the balance with the handheld and electric, from a geographic point of view, we also taken a bit of a hit in Russia. I could add to that Australia as well, which has had a fair bit of decline. Those two markets are important, Australia is in the season now, as you realize. They are significant. The impact of that, EBIT-wise, of course, wasn't that strong then.
At the end of the day, they kind of neutralized each other. I think it's a sign of strength that we were capable to balance the decline in the watering result-wise. We did that very much also by the reductions of the material costs and the productivity improvements. Americas, a little bit scattered picture. USA, strong. Latin America, strong, driven, of course, by Brazil as always the case. Canada, weak. The whole season of 2014 for Canada has been weak. It was a late start. It's not a particularly strong quarter three either. That has been a bit unfavorable up there, but good for the rest of it. We are continuing the positive trend with the dealer channel development. It's a double-digit growth, so we are very pleased to see that happening. Altogether, 6% increase fixed currencies.
You can see here the result, I mentioned is cut by more than half, minus SEK 122 million became minus SEK 55 million, improved by the material cost reductions related to the Accelerated Improvement Program, the supply chain productivity, remembering that, in all fairness, a pretty poor reference last year, quarter three. We also work, I would like to point out, quite concentrated on improving the sales and operations planning and the productivity as such in the plants as well. Of course, we benefit in sales volume. I also like to draw your attention to the fact that if you look at the last 12 months, we are now at 1.8 percentage points. Remembering the targets we have set out in the Accelerated Improvement Program of 5% EBIT margin by 2016 to get to the group target of 10%.
We think this is a good step in the direction of achieving that, and we're still confident that we should be up to it now. With the new organization, we will not show it in a one-to-one like format, but we will surely make some references to it. The 1.8% then can be viewed in comparison partly then to the full year of last year of 3.2%. All in all, a good result, improvement for Americas, and demand improvement. Construction continues on the path they have been on for quite some time now, 6% on the sales side is driven by North America. Still Europe is positive, but North America is a factor two and a half on the growth rate of what we see in Europe, the rest of the world. Result-wise, it is of course driven by the volume, but also by the mix.
We have a positive mix. You remember that we have introduced quite a lot of new products lately, the business unit here driving the growth the most is construction equipment. Typically, floor grinders, wall saws, drilling equipment, the new PRIME high-frequency system, like you see here on the picture. We are up now at a margin of 12.6% for the quarter, rolling 12, 10.9%. Some of you who attended the CMD might recall understood me being fairly upbeat about the margin improvements. We might of course, do even more here in the direction of pushing growth, and that might influence it. But it's a good development of the margin. We have a small acquisition of a micro-irrigation company in Australia that we have completed. It's not large by any means.
We're talking about 100 million SEK, and it was an asset purchase, but it's one of the leaders in the micro-irrigation area, and that's particularly what we were looking for. They're also active in mobile watering, and they are among the top 3 in Australia in this area, and they will become a partner of the Gardena division going forward. We see that as an important step to reinforce the position in micro-irrigation. It will be limited impact in the financials for 2014, so you won't really see that to any large extent, and it will be part of the EUAP business area for 2014. Ulf, please.
Thank you, Kai. Good morning, everyone. Let us, as we normally do, jump into the gross margin, gross profit development. You may see on this slide nine that the continuation of the gross margin is a fact also in the third quarter of 2014. The last 12 months curve is really pointing in the right direction here. If we look at the year-on-year effect in the quarter, you may see that majority of it is related to the Accelerated Improvement Program. I mean, 1.7 percentage points related to we drive the mix towards the profit pools. We do have the efficiency, but also to a large extent that you heard from Kai related to the material price reduction. You could definitely confirm here that what we have seen in the first and the second quarter definitely continues in the third quarter as well.
Although if we look at in absolute figures, it is of course to a lesser extent than in the first and the second, because a lot, as you know from before, is related to volumes. Again, percentage-wise, definitely another confirmation that the program launch is definitely giving results. If we go back again then and continue in the P&L and look at the SG&A, we had slightly higher SG&A costs in the quarter. Looking at the percentage of sales, it's one percentage point higher, mainly a phasing, because if you look at year-to-date, we are still par with what we had done last year, if we look at as a percentage of sales. We have some FX hedges, and we do also have some warehousing cost that sticks out in the quarter, say, but mainly a relation to the phasing here.
Looking at the EBIT, in the quarter, we ended up 301 million SEK and a margin of some 4.4% to be compared with last year of 3.2%, and quite a improvement, although again, a small quarter for the group. Mainly an increase related to, of course, the material price reductions, sales volume, as well as the improved productivity and efficiency. We had an FX impact year-on-year in the quarter of some -12 in the quarter. If you look at year-to-date, we're on -60 roughly. Finance impact, sorry, financial net, we have had an impact of some positive when it comes to the interest rate differential in the hedge contracts, but also the lower debt is, of course, capturing a lower interest per se. Ending up with -70 versus -111 compared to last year. Tax amounted to some -55.
If you take the tax rate year to date, we are now on the 20%, that is all on par with last year, if you look at the first nine months. Moving over to slide 10 and the balance sheet. Inventories amounted to some SEK 6.8 billion, if we adjust for FX or translation effects, it is an increase of some half a billion SEK, mainly related to Americas, where we are consciously now we took a decision to do some pre-production at an manage and plan the utilization in a better way. That means that we should see some impact going forward in the fourth quarter in how we have planned that properly, i.e., we should see a smooth out of the inventory levels as we go here. It may attract then how does that then impact your P&L.
Well, if you look at, I mean, we do drive more and better efficiency as we go. We don't see that that should have a major impact in the fourth quarter per se. With the better planning, with the improved efficiency, this is the way forward, and should have a good impact going forward as well. Trade receivables slightly decreased some SEK 4 billion versus point last year, and that is an improvement. Also, if we take from a days sales outstanding, we are around 57 days versus 60 days last year. Moving over to the cash flow. A strong cash flow development here. We are above 2012 levels, slightly below 2013, very much related to the higher working capital and the higher CapEx, not least. Again, a strong EBITDA is, of course, contributing to quite a positive development here.
If we look at the CapEx year to date, we are some SEK 200+ million higher than last year according to plan. As you know, quite a big chunk of that is related to the new chain manufacturing, that explains some SEK 170 million of the increase year to date. We are up some SEK 233 million related to the new chain manufacturing. Continuing in the net debt equity, we are quite pleased to see that curve continues in the right direction. We are now on a level of 0.5 compared to last year, 0.57. If we would take out the pension liabilities, we are actually below 0.4 at this time, end of Q3. Net debt/EBITDA, as you heard from Kai, we have a financial target that says we shall be below 2.5.
We reached that level already in the second quarter, that continues, and we are now around the 2.3. Also good development driven by a good strong EBITDA and a lower debt. Key figures, I think the majority of them we have talked about. You could see that it's slightly higher when it comes to average number of employees, mainly related to China and to some extent related to Americas, but nothing dramatic as such. That leads me also to give you, as usual, some guidance for the residual of the year. CapEx for 2014 is still on the level of SEK 1.4 billion for the full year, that still includes some SEK 400 million related to the new chain and new production facility in Husqvarna. Unchanged compared to what I've said to you before. Depreciations also unchanged, roughly SEK 1 billion. Excuse me.
Tax guidance for 2014 year, we are around 20%-24% calculated on that income after financial items. Finally, the FX for the full year. I guided you last time a span of SEK 60-SEK 80. I will be in the upper quartile of that. SEK 80-SEK 85 is the full year negative effect year-on-year for the group. In the fourth quarter, we assume some SEK 25 million negative impact on the EBIT. With that, I hand it to you, Kai.
Thank you. All in all, perspective, seasonally smaller quarter. Average of the last few years is about 20% of new year, Q3 about 12% of the result. I think we are quite pleased to see that we got the results leverage and the improvements out of the net sales of the 3%. All business areas contributed to the improvements. We see AIP contributing in a great way, also from Ulf being clear about. We talk about in general terms, broader terms, that we expect the demand for quarter four to be stable. Again, quarter four is an even smaller seasonal quarter. I think it's about 15% revenue-wise, and -13% average of the full year. That's what we're looking at. Remembering the reference of last year, it was a good quarter four, it was up some 8% compared to 2012.
We were quite pleased at that time. We had also some storms supporting good handheld sales. The reference is at least given the seasonality is still not bad at all. Stable, I think, is what we should expect. Also, in general terms, I could comment that we are through with the most of the listings. There are some minor things left. Nothing dramatic for the season of 2015 to expect, but rather stable outlook, which in general I would describe as positive. You remember that we focus on AIP. AIP will be our priority for 2015, there's no question about that. A lot of focus is being devoted on carrying through the activities that should give the next level of improvements.
In respect of sales, it means we push for the leading positions within which are then PoulanPro handheld, mobile watering, and robotics areas, and parts and accessories. We are not that concerned about the rest. It's selective growth from a sales perspective that we continue to aim for. The new organization is there to support the growth and expansion beyond 2015. That's how we describe it, to hit the ground running 2016 onwards. That's the intention and the aim. To round off, it's with some regret, I have also to comment upon the fact that Ulf has decided to leave the group. I can only congratulate him, naturally, for the new position. However, you will see him in the year-end closing.
It's not a thanks occasion really today, but Ulf has contributed in a good way here during the last few years at Husqvarna, so that's a loss of course. Thank you very much, and I think that leaves it open for questions. Operator, could you please open up for questions? We will start with questions from the floor here in Stockholm.
If you have a question.
Hi, I have a couple of questions. First, I wonder if you could elaborate a bit more on what you said about that engineering-driven cost down is now on par with purchasing cost downs. If you could talk a bit more about that, what's really happening and going to happen.
I think it's completely according plan and the way we also discussed about it at the CMD. Initially, we have seen a lot of purchasing-driven material cost reductions. Now as we move in time into 2015, we will see more of the engineering-driven improvements. It's a shift that is expected, a natural impact.
If you could say anything about what you believe has been market share and mix development. I mean, to kind of give us the organic growth there, can you split it up somehow between market mix and market share maybe?
I think the good news for us is that in the leadership areas that I pointed out earlier, I don't need to repeat them. We are fairly confident that we are holding respectively gaining our market shares. There are other categories where we probably are losing, like walk-behind mowers. Petrol-driven lawn mowers, we should push. That is an area where we probably lose share, but that you could say is almost intentional because we haven't prioritized it, and we have even left some contracts which are less favorable. I think we have been successful where we aimed at being successful. We are quite pleased with that. However, I haven't concluded the season fully, so I need to be a bit cautious about it. It's too early to be firm. I think by early February, we can probably give more qualified comments as to the market share development.
Probably positive mix, maybe negative market share.
The right market share development, I would say.
Yeah
equal or better in the right areas. Yeah. Lost in some others.
You think you have had higher or lower organic growth than the market to combine everything?
I would speculate that we are a bit ahead of the market as a total impact, that's a speculation, I emphasize that.
There's no real product pruning happened yet?
No.
Getting rid of some of the tails.
Oh, absolutely. There is. Again, remembering what I've been saying before, that there's a long lead time to it because the reductions take place with a one-year delay, principally because we need to take them out of the catalog for the next season. They need to be terminated at the warehouses, et cetera. By the time we have taken it out of the catalog, there's still some time lag before we see that it has, so to say, been eliminated completely.
One final-
From a planning perspective, we are okay with the complexity reduction target of 30% by end of 2015. Still need, with the understanding that the full impact of that will be in 2016.
One last one. Q4 demand to be stable, i.e., about the same as last year, is what you're sort of saying.
Correct.
Does it mean that you expect your organic growth to be about flat also?
You have seen quarter three now with a plus six in North America, or Americas I should say. You've seen Europe & Asia/Pacific being flat. That's not a bad proxy. Who knows? We don't know. There might be storms. We might not see the storm. There are many uncertainties here that we're facing, so I can't give any qualified outlook to it. The expectation is that it will be close to the same pattern.
Hi. Rasmus Engberg, Handelsbanken. I wanted to ask you about Europe & Asia/Pacific in the third quarter. You're saying that watering is obviously down. Russia is down a lot, and that's handheld mainly. You still say that the rest of the handheld business must be up a lot. Where is that, and why is that?
I think we have a very strong and competitive product range in handheld.
We have also introduced new products like hand blowers, which are doing fine, trimmers, brush cutters. I think we have a complete range which is very competitive, and that has supported that development, despite, as you point out, Russia is weaker. However, I need to emphasize that a part of the weakness is Russia is not only handheld, but it's also related to snow throwers. We have also declined on the snow throwers. Russia is not equal to handheld, I want to be clear about that. Which geographies are showing this strong growth in this quarter? A little bit surprising, maybe for some of you. We have been, for example, doing quite well in countries like France. The distributors in Southern Europe have been doing fine. Of course, we suffered in Germany much driven by the watering decline as such, beyond that, it's looking good.
If you look at the dealer channel as a total, it's okay. It's a fairly positive situation still, with the exception of Russia and Australia. Then I just wanted to ask you about the acquisition, Neta. Was that a bankruptcy, and what exactly is it that they do? I don't think there was a bankruptcy. It was an auction in an ordinary fashion. It was an asset deal. We saw that as a great opportunity now to reinforce our position in the mobile watering and micro-irrigation, and particularly micro-irrigation is the aspect where we haven't had any real offering here. We might be able to take that out of Australia into some nearby geographies as well. There could be a bigger geographic expansion opportunity with that product offering. What else was there in your question? What is it that they do?
What do you mean by micro-irrigation? It's a way to control polyethylene plastics that has kind of dripping abilities into plants, flowers, et cetera. That's a fairly big area in some of these markets. Not necessarily yet in Sweden, though.
Christer Malmgren from DNB. Just a very short follow-up on Rasmus' questions on Europe. What exactly, if you can specify the growth, excluding watering in Russia, just what is the market doing now?
I don't think we necessarily want to be that specific. I don't think so. I'm sorry to decline your request there. If you look at Russia and Australia, if you take the geographical dimension, there's probably two to three percentage points related to them on the decline. That gives you a hint.
The second one on Americas. If you compare Q3 this year with Q3 2012, since you had some issues in 2013.
Sales are up SEK 600 million, EBIT is up only SEK 40 million, despite that you have the Accelerated Improvement Program and you have lower direct material costs.
Why don't you have better operational leverage in Americas?
I don't know if you want to comment. Okay. Still to come, I must say. That is something what we're working at, and this takes time, and it is still striving for the 5% EBIT margin as we go. To have in mind, this is low-margin business, so the sales leverage is low if you compare with what we have in Europe. Again, there is a time factor related to it that this takes some time. Yeah. I can only concur and support the same track exactly because we are on plan towards the 5%, it's a lot of activities taking place, and are we completely efficient by now? No, we aren't. We are doing continuous improvements and progress. I think that's how you should look at it, but we have much more to do. I can see your question.
A final, a little bit of a history lesson, maybe. Before 2008, Husqvarna did quite substantial earnings in Q3 and also actually in Q4. Now we're averaging negative SEK 300 million on the Q4 EBIT. It's quite a big swing for the company.
Can you be profit-making in Q4 again? Is it something that has changed in the company or in the markets for the negative?
In short, while I would not point out the speculation whether we can be profitable, definitely there is an ambition that we shall be profitable in every quarter going forward. That is very much related to, if you look historically, there has been quite a big mix change. Bearing in mind also that if you go five, six years back in time, the market in, for instance, Americas and U.S. specifically, have shrunk some 20%-25%. There is a difference market-wise, there is a difference definitely mix-wise, that has an impact. That said, I think you shall take it with you, what we are doing in the Accelerated Improvement Program, that is the major component to make us profitable in any quarter going forward.
I think the only thing I can add to that is the new divisional structure that we established. Again, of course, the Consumer Brands Division is up for a challenge. There's no question about that. You might recall from the Capital Markets Day, we described the profitability as slightly negative in 2013. Of course, there are work to be done here to bring that into order, and that is the type of work that needs to take place to support it. We will work with aim of getting quarter four neutral, and then hopefully eventually positive. That's not a short-term fix.
Maybe just a very short final question. You talked about listings, stable listings. Can you just talk about the mix in the listings and potential also the price?
The general answer I can give you is that we have given the sales the liberty to step out of less interesting businesses. Typically, that has been related to the wheel category. The decline you might see in the wheels area in some cases, that is true for Europe, Asia Pacific, as well as for Americas. Maybe somewhat more pronounced in Americas, but it's a generic direction, so to say. A less added value, highly competitive space. The differentiation is simply too small in some of those areas. We are doing better on the high-performance products there than on the smaller scale, so to say. I don't think that's any news to anybody.
Yes. Lundberg, ABG. You talked about improved supply chain in the U.S. Sure, you also mentioned you had some easy comparables there, given what's happened last year. What have you done on an underlying basis that has improved?
I talked about the sales and operations planning that we are working on improving that goes all the way from the demand forecasting into our own production, and then down to the supplier structure. That's one comment which I think is important. Then, of course, in the plants themselves, we work with continuous improvements, and Ulf mentioned that we have produced at a flatter rate, stable conditions, which is also a positive contribution. These are some of the examples about what we have done. There are a lot of continuous improvements going on. It's not dramatic, but they stepwise move it in the right direction. That's how you should see it. There are very few magic thing we can do about it. It's continuous. It's a lot of activities, and improving the processes also to a large extent, and the planning.
A lot of our smaller activities involving many people rather than anything spectacular.
Thank you. Back to the question about Russia. How big is Russia in the second half of group sales?
In total? Not to specify, majority is in the second based on a lot of handle, of course. Say 3% of the total group sales is roughly Russia as a sales for the Husqvarna Group, per se.
Full year?
Full year, yes.
Can you also give some guidance on FX for 2015?
I will come back to that when we release the Q4. Bear with me.
What about pure raw materials?
Raw materials, it has looked a bit tough year-on-year. On the other hand, the recent development should support that situation improving. Plastics, oil prices going down should support plastic prices downwards. We have seen iron ore come down. We haven't seen the steel prices come down in the same fashion. The recent changes should support it to the better. Without recent changes, it would be a negative year-on-year, but not significant, but it would be a small negative. Now it seems to be moving in the direction of neutralizing. We are not overly optimistic yet about any contribution from that side. Remembering that we also need to secure our contracts, and we have the major chunk in the first half of the year.
From the raw material perspective, it should definitely have been a lot better should we have had the gravity in the second half rather than the first half of 2015.
To capitalize on what's going on right now.
Operator, can we take questions on the telephone audience, please? The next question comes from the line of Johan Dahl from Erik Penser Bank. Please ask your question.
Thanks for taking my question. I was wondering, the production planning, you, Ulf, referred to quite significant higher inventory. I assume that is significant higher production in the third quarter versus last year. Was that a part of the production plan earlier in the year or is that a recent change? What is the earnings impact of that change in production, bringing production into Q3 from Q4? Is that significant to an extent? That is my first question. Second, I was wondering if you could elaborate a bit on the U.S. deliveries. You were up 6% in the third quarter on extremely tough comps. Can you elaborate a bit on channels, categories that delivered this, and also if inventories among your customers have played a major role there?
If I take the first one and say, hello, Johan. Yes, the decision to make this pre-production is a conscious decision that was taken already during the second quarter. Yes, it does have an impact together with, of course, what we said here, driving the mix as well as the underlying productivity improvement. When we talk about productivity improvements in the third quarter, yes, we do get a benefit of the volumes and the pre-production, but there is also a component of underlying productivity improvement that should not be neglected. That we also seem to be benefiting us, not least in the fourth quarter. Although the fourth quarter, as you all know, is our weakest quarter for the group.
I understand this is a benefit for the group for the full year, should we take into account that earnings is pushed into Q3 from Q4? To some extent, not.
Well, to some extent, yes, if we then run less, let's say, utilization in the fourth quarter, like for like, then we assume that we should have productivity improvements that offset that, let's say, under absorption that we in prior years have had seen from a like for like basis. I tried also to explain that at the Capital Markets Day there. This is part of how we want to now secure that we can do with conscious decisions, run, let's say, with a better utilization impact as we go here.
If I turn over to your second part of the question, Johan, starting with the trade. The trade had fairly high inventories after the late spring season, we talked about that before. What we have seen is that they have reduced those inventories back to normal levels. I would describe it in general terms as normal levels or close to normal levels, but most of them are at normal levels. That's all okay. From a category point of view in Americas, I like to emphasize, again, the handheld products, the blowers, as I pointed out before, that's a new product launch. We have new products also in the trimming area, which have been quite successful. Both of these products relate to the consumer side. I also mentioned that we, in general, have a double-digit growth in the dealer channel.
I think these are the major components of where we have seen that demand increase. I don't know, Johan, if that answers your question.
Yeah, no, it answers my question. Do you have any idea of the market growth in retail in the third quarter? Just round numbers.
I would refrain from speculating around that. I have some ideas, but I rather rely on the facts and come back to that at the next full year report.
That's great. Thanks.
We have no further question by phone. It appears we have no more questions from the floor here in Stockholm. Oh, we actually have one more.
Three tiny questions, actually. Just to clarify on the acquisition in Australia, the product will be sold under the Gardena brand, is that correct?
That's not unlikely over time, no.
Okay. What electric products were strong in the quarter? Was it the robot mowers or was it also something else?
I think the robotic lawn mowers was the major piece. That showed a good strength also in the quarter. We also had other battery-based handheld products that are doing fine.
Finally, financial-
Including the blower.
Okay. Financial net also was sort of low. You alluded to that there were some hedge gains on interest rate differentials. The underlying would have been what, excluding that, like eight to 85?
Half, you would say, is attributed to the FX hedges that we have.
Of the improvement year-over-year.
Yes. Year-over-year.
Okay. Didn't you do some refinancing also now in October? What is the likely effect of that on interest costs?
I will come back to when we guide you for 2015. We will have less of that in 2014 for good reasons.
It's, yeah, it's a positive effect, I guess. Thank you.
Okay, with that, we have no more questions. Thank you everyone for calling, and see you again on February 6th when we report the full year results. Thank you