Earnings Call: Q3 2014

Oct 22, 2014

We recently had a clear market stay with less than a month ago. And this is a seasonally smaller quarter for us, so we try to keep it short and sweet. If we 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, and we had a good leverage on that result wise. We were 46% up EBIT, and we tell you the story of where that comes from. At the same time, we have strengthened the balance sheet and the solvency ratios. So a good trend on improved performance. On a flat revenue basis for Europe, Asia Pacific, we have managed to improve the results, but there are quite some swings and roundabouts behind those numbers. So 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, and we have seen an improved demand in North America. And that has allowed us to reduce the seasonal lots by about 50% it is more than 50%. At the same time, we have seen a good development, continued good development, I should say, of the dealer channel development. Construction continues the journey of profitable growth. So that pretty much sums up the top message. But let me move over to the financial highlights. You can see there that the EBIT went from SEK 206,000,000 to SEK 301,000,000, 3.2 percentage points, margin became 4.4%. And you can also see that the last 12 rolling 12 is now at 7.1%. But if you look at the EBIT, of course, we have a positive influence on the volume, but we also have a positive impact of the Accelerated Improvement Program. And I'd like to point that material cost reductions. For the Q1, we now see that the engineering driven cost reductions start to become in parity with the purchase related ones. We have also productivity improvements relating to predominantly North America. Solvency ratios, both net debt, equity 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, so I'll leave it for the moment being. I continue going over to Europe, Asia Pacific. Flat sales situation, but still an improvement of the result from €285,000,000 to €309,000,000 8.9 percentage point became €9,400,000,000 If you look at the sales, we had a good development in the handheld area. We had also good development in electric, but we had a big swing with watering being down, remembering that watering had a good year last year. So it was a strong seasonal year, which did not repeat and the variance between the 2 years is significant impact. So we were quite pleased to see that we could have the balance with the handheld and electric because we're 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. And those two markets are important. And Australia is in the season now as you realize. So they are significant. The impact of that EBIT wise, of course, wasn't that strong then. So at the end of the day, they kind of neutralized each other. But I think it's a sign of strength that we were capable to balance the decline in the watering result wise. And we did that very much also by the reductions of the material costs and the productivity improvements. Americas, a little bit at the picture. U. S. A. Strong. Latin America strong, driven, of course, by Brazil, that's always the case. Canada, weak. So the whole season of 2014 for Canada has been weak. It was a late start. It's not a particularly strong quarter 3 either. So that has been a bit unfavorable up there, but good for the rest of it. And we are continuing the positive trend with the direct channel development. It's a double digit growth. So we are very pleased to see that happening. Altogether, 6% increased 6 currencies. And you can see here the result and I mentioned is cut by more than half, so minus €122,000,000 became minus €55,000,000 dollars 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, Q3. And but 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. And of course, we're benefiting from sales volumes. 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. So we think this is a good step in the direction of achieving that. And we still confident that we should be up to it now. With the new organization, we will not show it in a one to 1 like format, but we will surely make some references to it. So the 1.8% then can be viewed then in comparison partly then to the full year of last year of 0.2%. All in all, a good result improvement for Americas and demand improvement. Construction continues in on the past. They have been on for quite some time now. 6% on the sales side driven by North America. Still, Europe is positive, but North America is a factor of 2.5 on the growth rate on what we see in Europe, rest of the world. Result wise, it is, of course, driven by the volume, but also by the mix. So we have a positive mix. You remember that we have introduced quite a lot of new products lately and the business unit here driving the growth and 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. So we are up now at a margin of 12.6% for the quarter, rolling 12%, 10.9%. Percent. And you some of you who attended the CMD might recall that Undistributed being fairly upbeat about the margin improvements. Now 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. So it's not large by any means. We're talking about SEK 100,000,000 and also 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. So we see that as an important step to reinforce the position in micro irrigation. But it will be limited impact in the financials for 2014. So you won't really see that to any larger 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. And you may see on this Slide 9 that the continuation of the gross margin is a fact also in the Q3 of 2014. And the last 12 month 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. So I mean you could definitely confirm here that what we have seen in the 1st and the second quarter definitely continues in the Q3 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. But again, percentage wise, definitely another confirmation that the program launched is definitely giving results. If we go back again then and continue in the P and L and look at the SG and A, we had slightly higher SG and A cost in the quarter. 1 percentage point higher, mainly a phasing because if you look at year to date, we are still on par with what we have done last year if we look at as a percentage of sales. We have some FX hedges and we do also have some, put on warehousing costs that sticks out in the quarter, but mainly in relation to the phase here. So looking at the EBIT, in the quarter, we ended up SEK 301,000,000 and a margin of some SEK 4 point 4,000,000 to be compared with last year of SEK 3.2 million and quite an 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 activity and efficiency. We had an FX impact year on year in the quarter, some minus 12% in the quarter. And if you look at year to date, we're on minus 60% percent 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 share. So ending up with minus €70,000,000 versus minus €111,000,000 compared to last year. Tax amounted to some minus 55. And if you take the tax rate year to date, we are now the 20% and that is all on par with last year if you look at the 1st 9 months. Moving over then to Slide 10 and the balance sheet. Inventories amounted to some SEK 6,800,000,000 and if we adjust for FX or translation effects, it is an increase of some SEK 500,000,000 mainly related to Americas where we are consciously now, we took a decision to do some preproduction at an going forward in the Q4 and how we have planned that properly, I. E, we should see smooth out of the inventory levels as we go here. It may attract then how does that then impact your P and L? Well, if you look at the I mean, we do drive more and better efficiency as we go. So I mean, we don't see that that should have a major impact in the Q4 per se. But 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 4,000,000,000 versus the 8 point from last year, and that is an improvement. Also, if we take from a days of sales outstanding, we are around 57 days versus 60 days last year. Moving then over to the cash flow. I mean, a strong cash flow development here. We are above 2012 levels, slightly below 13%, very much related to the higher working capital and the higher CapEx not least. But 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 200 €1,000,000 plus higher than last year according to plan. And as you know, quite a big chunk of that is related to the new chain manufacturing and that explains some €170,000,000 of the increase year to date. And total, we are up on €233,000,000 related to the new chain manufacturing. Continuing then 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%. And 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, I mean, we have a financial target that says we shall be below 2.5%. We reached that level already in the Q2 and that continues and we are now around the 2.3%. So 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 them 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. And that leaves 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 1,400,000,000 for the full year and that still includes some SEK 400,000,000 related to the new chain and new production facility in Husqvarna, so unchanged compared to what I said to you before. Depreciation is also unchanged, roughly EUR 1,000,000,000 excuse me. Tax guidance for 20 14th year, we are around 20% to 24% calculated on net income as the financial items. And then finally, the FX for the full year, I guided you last time a span of 60 to 80. I will be in the upper quartile of that. So 80 to 85 is the full year negative effect year on year for the group. So in the Q4, we assumed some SEK 25,000,000 negative impact in of the EBIT. With that, I hand it over to you, Kai. Thank you. So all in all, perspective, seasonally smaller quarter. Average over the last few years is about 20% of the year, shifting to 3%, 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 integrator heard also from Ulf being clear about. And we talked about in general terms, broader terms that we expect the demand for quarter 4 to be stable. Again, quarter 4 is an even smaller seasonal quarter. So I think it's about 15% revenue wise and minus 13% average of the full year. So that's what we're looking at. But remembering the reference of last year, it was a good quarter 4. So it was up some 8% compared to 12%. So we were quite pleased at that time we had also some storms supporting good handheld sales. So the reference is, at least given the seasonality, still not bad at all. So 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 that rather stable outlook, which Jen and I will describe as positive. You remember that we focus on AIP. AIP will be our priority for 2015, and there's no question about that. And a lot of focus is being devoted on carrying through the activities that should give the next level of improvements. And in respect of sales, it means we push for the leading positions within which are then for handheld mobile watering and robotics areas and parts and accessories. And we are not that concerned about the rest. So it's selective growth from a sales perspective that we continue paying for. The new organization is there to support the growth and the expansion beyond 15%. So that's how we describe it. To hit the ground running, 16 onwards, That's the intention and the aim. To round off, it's with some regrets. 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. So 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. But thank you very much. And I think that leaves it open for questions. So operator, could we please open up for questions? And we will start with questions from the floor here in Stockholm. If you have a question Anders, SVP, 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 what's going to happen. I think it's completely according to plan and the way we also discussed about it at the CMD. I mean, initially, we have seen a lot of purchasing driven until cost reductions. Now as we move in time into 2015, we will see more of the engineering driven improvements. So it's a shift that is expected a natural impact. Also on if you could say anything about what you believe has been market share and mix development. I mean, you kind of give us the organic growth to speed 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 behinds, petrol driven loan movers which 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. So I think we have been successful where we aimed at being successful. So 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. But probably a positive mix, maybe negative market share? The right market share development, I would say. So we have seen equal or better in the right areas, yes, lost in some other regions. So you think you have had higher or lower organic growth than the market combined everything? I would speculate that we're a bit ahead of the market as a total impact, but that's a speculation. So I emphasize that. And there's no product real product pruning happened, yes, getting rid of some of the phase? Absolutely. Absolutely, there is. But again, remembering what I've been saying before that there's a long lead time to it because the reductions take place with a 1 year delay principally because we need to take them out of the catalogs for the next season and then they need to be terminated at the warehouses, etcetera. So 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. But from a planning perspective, we are okay with the complexity reduction target of 30% by end of 2015, but still with the understanding that the full impact of that will be in 2016. One last one. Q4 demand to be stable, I. E, about same as last year is what you're sort of saying. Does it mean that you expect your organic growth to be about flat also? You have seen quarter 3 now with the plus 6% in North America or Americas, I should say. As you've seen Europe, Asia Pacific, flat. That's not a bad proxy. Who knows? We don't know. I mean, there might be storms. We might not see the storm. There are many uncertainties there that we're facing. So I can't give any qualified outlook to it. But the expectation is that it will be close to the same pattern. I wanted to ask you about EuropeAsia Pacific in the 3rd quarter. You're saying that water industry is down. Russia is down a lot and that's handband mainly. You still say that the rest of the hand held 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 hand held. We have also introduced new products like blowers, hand blowers, which are doing fine, trimmers, brush cutters. So 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. So 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. And the distributors in Southern Europe have been doing fine. Of course, we suffered in Germany much driven by the watering decline as such. But beyond that, it's looking good. And if you look at the dealer channel as a total, it's okay. So it's a fairly fairly positive situation still with the exception of Russia and Australia. And then I just wanted to ask you about the acquisition Netpac. Was that a bankruptcy? Or and what exactly is it that he did? I don't think there was a bankruptcy. It was an auction. It was an auction in an ordinary fashion. But it was an asset deal. And 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. So there could be a bit of a geographic expansion opportunity with that product offering. Now what else was there in your question? What is it that they do? What do you mean by irrigation? It's a way to control polyethylene plastics that has kind of drifting abilities into plants, flowers, etcetera. And that's a fairly big kind of area in some of these markets, not necessarily yet in Sweden though, but Yes. Christair Meingaard 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? That's 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. But I mean, if you look at Russia and Australia, if you take the geographical dimension, there's probably 2 to 3 percentage points related to them. On the declines. That gives you a hint. And then second one on America. If you compare Q3 this year with Q3 2012 since you had some issues in 2013, sales are up $600,000,000 EBITDA is up only $40,000,000 despite that you have accelerating improvement program and you have lower dry material costs. Why don't you have better operational leverage in Americas? I don't know if you want to comment on that. Okay. Still to come, I must say. And that is, I mean, what we're working at. And this takes time. And I mean, it is still striving for the 5 percent EBIT margin as we go. But to have in mind, this is low margin business. So the sales leverage is low if you compare with what we have in Europe. And again, there is a time factor related to it, but this takes some time. Yes. I can only concur and support the same track exactly because we are on plan towards the 5%, But it's a lot of activities taking place. And are we completely efficient by now? No, we aren't. But we are doing continuous improvements and progress. I think that's how you should look at it. But we have much more to do. And I can see your question. And then just a final a little bit of a history lesson maybe. Before 2008, Husqvarna did quite substantial earnings in Q3 and also actually in Q4. And now we're averaging negative €300,000,000 on the Q4 EBIT. So it's quite a big swing for the company. Can you be profit making in Q4 again? Or has is it something that has changed in the company that or in the markets to the negative for the negative? Sure. Well, I would not point out the speculation whether we can be profitable. I mean, definitely, there is an ambition that we shall be profitable in every quarter going forward. But that is very much related to if you look historically, I mean, there has been quite a big mix change. Bearing in mind also that if you go 5, 6 years back in time, the market in, for instance, Americas and U. S. Specifically have shrunk some 20%, 25%. So I mean there is a difference market wise, there is a difference definitely mix wise that that has an impact. That said, I mean, we still and I think you shall take it with you what we are doing in the accelerated improvement from that is the major component to make us profitable in any quarter going forward. I think that's the only thing I can add to that is the new divisional structure that we established. Again, of course, the consumer brand division is up for a challenge. There's no question about that. And you might recall from their Capital Markets Day, we described the profitability as slightly negative in 2013. So 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. But we will work with the aim of getting quarter 4 neutral and then hopefully eventually positive. But that's not a short term fix. And then 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. And typically, that has been related to the wheel category. So the decline you might see in the wheel 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, let's say. Less added values, highly competitive space with I mean, the differentiation is simply too small in some of those areas. So we are doing better on the high performance products there than on the smaller scale citizen. I don't think that's any news to anybody. Lumber, ABG. You're talking about improved supply chain in the U. S. Sure you also mentioned you had some easy comparables there given what's happened last year. But 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 cost all the way from the demand forecasting into our own production and then down to the supplier structure. So that's one comment, which I think is important. And then of course, in the plants themselves, we work with continuous improvements. And I also mentioned that we have produced at a flatter rate stable conditions, which is also a positive contribution. So these are some of the examples of what we have done. And there are a lot of continuous improvements going on. So I mean, it's not dramatic, but they stepwise move it in the right direction. That's how you should see it. And there are very few magic things we can do about it. But it's continuous. There's a lot of activities and improving the processes also to a large extent and the planning. A lot of smaller activities involving many people rather than anything spectacular. Thank you. And back to the question about Russia. How big is Russia in the second half or group sales? Russia, Hungary. In total, not to specify, majority is in the second based on the lot of handle, of course. But I mean, say 3% of the total group sales is roughly Russia as a sales for the Husqvarna Group per se. Full year, yes. Can you also give some guidance on FX for 2015? I will come back to that when we release the Q4. So bear with me. What about raw materials? For 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. But the recent changes should support it to the better. But without recent changes, it would be a negative year on year, but not significant, but it would be a small negative. So now it seems to be moving in the direction of neutralizing. But we are not overly optimistic yet about any contribution from that side. And remembering that we also need to secure our contracts and we have the major chunk in the first half of the year. So 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 50 to capitalize on what's going on right now. Operator, can we take questions from the telephone audience, please? The next question comes from the line of Johan Dahl from Ericsson Bank. Please ask your question. Yes, thanks for taking my question. I was wondering the production planning, you also referred to quite significantly higher inventories. I assume that's significantly higher production in the quarter versus last year. But has that was that a part of the production plan earlier in the year? Or is that a recent change? What's the earnings impact of that change in production bringing production into Q3 from Q4? And is that significant to an extent? That's my first question. Secondly, I was wondering if you could elaborate a bit on the U. S. Deliveries. You were up 6% in the 3rd 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 preproduction is a conscious decision that was taken already during the Q2. And yes, it does have an impact together with, of course, what we said here, driving the mix as well as the underlying productivity improvements. So when we talk about productivity improvements in Q3, yes, we do get a benefit of the volumes and the preproduction, but there is also a component of underlying productivity improvement that should not be neglected and that we also assume to be benefiting us, not least, in the Q4, although the Q4, as you all know, is our weakest quarter for the group. I understand that this is a benefit for the group for the full year, but will it should we take into account that earnings is pushed into Q3 from Q4? Is that to some extent, not? Well, to some extent. But then again, yes, if we then run less, let's say, utilization in the Q4 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. And I think that is I tried also to explain that at the Cap Market Day. I mean, 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. Okay. If I turn over to your second part of the question then Johan and starting with trade. The trade had fairly high inventories after the late spring season, and 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. So that's all okay. Then from a category point of view in Americas, I like Tempur Size, again, the handheld products and 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. So 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. Yes. No, it answers my question. Do you have any idea of the market growth in retail in the Q3? Just round numbers? I would refrain from speculating around that. I have some ideas, but I'd rather rely on the facts and come back to that at the next full year report. That's great. Thanks. 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 that will be the products will be sold under the Garena brand. Is that correct? That's not unlikely over time, no? Okay. Also what electric products were strong in the quarter? Was it the robo movers? Or was it also something else? I think you the robot fixed movers, lawnmowers was a major piece. So that showed a good strength also in the quarter. But we also had other battery based handheld products that were doing fine. And finally financial Including the blower. Financial net also was sort of low. And you alluded to that there were some hedge gains on interest rate differentials. So the underlying would have been what excluding that like $8,000,000 to $85,000,000 Half you would say is attributed to the FX headwinds of the year on year on year on year. And did 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 guided for the 2015. I mean, we will have less of that in 2014 for good reasons. Yes, it's a positive effect, I guess. Thank you. Okay. With that, we have no more questions. So thank you, everyone, for calling, and see you again on February 6 when we report the full year results. Thank you.