Earnings Call: Q2 2014

Jul 16, 2014

Good morning, everybody. Welcome to this combined press and telephone conference for the quarter 2 result presentation. I will together with Ulf Lilidar, my CFO present the results and do it according to normal procedures meaning we talk it through and then you have a bit of Q and A at the end. So jumping straight into the summary of the quarter, all in all, of course, a very positive quarter for us in various respects. First of all, demand was very good. We benefited from an early season in Europe and particularly that has affected the April comparison with last year because we had a late seasonal start 2013. However, worth to note is that U. S. Yet again 2014% as well as last year had a late start of the season. So in that respect, we didn't have any benefit. But all in all, it's good demand with a 7% sales increase as you have noted in comparable currency. If you look at the results, it's principally pretty much a repeat of quarter 1 meaning on one hand benefit from the sales volumes, on the other hand also a good impact and contribution from the accelerated improvement program. Same type of components as we saw in quarter 1, so we continue on that path. And that's encouraging of course for us to see that we have that impact. Also like to point that growth profitable growth in construction was pretty much a strong demand situation in the various geographies globally. Operating income increased with 35 percent to SEK 1,384,000,000 and we also improved the net debt equity ratio to SEK 0.6 compared to the SEK 0.75 last year. And I'll get back to later in this presentation to some remarks and comments related to the new brand based organization that we are implementing stepwise and that will be fully effective by January 1 next year. So that's a bit of summary of the quarter. Looking at the financials, you can see here that we ended up with SEK 11,000,000,000 45,000,000 adjusted 7% increase year over year. And the margin of the EBIT rose from 10% to 12.5%. Of course, as I pointed at very much driven by these two components, the volume as one piece and the other one being support from the accelerated improvement program. I'd like to say also that the productivity aspects were much more pronounced in quarter 2 than compared to quarter 1 this year. On the other hand, you could argue that that was a relatively weak comp last year on that side because we were working with stock reductions and it was a bit tougher task 2013. Solvency ratios as you heard improved and that leaves us with a January to June which is up 7%, so quarter 1, quarter 2 pretty much sales wise the same increase and altogether then 11% of EBIT margin for the first half year compared to 8.9% last year. And you can see the clear gross margin improvement by the way for the half year as well as for quarter 2 maybe even more so pronounced in quarter 2. I jump over to Europe, Asia Pacific, very strong the 10% altogether. Again, very much driven by April being a lot stronger than last year. And I would also like to emphasize that we have seen strategically and absolutely what we wanted to see, which is growth in the areas which we point out as priority segments for us, the pro handheld, the mobile watering, the robotics, as well as channel wise, the dealer channel continuing growing with double digit numbers. So I'm very pleased with the sales force and the fact that they have taken the selective growth to their hearts and really worked with dedication in these areas. So these are the 3 components on the sales side. From a geography point of view, I would say it's really strong principally across the board Scandinavian countries, Eastern Europe somewhat slower. The largest relative growth in the German speaking countries, also other geographies in Europe are doing fine like U. K. And France. So it's a fairly wide positive picture we have seen. Result wise, a 38% increase year over year. You can see the EBIT going from SEK800 1,000,000,000 to SEK1.1 billion about. Margin wise 15.5 percent became 19.1 percent, so big jump. Maybe also remembering that the reference of last year wasn't that convincing because of the late season. So let's be fair about that. Again, the volume supported us. The mix supported us. Direct material cost supported us. The productivity helped us. And even the currency now started to work in our favor as a consequence of the weakening SEK rate. Moving over to Americas, all in all 4% with quite a variation though from a very negative view up in the North Canada weather driven and a very late start of the season up in Canada, whereas U. S. Obviously then is above that average equally, Latin America above that average number of the 4 percent. EBIT wise convincing improvements up to 5% margin from the 3.7% last year. And you can see that we are very close to that on the half year. That's 4.9 percent EBIT margin on the half year compared to the 3.5%. So we are progressing here and moving ahead according to the plan. And you might recall that we have set out the ambition for U. S. To be at 5% on an annual basis 2016 for the group to reach 10% EBIT margin. And that still holds water that plan even though that the new brand based organization will not emphasize the geographies, but rather the brands. But I just want to leave you with a message from everything we see today and can judge. There is nothing that changes the belief in that geography as such has a chance to deliver 5% by 16% on an annual basis. Maybe commenting specifically on the sales beyond geographies, very satisfactory for us to see that the dealer channel remains with double digit growth, strategic for us in North America since some few years as you know. If you look at the retail channel, you might recall that I talked about that channel having over average stocks and inventories leaving quarter 1. And the stocks have been reduced, but I would still characterize it rather than somewhat over average than below average going into quarter 3. So it's a somewhat better situation at this point in time. But of course that has had an impact on the demand in the combination with the late spring as such. But still it's the fact that they are over average is an indication that there is a fundamental positive view on the market as such. From the profitability improvement point of view, pretty much same components as you saw for Europe. Direct material cost reductions dominated by the wheel category, which is under very high competitive pressure, but real good work on that side. Productivity improves. This is of course imperative for us. And you know that we have been doing stepwise improvements amongst others in the Orangeburg manufacturing plant which is a huge activity for us. And we have seen that moving ahead in a good way. We have also both the channel mix that you heard me talking about as well as a positive product mix. However, we had some headwinds on the currencies on €26,000,000 that went against us. But all in all, NOK 220,000,000 versus NOK 156,000,000 last year, which is quite satisfactory. Construction, another good story. And you can see that we have grown 8%, positive developments in all regions in Europe maybe the Southern European countries are doing the best related to what we call diamond, stone and multi wire. U. K. Is worth to maybe emphasize that it's doing a bit better than previously. America is doing fine. Brazil is doing fine. And Brazil is also related very much to the same area as the Southern Europeans I. E. The Diamond Stone part. I'd like to just mention that we have now introduced the prime concept that I talked about previously, the high frequency product range into North America. So that should support further positive development as well. And result wise, of course, we benefit from the volume increase and get the leverage on the fixed costs and we had a small headwind on the currency. All in all, the EBIT margin grew from CHF 12.3000000 to CHF 13.7000000, so CHF 121,000,000 versus CHF 100,000,000. And for the half year, it's 11,900,000 compared to 9,600,000. So I think it's pretty much in line with what we have communicated that we have been fairly upbeat about the opportunities in construction, stable profitable growth. With that, I'll leave over to Ulf to talk more about the details of the financials. Thank you, Kai, and good morning, everyone. Let us do as we usually do. We jump into the gross operating income and the gross margin that I think is worthwhile attract some attention to. Moving over to slide 8, you can see the gross margin development quarter by quarter as well as the rolling 12 curve. And no doubt we can see a good leverage when it comes to the gross margin in the quarter. And of course that also supports now a quite good pickup when it comes to the last 12 month curve as you may see on this picture here. If we look at the quarter isolated and compare with quarter in quarter 2 in 2013, there is an improvement of some 2.7 percentage points. If we exclude the FX impact that was tiny 0.1 percentage points I. E. Very little. I'll come back to that later on. And if we look at the improvement here, you could split it in 3 parts. You have heard from Kai that we see a very good development when it comes to the profit pools. So of course the mix from a product perspective is carrying 1 piece in the improvement as well as the channel here. I mean, we are growing the dealer channel faster than we are doing with the retail and that of course gives a good mix improvement here. So that is one piece of it. And then we have of course the productivities in the factories here. Yes, we do have a weaker comp with last year, but we also saw from Q1 into Q2 that we definitely get a better a better boost when it comes to productivity in our factories, which is the second piece here. And then the third and you heard from Kai here previously related to our accelerated improvement programs. So an activity started out with purchasing and our colleagues in product development are paying off quite well. So that is the 3rd piece. And those, I mean, you could say equally contribute to the delta in the Q2 here representing some 2.7 percentage points. And again, I mean, we are quite happy to see that. I mean, we reached 31.1% here in the quarter. That if you go back in time, I mean, it's actually at least on this slide is an all time high for an isolated quarter. So very satisfied to see that we have some good momentum in quite a few of our programs here. If we go back and look at the P and L again and then move down to the SG and A, we may see that we have a slightly higher SG and A cost to some extent triggered by the higher volumes. We have a variable component not least related to the transport and logistic costs. But we also do have higher brand spend here. And we are of course focusing now our brand spend to a higher extent towards the profit pools mainly to the Husqvarna brand as well as to the Gardena brand. And that explains the slightly higher pace that we have in SG and A if you compare with last year. But it follows quite well the volume development. We are though if we look at the leverage here, we are on 18.7% versus last year 18.4%. We shall also recall that in the group common costs, we are on a slightly higher pace than we were last year. We have been that both in 1st and second quarter and some is attracted to that we are also in the middle of a strategic intent program that has attracted some higher costs. We talk about SEK3 1,000,000, SEK4 1,000,000 in addition. So the pace in group common costs, because I know that was a question last quarter, which level we should be on and that should be on the €55,000,000 if we look forward the next coming quarters here. So that is also expanding some of the higher SG and A as such. Some about the saving program that you know that we launched in 2012 and took some restructuring costs on. We said at the time that that should reach a full year effect of some SEK220 1,000,000. We may declare that that has now been reached. And we had in the second quarter some SEK33 1,000,000 incremental of savings compared to last year. And that means that we are on a pace now actually exceeding the SEK220,000,000 on a full year saving, I. E. Compared with 2012 to bear in mind and the incremental that we then have this year is some SEK66 1,000,000 SEK67 1,000,000 in 2014. But again, it is a full year saving that has been reached I. E. There will not be further savings to be expected in Q3 and Q4. We are on this level now and that is the level that we will remain upon. That about the SG and A, if we then conclude that on the operating income, we did reach SEK1.384 billion and quite a significant increase, some 35% up versus last year and that also left us with an EBIT margin percentage of 12.5% versus last year of 10%. And again, no doubt the increased volumes have contributed. The lower material costs, the improved price mix as well as the savings from the different programs here are giving of course a good effect on the quarter per se. The currency effect in the quarter was minor, some SEK3 1,000,000 negative. And of course, we are benefiting from the stronger euro versus the Swedish krona. And you saw that in the previous slides very much in the Europe Asia Pacific business area is of course getting a tailwind from that. I'll come back later on to how we look for the remainder of the year. Moving down to the finance net, you can see we're more or less on par with last year. We do benefit from a lower debt and a lower interest rate. But at the same token, we have some headwind when it comes to the FX effects in our differential in the hedge contracts that goes against here. So we are roughly on par with the last year. Tax amounted to some €299,000,000 negative in the quarter compared to €255,000,000 €1,000,000 and that corresponds to tax rate around 23%, lower than last year. Now we can also see the effect that we have more of the profit related to, for instance, Sweden compared to then high tax company countries like Germany, U. S. However, I mean, this is also some of a phasing effect and I come back to the guidance for the remainder of the year as well when it comes to the tax. So all in all, a quite decent result in the Q2. If we then move over to and have a look at the balance sheet, we may see that we have inventories that we are following quite closely slightly higher than last year. At the same token, if you recall, we've made quite significant lowering of the inventory last year and we are slightly higher, but we expect still to continue and continue the work in capital reductions going forward here. So there is also a piece of a phasing related to the Q2 if we look at year on year. Trade receivables though we are quite happy to confirm that they are more or less on the same level as we were on last year despite a volume increase of some 7%, which is quite good, meaning that the average days of sales outstanding is actually going down and we are now on 58 days compared to 61 days last year. So all in all a quite good development also from a balance sheet perspective. And as you can see the payables are offsetting to some extent the higher inventory. So in essence, we are still keeping a quite good level when it comes to the balance sheet per se. And that leaves us with a quite decent curve when it comes to the operating cash flow. I normally have showed you this one and here you can also see the different generations going a couple of years back in time. We are actually breaking here as you can see in the Q2 or slightly before Q2 which is of course quite encouraging. We do have a slightly higher CapEx if we look at the Q2 per se and some of that or quite a lot of that is related to the investment we are doing in Husqvarna in the new manufacturing entity. But all in all, a quite decent cash flow if we look after 6 months. And as you can see, we are above the breakeven point in the Q2 here. That also means that we have been able to amortize some of our debt and net debt to equity ratio have improved. So we are down to 0.6. If we would exclude the pension liabilities, we are actually below 0 point 5, roughly on €0.49 and that is a quite decent level if we go we have to go quite a few years back in time when we were on those levels. And also the EBITDA sorry, the net debt to EBITDA ratio is developing quite good. And we are actually below the 2.5 now if we look on a 12 months basis. And that is, of course, as a result of a good and strong cash flow if we look 12 months back in time here. Key figures, I normally not comment too much. I have mentioned the margin of course. We are still as you may see on a working capital compared to last year that is quite decent and a good and strong cash flow. CapEx, as said, slightly higher, very much related to the investments in Husqvarna. And if we then take the opportunity to move into the guidance. We may then see that CapEx per se for the full year, I said SEK1.5 billion in the previous guidance. We lower it to SEK1.4 billion. There is some carryover to 2015. Of the SEK1.4 billion some SEK400 million for the full year should be allocated to the investment of the new production facility in Husqvarna. So far, we have invested some SEK160 1,000,000 in that facility. So SEK1.4 billion for the full year is the new guidance. Depreciation, amortizations on the level of SEK1 1,000,000,000 to SEK1.1 billion. So in essence, you could say if we exclude the investment in the new facility, we are roughly on a CapEx level that represents the depreciations in 2014. Tax guidance for 2014 for the full year will be a rate, I repeat what I said before, between 20% to 24% calculated then on the income after financial income. And that you know is on the level that we were after Q2. FX, based on the closing rates that we saw end of June, I lower that now. So the negative impact for the full year, year on year will be in the range of minus SEK60 1,000,000 to minus SEK80 1,000,000. So that is lower from the SEK100 1,000,000 to SEK120 1,000,000 negative that I gave you after Q1. And that is, of course, related primarily to the stronger euro versus the Swedish krona. And with that, I believe we take the summary with you, Kai. Yes. So all in all, I think it's being said several times a very positive quarter for us. We are of course very pleased with it. And again demand yes strong, but also the deliveries from the accelerated improvement program, the continued profitable growth from construction, the operating income improvement you heard about, the solvency improvements. And I'd like to focus here rather on the last comment which equals by the way the last paragraph of my CEO comments in the quarterly report. It's a word of caution because we have had now 7% for the quarter 2 respectively the first half year sales increases. I'd like to draw your attention to the fact that last year quarter 3 was we had a prolonged season in North America compared to an average season on one hand And we had a drought or high pressure that stayed for quite some time over the Continental European Space during July into August last year which led to over average water sales. So compared to a more average season, we had 2 things that stood out positively in Q3 last year. What we've seen so far from the start of quarter 3, it's more like an average quarter and I do not have the visibility of how the total quarter will look like. So I can only assume that it will be resemblance of a kind of standard quarter average quarter. And that would imply that we wouldn't see some 7% increase continuing to quarter 3 of the net sales. I just want to make that clear because the season is the predominant factor for us. It's not the macro that really has that huge impact on a quarter like this. So that's one comment I'd like to do rounding off the summary looking into quarter 3 without giving any forecast as we do not do. But of course just to in general terms talking about it, we would expect, however, the accelerated improvement program to continue delivered with or without the season. And that's the whole point with that program. Okay. With that, I'll just show the take the opportunity again to repeat the accelerated improvement program. The 5 components I don't want to dwell on them here and now. You heard me talking about this some few times before. But the program remains, I think I said last time that the only thing that has been changed since it was launched externally in October is that we added the parts and accessories because it's such an interesting profit pool that wasn't fully explored. And we're working more on that side. Besides we hang in there and I can only repeat what I said a quarter ago which is there's nothing that has happened that changes our mind as to this program. We're still working with the same objective I. E. Reaching the 10% EBIT margin by 2016. And yes, we feel convinced that this has the conditions to deliver on that commitment without any major modifications in fact. Okay. So let me then turn over to the new organization. You saw by mid June that we had a press release about a new organization. And really you can ask them why do you start to fiddle around with that new organization if you have a good momentum. Well, the reason is pretty simple that AIP will take us as you heard me said several times now hopefully to 10% and we do believe that we have all the conditions to do that. But the question is how do we prepare for the next step? How do we look upon the 2020 horizon? And we need to give some guidance internally and direction internally beyond the end of AIP which will be 20 15 from an activity point of view than the full year effects in 2016. And then we have went through that exercise quite a lot and we want to elaborate more around that in connection to the Capital Market Day 25th September. But let me repeat some of the messages from mid June here when we launched this organization. So really the organization that we are running today is challenged with a huge array of priorities within the same type of organization and resources. And what we want to do here is to come from the customer segmentation, not the channel necessarily, but the customer segmentation go into the through the brands, which represents the business model of what we do. And there are quite some differences, of course, if you're competing on the professional side with professional users with the Husqvarna brand or where you compete with Makalu for example or Poland Pro in retail or if you compete with a Gardena brand which is enjoying a bit of must have status in the retail area. And with that, I think you should see it as comparable to other categories. You could talk about Weber in grills. You could talk about Carrijer for high pressure water, etcetera who enjoy that position of being the reference within that category as such. So my point is retail is not retail. It depends on whether you play in a better category. So to say that can be characterized as a better category in retail with a McCullough brand, Poland Pro brand to give a couple of examples or whether you have a must have brand character like Gardena. They will look quite differently in terms of gross margins and the type of support you're going to give in terms of building those brands and that you can afford building those brands. So we really have 3 business models and that's what we want to mirror and reflect in the new organization. So the whole thing aims at supporting the market leadership ambition we have. And we're talking about 2020 then as the reference time frame for that view. And after AIP is being finalized, we will of course be more growth oriented. So this is preparing for the next step. But it doesn't change the fact that AIP is the top priority all the way until end of 2015 when the activities will be finalized for that program. And we also see as I pointed at this page construction as a good example. And what we hope to get with this new organization is even more clear accountabilities. We're talking about global P and Ls for these 3 brand divisions, even more accountability for this organization, faster decision making and even more drive and ownership in the organization. So we all think that that is going to contribute to the next phase. And in that sense, you can say construction is a goal a good internal role model for us. Looking at characteristics of these 4 divisions whose kroner represents about half a little bit more than half of the group sales. It is dealer channel centric. You heard me talking about that before. It is referring to professional and demanding consumers. We're not more specific than that now. But you can imagine we have a lot more information of course about the end customer segments and what characterizes those that we're targeting with Husqvarna division. Gardena representing 13% of the sales and really three components, the mobile watering, the hand tools and the electric products. And I've been emphasizing the mobile watering because that's a real strong profit pool for us. Free tail channel centric, yes, but you could say it's a bit of a multichannel play and it enjoys this must have position in the mobile watering the reference in Europe. Consumer brands predominantly Poland, Poland Pro, McCullough, Weed Eater, Flymo. And of course, this model calls for a huge skill of cost and scale and utilization of that, you could say lean and mean in a popular terminology, maybe more of a smaller innovation, but you still need to create that consumer excitement, whereas a development program in Husqvarna might be rather 2, 3 year time frame, this might be shorter developments, smaller more confined developments, but still you need to create that consumer excitement. Construction remains the same representing about 10% of the group. So these are the 4 global divisions we will operate with from January 1. And the new management team structure will then be constituted of these 4 units in dark blue Husqvarna with Pavel Heiman who came from Assa Bloy in Asia. Gardena, Sasha Menghis has been in charge of M and L before sitting in Olm. Consumer Brands who is Alan Shaw who is now the currently North America Manager and Anders Trobe as is on the construction side. And there's a bit of other support functions for group operations to safeguard that we don't lose out on the synergies for example sourcing, but also other areas like transport and freight, etcetera. Standards, methodology development, process development and other things that cut across. But the whole point is to make these divisions fairly autonomous and strong empowered to run the business. We will have support from technology office, brand and marketing, how do we keep together the brand architecture such that we optimize the penetration in the market to minimize the overlaps and frictions. There will be overlaps and frictions inevitably. I don't think that's a problem. We just need to manage it in some controlled way. We are running the Accelerated Improvement Program office until end of 2015 and we have Per Ostrom on business development beyond the functions that has been there before and that hasn't changed with Ulf in Finance, IT, IR, Ole, by the end with Legal and Paradigm with People and Organization. Now we also have Friedan Norbom Sams who's been running the Europe, Asia operations in the group management representing strategic sales initiatives and also quite important and that we will talk more about at a later stage. So that's how it will look like as of January 1. It's our intention to be a bit more specific about these divisions and have them present their activities operations 25th September. We will of course then get back to the rated improvement program. We will talk about the direction 2020 and we will of course give the details and about the details but at least a lot more about the new organization at that point in time in parallel to give an overview of relevant product news and informations which we think is at the core of what we do and should not be left out or forgotten in any sense. So that would round off the presentation part. And with that, I leave to Bjarvi to start the Q and A. Let's start with questions. Operator, we will start with questions from the floor here in Stockholm before we hand over to the telephone audience. Thank you. Yeah. Christer Magengard from DNB. You ended the Q3 outlook with a word of caution. Will you basically end the Q1 2015 presentation with the same message for Q2 is that the weather was exceptionally good this quarter? Or was this just a normal quarter for you? It was it looked really strong partly due to the reference of 2013. And I think we need keep in mind what constitutes a more average type of quarter from a seasonal point of view and what is beyond that or beneath that so to say as we keep that reference because it has such a huge impact in the Husqvarna environment and world and we will never get away from that fact. So if that's relevant, I might do yes. But we have had 2 quarters which have been strong now from a demand point of view and we're very thankful for that. But I just want to avoid the risk of somebody using the ruler here and just putting in a plus 7% into quarter 3 that is from a statistical point of view unlikely. The same thing for next year then for 2015 Q2 is that But it's not that exceptional I think Q2 in that respect. Yes, we had a good season in Europe, but North America wasn't particularly good in that sense because it was late. So all in all, I wouldn't overemphasize that too much. It is good, but it's good versus the reference which was poor. And can you also talk about the exposure you had in the Q2 in Europe? For Gardena? How much did Gardena grow in the Q2? And also how big share of your European sales came from robotic lawnmowers? I don't think we are specific about the numbers. But in general terms, watering has been contributing very well to quarter 2. It has been selling very well. We have emphasized it over some period of time now even more than previously was the case and we see the results of that. So that's fine. And the same goes for robotics. So we have very good growth of robotics. It's way beyond double digit. So we see that the results of that focus in robotics and market share wise Husqvarna is the player in the robotics lawnmower space. Still there are many actors. I think we counted up to close to 20 recently, but still we hold a very strong position simply because who's going to still offers the best products in the market. And then just a question to Ulf about the currency guidance. You mentioned that you used the spot rates at the end of the quarter. After that, we had the interest rate cut in Sweden and the Swedish krona depreciated a lot versus the euro. So does that mean that the guidance is a bit on the conservative side for the second half? Well, I have to focus on one, let's say, spot and that is end of June. So you have to put in your let's say estimates you have to take the account of the interest rate lowering and make your calculations on that. But of course, I mean, you shall bring with you a weaker krona versus the euro is of course benefiting the company from a transaction perspective. We don't get the full effect into the result because we still have some hedges with us that are lowering the impact of that into the year here. So but what is happening beyond 30th June that you have to make your judgment on yourself. Johan, it's Johan Daller, Panze. I was wondering Kai if you can look if you look on the European operations and try to split up the retail volumes and dealer channel volumes and sort of also taking out the with the watering effect. What's the difference between those channels? That's my first question. And secondly, what's your take on the inventory situation currently in the dealer channel? Is that an important year on year explanation? Or is it more a function of demand pull? Or your efforts within the organization to push those products? Starting with the first part, the channel mix in Europe was fairly even in fact in contrast to U. S. Where the variation wasn't that huge. And I think you know roughly the differences in terms of size with a 2 thirds give and take size of the dealer channel in Europe. So, of course, in profit terms that is the important component for us even though we are lifting the retail side of it to improve levels. I don't think inventory levels have played a major role in Europe at all. That's the general view. I think if you look at the European space, it was a mild winter. There could be some impact from that into a weaker start of the next season. So that could be sitting with some stock for the fall season. But it hasn't played a role for quarter 2, but it could potentially play a role for end of quarter 3 beginning of quarter 4. On the other hand, the winter was really demanding in areas like Russia. So snow throwers are probably in demand there. But that was so they might sit with you have to stay with that example that you might sit with a bit of overstock for that product category in the Western European space, but you would probably lack it in the Russian space and the Eastern European space. I don't think it's a major component in Europe in this story at this point in time. Can I just quickly follow-up with a question on the accelerated improvement program? It contributes a 90 basis points to gross margin according to your presentation. I was wondering, is it correct that we see more of that in the European operations and more effects in Europe versus the U. S? Or is that incorrect? And if so why is that occurring? I think it's a fair comment because 2 of those 3 profit pools product wise are predominant European products. The mobile watering is European focused on because there's a different standards on mobile watering in U. S. And then you have the robotics lawn movers, which is a non type of category in North American space. So it's very Eurocentric at this point in time. So both those have a much higher impact of the result in Europe. And that would be the major explanation. If you look at the material costs productivity, I would say that's they are delivering fairly well across geographies. Operator, can we please have questions from the telephone audit? Our first question comes from the the line of Rasmus Enberg. Please go ahead with your question and answer your company's name. Yes. Hi. This is Rasmus with Handelsbanken. I wanted to ask you first on the FX guidance. I know you talked about this, but I still like to understand it because you are at an FX effect of minus SEK62 1,000,000 at the end of the quarter and you say minus SEK60 1,000,000 to minus SEK80 1,000,000 when rates have sort of, as I see it, continuously improved. Why is that? Is there another FX effect in the second half of the year relative to the first half or are you just being conservative here? Well, mainly as I said Rasmus is that we do have if you look at the transaction piece that one is of course beneficial assuming the ratio that we have right now between the Swedish krona and the Europe primarily. However, we do have hedge contracts and depending on how they play out during the second half, they will have a negative impact for the second half. So they are the main let's say explanation to the judgment. But bear in mind, I mean it is significantly better than what we came out from the Q1 here. So there is still an improvement. But the flows go the same way throughout the year, right? Flows you mean? I mean, your transaction flows still go from Sweden to Europe and from U. S. To Europe throughout the year? Yes. There is no change in that and especially year over year of course. Yes. Sure. And then the second thing I wanted to ask you about, if you could help us somehow quantify the effect of the cost overrun you had in the Americas business last year in Q3? Because as I recall that you had something like 20 percent growth, but earnings still fell. Yes. Quantification might be tough because what was the reason was that we did not get the benefit from the leverage of the higher volumes and we were late in how to plan for that. And that was the main explanation to why we did not see the leverage of the 20 plus percent improvement in volumes there. So I mean the majority came from a lower margin gross margin than expected. So it was really a COGS element that did not deliver. And then just a question, I keep seeing robotic movers mentioning the U. S. As the new next thing. But do you have any plans as of yet to look into that? It seems to be heating up there, there's discussions at least about it. Yes. Of course, we are reviewing that. I don't think there will be any significant impacts of any numbers for the season of 2015. I think it's more realistically beyond that. But I think we also need to remember that they have a fairly efficient if I call it infrastructure with relatively cheap labor moving in taking care about gardens for people and then disappearing so to say. It's like a hit squad coming in with equipment doing the job leaving at a fairly cost efficient rate which we cannot really see a comp to in Europe. So that's one part. So I think the entrance of robotics in U. S. Will be more driven by values and technology aspects people who identify with a bit high-tech and who would like to go that route. Environmental reasons rather than necessarily as a pure cost efficiency perspective. Sure. But aren't you sort of concerned that the market moves away from you that someone else takes your sort of number one position as you seem to not be launching there or? No, I think your comment is fair. Maybe we have been too cautious. I can't rule that out. I think you're putting the finger in a good spot. It's time for us as a market leader in robotics to start to develop new markets. Okay. Thank you. We have no further questions. I'll hand the conference back to you. Andreas Lundberg, ABG. You talked about some brand building activities hiking the SG and A here in the Q2. How do you look upon these investments going into the second half and into 2015? You. Well, you could say from pure cost perspective, I mean this goes very much hand in hand with the accelerated improvement program that talked about here and they are primarily directed towards Husqvarna as well as Gardena. I mean for the reason that we have a lower activity into the second half, there will be less of those activities per se as well in the second half. However, if we look into 2015, of course, the emphasis will be and I mean you can see and we will talk more about this at the cat market, the emphasis will be on the Husqvarna as well as on the Gardena brands going forward as well. And for the second half, should we expect a similar sort of pace coming from the improvement program adjusted for the seasonal split of the quarters? Yes. There is a bit of product mix type of component into the material cost reductions that which could be somewhat lower during the second half than what we've seen through the first half. But by the nature of those products and the scale the volume share volume of those, but all in all, I think it's not unreasonable to assume similar levels from that program even second half versus first half so to say. Some small differences there will be obviously. And but as a rough direction I think that's if you want to add something, please. Yes. No, I think as you said, Kai, I mean, don't make a linear development of that because we have as you know lower activities, I mean, sorry, the 3rd and the 4th quarter do carry lower activities. And for that reason, we do get more of the effect in the first half year per se. So that will be less of that from just for the sake that we have less activities there. And if lower component costs appears to be a big driver of 2014 earnings, what do you think will be the major driver into 2015? Thank you. I don't think you will see a change that much from a structure point of view, but I think it's unfair not to count in the selective growth components because they are significant. We shouldn't forget the productivity development because it is also significant. And then as we talked about before from the material cost reductions, we have seen maybe an over proportional part relating to the purchasing activities so far whereas we will see more of the redesign impact coming through into the next year. But you will not see that difference so to say in the numbers we report. But for us it is a difference. But I think the answer to your question is you will see the same type of components really supporting the results. If we're talking the benefit from complexity reduction amongst others that's more for in fact 2016, 2017 where we really start to benefit from the reduction of the 30% of platforms and more than that in terms of stock keeping units SKUs and the ability to simplify as a consequence of that lower complexity. So it's still going to be these components that drive the result for 2015. And then beyond we will see other things kicking in. Equally, we will see emerging markets start to play a larger role into those years. Bjorn Enarson, Danske Bank. A question on consumer brands here. How much of that is basically Europe and North America? Is this 50, 52? Give and take. It's probably a bit more U. S. Of course. Altogether it's more U. S. But I think we will reveal more information in September. Okay. And be more specific about it at that time than we want to be today just to keep it in our next level of information. Yeah. Okay. I was thinking about if there are any major changes between the consumer part in Europe and North America when it comes to profitability? That's part of the answer. We like to talk about 25th September rather than kicking off today more on an ad hoc basis. I'll come back to that. Yes, please. Please say perhaps I'm Patience. Perhaps I'll also talk about batteries back in September or even now. A lot of your clients are talking more and more about batteries for consumers in the lawn and garden field. And I can't really see that many of your products in their shops or online stores, etcetera. How are you facing that development? I think Husqvarna has been emphasizing product developments for the pro and prosumer side and we have quite a comprehensive range in those areas. As always when you introduce new technologies, you need to also deal with your channel partners to make them up to speed to sell those products because it's a different sales pitch, it's a different competence. But there is no question about that the battery based products are growing over average in the market and that we expect that to continue that trend. It's probably a factor 3 to 4 compared to petrol based handheld products for example. So we have all the reason to reinforce our efforts and further explore the consumer brand opportunities within Elekte. If we are there, we will demonstrate that again pointing at the Capital Market Day. We will show those ranges we have because it is probably more than you would expect, but we haven't really been able to capitalize fully yet on that on those product ranges. And partly it's related to competence and habits. And we just need to make sure that we get through in the right way with the sales support in terms of our salespeople, in terms of channel partners. Because people who tried and I have these products myself and they are extremely easy to use. And I mean it's fantastic in fact in terms of usability aspects. So I think a lot of people who will try them they will be convinced and believe. But we just need to find a way to get the multiplication of those things going a bit quicker than we have managed so far. And this goes for both the dealer or the dealer channels as well mainly? We have focused on the dealer channel so far and it's definitely true for the dealer channel. I think other people penetrating, other competitors penetrating less space with these type of products have similar experiences. It's a fairly conservative channel. Yeah. But on the retail side, it must be, I mean this less conservative and more batteries I would say. That's true. That's true. But we haven't chosen to start our penetration in a broader sense. You will find us with Gardena electric products and battery based products as well. But it's not to that extent yet. The bulk of the developments have been in the more professional semi professional space. Perfect. Thank you. So it appears we have no more questions, which means we will conclude or we do have one more question. Thanks, Tobias. Can I just follow-up? Given that selective growth is a major profit driver for next year, What major changes in the retail channel are you aware of today looking into 2015? What can you share with us given that this is such an important factor in the bridge for 2015? I don't think the product mix as such is a major factor explaining the further results improvements. I think we are working to become more efficient executing what we are selling and optimizing specifications. And that's an ongoing job so to say. So if you're asking more about listings, I can't share that much yet. It's a bit too early to say. But I wouldn't expect major changes and I can't be much more specific about it because there are lots of discussions ongoing as we speak. So it's a bit premature to be more specific about it. But I wouldn't expect that to be a major change.