Earnings Call: Q3 2013

Oct 24, 2013

Welcome to this quarterly presentation of the results. My name is Kai Van. I'm the CEO of Susskinda since beginning of July. I have with me Ulf Lilidar, our CFO and Tobias Norbi, our IR responsible. And we will guide you through this presentation. I presented myself in the conference call July 17, I think, or 2019. As I I won't do that again, but maybe I could take the opportunity as to say some few words about what I have done throughout my 1st 90 to 100 days. And I've obviously done what you would expect, which is to spend a lot of time getting into the operations in various bits, pieces and parts of the world. I've been traveling into various countries in Europe. I've been a couple of times over to America and I've been traveling over to Asia and visited some 3 countries there. I met some customers, of course, naturally in Sweden, also down in Europe, met a couple of the largest retailers in America. So I'm starting to dig into the realities of our operations and I met also a couple of key suppliers in that period of time. So I'm starting to see the patterns and the way things are looking internally. So I hope I will be able to respond to some potential questions you might have later. With that short introduction, I think we are getting to the point. What we will do is that I will present now the overview. Ulf will give you the financials. And then after that, I will continue talking about the accelerated improvement programs and then we will take the questions. So you're aware of how we go about it, okay? Good. If we summarize the quarter, I think first of all, it's a great quarter from a sales perspective. We have net sales increases in all business areas. We are up 8 in Europe. We are up 20 in America. Construction is up 6 in comparable currencies. So I think that's a very good starting point. Of course. What is a more mixed bag is, of course, looking at the earnings of that increased sales. Europe is delivering an improved margin and we are satisfied with that. It's stable for construction. And I guess part of the questions I would expect from you relate to North America where we obviously have not delivered in according expectations. But I'd like to emphasize also that we had a very good cash flow in the quarter. So we are proud of that achievement. So with that, I'll move over to the financial highlights page 3. And you can see then that the group sales increased 12% comparable currency, again positive for all business areas and especially then for North America. And then the EBIT improvements, yes, we have impact of the higher sales in a couple of the business areas. We have impact of the reductions of staff. We have through the over average increase in North America and negative business area mix. And we have the inefficiencies in the U. S. Supply chain. I would say that's the effect. I will get back to the root causes of that, because this is what we see. But at the end of the day, this is the tail and not the root causes. We have been successfully continuing reducing our inventories, which have supported a good cash flow. So I think those are some of the major comments to make on the group level. With that, I take the opportunity to move over to Europe and Asia Pacific. As you see the increase was 8%. Yes, I think in general, I didn't make the comments initially, but I maybe should have. It has been a very favorable season quarter 3 in both Europe as well as in America. So it has also had a period of dry weather in Europe, which has supported good watering season. And the watering products have an over average gross margin. So that obviously contributes to the result improvement as well. On the other hand, as you recall, the season wasn't that favorable for us in Q2. So it started late, but it was also prolonged and extended. We put a small minus on the handheld from a sales point of view because it is flat year on year. We would have liked to see that being a bit more positive. On the other hand, I see that as one of the potentials moving forward. And I'll comment a bit more about the handheld later on. From an EBIT point of view, yes, we have the impact of the sales volume. We have the impact of the stock reductions. We have the impact of the product mix read predominantly the watering products. And but I should say there are some under absorptions impacting negatively. But on the other hand as a conscious result of course of the inventory reductions we are pursuing. So €289,000,000 versus the €238,000,000 last year quarter. Margin wise, you see it going from 7.7% to 8.9%. So I think we are satisfied with that improvement as such. Now moving over to North America, which I guess is of high interest for you. We had a fantastic sales development with the 20% comparable currencies. Again, prolonged season, favorable weather conditions. Last year was also a year of drought. So the reference in that respect maybe is artificially somewhat lower. But the big issue is, of course, that we didn't manage to get the scale advantages from that sales increase. I mentioned that we had inefficiencies in the supply chain, yes, But the root causes are to be found in high complexity in the offering in a relatively weak internal process capability. And particularly, I would like to emphasize the sales and operations planning where supply and demand meets and we have opportunities to improve that a couple of notches. And then generically, I would like to emphasize that the end of the season is always difficult to predict. Now it was extended and we didn't fully cater for that good demand extent and duration in time. But I think this is the logic. These are the reasons why we didn't manage to get the scale advantage. Of course, I should emphasize on the other side that the mix is very unfavorable because we are talking about very positive sales in the retail channel and with products that are rather opening price points than anything that has to do with premium price points. So that combination with a very competitive product segment with relatively low margins to start with and the inefficiencies caused this disappointment in plain language, because it is a disappointment to us internally obviously. I think the good news is we know what we need to do and we are dealing with it already now. We have learned from that. I think we are capable to handle the variations in the smaller scale, but this large variation in volume, we didn't have the capability to handle in the right way. We proved that unfortunately. But again, doing mistakes is one thing. To improve and learn from them is absolutely imperative and we are doing that. Let me assure you about that. So this is something we are taking with us into next year. Now I will get back to talking complexity reduction when I speak about the accelerated improvement programs. But in order to be really competitive in the retail segment, we are not talking 20% complexity reduction, but a much higher number. And in my mind, reducing the complexity enables us to be more efficient, not only to handle these type of variations in a better way, but also to be to take the benefits of being more efficient, rationalize. So there is an element here of competitiveness in the retail segment that we need to deal with that was really provoked by this sales volume variation. With those comments, I proceed over to construction. I mentioned the 6% comparable currencies year on year, high demand in all regions. I would like to point that maybe Brazil and the diamond stone cutting, which multi wire concept, which is very successful. We had the volume advantage, yes, but we had a lower factory utilization again as the conscious move to reduce inventories and we have an FX impact. At the end of it, EBIT is comparable to last year, which I think is satisfactory given those circumstances. We have then year to date 10.1% versus 9.2%. Percent. And maybe I should have taken the opportunity to please allow me to go back to Americas because I missed to make one point, which I think is important. Yes, we are disappointed naturally with the EBIT development in quarter 3, minus €97,000,000 last year to minus €126,000,000 But the fact of the matter is year to date, we were at €73,000,000 last year, euros and we are in fact more than double of that now with €161,000,000 So I think we need to keep the perspective a bit right. We are in fact improving. I don't think you should miss that point. But still the quarter 3 is a big disappointment. Okay. Now proceeding the presentation, I'd like Ulf to take over and talk through some of the P and L effects and the balance sheet. Okay. Thank you, Kai, and good morning, everyone. Let us then jump into the P and L. And as you have heard from Kai, no doubt, if we look at the sales figures, they are of course if we look at the composition of them, they are of course to they are of course not satisfactory. I mean to start with we have within Americas of course a channel as well as product mix that is disadvantageous. But also if you look at the group level, we have grown more in Americas at a lower margin versus Europe. So there is, of course, a significant portion related to the business area mix as well. And if I try to guide you through, if we look at the gross margin as reported, it was 26.3% versus then last year 27.7%, a deterioration of some 1.4%, a dissatisfying deterioration for sure. FX, I would attribute some 0.3% negative. If we then come to the mix and primarily then related to the portions I mentioned here, some 0.6 percentage points should be attributed to that. If we then try to isolate the inefficiencies that Kai talked about here, it is as much as 1 percentage points that relates to that. Then however, as you also heard here from Kai, we are having some improvements when it comes to some of the initiatives that we talked about at the CAP Market Day that are coming through in the P and L as well the savings from our reduction program. And that in the gross margin is giving some positive contribution of 0.7%. So there you have the main buckets here. But as you can hear, quite a significant portion related to mix, 0.6 percent as well as to the inefficiencies in our supply chain of 1.0 percent, attributing them back to the 1 0.4% in deterioration. Moving further to the SG and A. In percentage, well, we do have an improvement. We are on a 23.1% compared to last year, some 24.4% if we adjust for translation effects. In that figure, we do have, of course, some effect of the restructuring program. I'll come back to that later on here. We see some increases when it comes to brand and selling expenses in the quarter per se. Moving down to the EBIT. We are on, as you can see then, on EUR 206,000,000 versus EUR 197,000,000. And as I said, roughly then par on last year and but with a decrease EBIT margin to EUR 3.2 billion versus EUR 3.4 billion And again, negatively impacted by currency to a less extent, as you know, in the 2nd sorry, in the 3rd quarter versus the 1st and the second quarter, but still some SEK 27,000,000 year over year. And the main components here for the deteriorating margin is the strong growth in North America with the lower margins as well as the inefficiencies attached to that. Savings from the restructuring program is on total EBIT some positive SEK 56,000,000 for the quarter. If we add now what we have after 9 months, we are running at SEK 112,000,000. And that means we have said to you previously that we account for the SEK 20.13, we shall achieve some SEK 160,000,000. And we are pretty confident that the residual here of the SEK 50,000,000 to SEK 55,000,000 will be delivered in the Q4. And as you can hear from that, that means that we are up on full year speed now. So that means also for year, the promise EUR 220,000,000 should be in line with what we have said before. Moving down to the financial net. We have been running on a quite favorable level based on that we have been driving the cash flow and by that reducing the debt and gaining some from the interest rate. In the quarter though, we had some revaluation effects on the interest rate differential on the hedge contracts that is giving us some negative effect moving it to EUR 111,000,000 negative versus last year minus EUR 93,000,000 Tax based on, I mean, a quite small quarter. As you can see, it is a residual of some minus 3%. And I come back to the guidance later on. We are year to date on a tax rate of some 24%. Moving then forward and looking into the balance sheet. I mean, the main attraction the way we have been working now for the 1st 9 months here, we have more and more and more the way we have been working now for the 1st 9 months here, we have more and more been able to reduce inventory. And as you can see moving it from SEK 5 point sorry, from SEK 6,800,000,000 down to the SEK 5,900,000,000 is quite an achievement. Also on the trade receivables, if we look at the days of sales outstanding, we have moved there from some 64 days last year to some 60 days this year. So I would say the working capital And again, the result of And again, the result of that is that we this curve I have showed you at least since I started in Husqvarna to show the seasonality. And I think this is giving also the evidence of that we are performing in a quite good pace. That said, I mean, we are not still satisfied. We will continue this journey. This is a continuous improvement project. And I think this the organization have really teamed up to answer on those requests here. And we are, of course, continuing that journey going forward as well. A lot related to the inventory and the reductions in all areas, primarily in the Europe, Asia Pacific. That in essence has also meant that we have been able to reduce our debt to some extent. And looking at the net debt equity ratio, it is now down to 0.57 versus 0.68 same time last year. Some key figures and maybe not too much to mention. I normally focus concentrate on the CapEx number. You can see that one is slightly higher, mainly related to the chainsaw manufacturing in Husqvarna. We have a lower pace than anticipated beginning of the year, some related to the activities are lower, but we also do foresee some carryover. I will soon come to the guidance of the CapEx here. What I'm mentioning is also the average number of employees going down quite radically and, of course, but also, I think, achieving gradually improvements when it comes to flexibility and how we flex in and flex out with our employees. So then some guidance. Starting then with the CapEx, I said last quarter SEK 1.3 1,000,000,000 for the whole year of 2013. There will be some carryover to next year. So I am now around the figure of SEK 1 point 2,000,000,000 for the whole year of 2013. If we move forward to the depreciation and amortization, we are in the range of SEK 1,000,000,000 to SEK 1,100,000,000 when it comes to depreciation. Tax guidance remain for the full year. We are in the range of 20% to 24%, calculated then on the income after financial items. And finally, the FX, I also remain in the span of SEK 350,000,000 to SEK 3 70,000,000 negative full year 2013 versus 2012. And I believe with that, I hand over to you again Kai for some summary. Thank you. So summing up, a very good demand, a very good sales number in the quarter throughout all the business areas and region. Yes, we did improve the results, but not to the extent we would have expected. We talked about Americas sufficiently. Yes, we are very satisfied with the improvement in cash driven by the working capital reductions. And with that, I'll take the opportunity to move over to talking a bit about the accelerated improvement programs. And when I do that, I want to emphasize that we are talking about forest and garden. So this does not encompass the construction. The focus is Forest and Garden because this is where we have the issues to address that I will talk about. The target for the group is 10% EBIT margin. That of course, remains. There is no hesitation about that. That's where we're heading for and setting out to deal with. What I will talk a bit about now is 5 various aspects, the focus on the premium brands and the leadership positions. We'll talk a bit about the dealers and the retail channel and their business models and how we can differentiate them going forward. Further measures to turn around U. S. Operational excellence and last but not least, emerging markets and opportunity that are connected to that. Starting with the brands. We have 2 major brands that we want to capitalize on going forward. We're talking about Susqvarna and Gardena. They represent some 60% of the revenues, but surely a significantly higher share of the profit. So this is you could say our profit pool related to those 2 brands. We also have at least 3 leadership positions that we want to leverage on even more going ahead. Professional handheld products, we're talking about the robotics lawn movers and we're talking about the watering products. These are areas where we actually can do even more to expand our positions and to even more actively pursue expanded sales. Starting with the handheld, we have now a very competitive range in the market. And yes, you did see that it was flat, for example, in Europe, but we have very good opportunities to start to expand that moving into the next season, built on that strength. We will certainly explore that. Robotics movers, yes, we are market leader. It's a highly profitable segment. Will it come under more price pressure? Most likely, but we have a huge scale advantage that we are benefiting from in this area, and we will make sure to remain doing so. We have more than 50% of the market share in this segment. It has a very healthy growth. So I think the question for us here is, how do we stay on top of the game? There are many people entering, of course, but still we are on our 3rd generation of robotics lawn movers. The others are in the 1st generation principally. So it's a matter of how do we maintain the advantage we have in this segment. And in watering, we have a great opportunity, I would say, in the next 1 to 2 years predominantly related to geographical expansion. But then I also see further product development impacting as we move beyond that time window. So geographical expansion is the theme here for the next period to come. These three leadership positions maybe represent some 40% give and take 40%, 45% of the revenues, but substantially higher share of course of the total earnings. So that's one thing. So allocate more resources and investments to these areas. What you miss here is Mercado, which is a retail brand. Will we leave that brand? Will we drop it? The answer is no. We will remain with it, but we will not invest to make it a global retail brand. It has strength in Europe and some other geographical Leaving the brand, Leaving the brands and the leadership position moving over to the business model differentiation. We as you are aware of, we have these 2 business models to deal with. But I want to emphasize they are fundamentally different. Whereas the retail really is a matter of price points, cost management and scale. We can't really set the price to any larger extent. Our choice is do we want to take a position in a certain price point segment or not? That's the question. And if we actually take the decision to do it, we better make sure to be competitive dealing with that product. So it means cost management is imperative. And it's volume and scale and it is a bit good enough. And that's absolutely contrary to what we see in the dealer channel where it's all about product performance and specifications selling the value. It is about premium brands. It's about solutions. So there are 2 different worlds in which we are operating and we need to make sure that we are competitive. And the point I'm doing is we need to increase our competitiveness in the retail side because Husqvarna culture comes from the dealer culture. We are proud of the best products. We have fantastic products and innovations throughout the years. That's not the question. But the question is how do we really stay on top of the retail game and how do we utilize the volume synergy between these two, because we are unique in the sense in the market that we are active in both these channels. Most are active in 1 of the 2. I'd like to believe it's a strategic advantage to be in both of them, but we need to pave the way to really utilize to the full benefit. And the point is the retail channel. This, of course, goes for product offerings, but it also goes for cost to serve. We're talking about the full thing here. And particularly in the retail channel, the margins are thin and we need to adjust according to that. Now having said that, I'm moving over to U. S. I think even though it's a bit of a disappointment in Q3, we still had more than the doubling of the results year to date. So yes, we are even this year doing significant improvements and there has been significant improvements since 2011 in the previous years. But further measures are required. That's pretty obvious. And we are talking about speeding up the margin recovery and we need to do more of value versus revenue. So revenue growth is less important than margin improvement And it means we need to prioritize that even harder going forward. It means obviously the dealer channel growth is not new, but we will maintain the focus on the dealer channel growth. You know that roughly 1 third of the revenues in North America is dealer oriented and twothree retail, which is a big difference of course to the European market where it's the opposite. We have twothree in the dealer channel and onethree in the retail. But as I was alluding to before, we have a big issue related to complexity reduction. I will soon show a picture showing that we have raised the bar from 20% to 30% to the group in terms of reduction of platforms. But really in the retail, the question is rather a number of 40%, 50% complexity reduction than anything else to reap the full benefits of the scale advantages we need to install to be competitive in that business and earn money. So we're talking about reducing brands, yes, platforms, yes, and stock keeping units. We need to also work on the key processes. I mentioned the sales and operations planning as maybe at the centerpiece of that. And we need to look through the whole supply chain and footprint, not excluding anything, but not necessarily implying that I believe that we can close any of the big three plants we have in U. S. That's not the message. But for sure warehouse optimizations, maybe office optimizations, etcetera, whatever there might be. But this is also a matter about how do we interact with our suppliers? How do we really involve them in helping us reducing costs? How do we give them scale advantage such that they are motivated to do the journey with us? So it's not all in house. It involves our supply chain all the way to the supplier and the dialogue with them. Of course, everybody realizes the complexity reduction is not a quick fix. And it is and some things we can do and I'll talk about them soon. But if we're going to get to anything like 40%, 50% complexity reduction, we will need to do some redesign of existing platforms to merge them into new platforms that have this fundamental capability to provide that scale advantage. So that will, of course, take some time when I talk about platforms. I'll proceed over to exactly the complexity reduction on a more generic group level. And if you make a classic quadrant like metrics looking at gross margins per SKU stockkeeping unit and you look at the sales of those stockkeeping units, of course, the lower left is where you like to make rationalizations to start with. And we have quite an opportunity here. In fact, we think we can go all the way up to 30% by principally penetrating that corner. And this will be done and the goal is to have done this reduction by end of 2015 versus the starting point of 20 12. And beyond that, to do further complexity reduction, I think we need to think about putting in fresh engineering resources to consolidate platforms going from 3 to 2, etcetera. But this we can do by taking out low sales volumes and low margins low profitability aspects. Again, understanding I think it is important to emphasize this is not only about the product and the product costs, the COGS. It's also bringing costs throughout the whole company. I mean, by doing this complexity reduction, we are enabling taking out cost all the way from supplier interactions to sales and marketing. Also under operational excellence, we intensify our efforts to take out material price reductions, direct material price reductions. If you look at the component purchases as share of the revenues, it's about 42% excluding raw materials, because that's much more commodity driven and much more difficult to deal with. And the target we have set out to do here is to versus the same reference end of 12 take up 10% until 10.15. So we are quite specific here about that. That is a combination of purchasing and R and D. So it's not one of the 2, it's the combination. Some of them of those percentage points can be realized through smarter negotiations. But in many of the cases, we need to do redesign to actually facilitate that cost reduction. So it's a combination of the 2. Last but not least, emerging markets. And then when we talk emerging markets, we're talking Asia Pacific, we're talking South America. Both those markets both those regions, I should say, they are quite dealer centric, which is advantages for Husqvarna fundamentally. And both those markets are pretty handheld oriented. Yes, there are some differences related to Europe and North America. You have fundamental changes in the way that agriculture might be more important. You might have palm olive plantations. You have commercial weed to deal with, which brings some differences in the product. And yes, we do need to respond to that. But I think we're talking about modifications to a large extent of products that fundamentally can be used in a beneficial way in those markets. But we're also talking about supporting quite substantially lead time improvements to the market. Today, we are shipping a lot of products still from Europe with a much too long lead time. And we need to shape that up with by installing distribution centers in the regions. But that's no rocket science. That's a task for next year. The customer responsiveness and allocating shares of R and D supporting them will come, but that will not have an impact necessarily on 2014, but it has potentially impact talking about 2015, 2016. So we I think with doing these things, we have the fundamental conditions to say double in 5 years. But the reference is not 2013, but then rather 2014 and moving forward. You see my point. So we need to do this. These are enablers for accelerating the growth in these markets, the responsiveness in terms of R and D, and the logistics solutions. Having that installed, we can accelerate the growth in those regions. This is as far as we have taken it for the moment. This is my first reflections and thoughts. I'm confident that this will help taking us to the 10% EBIT margin that we have as a target. I will not necessarily answer when that will happen today. So if you're asking me, will you do it for 15% or will it be 16% percent? That's nothing I'm capable to answer. What I can say is we will continue quantifying these programs as we move ahead. So by next meeting, we hopefully can be more specific about what will impact when than I am prepared or capable to do today. So with those comments, I'd like to say thank you and leave over for the Q and A session. We can start with the questions from the floor here in Stockholm please. Stefan Kallen from Nordea. A question on your targets. 30% 10% decrease from 2012, 2015. Where on this journey are you now at 2013? I mean the company worked with ambition to reduce 20% of the complexity until 2015 since you installed the program? And when exactly did you start that program? Well, we presented it at the Cat Market Day and of course the journey started during 2013 beginning of 2013. And as you know there is a lead time for those projects. So I mean we are in the start up phase. So no material impact so far? Well, as I guided you, and if we look at the margin where we should see the impact of it, together with the reduction in force program already in the Q3, we have some 0.7 percentage points in improvements. And you could say that is also the blend for the 1st 9 months in 2013. I think it's fair to respond to you that the major bulk of this of course 80% give and take. It's going to be 14%, 15%. And maybe another comment just to be clear. The positive impacts of the complexity reduction will be with the start of 14 season 14. And the full impact of the complexity reduction will be for the season 2016, because we have done this work until end of 2015, meaning so it's effective for the season 2016. I mean, we're living in this seasonal world and it's front heavy quarter 12. So that has an implication of course. Johan Dallek Panser. If I could ask 2 questions. Firstly on the U. S. Operations in the 3rd quarter. As the season was prolonged and I assume that retailers called in and reordered and you obviously accepted those orders. Could you explain to us the logics here when you chosen to supply your retail partners on those profitability levels? Is it a problem of governance in the U. S. Organization? Just help us understand how that occurs. Secondly, if you could help us understand also the production problems. What sort of production is that related to? Is it production to fill in for the current season? Or is it for next season? Or what sort of product is that related to? I think the contracts are established through the listings. And then I think our colleagues are identifying to a very high degree with the customers and they're doing everything they can to provide products according to the requests. And maybe at the expense of going an extra mile almost too far, accepting too high expediting costs. Imagine you have a situation where you have a supply chain set up with certain efficient deliveries and those cannot meet the excess demand. So you will have to go to a supplier B in order to solve that additional capacity request to a higher cost. That's one example of the manufacturing implication of what you would have to do. And then being late in the process caused by introducing alternative suppliers, you also eventually end up having higher expediting costs. I think if you think in those terms, I think you're getting closer to the answer of your question. In hindsight, you can say, should we have bent over backwards to get those volumes? Maybe, maybe not. But the thing is the important thing I want to emphasize is we are learning from this exercise. And of course, at the centerpiece here is the sales and operations planning and what type of flexibility do we install in the supply chain to cope with these type of variations that actually do occur. So I want to emphasize the importance of the flexibility element in the supply chain to be able to respond to this in an ordinary way, meaning reaping the benefits also of the scale advantage. What does that imply for listings going into next year both with having the new improvement program in place and also with this Q3 in hindsight, it says to me that you're very cautious about listings next year to reduce complexity and focus on profitability? Let's be clear about it. The most of the listings are being set in the summertime. So the most of what we're talking about for 2014 is set. The stage is set. So now it's for us to deal with that and be more efficient dealing with that type of listings that we have in fact. I mean there are certain bits and pieces that we can open up for discussion, but the large picture is pretty much set. So the primary focus is then to how do we go about the cost of those thin margin products that are in fact delivering scale such that it's going to look different next year on one hand. And number 2, how do we install this planning ability that is enhanced such that we can cope with the variation in a much better way. I think these are 2 key aspects. Just a quick follow-up if I may. On McCulloch what was the strategy there? You were very brief there. Is it to do anything about it? Not to invest, but are you selling it? Or No, no. Is it just continuing as it is? Is it basically doing nothing or I think we should look upon it from another direction. The company has taken quite some investment to put McCullough on the map. We will of course harvest the benefit of that. It has a strong standing in the European market. It's not necessarily so that we will make it through global brands. We will not invest the marketing spend that would be required to take a strong position in North America with McCullough. We have other brands we can use for that. And we don't need yet another brand. I think our situation is the opposite. We should reduce the Maslow brands more aggressively. So we proceed with McCullough. It's an important product for the retail channel, But we are not going to take fulfill the ambition to make it a true global retail brand. I think that's the message. Okay. I think we will take some questions from the telephone audience please. Operator? Thank you. Your first question comes from the line of Bjorn Enarson of Danske Bank. Please ask your question. Yes. Thank you, Bjorn and Danske. One question on the dealer channel's expansion has been ongoing for quite some time. Do you have revised the target for how big that proportion of sales could be going forward? Thank you. No. We have not revised any targets in that sense. The target is really growth oriented in that channel. We will maximize the growth in the dealer channel. That's what we're talking about. And I think there are quite some opportunities taking yet more steps proceeding. And looking on the retail channels, do you indicate that you played down your growth efforts in the U. S. There or more focus on bottom line? Or how should we look upon the overall volume growth for the U. S. Market for Americas? Yes. We will in fact absolutely prioritize margin over revenue growth. That's absolutely true. Having said that, as I commented earlier, to a large extent, the listings are set and done. We will try to open some minor discussions here and there, but it will not be moving the needle that much in terms of revenue generation for next year. So I wouldn't model that to any larger extent. Then also I had some questions on timing of the actions and the cost for these actions, but I think you have I guess said as much as you can. Or is this possible to anyway give an indication of what kind of costs these extended actions will trigger? I don't think we are talking about any significant short term one off costs for what I described so far. Thank you. Your next question comes from the line of Anders Thorpe of SEB. Please ask your question. Yes. Anders Thorpe here. I have a couple of questions on the timing as well basically. But first of all, did I hear you correctly when you say that there was no year or date set for the 10% target? Was that correct? It has never been set for the group and it's not being set today. No, that's true. Correct. I think there has been a statement from my previous answer Hans about the North American 5% margin target and that still remains. You said 2 to 4 years 1 year ago and that hasn't changed. Yes. All right. Very good. Then also I wonder if you could comment a little bit on the impact of the seasonality of the business both on sell in and production and that impact what it has on the timing potential of all these actions. Basically, I guess nothing can be done this year because of the season sort of the production why it starts well now I guess or very soon. So is that fair then to assume that basically the absolute majority of what you're talking about will be really in 2015 2016 rather than 2014? I think it's a fair conclusion you're drawing that the majority of the impact will come in 2015 and it will spill into the season of 2016. But you will see some impact in 2014 as well. And not necessarily for the pre build season, which starts about soon or now, But definitely, there could be cost reductions introduced throughout the season as such. But I think you're correct in your assumption, yes. Good. Also you say that price point management is important. Does that base deciding on whether or not to participate, I guess, in a certain price point, does that sort of indicate that you will actually maybe exit some price points or at least reduce your presence in some price points on the retail in the retail channel? I think we it's fair to say we are reviewing certain placings and price points in various product groups in connection to the strategic rationale, whereas it is reasonably obvious, I think, that we have an interest, for example, to go all the way in chain source down to opening price points that might not be equally true in all other product categories and areas. So I think we want to see that also in the setting of a strategic context. Final question. Again, that is nothing that impacts 2014 necessarily to any large extent. But it will in fact have some impact as we proceed into 15 years. Final question also on trying to differentiate more between the retail and dealer channel. If does that include could it include having exclusive brand for the dealer channels in U. S? I would say, if you look at the Husqvarna brand, it is principally exclusive for the dealer channel. There is one exception to it and that probably will remain. But I think you should see it as a dealer predominantly a dealer exclusive brand. And you have John's Red, for example, as well in North America. That's a dealer brand. I think to simplify the world, you can treat it as if it is exclusive. It's not fully true, but it's sufficiently true. I guess the question is if the dealers agree with that or not? I think we are aligned about that. I think you need to see the other side of the coin, which is if we do have Husqvarna as one of the major retailers that also creates demand. It creates publicity. It creates demand. It's generated a lot of commercials around that position. So there could be in fact a positive impact on the dealer channel by having it introduced at select retailers. So that dynamic is not black or white. It's you need to have a larger context view at it. Okay. Thank you. Your next question comes from the line of Kenneth Torbjornson of Carnegie. Please ask your question. Yes. It's Kenneth here. I'm a little bit surprised that you probably will show losses for Americas this year when it's actually a pretty good year on the markets. If you fail in increasing your profitability in North America, could you divest that business? Or is it too sort of coupled with the business in Europe? Let me be clear. There is no scenario in which we are divesting Americas or the retail for that sake in Americas. It's an integral part of the business and the strategy. It will remain so. And I think our task is pretty simple is to make it deliver results and not 2020, but a lot earlier, but really recognizing what I said before. Okay. Then another issue, you talk a lot about a lot of complexity in North America and a lot of platforms and Husqvarna was listed, there Husqvarna was listed, there have been a couple of acquisitions with some competing brands and so on. Do you see a need to do more integration of those acquisitions like integrating manufacturing and products, bringing all your chains of products in your group onto the same platforms and things like that in order to simplify the product structure in the group? My impression is that those acquisitions have been integrated. That's not necessarily the question. I think we haven't maybe gone through the full exercise of exploring the opportunities in the product portfolio related to that. I think that is much more what I'm saying. So that means our life is fairly rich in terms of product. Yes. That's Maybe unnecessarily rich. Yeah. And then finally, do you think that you will keep the dividends unchanged or do you have to lower them? Do you want to? Well, it's as you know subject to Board of Directors decision and then we have an AGM that finally takes that decision. But I think you shall see it in hindsight the way we have been working with our cash flow and despite then at lower net income, I mean, the work we're doing with the balance sheet, I think, well, you have to draw your own conclusion. And I said it is subject to a Board decision and then it's AGM. Yes. But the management recommendation to the Board is not to cut it dramatically? Still early days to say. Okay. Thank you. Yes. Hi. Rasmus Engberg from Handels I had a couple of questions, needless to say, about the U. S. Business. Firstly, can you help us understand why your planning system was surprised by 20% recovery given the decline you had last year? Is there something wrong with that system overall? I'm not in a position to give you a good answer on that specifically, Ron. I'm sorry. With regards to reporting systems in the U. S, are they really up to date? And you have a fair picture here in Stockholm on how they're doing on a daily basis? Well, that I wouldn't say is the rationale or the reason behind it. It is locally related and how things are working. As I said here, we have a number of issues related to it. But taking the reporting system back here or governance issue that is not the issue. So you have seen this throughout the quarter that those are big. I mean we follow statistics weekly. Yes. Right. On to the 20 4 teen season, as I understand that you've done most of your negotiations already. On the retail side, on the retail side, yes. Are there any sort of significant impact in volume or price mix to be expected for the coming year based on that? I wouldn't emphasize that necessarily. I would say to the larger extent, it is a continuation of the positions we have had. There are always changes things leaving the other thing entering. But in the larger scheme that will not make any larger change. No. And again, back to the slide I showed about the business models. I think we need to be clear upon for us the decision is more are we taking that position in that price point or not. It's not really that much of a price negotiation in retail. It's more how do we have a competitive offer for that position. We have the price increase opportunity in this dealer channel because we can sell the value. It's not really that dynamic in the retail. So there are 2 different sets of worlds in that respect. Finally then, given that you're sort of loss making or breakeven in the Americas for the 3rd year, How many of your retail SKUs are actually profitable? Is it a few that are profitable? Or is it a few that are hugely loss making? If you want to describe it to us sort I don't intend to get into that level of detail here and now. What I would like to emphasize though and take the occasion to say is that we have a new Executive Vice President for North America, Alan Shaw, who came in 1st August. And I was part of interviewing him and he has a broad background from Worldpold, from Sherbroil and he knows the retail model inside out. So you can say, whereas he is new to Husqvarna, he still is very familiar with this industry and the dynamics. And I'm very confident that he will be able to take the required measures that we have talked about and described on this page of further measures in North America. We are completely aligned. Let me put it this way. But just coming back to the question, is it a few things that need fixing a lot? Or is it many things that need to be fixing a little? It's a tough one. Maybe we are somewhere in between. It's easy when it's polar or polarized, but if it's not Yes. Tom Valente from RBS. A quick question regarding your target of 10%. It doesn't look that ambitious. If you look at it looks like if you fix the U. S, you won't have to be there if you get to the levels you probably anticipate there. So is this a kind of step towards increased profitability above 10% as well? Or are you targeting 10% long term? I think the way it's formulated is as an average of a business cycle, which meaning during favorable conditions we should be above it. So I think it is realistic, it's ambitious. And I think we need to get close to it before we start thinking about moving it yet another notch or level. We have a bit to go, but we will get there. I don't have any hesitation about that. But I also think we need to have respect for the fact again back to this page that the competition is really intense in the retail area. And of course, there's a lot of new entrants who are prepared to enter with quite tough conditions. So to expect any price increases of that corner is unrealistic. I think then we need innovation. And if you have innovation, you probably rather bet to introduce them here. So again, you just give sufficient innovation to try to differentiate a little bit to defend a little bit of price premium price point wise. But the issue short term is to make ourselves really competitive and profitable in the retail channel. That's the task short term North America. So operator, do we have any more questions from the telephone audience please? Your next question comes from the line of Adrian Catelli of Citigroup. Please ask your question. Yeah. Hi. I had two questions. First, can you just say a little bit more you commented in the construction side that you're seeing a bit of a slowdown in the U. S. What that is? And then secondly just on the numbers. I just wondered if you could help me a little. You gave the sort of the impact of mix, the negative impact of that. That doesn't seem to square. If I take the contribution of that as the negative with the degree of the U. S. Sort of profit fall. Is there any other things that are going on there? Or is that mix effect is that is it greater than that within the U. S? Do you want to take Construction first? Yes. I think we saw according to my memory now a slowdown on the power cutters in North America in the quarter, but we do not really extrapolate that any further into the future. Fundamentally, we have a very competitive product range in the construction area all the way from the power cutters into the wall saws, the floor saws and the diamond tools. Demolition robots is expanding rapidly. So I think fundamentally the setup in construction is geared for further growth also in North America. That's where I would leave it for the moment being. And then if you comment on that. Yeah. I don't know if you recall what I said on the margin bridge, but the deterioration of the 1.4 percentage point. 1 percentage point is allocated to the supply chain inefficiencies that we discussed here as well as then the mix. Now we talk about the group. So bear in mind, it is mix when we compare specifically Americas have been growing with a low margin per se versus then a Europe, Asia Pacific, relatively higher growth in Americas. That gives in the group some 0.6 percentage points in business area mix. On top of that, if you isolate Americas, as you have heard here I mean, we talk about a retail channel that is attributing a lower margin and then we have wheeled product that in term is giving a negative product mix as well. So the mix impact do have quite a significant impact of the result of Americas in combination then with the supply chain efficiencies. So would it be kind of double the 0.6% if it was just looking at the U. S? Well, I don't go in and disclose exactly because we only look at the margin gross margin for the group. But it is a significant portion as you can understand. Okay. Thank you. Your next question comes from the line of Andreas Lundberg of ABG. Please go ahead. Yeah. Thank you. Most of the questions have been answered. But could you I think you touched upon that you saw some opportunities to expand your professional handheld products into next season? Where do you see those opportunities? In fact, I see them pretty much across all geographies. We have a very competitive offering now on the Pro side that has been introduced and that is about to prove itself. And based on that, I see definitely very good opportunities to expand that. But is it the new dealerships or is it your existing customers? Existing dealership can sell through a lot more of those products into season 14. Okay. Could you also touch upon the inventory levels in the channel in both for both customers also? You take that. Have you talked about our inventory levels or the No, your customer inventories. Okay. Okay. If it's a trade inventory, I'll take the comment. Due to the extended and good season in quarter 3, our impression is that they have a lower inventory leading this season than they had coming into the season. So that's our view of it in general terms. Okay. And that's true for both channels? Yes. Okay. What's your own take on your own inventory composition? We have taken a step to rationalize our inventories as Ulf has described. We think we can continue that journey. And the issue for us is, as I was alluding to in an earlier question, to increase also our flexibility in the supply chain, our ability to respond to the volume variations. I think that's one of the key aspects here going forward. And just to add Andreas, I mean, you all know that we have talked about complexity reduction. Of course, it has a P and L impact, but it will also of course makes our balance sheet even more healthier because complexity is also driving of course tying up more operating capital. Okay. Thank you. Okay, sorry. Your last question comes from the line of Anders Dorff of SEB. Please go ahead. Yes. 1 final question. You did increase sales basically compared to a year ago by SEB 500,000,000. Same time your inventories are down more than SEK 1,000,000,000 I think. Yes. And you are talking about under absorption basically as impacting the results. I wonder if you could say something about the degree of this under absorption's effect on EBIT? Well, if you look again, I mean, we say under absorption related to inventory reduction is mainly EuropeAsia Pacific. Then the one percentage point that I talked about in the GP in the gross margin bridge is really related to the inefficiencies that we have described here. Yes, exactly. So inefficiencies is one thing, but under absorption from choosing to reduce inventory is a different thing. So and that normally means negative impact on earnings. So my question is really related to that. Yes. If you take in the quarter to a less extent that was the majority of that was taken in the 1st and the second quarter. And there we are up to maybe say 0.5 percentage points if we looked at the total group. Thank you. One final question from the floor in Stockholm. Thank you very much, Tobias. Kai, as you have traveled in the group now and I assume you made a thorough analysis of the U. S. Operations, You would think that your major categories in the retail part walk behind tractors. You should have significant scale compared to your competitors. What's your analysis of the industry as such? Is it a poor industry in those categories? And what's your in your judgment, what's the relative position there of Husqvarna? You're highlighting several measures that will improve that obviously, but is it just to catch up? Is it to get ahead? Or interest rate here of you on the industry? Number 1, it's a very competitive category. We're talking about all categories set of categories and what behind riders. But there are competitors earning more money than we do. And I know for a fact also that some of them operate with much less mountain platforms than we do. So I think these measures are directed towards the core issue of the competitiveness in those categories. So I don't know if that fully answers your question, but I hope it does, but To increase the profitability in those categories, you need to be really utilizing the scale advantage or you need to bring that little extra innovation. I think we have examples of that, which have been successful. We're talking about the fast tractor. We're talking about the 4 wheel drive on the walk behinds etcetera. And they have been doing pretty well. But the majority and the bulk of the volume is really here at extremely exposed for this competitive pressure and that's where we need to get to terms with it.