Once again, good morning everyone here. As Tobias said, it's the first time we have this quarterly report for the Husqvarna Group at our headquarters here. I think you on the telephone, you miss all these nice products we have around us here today. When judging the third quarter, I think it's important to keep in mind that the current business environment around us is a bit different this year than it has been previous years here. I think that's important to see what's happened in the economic situation in the markets here. We see in Europe, a lot of discussion in the Latin countries, but we see that it's going north as well here. Of course, the Lawn & Garden business have been heavily impacted by this drought situation we've had in our biggest market in USA, of course.
Of course, we have currency exchange a little bit against us, the SEK versus the EUR. Given this, I have to say I'm quite pleased with the result for the third quarter. The operating income and the operating margin have increased in spite of actually loss of 8% in net sales. We look into what I said here after the half-year results here, that we have been able to deliver and fulfill what we said when it comes to our supply and the problems we had in our factories here. I have to say we are continuing and have seen more improvements in our supply chains, not only in the U.S., not only in this famous factory, all over the places. We have been very flexible and able to deliver the products on time with right quality.
As you know, another focus area for us have been cash flow. When we see here, we continue to develop the cash flow in a very positive way. We go further and look upon the financial, of course, as usual, Ulf will go through this in details here. Sales, as you've seen, down currency adjusted 8%. Americas, due to what I said, 14%. Europe, Asia, Pacific, minus 6%. We have had a good development in our small business unit Construction, plus 3%. Of course, the downturn for the garden products was broad. Across basically all product categories and all markets and all channels. There hasn't been that it has been down in some channels, some markets. They've been a little bit all over the place across the globe.
Of course, as I said, heavily affected our economic situation, mainly here in the southern part of Europe, as well as the northern part lately. We have the weather impact. The weather impact we said here, we had a lot of rain in quarter two. Of course, that continued in quarter three as well in July and August. Of course, it recovered a little bit here in September. Of course, when it comes to Europe, the weather situation here. Have we lost market share? No, we haven't done that. We even kept our market share, followed the market, as well as increased market share. As you know, some of you may have realized it was snowing yesterday evening, saw that on course this morning as well here. Snow throwers last year, there was a lot of discussions.
We planned already from the beginning this year, the snow thrower sales will be less than it was 2010 and 2011 here. We have planned for that here. The reason for that is that the trade have inventories since last year, and all consumers who want a snow thrower have a snow thrower today here. Let's plan that the snow thrower are down vis-à-vis last year and as well as 2010. If you take group EBIT up, I will not comment that more. Ulf will do that in detail here. I have to say, I'm very pleased with this result we have been able to do when it comes to have efficiency and cost under control in this turbulent market situation we've had. If we look into Europe, Asia, Pacific, I said -6% adjusted here. Of course, in many markets here.
The effect of this euro crisis and all this discussion, in the beginning, we don't really saw any effect of that in our main markets in central and north of Europe. The last part of the quarter, we see now an uncertainty when it comes to our customers, how they behave here. If we take some other products, the snow throwers, we don't have any snow throwers here. If you look for another product, we have performed very well here. Our robotic mowers have performed excellent this year. We have taken more market share, increased the volume, both under the Husqvarna brand as well as we launched a robotic lawnmower under the Gardena brand as well here in the mass price here. We were a little bit doubtful. Is that a, what we call, carry-away product or not? Does that fit into that channel?
Now we've seen it does. Of course, the Gardena version in that channel are a little bit different than the Husqvarna one here, a little bit easy to use and maneuver. You see there during the quarter there have been a good development on that product category as well here. Given the sales decline here and the impact of currency, I think the margin was fine for the third quarter here. We see here a little bit that we have been able, what we said here, to working with efficiency in this company here, and look upon the SG&A cost. Of course, SG&A, there we have transportation cost. By definition, transportation goes down a little bit when the volume goes down as well.
Either way, if you exclude the transportation cost, we have seen a good improvement in the activities we have done when it comes to lower or be more efficient with how we use our marketing money and the spends we're doing for brand advertising as well here. We even been able to look, be more efficient when it comes to how we use our IT spend in the company. There have been good improvements there as well here. If you take Americas. Yes, Americas started up extremely well in the beginning of the year here. Good selling, we know that we have a drop when it comes to drought situation there. Have never been such weather the last 50 years in the U.S. Of course, there's no need for main products, wheeled products, both ride-on and walk-behind products here.
Even in U.S., we've been able to keep up our market share, even increase market share. When it comes to garden tractors and the zero-turn, the big machines, we have increased our market share. I'm very pleased to see that we have been able to increase our market share on tractors, where we had 11, this huge problem when it comes to deliveries. That's a confirmation that it's trust among our customers in U.S., that we are a company which they can continue to work with, and as I said, trust in our organization. EBIT for the business there improved over last year in the quarter, mainly through a lot of activities here. Coming back to the supply issues. We have ticked off now the Orangeburg factory. We don't internally talk about that factory anymore. That's up and running in a very good way.
We have the cost under control. We even use now that factory as a role model for the other factory, what you can do when something goes wrong. All other factories have done a lot of improvements when it comes to efficiency and flexibility. Of course, we have an impact of lower costs, such as steel in the quarter, and even here, a good cost control when it comes to SG&A spending. Of course, we have had some headwinds as well here, impact of lower sales, of course, when it comes to EBIT and the currency effect even in U.S. The star this quarter, as I said internally, is Construction. Good sales, 3% up, and a good EBIT result as well here. Mainly driven from U.S. when it comes to construction equipment here.
While the rest of the world has been a little bit ups and down here. If you take Europe, of course, with the stone business, heavily impacted over the situation down in Spain, a main market, as well as in France. We take Brazil, had a very good growth. We have the low in China and Australia when it comes to the sales. EBIT margin continues to recover. I think Construction is on the way to come back to where they should be and where they have been in the past. Very good development for Construction. Now I hand over to you, Ulf, to go through more in details the figures here, how we have performed.
Thank you, Hans, good morning, everyone. We jump into the income statement as we normally do, I think I leave the volumes because you have heard very much in Hans presentation, the explanation and the deviations related to that. Let us move down to the gross margin and the gross margin percentage. On this page eight, you can see that we have, if we adjust last year for items, we are flat in terms of gross margin percentage. That is very much related to the Construction and the restructuring we took in Construction in the third quarter last year. Let us also, when making the assessment here correctly, to come back to like-for-like, also adjust for currencies as well as for the Orangeburg impact. We have last year actually a gross margin percentage of 28%. We have a like-for-like.
I.e., a small deterioration versus 27.7% that we ended up in Q3 2012. Behind the delta, there are actually some quite big items here. We have FX in terms of transactional, there we have, as you know, I've told you before, we gradually move into more and more headwind as we go. That is definitely seen in Q3 as well. What we on the other side have some tailwind from is that we now see the effect of the lower material prices. That we gained from in Q3. The delta is small deterioration, still I think it is good to see that also the efficiencies that we are working quite continuously with is giving some good impact also in Q3.
Of course, having in mind that there was a lower volume in Q3 versus last year, taken into account as well. Moving back to the P&L, moving down to the SG&A, you have heard from Hans that all across, I can say that we now see some good impact of what we both decided in Q4 last year in terms of restructuring, the savings are now coming into full swing in Q3, also the continuous, I must say, continuous improvements that we drive. We have been restrictive in hiring and replacing new employees. We have been quite restrictive in terms of spends on IT. We see that the level of IT cost now is going down, we get the benefit of the investments we have done previously.
Saying that, we still have more to be done, for 2012, we have been quite careful in terms of spending, very much triggered by the situation we are into for 2012. Of course, also when you look at the SG&A, although there is a lowering of SEK 200-plus million, you should, of course, make certain adjustments for currencies as well as for the Orangeburg here. There is still a delta of some SEK 140 million that is related to other savings. There is, of course, a one-off item related to the former CEO that I think you shall take into account as well, SEK 21 million when you make your assessment. All in all, good momentum and good pacing of the savings that now kicks in into Q3 that we are quite happy to acknowledge.
What you can also, of course, have in mind is that there is a variable part, we do get some of that. I think that is also something we should take into consideration. We are better now in adjusting, back to Hans' point here, flexibility is key for us. We have to make sure that when volumes goes down, we also have to make sure that all variable costs are actually moving in the right direction. I think we see that as an example in Q3 as well. All in all, a good development of our SG&A in Q3. Looking into the EBIT, SEK 182 million versus SEK 113 million last year, an improvement of SEK 69 million. If we summarize again, as we do have in the majority three components that you should take into account in your assessment.
We have the former CEO of SEK 21 million, we have the Orangeburg of SEK 38, and we have restructuring of Construction of SEK 24. That means you should add back some SEK 83 million of Q3 last year in order to have a like-for-like. You should take the effect of the currency headwind that is roughly SEK 69 million in the quarter. If we take that into account, we have a decline in sales. We believe, although Q3, as you know, for Husqvarna Group is a small quarter, but I think we also show that there is an underlying momentum that is quite good. Finance net, minus SEK 80 versus minus SEK 89, not much to mention about here. We do capture some of the lower interest rates that we have, and then we have the interest rate component in our FX derivatives that gives us still some tailwind here in the finance net.
Tax, well, you know how I normally have guided you. We have approximately 29% as the blend, and then we have the Belgium financing set up that is giving them, on a yearly basis, SEK 180 million to SEK 200 million split evenly by quarter, and that gives us some tailwind here on the tax side as well. All in all, in income for the period, SEK 105 versus SEK 55 last year. If we move into the balance sheet, we can actually take it. If you remember what we have said, that we did start the year on a quite high level when it came to inventory. I must say, we have successfully been working with this during the first nine months here and continue that journey into Q3 as well. That said, we are still not happy.
We still believe there is room for improvement here, that is a continuous work that do not stop here. Moving down to the next picture, I think we have some of, you could say, declaration of success, that we have now a quite good momentum in our cash generation. This is normally the pace that we want to see in this company. We draw cash in the beginning of the year, we break even by end of Q2, which we did, and now we're generating cash here in Q3. SEK 1.6 billion, roughly, versus actually a negative of SEK 300-plus million last year. Quite a maneuver that has been achieved here over the first nine months. That, in turn, has, of course, had an impact that we have been able to amortize our net debt.
On this page, you can see that we have, beginning of the year, we have gradually been amortizing down the debt. Net debt equity ended up being 0.53, last year 0.51. We don't get the full effect here because we do have a translation part. You can see that in the comprehensive income statement, that there is, of course, now the revaluation of our foreign subsidiaries gives us quite a negative impact on the equity, some SEK 900 million. That is the reason why we don't get more leverage on the net debt equity ratio. Still, good momentum of the cash flow has meant that we've been able to amortize some of our debt here. That is according to the plan.
That is what we have said here since last year, that that is one of our main focus, and we think the organization has really been attending this quite well. Again, it is a continuous work. This will continue. It is not that we stop here. Key figures. I think mainly the two last ones I want you to attract some attention. CapEx, we have also been fairly cautious here, I would say the third quarter, and we will continue being cautious the rest of the year. Very much related to where we see the business is taking us here. So that is more or less a correlation to that the business is slowing down here by the end of the year, SEK 187 million versus SEK 262 million. Nothing dramatic, but still a lower pace than what we had in Q3 last year. Average number of employees.
This is defined, as you know, as full-time equivalents. Here you can see also both in terms of savings and that we are now also coming into a more proper level in terms of comparing with last year when we had a lot of, as you know, overtime as well as a lot of extra people due to, not least, the Orangeburg debacle. 2,000+ people less if we look at Q3 versus last year, which I think is quite a change and according to the plan that we have had here. Finally, before letting Hans back, some guidance then. One quarter left. Starting with the CapEx. You can see on the pace that we will be closer to SEK 0.9 billion in terms of CapEx here. So I am adjusting that one down somewhat.
Depreciations still on the level of SEK 1.1 billion, but CapEx down then to SEK 0.9 billion. Tax guidance remains 29%, and you have the financing set up that gives us the SEK 180 million to SEK 200 million in a kickback, or you should add back and then split that evenly over the four quarters. FX, as you see, deterioration of the FX hedges is gradually moving away, but we still believe quarter four is such a small quarter. So I remain with the span that I gave you last time, SEK 30 million to SEK 50 million in the lower quarter. We are now roughly on SEK 35 million. I believe we can keep that level for the remainder of this year based on it is a small quarter, of course, assuming the closing balances in terms of FX rates we have end of September. So then I leave over to you, Hans.
Thank you. Then, of course, it is important for us to continue to deliver new products here. The product news under our three main brands in this company is that we continue to expand robotic mowers here with the third generations here. We continue as well when it comes to the rider products. We have the consumer riders here. There are customers who want to have a more professional look on consumer riders as well. So there will be a consumer rider with a lot of professional features for next season here. Then we are introducing a four-wheel lawnmower. You can question mark, do we need a four-wheel lawnmower? Yes, we do, in the more professional segment here, when you have slopes and ups and downs here. So we will be the first one to introduce the four-wheel lawnmower. It is not a gimmick.
That's a demand we have seen now where we enter into this more business-to-business segment, commercial and garden here. There we come with a complete new product, which has quite interest among our customers who work in these segments here. We have a U-Cut steering solution for tractors. That's a little bit that we take a little bit from this rider here. You can see that, listen to me, I pointed out these riders here, that we use that concept that when you have a garden where you have some trees, it's a little bit easy to maneuver these tractors which are produced in the U.S. We, of course, continue to launch all these battery products under the Husqvarna brand here.
We have launched a handheld product, we have launched even a ride-on product under the battery, we continue to increase that focus on battery products. Under the Gardena brand, another of our premium brand, we continue to expand the range of robotic mowers. We have seen, as I said, there is a need for this kind of product even in the mass market here, what we normally call DIY channels here. We add another product there. We go up to 1,500 sq m. That one is 400 sq m. We add another one that can be used in gardens up to 1,400 sq m. We, of course, have a lot of new products like electric hedge trimmers, and we continue with this older sprinkler system and this automatic sprinkler system as well. We see a good combination.
The robotic mower take care of the lawn, when you have these weather conditions, if you want to have a nice lawn when it's warm outside, you use this automatic sprinkler system. It's a combination here, which can be used here for people who want to use this in a perfect way here and have a nice garden. We, of course, continue with the McCulloch range. As you have heard before, McCulloch is our premium brand. It should be mainly used in the retail channel here. There we continue to expand the range as well there for tractors, mowers, and accessories here. We continue, of course, to focus on new products here, but there is a limit. We might have launched too many new products. We need to, of course, see that the customers can absorb all these new products.
That's the reason why we take a little slow pace when it comes to new products here. Of course, it's important to continue with this here. We continue even with our professional chainsaws. We launched this 560 chainsaws here earlier, quite a good success here. Summing up Q3 here. As you said, higher operating income, but sales decline 8%. We normally talk about weather. You might think we talk too much when the weather is against us, but it's quite a balance even when the weather is with us here. Of course, as you know, the currency situation, that's something we have to live with as well here. We improved margin. We have a very good cost control in everything we're doing here. Question mark things more, was mentioned here that we go through a higher increasing situation.
Actually, every Friday afternoon go through a list, all people sitting in group management, so we don't run in the wrong direction. We recruit the right people here in the future. We have had that now for a while, and there's very good control over that we recruit the right people. Of course, cash flow. That was, of course, a nightmare when we saw the cash flow last year, that we have done a lot of good things here, a lot of involvement from all people in the company here. Of course, if you look into next year, it's important for us to continue to work with efficiency. We, of course, have to have the cost under control and even to be more flexible in our factories.
That's something we will communicate later on, what we mean by that statement here during quarter four. Looking ahead. I think it's more tricky than ever to look into this crystal ball with what's happening in the market here. We know that the area of our customers really look into the diametrical levels as well. They, of course, are waiting a little bit. We have the election just now in U.S. There's always a little ups and downs when it comes to elections here. Normally, when every fourth year, I've seen a trend, the sales are going down a little bit and discussions and order as well here. I think we'll see what's happened after that election here. Of course, as I said, what happened in Europe when it comes to the economic crisis we have seen in the southern part here.
Predict, we're not going to do that here. With that, Ulf and I open up for questions.
I think we will start with questions from the floor here in Stockholm.
Yeah. It's Kenneth Olving from Carnegie. A question on. You say the customers are a little bit hesitant to add inventories and the weaker outlook, and you have very many product launches. Do you feel that the retailers and dealers are less willing to bring on newer type of products now when the outlook is poor? Or is it the opposite that they feel that they really need to have something new to offer?
I think that you answered your question by yourself, the last part. They really want to have new products, but not at that magnitude we had before. That's the reason why we, of course, need to adjust that a little bit to the demand when it comes to our customers, well, how much new products we are able to launch. Of course, we really want to be sure that we can launch the product with the right performance and the right quality and so on. That's another way that we have reduced this year. Of course, they want always new products, and we need always under these three main brands we have for the Husqvarna Group come with new products every year. We are not where the car industry that we need a new tractor 2030 model. We're not there yet.
I've seen that happen in the white goods business here, but that might happen as well here in our business later on, but not today.
Can you put some numbers on it that maybe new product launches this year is about 20% lower than last year or?
I think if I should take a number, maybe 5% , maximum 10%. Still a lot of new products here. I'll just mention some. Some, of course, or some features we could face lift as well into this.
On the upcoming sort of cost-cutting efficiency efforts that you have. After the Orangeburg debacle a couple of years ago, do you dare to push such a big program that the former CEO did?
Yes. Some of you know my background comes from Electrolux. I was heavily involved in all these huge, big effects in Orangeburg at Beatrice. I have no problem with that. You need to plan. The most important when you do such an operation, that the receiving parts are ready. That's the key when you do activities like that. That's the same if you want to merge sales companies together. To close down, that's one thing. To take care of all these things, that's completely different. There you need to be much more careful how you plan that part for the receiving factory or sales company, whatever it is. No problem with that.
Okay. Thank you very much.
Stefan Wård, SEB Enskilda. Can you comment on your ongoing discussion about floor space and prices for next season?
When it comes to prices and what you call listings here, we have seen a little bit shift here this year. It takes a little bit longer time. In U.S., of course, they wait a little bit for what happen the next coming two, three weeks here. There are always our ongoing, both in Americas, in Europe, and Asia Pacific here, in all areas, in the same way as before here. We see they really want to discuss, but they are a little bit hesitant when to discuss the volumes, more this year than ever seen in previous years here. Of course, they are careful when it comes to inventory levels as well here. We see that even the small dealers have learned something from 2008, 2009 when it comes to inventory reduction. They have that in mind what's happened there.
They are looking a little bit how they should handle their inventories. That's the reason why we have worked hard with our flexibilities, that we can be more flexible. If it takes off or slow down, that we can adjust that in our own factories as well as back to our suppliers here. When it comes to prices here, we are just now discussing the prices. First, we take the listings, and then it's not 100% finalized, and then the pricing comes here, normally in November and December. There we see the same trend as the previous year. Pricing takes longer time. That's nothing new vis-à-vis 2012 or 2011 going into 2013 when it comes to price discussions. That's always the toughest part.
Is there some change in your industry about competition? Is there anyone exiting the industry or?
Yeah, I think there was maybe a couple of months ago, even during quarter two announcement for Briggs & Stratton, that they have realized that they shouldn't compete with our main customers. They have decided to step out of walk-behind lawn mowers. They learned a lesson there, of course, that they should keep to their core business to be an engine supplier. That's the main change when it comes to our competitors here, when it comes to that. There have been a Hozelock competitor to us in the watering area, a U.K.-based company, have been bought up by a French company here. Was announced two weeks ago. That's mainly the changes here when it comes to our customer base here. Nothing especially when it comes to different activities among them.
Then a question on your production rate in Q3. How much did you reduce production by?
The only we have a real plan for was already at the beginning of the year when we were sitting and discussed, will there be a good snow market? The only we have discussed here, but that was done already this time last year, that we'll reduce the production and the forecast of snow throwers, which of course, have had an impact on quarter three, and will have in quarter four. That's the same as, I guess, all our colleagues have done who work with snow throwers here. Everyone is a little bit afraid if there will be what you call a green winter, that you sit with these snow throwers maybe for two, three years. That's the reason. That's a little bit the only we have done it. Of course, we always look upon what happened here.
Of course, we are looking now to ramp up some volume to be able to deliver where we need to do that in quarter four. Of course, we are a little bit more careful how much should we do that. There are more discussion out with the different companies, sales companies we have and the salespeople, and they, of course, listen more than they did maybe a year ago, how customers look upon the future as well here. We have worked more to use our front-end people to listen what's going on there when it comes to what's happening in the market. Of course, all have learned a little bit 2009, we are a little bit careful.
Overall, your production is in line with the sales decline?
Yep. Now, yep. I have said the production in the factories have improved a lot when it comes to the flexibilities. We even now see an effect what we started up one and a half year ago, that we have dedicated people in the sales regions, dedicated people in the supply chains work more or less daily to interact with each other here, to change the forecast more frequently, sometimes even weekly, to be more flexible to follow this year. That's a plan to reduce, of course, the inventories for the future as well.
Thank you.
Hi. Johan Eliason from . Just coming back to this manufacturing. Normally, you ramp a little bit in Q4, I think you said last year that you probably ramp a little bit more just to make sure that you were able to deliver in 2012 season. I guess there's an inventory overhang on the wheeled products in the U.S., for example. Will this imply we should expect cash flow to be positive in the fourth quarter this year?
When it comes to ramping up for inventories and be prepared to deliver here, we are more back to a normal situation in this company. Of course, we need to do that. If you take the garden seasons, they are short. Of course, we need to do it. If you take this kind of products here, of course, we need inventories of a couple of thousand, even more. Of course, that means that we start up the production a little bit earlier when it comes to that. That depends on the demand. We are planning if we do that and if that will have an effect on cash flow, we will not comment that until we have the quarter four results. As we said earlier, cash flow is a really focus area for us in this company.
Another issue, Construction seems to be on a quite a good trend. Is it time to put it up for sale now?
Construction is not for sale. I can talk for the two main hubs that are not on the board. It's not for sale, and not on the management team either. It's not for sale.
Okay. Thank you.
ABG. What's your take on the composition on the inventory level right now and the mix there? My second question relates to raw material costs into next year. Thank you.
If we take the raw material, we see, of course, the trend now in the downward direction here, and now it is the matter as we are dealing now as much with pricing as well as the load for next year. This is also part of the discussions we have with our suppliers. Mix of inventory, do you refer to our inventory or do you refer to our customers?
Your own inventory.
Okay. Well, you could say that we have been driven down the inventory quite substantially related to Americas, of course, for good reasons. We built it up last year in order to supply our customers, which they have been quite satisfied with. Now we have been able, I would say, both in second and third quarter, driving down the inventory quite significantly, as well as on finished goods, as well as on raw material. The latter is very much based on also that we now improve the flexibility here. Now it is to balance off how do we now want to match this for the next coming season here? I can say we sit now in a much better position for that than we did one year ago.
We have started that discussion much earlier, and as you hear from Hans, we have weekly reconciliations of the sales forecast versus our production forecast.
Thanks.
Operator, do we have any questions from the telephone audience, please?
As a reminder, telephone participants, please press star one on your telephone if you want to register a question now. Thank you. First question come from Aaron Ibberson. Please announce your company name and go ahead with your question.
Yes. Hi there. Good morning. It's Aaron Ibberson from Goldman Sachs. I've got three questions, if I may. First of all, if I understand your release and your comments correctly, you're intending to embark on a new restructuring program. I was just hoping to get an update on the current one. If I'm not mistaken, there is some SEK 350 million left of communicated cost savings from the shift from Sweden to Poland. I believe you took all the restructuring charges for that. I was just hoping to get an update on when you're planning those savings to come ahead or come in. Secondly, just a comment on the U.S. I was wondering if the board is considering or you are considering recommending to the board to exit the U.S. or shut it down.
As far as I can tell, you've been cumulative loss-making for the last four years. Unless you have an amazing fourth quarter, you will be breakeven at best this year as well. Finally, maybe to you, Hans, just a general question of what you see as the earnings power of Husqvarna over the next three to four years or so. I guess you've been hovering around SEK 1 billion-SEK 1.5 billion for the last five years or so, versus quite a bit more historically. I was just wondering if you see it as possible to get back over the SEK 2 billion level, or if this is what we should expect. Thank you.
First question, when it comes to the previously announced restructuring plan. You mentioned the Swedish production down to Poland, as we have announced earlier, that we take that in 2 steps here. Just now we have finalized the second step here when it comes to move down the production to Poland and the factory down there. Having said that, there are niche products in this commercial, Lawn & Garden, which we always say that product stay for the time being in Sweden. There we're talking very small volume. This is the extreme that you more or less build that product on orders here. Otherwise, that will follow the plan here. When it comes to the savings, we will come back to that later on here. In the end of this, I will tell you when.
When it comes to U.S., exit, no, fix it. That's what we internally, as well as the board said. We have to fix the U.S. We are on the way to do that. Having said that, U.S. in all business I've been involved in, U.S. is always a unique market and very tough market to be in, lots of competitors. We are on our way to fix the U.S. When it comes to last comments here, I say I have no comments at all when it comes to the future, when it comes to that part here. I refer to the upcoming Capital Markets Day as well here. Come back to that in the end.
If I just follow up on your comment on the U.S. How should we understand your comment about the year having started extremely well and Orangeburg not being an issue anymore? Yet being breakeven? How are you planning to cover your cost of capital in the U.S.?
Of course, when it comes to U.S., it's important that
We continue to increase the volume in normal market conditions with the weather with us, of course, and then price increases and focus on costs.
Okay. You think you can push through price increases then in the U.S.?
Yes.
Okay. Thank you.
Thanks.
Next question comes from Johan Dahl. Please announce your company name and go ahead with your question.
This is Johan Dahl at Erik Penser Bank. I was wondering if you could elaborate a bit on the U.S. performance in the third quarter. You talked a lot about savings on SG&A, brand, IT. If you focus a bit more on gross margins in the U.S., what sort of savings are visible there in the third quarter? What is the impact on EBIT in the U.S. from the lower volumes? If we can start off there.
Well, the majority, Johan, is of course that we have been working a lot with the overhead costs. What we have said is that gradually we are also now improving continuously on the cost of goods sold. The majority that we have seen in savings in the quarter related to U.S. is very much related to SG&A. Now the work captures here that you could say that this year has been very much an acid test for delivering. As we have said from the very beginning, delivery as well as delivering at a good quality has been key. We started during Q2 to work with efficiency, and we see now gradually that we are improving efficiency from a cost of goods sold as well.
The two major components, if you look at Americas, it is very much SG&A reductions as well as we have some tailwind of the material. The trust is that we are, as Hans said here, working with pricing and working with efficiency. Gradually we should capture and improve results in U.S. as we go forward here.
We touched on the absorption problem or production levels in the U.S. in the third quarter. Where is the effect on the lower number of employees? Is that only Orangeburg related? I'm mainly interested in the drop through there from the lower volumes.
Well, if you take employees, of course, measured, as you know, as full-time equivalent, if we work with less overtime and less shifts, of course that pays off in terms of the way we measure full-time equivalents. That is what we have seen in the third quarter. That pays off both in the cost of goods sold, we also do have, as you have heard, restrictions when replacing and hiring new employees. There is, of course, a component related to SG&A as well.
Great. Finally, looking at the profitability in the U.S. as a whole, also looking at some of your competitors, what's your view there of the current profitability? Secondly, in the lineup for next year in the U.S., the offering you're putting into retail in the 2013 season, can you see any sort of improvements there with regards to cost and any sort of gross margin improvements? Disregarding price, say it's just based where it's currently, also disregarding raw material costs, mainly design.
Well, as you have seen, Hans have talked about some launching new products. Of course, that will come to the benefit of U.S. as well. I think the price vehicle is something that is very important here, that might be that we also will take then some lower volumes as a result of that. Important is to come back to what we have said here in the strategy. We are moving across. We, of course, have to change the mix in the right direction, getting more dealer sales, as well as moving the right mix within retail as well. Then, of course, work internally with improving the efficiency. I think we play with all three cards going forward here.
Thanks.
Next question comes from Anders Trapp. Please announce your company name and go ahead with your question.
Yes. Hi, Anders Trapp, SEB. Two questions. First, on the inventory levels in the trade, I don't know if you actually said anything about that, or if you did, I missed it. What can you say about the inventory levels in the trade right now? Secondly, also your robotic mowers, if that's becoming a sort of important product, could you tell us a little bit more about how much sales you have on that one? Also, if you have anything on market share, some of this competition is increasing.
First, when it comes to inventories in the trade, the inventories in the trade are normal. What we try to do now to look upon the total inventories, that we try to look into the inventories in trade and what we have as well here. The inventory in trade is normal, except for snow throwers. Snow throwers is a little bit high. Otherwise, it's a normal inventory level, both in the dealer channel as well as in the retail channel. When it comes to the robotic mowers here, of course, we have had a huge success during the years, as well this season as well, increased the volume a lot. Have we lost market share during the years? Yes, we have. We have lost market share because we started up with 100%.
Yes.
By definition, we are down. Are we losing market share now today when it comes to a lot of new competitors here, when it comes to this season here? You maybe read, some of you here in Sweden, a couple of things, an article about some Chinese coming in here and that Bosch are coming in, Stihl is coming with robotic mowers. Of course, there will be more players on that market here going forward. How do we look upon that? In a positive way. Because there we will get some help from our competitors to take an interest of this product in the market we have out in the European areas. Of course, we have been alone
To take all these marketing activities to inform about this product here, of course, that is costly. Now we will have some help from our competitors. We see that in a positive way, especially when it comes to people who understand how to do this and keep the quality under control, so that don't destroy that kind of product as we have today here. When it comes to this major player, well-known player, not at all, rather opposite here. Of course, it will be a little bit tougher when it comes to that. We have the original one, and that's the reason why we were first in the retail channel as well, due to there will be some others coming into the retail channel.
That's the reason why we were so fast to have the Gardena robot in the retail channel, due to Bosch, of course, will be there. It's always best to be number one and have that position here.
You are still by far number one, is that correct?
We are by far number one, yes, correct.
this is mainly, or almost entirely, European business. Is that also correct? If so, when will you go for the U.S. market? I think you didn't outright speculate about huge market potential for robotic mowers in the U.S. recently.
Correct. It's mainly European product here. We have looked into U.S. a couple of times and stopped that. What we need to do, normally, we see U.S. as one country, one market. When you discuss Europe, you don't look upon Europe as one market. It varies between the southern part, northern part, central, and east here. What we are doing now, we look upon U.S. in the same way. We divide U.S. now in regions. There are some regions where there might be possibilities to use these robotic mowers here. This is not a cheap product today. Normally, people who buy these products and want to have that kind of product can afford to have that. In U.S., they don't take care of their gardens by themselves, as you know. That's a little bit different market over there. There are some states where we see possibilities.
That the same, there's been a discussion if we should have watering, irrigation products in U.S., could have been a fantastic business this year, of course. We look upon the same way. There might be some states where we can see that we can sell this European, what the Americans have, plastic products in United States. We have started to look into that as well here, see what's happened there. When it comes to this kind of product, U.S. is a complete different market.
Would that be Northeast U.S., then, I guess that could fit better?
When it comes to robotic, yes. When it comes to watering, it can be some other areas as well.
Yeah. All right. Thank you.
Next question comes from Krister Manhem. Please announce your company name and go ahead with your question.
Hi, Krister Manhem from DNB. Firstly, on the SG&A savings you made, you talked about that some of those savings were volume related. If you look on the year-over-year bridge, you talked about SEK 140 million in savings. How much of that was like-for-like savings, if you exclude the volume effects?
Say like this, Krister, that less than 50% of the savings year-over-year are related to variable, i.e., related to the volumes. The rest are savings incremental in terms of this program that we launched last year in Q4, as well as the initiatives mentioned here before, being restrictive with replacement and new employees, being restrictive in IT, and to some extent in branding as well. Continuous improvements.
The SEK 140, was that including or excluding the SEK 20 million for the CEO?
That was included. Take out that, we talk about year-over-year SEK 120, roughly.
Perfect. Also, if you can talk about the currencies for 2013, or at least the first half of it, because then I guess you're going to have the big effect from that.
Well, you have seen, and that is what I am trying to guide you over the year. Of course, we have had positive effect of our hedge contract this year. You also can see how we disclose, and that becomes less and less of impact. Of course, if you make the calculations yourself, and if you look at our sensitivity analysis in the annual statement, you can see that, of course, next year, provided these rates remain, there will be a hefty impact in 2013. More precise guiding, I will come back to in the Q4.
Okay. Finally, you touched upon inventory levels in the retail chain, but you also say that they are trying to manage their inventories. Does that mean that we are going to see a lower sell-in season this year, and of course, everyone is just waiting for the month to come, or should the sell-in season be as normal, do you think?
I think when I look upon this, that doesn't mean that there will be a lower sell-in for this season. I think it will be normal.
Great. Thank you very much.
Next question comes from Rasmus Engberg. Please announce your company name and go ahead with your question.
Yes, hi. This is Rasmus with Handelsbanken. I have two questions remaining. Could you update us on how much of savings from the previous program have not yet been accounted for, broadly speaking?
Well, in essence, what we have said is that we can't see that to be materialized in 2012. We will come back during the course of Q4 to give you more explicitly how we look upon that going forward.
My question was how much of the promised savings have you delivered so far?
You mean of the cost that we took in the fourth quarter?
No, on the previous program.
On the previous. Well, that relates, some of it has been postponed, as you know, and as we declared already last year.
Yeah.
That is still postponed into 2013.
I was just wondering about what the level was.
SEK 300 million.
SEK 300 million postponed.
Yeah.
All right, thank you. Then just trying to understand the U.S. business, given that you are, well this year maybe break even or around there, could you shed some light on whether you lose money in mass market or in trade?
I think the toughest channel in U.S., that's the same actually worldwide, is the retailer, what you call DIY channel. That's, of course, always much high price pressure when it comes to these accounts than if you take the normal dealers here.
Of course, that channel is much tougher to be into in U.S. with the dealers. Having said that goes for the rest of the world as well.
You're saying that your losses are in the mass market channel?
Once again. Can you repeat?
Are you saying that in the U.S. or in Americas where you are breaking even, I assume the margin is not the same in both businesses? Is the problem in the mass market business, or is it that you're subscale in the dealer channel?
I didn't say that here. I said that it's much tougher to be in that channel here. Of course, it's much higher margin in dealer channel rest of the world as well here, and the same in U.S. of course. The dealer channel is much higher margin than in the retail channel.
For you as well.
That goes across the whole world.
Yes.
Normally the same.
What you need to do is essentially to raise prices and cut costs in the mass market business. That is really my question.
Yes, we are, of course, looking to do that in both channels.
Yes. Okay. Good. Thank you.
It appears we have no more questions. One more?
Maybe I can just ask about the dealer channel in the U.S. You said for quite a number of years you want to expand that. Can you quantify it? What has happened over the last year? Have you added 1,000 to your previous, or in percentage terms or whatever?
Yes, we have expanded the number of dealers in U.S. a lot and worked hard when it comes to that. When it comes to more details, I will come back to that within a second, when we will present a little bit more facts about that.
Are you more confident achieving a 5% EBIT margin in Americas today than three months ago?
Thanks for that question. No comments. I'll come back to that later on at the end of this presentation.
Okay.
If not, we want to come back here to, that we now will invite you to a Capital Markets Day, February the 14th of next year. It will be here in Stockholm area. Of course, there we will go through more details, what we not have answered in a quite good way today here. Of course, a little bit what we are doing now when we have updated our strategic plan. We still are not finalizing that part here. We want then to invite you for this Capital Markets Day, the 14th of February next year in the Stockholm area. It will not be at the headquarter, it will be somewhere else. We don't know it yet, Tobias will come back to that. Of course, there we will be able to give you more facts and details.
Okay, thank you everyone, we welcome you back on February 13th when we report our full year results. Thank you.