Earnings Call: Q2 2012

Jul 19, 2012

Welcome, everyone, and thank you for calling into Husqvarna's 2nd quarter results presentation. We will follow the normal procedure over here. Our President and CEO, Mr. Hans Lina Schall, will start with an overview of the quarter. And our CFO, Mr. Ulfi Lille Dahl, will provide us some more details on the financial development. And with that, I hand over to you, Hans. Okay. Thanks, Tobias, and good morning to all of you, and welcome to the presentation of Husqvarna's 2nd quarter results. Actually, I want to start a little bit different. Given circumstances, I'm very pleased with this quarter. We've seen here now that we have a very strong development in the Americas market, both for forest and garden products as well as construction, while we have had a bit different when it comes to the European markets. There we have seen a completely different picture. As you know, all of you here in Europe, Central Europe, UK, Scandinavia, Nordic, a lot of rain, cold, lot of rain. We haven't had so much rain that 100 years according to the weather growth in Europe. That, of course, affected Europe a lot when it comes to high margin products, watery. But having said that, on the other side, the grass is growing very well that had a positive effect on some other products. We've seen here that the sales have been flat in the quarter and was pleased to see the operating margin have improved for the group. And we have worked very hard during the year to solve the problems we have when I was standing here 1 year ago when we had this famous orange book debacle. And we have seen all these effects we have taken when it comes to that factory up and running and all the effects in all other factors are given results. High operating income for the group And what I'm really pleased to announce is that we have a very good cash flow. So remember, last year, it was negative the whole year. We come back to that for now light drawn here. Here we have worked hard as well to reduce our inventories and our accounts receivables. Have been very good cooperation between the sales organization as well as the supply organization when it comes to forecast and how to plan and be more flexible within the supply channel we have. Then of course, we had a couple of main focus areas. Delivery, we said for this year, for this season, the key is to secure that we can deliver products, not only from the U. S. Factories here, even from the European. And we have been able to do that and give much better customer service. And then we said we need to focus on cash flow. So when it comes to these 3 main activities, we have been very, very successful. If I then go over to financial, the highlights here. As I said, sales flat, we said it last year. High in Americas, mainly in the U. S, but also in Latin and South America, also construction as well as the forest and garden. Low in Europe. Europe mainly, not only, but mainly due to the weather. In the retail channel, we sell more than 95% of these watering products. Then we have got in the retail channel is more consumer driven channel for us. We have been affected a little bit over the economic situation in the Latin countries, Italy, Spain and Portugal. On the other hand, on the grass screen as you can see outside here with a lot of rain, we sell a lot of garden parts, lawn mowers, both walk behind as well as ride on products. The dealer channel, both in U. S. As well in Europe, have performed very well under Husqvarna brand. That's important for us because that's our main brand in that channel. Then of course, we look upon this 2 Terjeon, the operating income went up 12%, Lower production costs. We have worked to improve the pricing. We have high sales in the deal channel, vis a vis the retail channel. Then of course, the positive effects have been offset by the weather, mainly in the Watering segment. Cash flow that we have worked hard with cost functions team here, that have been both people from factories, supply, sales, financial treasury people who work together to see how we can really reduce the inventory and improve the cash flow. If we then go over to Europe, Asia Pacific. Yes, sales went down 8%. We normally in this business talk a lot about weather. We can't avoid that, but I've already said that's what happened in Europe and a lot of you have seen that. Well, we were pleased to see that in Europe, we've been able to grow a lot in the leisure that have been one of our main focus area, not only in Europe, even in Americas. And we have done that to see if we can even sell more of global premium brand Husqvarna. So there we've seen the all activities we had had in the dealers. We have launched what we call commercial lawn and garden that we start to work with more professional products, both when it comes to ride on products as well as lawnmowers and premiers. So far, that launch of that new segment for us has been very successful, that's mainly in the Lilly channel and under the Liskona brand. Retail channel, on the other hand, mainly driven by watering due to 95% of the watering products under Gardena brand are sold via this retail channel, of course, been effective. Then, of course, a little bit affected in Latin Europe as well here when it comes to Italy, Spain and Portugal. So that's, of course, it's not only the weather impact, more the economic situation down there. When it comes to this McCulloch, the product you see here, which we launched last year and start to sell this year, so far very good start of our colic range, a product mainly in the retail channel. When it comes to Central and South Europe, it's under the handheld products. In the northern part, it's book handle as well as wheel products. So far, good start. We will see in the after quarter 3 here the full impact of that launch here. So I will come back to that in the Q3 meeting we will have. The dealer channel, we have had good cost control when it comes to that. We work as well a lot with our dealers to see how we can improve the business together with them. We call it business development in the dealer channel here, which we have worked with for a couple of years here and worked a lot with the price revenue that we look upon the price waterfall, see how we can control our price more, when and how much we give away when it comes to bonus and other rebates have been very successful as well here. Robotic workers, yes, lawn grass is growing once again a record year when it comes to robotic movers. And we launched even the Gardena brand in the retail channel, started up a little bit question mark, is this a really product in the retail channel? We were a little bit worried in the beginning of the year, but now we've seen the result. The sell outs have been very good in the retail channel for this product as well. So when it comes to Europe, very satisfied, I'd say, that we have been able to keep this high margin, 18.8%. With this effect that we lost all this volume in the Watering segment, that's a high margin segment we have and offset with all other activities here. So we're very pleased to see that development in Europe. And then going over to Americas, yes, 11% adjusted currency effect on the top line here, mainly driven in U. S. And Canada and Latin America, but mainly in U. S, but all have had a growth in Americas. But what we have seen here for a very, very good spring, especially in U. S, a slowdown in the beginning mid June. We, of course, follow the weather very well, normally look on the weather forecast twice a day worldwide. The last 6, 8 weeks have been extremely warm and dry out in U. S, all the states, Above 100 degrees Fahrenheit, that's roughly 40 degrees. Of course, that's have affected a little bit now, but the sales dropped when it comes to lawnmower and ride on products in U. S. In the second part of the quarter here. We have increased the market shares in some areas. There was a question last time if you have lost market share when it comes to the tractors due to the back end we have in Orangeburg. Yes, we had it last year, but we see now we're coming back again here. This hard work has had an effect on us here. We talked a lot about the listings here. We said that we have been able to convince our customers to believe in us that we saw this problem and we've seen the effect this year. The sales have grown a lot and we've been able to supply them. Extremely good work in Oesberg. That effect, we work with that factory in itself, of course, have had a lot of spillover effects in other factories in the group as well. To be more flexible, you can see that in the inventories, we are being more flexible to go up and down here when it comes to the weather conditions here. Very good improvement when it comes to that year. And a little bit effect of this problem we had in U. S. Last year. EBIT increased as a result of higher sales and lower production costs. Having said that, we said last year to secure deliveries and secure quality, we had to do that on behalf of the cost of the factory. I'm sorry to say, we fulfill all 3. Of course, I've been a little bit more happy if we have said a little bit when it comes to the costs. So what we are doing now, of course, now we look into how can we reduce the costs a lot, cost focus in the factories, increase the productivity as well in all other areas. But we said all of that, of course, there will be some extraordinary activities, which, of course, will have an effect on the cost in the factory. And then going over to construction as well here, growth 3%, mainly driven from North America, Increased construction activity and the customers, the rental customers, they had to review the product. Petroleum, you see North America emerging markets, but a slowdown in Europe, especially in the Central South of Europe. France, the main market for construction, we have seen a drop. But that's mainly due to the financial situation. Have we kept our market share here? Yes. Have we gained market share? Yes, in this area. That's due to good development in new products and the shift to focus on the Husqvarna brand. Higher EBIT margin here as well here, mainly due to the higher sales. So all in all, when I look upon this year, even if the sales are flat in the quarter, but you look upon the half year, I can't say anything else that I'm very pleased with the development we've had during this first half of the year. Having said that, I hand over to you, Ulf Jan, to go a little bit deeper into the figures. Thank you, and good morning to everyone. A bit of a recap then on the 2nd quarter and net sales. As you saw and as you've heard from Hans, it came out flat compared to last year SEK 10,700,000,000. And growth in Americas, plus 11%, growth in construction, plus 3%, while we then had a decline in Europe, Asia Pacific of 8%. If we then move down to the gross profit and the gross profit margin, allow me to give you some highlights there. It increased, if you look in absolute terms, with some SEK 130,000,000. The gross margin in the quarter ended up in 28.7 percent versus last year, 28.9%. However, then you should, of course, have in mind that last year, we did attract some impact of the Orangeburg of some 1.5 percentage points. So those for comparison reasons should of course be adjusted. Then we have had headwind of currencies in the transaction piece up in the gross profit in the Q2. And if I adjust for that and have then a like for like, I still have a delta of some 0.9 percentage points to the worse. We are 0.9 percentage points less in the Q2 2012 versus 2011. Main explanation, 2, we have, as you have heard, an impact of a high margin business in terms of watering that had a lower sales in the Q2 that has an impact for sure. And then of course, we have a regional mix based on the decline of sales in Europe, Asia Pacific versus then a growth in Americas with a significantly lower gross profit margin has, of course, an impact. And that explains the 0.9 percentage points in delta between the two quarters. If we then go back to the P and L and then look at the and A, you can see that face value, they are slightly higher. But again, we have a translation effect here. That means that if we adjust the translation effect in the SG and A, they are down some SEK 60,000,000. We are on a relation to sales down to 18.1% versus 18.7% same period last year. Same thing here, if we shall do the comparison with last year, we of course have take into account that we had some pieces of Orangeburg related also in the SG and A. And we do have some tailwind of the FX hedges in the quarter as well. If we adjust for those, we are roughly flat. But we can then confirm that we do see good effects of the saving initiatives we have put in place here. However, some of them are then eaten up by that we have higher transport and warehousing costs very much related to Americas in the quarter. But in essence, we are quite satisfied seeing that we now have a good trend in the SG and A development going forward here. And that is, of course, something we have talked with you about in the past, and we see that things are developing quite well here. Moving down to the EBIT ended up at SEK 1,136,000,000 compared to last year of SEK 1,012,000,000 an increase of some SEK 120,000,000 giving then a margin of SEK 10.6 million versus last year, SEK 9.9 million, again, Orangeburg P is some SEK 180,000,000, of course, affected last year. We had a year over year effect of the currencies of some SEK 37,000,000 in the quarter. We do have, of course, the effect that we do see headwind in the transaction piece up in the gross profit, but we gain it back in terms of what we get on our hedges further down in the P and L. And you can also see year over year, we are now plus SEK 100,000,000 after 6 months. I come back to the guidance for the rest of the year later on here. Finance net ended up SEK 106 negative versus 115 negative last year same quarter, and we can see that we do have effects now from the market to market valuation of the interest rate component in the FX derivatives that explain the slightly better finance net than last year. And tax amounted to some SEK 245,000,000 versus the SEK216,000,000 last year. We are on a tax rate of some 24% in the quarter. Then if we move over to the balance sheet, for sure, if you look at the inventories, we are quite proud to confirm that what we said here 6, 8 months ago, that work that we put in place has actually paid off quite well. If you recall at the end of last year, we had a delta versus prior year of some SEK 1,100,000,000 when we talk about inventories. If we adjust for the translation effect here, we have now delta versus last year closing balance end of June of some SEK 100,000,000 and that we are quite satisfied seeing that this has given a good effect and the ambitions and the initiatives that has been taken has paid off quite well. Also as you can see in the balance sheet, the trade receivables are lower than last year, close to SEK 500,000,000 again, if you adjust for translation effects here, and that is a quite nice development. Of course, this has been an impact if we look into our operating cash flow. As you know, this company, Husqvarna as a group, normally draw cash in the beginning of the year. So we are having a negative cash flow in the beginning of the year. The curve you see here now, the blue line represents last year, 2011. And as you could see from last year, we actually had a negative cash flow after 6 months of more than SEK 1,000,000,000. And this year, we can now confirm that we have a more normalized pattern. We are breaking even here. We are roughly SEK 100,000,000. Again, based on a good result development, of course, but also based on some very good initiatives when we talked about inventory as well as the ambitions we have put for working capital in total here. So this is something that we believe is a good takeaway and of course gives us some headroom going forward here as well. And this has, of course, a positive impact as well based on when we look at the next slide and look at the leverage or the gearing net debt versus equity, we are down to 0.6 now and we are well ahead of the covenants that we have in place for the company here. So the good cash flow had of course had a very good impact of the company here. And of course, I mean, as you know, the tendency now is that of course we see that the accounts receivable should go down as we go rest of the year, and that means we should be in a cash flush position by the end of the year. Some key figures, I normally do not comment more than a few. CapEx, as you can see in the quarter, was roughly on the same level as last year, slightly behind. If we look at the 1st 6 months here, nothing dramatic in that. Maybe a figure that attracts some attention is the average number of employees. And there you can see comparing with last year, we are down quite significantly. And then this is now a measure based on full time equivalents. But also if we take the look at the number of heads per year and sorry, per end of the quarter, per end of the half year, they are also down quite significantly, very much related to what we had done in the factories, of course, Orangeburg as well as we have done some pull down in the Chinese factories as well. So there we have a good momentum, a good development talking about number of employees. Finally then some guidance. CapEx for 2012, here I guided you last time, it should be above SEK 1,000,000,000. I'm now closer to say it will be around SEK1 1,000,000,000 in terms of CapEx. Depreciation, amortizations remain on the SEK1 1,000,000,000, so we will have a CapEx level slightly below that. Tax guidance for 2012 remains. We say normally 29% calculated on the income after financial items and then you add back the SEK 180,000,000 to SEK 200,000,000 over the year, and that gives you the applicable tax rate for 2012. FX, here I've said previously a span of some SEK 50,000,000 to SEK 70,000,000 plus. Based on the change of FX rates, I now see that we will be in the range of plus SEK 30,000,000 to SEK 50,000,000. So we will now from the plus €100,000,000 roughly after half year, we will now see a deterioration and or the rest of the year until the end of the year. Very much related to that, we now have hedge contracts that, of course, do not contribute to the same extent as it did the 1st 6 months here. So plus €30,000,000 to €50,000,000 for the full year year over year effect 2012. And with that, I believe you take the summary, Hans. Thank you. To summing up this year, flat sales last year and very strongly more in U. S. Market as well as for us, the weather in Europe and in the end of the quarter, even in U. S. Very important to understand this when it comes to watering here, how it works here. The shift between watering products and the grass needing more water vis a vis as it is today is roughly 2.5, 3 weeks. It should be dry out now in Central Europe mainly. It takes roughly 3 weeks then the grass is brown. Then if it starts to rain, it shifts again. So here we need to be really flexible. So today, we can see it's good to have both watering as well as lawn and garden lawnmowers. The sales in the dealer channel with the Husqvarna plant, I mean, extremely good, the robotic mover as well as other wheel products have been extremely good when it comes to this weather. On the other hand, the high margin, mainly in Central Europe, have been heavily affected by the weather in our result and top line. Some people question mark, can it will be like that? Yes, I've been known this company for 5 years and follow this very carefully. High operating income, high dealer channel sales, and we've been able to have the production problems we had last year in Orangeburg under control. Extremely good work. I worked in the industry whole of my life and seen catalyst things happening before in other industry. To see how we are able within 5 months to change that and be able to deliver as we did, I'd say I'm very impressed with that. Then we come to cash flow and the inventory focus we have had, there's another activities we have. And with all these activities we had in the organization, I'm pleased to see the reaction for the people we have, who then stand up and work hard to really come over all these problems we have. And having said that, when you look upon all these initiatives we have, the cash flow and other activities here, I have to say we never had so much control over this company as we are today. And then to discuss the future, the weather, the sun we had to live with and be flexible, And we are working on that to be even more flexible than what happened in the future. I don't know with all this information we have every day in the newspapers as well in the news and TV here. It's very important for us now to continue to work in the same direction as we have done the last 12 months here, continue to see how we can be more efficient, increase the productivity in all layers, not only in the factories, in all layers, in sales, there are activities there. We have a lot of enterprise management, so you can see how we can get more out of it. The price increase we are doing here to keep as much as possible net as well work with the cost to be more efficient in all the areas. We'll continue to do that. And still, delivery is key for us, customer service, quality and cash flow. So that's a little bit what we continue to do here and what we have done the last year, which we see have paid off very good this year. And short term focus, more or less the same. We have done a little bit changes in the way how we work with our products. We have 5, what we call, super categories here. We see now that more and more trend to be more electric than battery powered with more high end, some software things in it, not only when it comes to the automobile sorry, robotic mover. That's our name, Automower robotic mover. And that's the reason why we have now taken out quite a new, what do you call, product category to focus a little bit more on this future development of the new product. Electrical corded products will change into battery as well. That's the reason why we have launched a range of battery products under Lutz Kvaer Brand last year for sort of sell this year. And we'll continue that work to focus on that. And we've been more even when it comes to battery products on ride on and even on walk behind products. That give us more focus. Then we have changed a little bit that we collect all, let's say, lawnmowers and ride on products into one category. We see a lot of synergies, lots of technologies. Cutting equipments are more or less the same. So it has more people to focus on this and will be more efficient when it comes to focus on new products in the future. And just now, we started up to launch the new products and start to discuss with the customers when it comes to listings for next year. And then we have a lot of new products this year as well here. So we see how that will work out here. And when we have done start up early in some areas, we have good feedback. Then the main discussion will be with our customers in August, September, then we start with the pricing discussions here. So I have to come back to that, how that works in when we meet each other. Next time here, after the Q3, cash flow, very important. We will not know when we reached this level. Stop that. It's always that we need to come back and repeat and remind ourselves This is important. And then we have a 3 year rolling strategic plan here. We are working on to update the strategic plan and through all the business areas and the power catheter and supply how we work here. And that's something we will come back to here due to the plan now to have a Capital Marketing Day late 2012. We are planning to have that the 1st week in December. Then we have done an update of our strategic plan, and we know where we're going to lease things. And then we can go more in details how things are going here into next year here. But there's a lot of activities going on in this company and we will continue to do this here. And once again, with the development here during this year and this first half of the year, we are internally at least probably what we have been able to do, but there's still a lot more to do in this company. With that, I open up for questions. Thanks. We'll start with questions from the floor here in Stockholm. It's Kjell Notal with Carnegie. A question on the U. S. You have good volume growth, but the operational leverage is very low in that kind of operation. Do you believe I expect that last year after the production problems and when the sales force in the last fall went to the big retailers to discuss what kind of pricing you should have on product and so on, that the confidence in the sales team wasn't that great and you had to maybe give away some on pricing and so on. Do you feel that with the good performance you have had with quality and delivery and so on this year that you could be more tougher on price negotiations so that you can lift your profitability in the U. S. From that point of view as well? We'll not agree with the comment what we are doing here. Of course, that's our intention, to really see how we can work both with increased prices as well as cost here. And of course, it's a tough market in U. S. It's thought to be even tougher in Europe as well here. So the price discussion we will have will be much tougher going in for '13 than it was this year. I can tell you that we have, of course, are forced to take a step back for this year. But of course, with all these improvements that we have done in the deliveries, we feel it is more stronger and more powerful in that discussion with our customers, of course. Do you have any feeling right now for where your raw material cost or cost of components will move into next year? Could you also have better negotiation power there compared to your year over year and to your competitors? I think that's a good question here when it comes to purchasing what we're all suppliers here. I think that's an area where we start to focus more I know that we changed a little bit organization here. We lifted up the purchasing managers to be a part of the group management here. So we're more focused on that. And we have more and more discussion how can we improve the way how we work with fewer suppliers, given more volume and, of course, see how we can take a little bit the learnings from our customers, how they look upon us in the price discussion and transfer that a little bit back to our supplies as well here to try to be squeezed in both end here, which we normally are in this industry that we are into. Okay. Alyschop SEB, I have a couple of questions as well. First one, if you could after listening to what you've been saying and describing the European development, I get sort of the feeling that the only really big product category that's down is irrigation or watering products and basically the others are flat or up. Is that correct? It's correct, yes. And that should mean then and then also the dealer segment is up a bit and Asia Pacific is flat, which must mean that retail sales or channel is down at least 25%. It's down a lot, yes. But it's about sixty-forty relationship between sales and dealer. So that means about 20% I mean, it's between sales and dealer. 15% or 20 5%. But it's down 50%. All right. Thank you. I wonder if you also comment, I didn't say anything about inventory levels in the trade or right now. I know it's Q2 instead of 4th, but still it's relevant, I guess. When it comes to working products, the inventory in the trade is more or less have what they need if it will be good weather. So what we, of course, want to have now is good weather so the trade can sell out. Then, of course, it's easy for us to fill up what we normally do in the Q1. So otherwise, it's normal when it comes to other products in the trade. That goes good for Europe as well as Americas. Right. Good. Is it a risk that if we don't get if you get continued rain and etcetera, that you need to sort of buy back products in later in the year. No, we in our contracts, we are nothing like that. Of course, that's something we always try to avoid. So there's no return obligation from us in our contracts. If they have, they have. Yes, yes. But they might require it anyway even though it's not in the contract. No. Normally, they don't do that. We've seen that before. These retailers normally don't do that. They can be a little bit different in UK being Q that they normally can request that. But also that are in the Germans where we normally have these working products, they've never been that place. Also, since you're guiding for negative FX impact in the second half, does that mean we should expect that also given current conditions for next year? Well, I don't give any guidance per se. But of course, if you see the current situation with the FX and the cost rates we have, of course, the deterioration of the hedge contracts we have will continue. Yes. And final one question also. Just wondering on the SG and A cost level comparison between U. S. And Europe, really, if it's a big difference in sort of share of sales in SG and A levels. It depends on the channels for sure, but I will not go in more in details on that. But there is a difference, yes. All right. Thank you. Yes. Johan Daltteri, Panso Bank. Could you just clarify again of the savings on SG and A? You said some it was a €60,000,000 And could you also is that savings coming along from the restructurings in Europe? How much will it be in the full year approximately the way you see it now? Full year, we said already last year from Q3 roughly SEK 50,000,000 and we have half of them already accounted for you, let's say, after the 6 months now. Say SEK 62,000,000 is the delta you have between last quarter and this quarter if you adjust for the currencies. Then we have, as I said, transportation costs that are eating up the significant part where we have savings, we have both less marketing, we have less staff, we have less brand spend and less IT. But the transportation costs right now is taking off that saving. But as you can see from the Q1 to the Q2, we have a good pace and that we account for should continue going forward here. And where do you see that going next year? Well, we continue that is a continuous improvement work we have and we don't only work with SG and A as you have heard. I mean that is also related to the overhead costs we have in our factories here. And I think that is what you shall bring with you. I mean that is the work we take a next step into now. When we have sorted out a lot of the delivery issues, sorted out some of the quality issues, I mean now come, let's say, from a level where we have to continue the journey securing that we reach decent efficiency going forward here. And we have started with SG and A, and we think we get a bit of a receipt of that in the second quarter here. A question on the U. S. There have been some announcements on competitors leading the mass market in the U. S. I was wondering the strong volume performance you've had in the U. S. So far, has that already is that a result of those announcements? And also, we talked about the price discussions into next year, Cies. And how do you see that impacting your negotiating position? I think when it comes to the dealers, no impact at all here when it comes to that here. The retailer is always difficult to see what's going on here. This big customer service in the retail business here, of course, they have a huge power here. It comes to Luka Ponteholda play with us visavis our colleagues here as well here when it comes to this. Yes, a little power game. I'd say this discussion we have with listings here. So I will not say any not really an effect. Final question on the electrically powered products. Is this reorganization, have you also rethought your plan with regards to electrical products in any way, either with regards to sourcing or white label production or I don't know. Is there any more to say about this particular category? We've seen in hand tools shift from coated products. Today, there's more or less no coated products with senior professional and consumer products. It's battery, all of them. We see that, that might will happen in our business as well. That's the reason why we have said that we want to continue to do that here, but we want to produce more in house. When it comes to corded products today, it's sourced from China mainly today. But in the future, we will look at what we call make versus buy. Look upon should we outsource or should we take back what we have outsourced in the past. Most likely when it comes to battery products in the future, we will start to produce them both itself here. That means that by definition, the coated products will go down. So we see a development there, and we see a huge shift in our business as well here. Of course, who wants to have this coated product in the future? We want everyone wants to have this battery product as well here. Then it's a question, will list go as fast as it did in the hand tools? A question mark may be it takes a little longer time. Will list have effect on petrol, gasoline products? No, not really long term. It's more the quarter product where we see a shift. Operator, we can take questions from the telephone audience, please. The first question comes from the line of Christoph Magnaud. Please go ahead. Christoph from DNB. A couple of questions. Firstly, you talked about the inventory situation in Basel Retailers and Dealers when it comes to irrigation products. But can you also talk about how the rest of the market looks for the moment, both in Europe and North America at the end of the second quarter? Then the second quarter here when it comes to inventory level. As we have said here and Urs pointed out, our inventories are down a lot. When it comes to the trade inventories here, high on this watering power, the couplings and the hoses here, very high. And when it comes to the rest here, it's a normal level towards low. Mainly, I have to say, in North America, the inventory levels are rather low. Then in Europe, Asia Pacific, it's normal here. And then don't forget now we are now facing up what we call the down under markets, the Australia, New Zealand and South Africa. There we know ramp up for the season here. Today, we have spring soon and summer. So there, of course, we're ramping up our inventories by ourselves here. And the inventory level in these countries are rather low for the moment here. So we have a little bit a season for garden product coming in there as well when we see growth of the season. So inventory level under control, high when it comes to irrigation products or watering products in trade, low in our due to be a stop to production. We have more flexible stop start up production today. Also to clarify on the mix and profitability in Europe. Is it correct that your watering products, your Gardena irrigation products have lower margins than Husqvarna branded products for the diesel channel? Now the opposite. Okay. That's what I thought. I was surprised. Finally, on the progress you've had in Norway and you've solved that and that's very good. But of course, that must have led to some extra costs here in the 1st and second quarter and in terms of too high personnel in the factories, the low productivity, etcetera. Have you been able to quantify roughly how much this extra or how should I put it to handle these issues in 2012, how much extra that has costed you? No. I mean based on what we did last year, I mean then we disclosed what we saw as extraordinary cost to sort out the problems and they were a one off character. What we have now is a factory that we are working with continuous improvements as we have said all the time. And of course, looking at the EBIT margin and as Hans pointed out, we are not satisfied as yet with the EBIT margin for Americas and there are of course improvements to be made. But also said previously, we have not been having the ambition to fix those during the 1st and second quarter because we learned the hard lesson last year that we don't make changes during the season. But to your point, I mean, this is what we will address going forward here and of course be better prepared for the season of 2013. Also the inventory destocking you had in the second quarter, did that have an EBIT impact for the quarter? No. That has been, I mean, very good focus and initiatives by the whole organization. And I think also you should read into that, that we have now a more seamless structure from sales to the back end of the supply chain that is working much better. And that, of course, pays off in that you have a better working capital. That said, I mean, there is still more to do. Excellent. Thank you very much. The next question comes from the line of Rasmus Steinberg. Please go ahead. Rasmus with Handelsbanken. I had just coming back to the inventory situation. Just is this a level where you're happy? I mean, as far as I can see, this is the highest Q2 inventory the group has ever had. And the Swedish krona is quite strong at the end of the quarter, I would think. So is this a level where we should see declines going forward? Or is this the sort of level we should expect? This is definitely not the level we want to be, look. Of course, if you look at my historical here, before the acquisition, of course, the inventory was much lower here. And we had to add, of course, the acquisition we have done here. But we'll continue to work with inventory reduction, and that is part of the negotiation we are doing, both when it comes to our suppliers due to we had to look upon the inventories finished goods vis a vis components, yes? So we are working both directions to lower the inventories components as well as finished goods here. So we are not satisfied with this level, not at all. Okay. And then the second question is, you mentioned a strategic review. Is that to mean that you are considering significant changes such as savings measures, etcetera, going into 2013? I will not comment on that part here. But normally, we always have a 3 years rolling in a strategic plan, which we update every year here. And that means the 1st year on strategic plan is more or less 80% of the budget. So that's only I want to comment when it comes to what we are doing with the strategic plan. So first, it has to, of course, be discussed with the Board. But should we read into it that the reason you put it in this presentation is that it is potentially significant? I will not comment that. Okay. Good. I have no further questions. The next question comes from the line of Bjorn Enersen. Please go ahead and ask your company. Yes, Bjorn at Danske Bank. One question on construction only, and it refers the earnings mix. You mentioned that SANS was the weak market, and you gave us the original split in demand. Does that represent also a weak earnings mix for construction? Yes. If you take France, I mean that is one of the major markets after U. S. So of course, not having a good development there or the development that we should have expected does have an impact mix wise on the earnings. The answer is yes. And looking into customers, are there is it rental companies that are not reseating? Or what are you seeing? Very much, I would say, hesitation from the rental companies, both in the Q1, slightly better by the end of Q2, but that is the major explanation, yes. Okay. Thanks. Okay. It appears we have no further questions from here. We have one more question. The next question comes from the line of Stefan Lai. Please go ahead. Rudka Smith. I must confess I'm not in-depth knowledgeable about Husqvarna, but what is striking and what has been commented on is the huge difference in EBIT margin between Europe, Asia and the Americas. In a normalized market and in a normalized HIFS corner, Are there any reasons why there should be such a huge difference? And if so, what sort of numbers would one expect, let's say, 3, 4 years in the future? Yes. It's in the markets between Europe as well as in our business as well in local other business, yes, a huge difference when it comes to prices and the EBIT margins here and the margin of products here. Conditions in our business as well as white goods and others is much tougher in U. S. Here. So that will be a difference even in the future between the EBIT margin in Europe visavis U. S. And then looking a little bit ahead here, no reason to change my opinion since I were Republic with an announcement when it comes to this year to reach 5% EBIT margin in U. S. Within, I said at that time, 1 to 3, 5 years here. No one year have left. I have no reason to change that opinion, not at all, or the opposite. I'm more comfortable with that statement today. But there will be, even in the future, a lot of different reasons why it's like this year, mainly market conditions here when it comes to this year and the big retailers in U. S. And a lot of volume driven market in U. S. More than in Europe. A lot of companies always want to have access to this huge volume to fill the factories. That means, of course, a pressure on the margins on the products. And to stress, I mean, it is really the channel mix that has a big difference between European market as well as the Americas. I mean, we have a much higher part of dealer sales in Europe that attracts a higher margin compared to what we have in Americas where you have a much higher part of retail sales. I think we have one more question from the telephone audience. Okay. With that, we wrap up from Stockholm. And we say thank you and welcome back on October 26 when we report 3rd quarter results. Thank you.