Welcome everyone, thank you for calling in to Husqvarna's second quarter results presentation. We will follow the normal procedure over here. Our President and CEO, Mr. Hans Linnarson, will start with an overview of the quarter. Our CFO, Mr. Ulf Liljedahl, will provide us some more details on the financial development. With that, I hand over to you, Hans.
Okay. Thanks, Tobias, good morning to all of you, welcome to the presentation of Husqvarna's second quarter results. Actually, I want to start a little different. Given the circumstances, I'd say 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 product as well as construction. We have had a little difference when it comes to the European market. There we have seen complete different picture. As you know, all of you here in Europe, Central Europe, U.K., Scandinavia, Nordic, a lot of rain. Cold, lot of rain. We haven't had so much rain the last 100 years according to the weather gurus in Europe. That has, of course, affected Europe a lot when it comes to high-margin products, watering.
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. Was pleased to see the operating margin have improved for the group. We have worked very hard during the year to solve the problems we had when I was standing here one year ago, when we had this famous Orangeburg debacle. We've seen all these effects we have taken when it comes to have that factory up and running and all the effects in all other factories are giving results. High operating income for the group. What I'm really pleased to announce is that we have a very good cash flow. Remember, last year it was negative the whole year.
We come back to that, Ulf and I, later on here. Here we have worked hard as well to reduce our inventories and our account 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. Of course, we have 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, we have been able to do that and give much better customer service. Then we said we need to focus on cash flow. When it comes to these three main activities, we have been very successful.
If I go over to financial, the highlights here. As I said, sales flat vis-à-vis last year. High in Americas, mainly in the U.S., but also in Latin South America, both for construction as well as for forest and garden. Low in Europe. Europe mainly, not only, but mainly due to weather in the retail channel. Because there we sell more or less 95% all is watering products. We, of course, in the retail channel, it's 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, when the grass is as green as you can see outside here with a lot of rain, we sell a lot of garden products, 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. Of course, we look upon this totally and the operating income went up 12%. Lower production cost. We have worked to improve the pricing. We have high sales in the dealer channel vis-à-vis the retail channel. Of course, the positive effects have been offset by the weather, mainly in the watering segment. Cash flow, there we have worked hard with cross-functional team here. There 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 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 what happened in Europe, and a lot of you have seen that. Well, we're very pleased to see that in Europe, we've been able to grow a lot in the dealer channel. That has been one of our main focus area, not only Europe, even in Americas. We have done that to see if we can even sell more of global premium brand Husqvarna. There we've seen the old activities we had had in the dealer channels. We had 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 lawn mowers and trimmers. So far, that launch of that new segment for us has been very successful, that mainly in the dealer channel and under the Husqvarna 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, have been affected. Of course, a little bit affected in Latin Europe as well here, when it comes to Italy, Spain, and Portugal. That, 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 McCulloch 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 both handheld as well as wheel products. So far, good start. We will see of the quarter three here, the full impact of that launch here.
I will come back to that in the third quarter meeting we will have. The dealer channel, we have had good cost control when it comes to that. We worked 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 now for a couple of years here. Worked a lot with the price revenue, where we look upon the price waterfall, see how we can control our price more, how much we give away when it comes to bonus, other rebates. Have been very successful as well here. Robotic mowers. Yes. Lawn, grass is growing. Once again, a record year when it comes to robotic mowers. We launched even the Gardena brand in the retail channel. Started up a little bit question mark.
Is this a real product in the retail channel? We were a little bit worried in the beginning of the year, now we've seen the result. The sell-outs have been very good in the retail channel for this product as well. When it comes to Europe, very satisfied, I have to 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. We're very pleased to see that development in Europe. Going over to Americas. 11% adjusted currency effect on the top line here, mainly driven in U.S., Canada and Latin America, but mainly in U.S. All have had a growth in Americas.
What we have seen here for a very good spring, especially in U.S., a slowdown in the beginning mid-June. We, of course, follow the weather very well. Normally look for the weather forecast twice a day worldwide. The last six, eight weeks have been extremely warm and drought in U.S., all the states. Above 100 degrees Fahrenheit, that's roughly 40 degrees. Of course, that has affected a little bit now that 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 we have lost market share when it comes to the tractors due to the debacle we have in Orangeburg. Yes, we had it last year, we see now we're coming back again here.
This hard work has had 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 solve this problem, we've seen the effect on this here. The sales have grown a lot, we've been able to supply them. Extremely good work in Orangeburg. That effect, we work with that factory in itself, of course, has had a lot of spillover effect in other factories in the group as well to be more flexible. You can see that when the inventories, we have been more flexible to go up and down here when it comes to the weather conditions here. Very good improvement when it comes to that here. 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. Secure quality. We had to do that on behalf of the cost in this factory. I'm sorry to say, we fulfill all three. Of course, I'd been a little more happy if we had failed a little bit when it comes to the cost. 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. 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. Then going over to construction.
As well here, growth 3%, mainly driven from North America, increased construction activity, and the rental customers, they had to renew the product portfolio. 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 under the Husqvarna brand. Higher EBIT margin here as well, mainly due to the higher sales.
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 here. Having said that, I hand over to you, Ulf, to go a little bit deeper into the figures.
Thank you, and good morning to everyone. A bit of a recap then on the second quarter and net sales. As you saw, and as you heard from Hans, it came out flat compared to last year, 10.7 billion SEK. Growth in Americas +11%, growth in construction +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 130 million SEK. The gross margin in the quarter ended up in 28.7% 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 one and a half percentage points. Those, for comparison reasons, should of course be adjusted.
We have had headwind of currencies in the transaction piece up in the gross profit in the second quarter. 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 second quarter 2012 versus 2011. Main explanation, too, we have, as you have heard, an impact of a high-margin business in terms of watering that had a lower sales in the second quarter. That has an impact for sure. 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.
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. In essence, we are quite satisfied seeing that we now have a good trend in the SG&A development going forward here. 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 million compared to last year of SEK 1,012 million, an increase of some SEK 120 million, giving then a margin of 10.6% versus last year, 9.9%. Again, Orangeburg piece, some SEK 180 million, of course, affected last year. We had a year-over-year effect of the currencies of some SEK 37 million 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&L. You can also see year-over-year, we are now +SEK 100 million after six months. I come back to the guidance for the rest of the year later on here. Finance net ended up SEK 106 million negative versus SEK 115 million negative last year same quarter. 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. Tax amounted to some SEK 245 million versus the SEK 216 million last year. We are on a tax rate of some 24% 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&L. You can also see year-over-year, we are now +SEK 100 million after six months. I come back to the guidance for the rest of the year later on here. Finance net ended up SEK 106 million negative versus SEK 115 million negative last year same quarter. 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. Tax amounted to some SEK 245 million versus the SEK 216 million last year. We are on a tax rate of some 24% in the quarter.
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 six, eight months ago, that work that we've 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 1.1 billion when we talk about inventories. If we adjust for the translation effect here, we have now a delta versus last year closing balance end of June of some SEK 100 million. 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 half a billion SEK, again, if you adjust for translation effects here, and that is a quite nice development. Of course, this has then 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. 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. As you could see from last year, we actually had a negative cash flow after six months of more than SEK 1 billion. This year, we can now confirm that we have a more normalized pattern. We are breaking even here. We are roughly plus SEK 100 million.
Again, based on a good result development, of course, but also based on some very good initiatives when we talk about inventory as well as the ambitions we have put for working capital in total here. This is something that we believe is a good takeaway and of course, gives us some headroom going forward here as well. 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. The good cash flow had, of course, had a very good impact of the company here.
Of course, 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 first six months here, nothing dramatic in that. Maybe a figure that attracts some attention is the average number of employees. There you can see, comparing with last year, we are down quite significantly. This is now a measure based on full-time equivalents.
Also, if we take the look at the number of heads 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. There we have a good momentum, a good development, talking about number of employees. Finally, some guidance. CapEx for 2012. Here I guided you last time, it should be above SEK 1 billion. I'm now closer to say it will be around SEK 1 billion in terms of CapEx. Depreciation, amortizations remain on the SEK 1.1 billion, 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, then you add back the SEK 180 million-SEK 200 million over the year, and that gives you the applicable tax rate for 2012. FX. Here I've said previously a span of some plus SEK 50 million-SEK 70 million. Based on the change of FX rates, I now see that we will be in the range of plus SEK 30 million-SEK 50 million. We will now from the plus SEK 100 million, roughly after half year, we will now see a deterioration over 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 first six months here. Plus SEK 30 million-SEK 50 million for the full year-over-year effect 2012. With that, I believe you take the summary, Hans.
Thank you. Summing up this year. Flat sales since last year. A very strong demand 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 need more water vis-à-vis as it is today, is roughly two and a half, three weeks. If it should be dry out- Now in Central Europe mainly. It takes roughly three weeks, then the grass is brown. Then if it starts to rain, it shifts again. Here we need to be really flexible. 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 this kind of brand have been extremely good.
The robotic mower, 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 really be like that? Yes, I've been owning this company for five 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 Årjäng under control. Extremely good work. I've worked in the industry all my life and seen a couple of these things happen before in other industry. To see how we are able within five months to change that and be able to deliver as we did, I have to say, I'm very impressed with that.
We come to cash flow and the inventory focus we had. There's another activities we have. With all these activities we had in our organization, I'm pleased to see the reaction for all the people we have, who they stand up and work hard to really come over all these problems we have. Having said that, when you look upon all this initiative we have to cash flow and other activities here, I have to say, we never had so much control over this company as we have today. To discuss the future. The weather, that's something we have to live with and be flexible, and we are working on that to be even more flexible. What happen in the future, I don't know, with all this information we have every day in the newspapers as well in the news in TV here.
It is 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 areas, not only in the factories. In sales, there are activities there. We have a lot when it comes to price management, so we can see how we can get more out of the price increase we are doing here to keep as much as possible net, as well work with the cost, be more efficient in all the areas. We continue to do that, and still, delivery is key for us. Customer service, quality, and cash flow. 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.
Short-term focus, more or less the same. We have done a little bit changes in the way how we worked 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, with some software things in it, not only when it comes to the Automower, sorry, robotic mower, that's our name, Automower. Robotic mowers. That's the reason why we have now taken out and created a new, what we call, product category. To focus a little bit more on this future development of the new product. Electric product, we've changed into battery as well. That's the reason why we launched a range of battery products under this brand last year for start to sell this year. We'll continue that work to focus on that.
There will be more even when it comes to battery products on ride-on and even on walk-behind products. That give us more focus. 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, lot of technologies. Cutting equipments are more or less the same. You have more people to focus on this, and we'll be more efficient when it comes to focus on new products in the future. Just now, we started up to launch the new products and start discuss with the customers when it comes to listings for next year. We have a lot of new products this year as well here, so we see how that will work out here. What we have done, start up a little bit early in some areas. We have good feedback.
The main discussion will be with our customers in August, September. We start with the pricing discussions here. I have to come back to that, how that works when we meet each other the next time here after the third quarter. Cash flow, very important. We will not, now when we reach this level, stop there. It's always that we need to come back and repeat and remind ourselves this is important. We have a three-year rolling strategic plan here. We are working on to update the strategic plan and through all the business areas and the product categories and supply, how we work here. That's something we will come back to here due to we have planned now to have a Capital Markets Day late 2012. We are planning to have that the first week in December.
We have done an update of our strategic plan, and we know where we are when it comes to listings, and then we can go more in details how things are going here into next year here. There's a lot of activities going on in this company, and we will continue to do this here. Once again, with the development here during this year and this first half of the year, we are internally at least very proud what we have been able to do. It's still a lot more to do in this company. With that, I open up for questions.
Thanks. We start with questions from the floor here in Stockholm.
Yes. It's Kenneth 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. I expect that last year, after the production problems and when the sales force in 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 tougher on price negotiations so that you can lift your profitability in the U.S. from that point of view as well?
I will not go into comment what we are doing here. Of course, that's our intention to really see how we can work to both increase prices as well as cost here. Of course, it's a tough market in the U.S. It's thought to be even tougher in Europe as well here. The price discussions we will have will be much tougher, going in for 2013 than it was this year. I can tell you that we, of course, are forced to take a step back for this year. Of course, with all these improvements that we have done and 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, how we work with our suppliers here. I think that's an area where we have started to focus more. Now that we change a little bit the organization here, we lifted up the purchasing managers to be a part of the group management here to have more focus on that. We have more and more discussion how can we improve the way how we work with the suppliers, fewer suppliers, give them 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 suppliers as well here to try to be squeezed in both end here in the middle, which we normally are in this industry that we are into.
Okay. Anders at SEB. I have a couple of questions as well. First, I wonder if you, 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 is correct, yes.
Then also the dealer segment is up a bit, and each specific is flat, which must mean that retail sales or channel is down at least 25%.
It's down a lot.
Yes. It's about 60/40 relationship, isn't it, between sales and dealer? Yeah, so that means about 20.
I'm not going to say if it's 15 or 25, the retail is down a lot.
That means watering is down 50%. All right, thank you. I wonder if you also could comment, you didn't say anything about inventory levels in the trade right now. I know it's second quarter, sort of first, still it's relevant, I guess.
When it comes to watering products, the inventories in the trade, is more or less have what I need if it will be good weather. What we of course want to have now is good weather so the trade can sell out. Of course, it's easier for us to fill up what we normally do in the first quarter. Otherwise it's normal when it comes to other products in the trade. That goes both for Europe as well as Americas.
Right. Good. Is it a risk that if you get continued rain, et cetera, that you need to sort of buy back products later in the year?
In our contracts, we have nothing like that. Of course, that's something we always try to avoid.
Yeah.
There's no return obligation from us in our contracts. What they have, they have.
They might require it anyway, even though it's not in the contract.
Normally they don't do that. We've seen that before. These big retailers normally don't do that. They can be a little bit different in U.K., in B&Q, that they normally can request that, but also that area, the Germans, where we normally have these watering products, they've never been that case.
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. Of course, if you see the current situation with the FX and the cross rates we have, of course, the deterioration of the hedge contracts we have will continue.
Yeah. I find that one question also, just wondering on the SG&A cost level comparison between U.S. and Europe, really, if it's a big difference in sort of share of sales in SG&A levels?
It depends on the channels for sure. I will not go into more details on that. There is a difference, yes.
All right. Thank you.
Yeah. Johan Eliason with Penser Bank. Could you just clarify again the savings on SG&A? You said it was SEK 60 million. 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 million. We have half of them already accounted for, you would say, after the six months now. SEK 62 is the delta you have between last quarter and this quarter, if you adjust for the currencies. 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. The transportation costs right now is taking off that saving. As you can see from the first quarter to the second quarter, we have a good pace, and that we account for should continue going forward here.
Where do you see that going next year?
Well, that is a continuous improvement work we have, and we don't only work with the SG&A, as you have heard. That is also related to the overhead costs we have in our factories here. I think that is what you shall bring with you. 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, now comes, let's say, from a level where we have to continue the journey of securing that we reach decent efficiency going forward here. We have started with SG&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 leaving the mass market in the U.S. I was wondering, the strong volume performance you've had in the U.S. so far, is that a result of those announcements? Also, we talked about the price discussions into next year's season. 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 retail is always difficult to see what's going on here. These big customers, when we have the retail business here, of course, they have a huge power here when it comes to look upon how they play with us vis-a-vis our colleagues here as well here when it comes to this. Yeah, a little bit power game, I have to say, these guys we have released things here. I will not say any, not really any 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 the hand tools, a shift from corded products. Today, there's more or less no corded products for semi-professional and consumer products. It's battery, all of them. We see that that might well happen in our business as well. That's the reason why we 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. In the future, we will look more at 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 by ourselves here. That means that by definition, the corded products will go down.
We see a development there, and we see a huge shift in our business as well here. Of course, who wants to have this corded product in the future? Everyone wants to have this battery product as well here. It's a question, will this grow as fast as it did in the hand tools? A question mark. Maybe it takes a little longer time. Will this have effect on petrol, gasoline products? No, not really long-term. It's more the corded product where we see a shift.
Operator, we can take questions from the telephone audience, please.
Thank you, sir. For our participants, please press star one to register a question and the hash or pound key to cancel. The first question comes from Christer Magnergård. Please go ahead and announce your company.
Christer from DNB. A couple of questions. Firstly, you talked about the inventory situation in both retailers and dealers when it comes to irrigation products. 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 second quarter?
The end of second quarter here when it comes to inventory level, as we have said here and Ulf pointed out, our inventories are down a lot. When it comes to the trade inventories here, high on these watering products, the couplings, and the hoses here, very high. When it comes to the rest here, it's a normal level to low. Mainly, I have to say, in North America, the inventory levels are rather low. In Europe, Asia, Pacific, it's normal here. Don't forget now we are now facing up what we call the down-under markets, Australia, New Zealand, and South Africa. There we now ramp up for the season here. They will have spring soon and summer. There, of course, we're ramping up our inventories by ourselves here. The inventory level in these countries are rather low for the moment here.
We have a little bit of season for garden products coming in there as well, where we were to work out of the season. Inventory level under control, high when it comes to irrigation products or watering products in trade, low in our because we have stopped the production. We are more flexible to start up production today.
Also, to clarify on the mix and profitability in Europe, is it correct that your watering products, Gardena irrigation products, have lower margins than Husqvarna brand products for the dealer channel?
No, the opposite.
Okay. That's what I thought. I was surprised. Finally, on the problems you had in Orangeburg, and you solved that, and that's very good, but of course, that must have led to some extra costs here in the first and second quarter, and in terms of too high personnel in the factories and low productivity, et cetera. Have you been able to quantify roughly how much this extra, how should I put it, to handle these issues in 2012, how much extra that has cost you?
No, based on what we did last year, then we disclosed what we saw as extraordinary costs 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. 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. Also said previously, we have not been having the ambition to fix those during the first and second quarter because we learned a hard lesson last year that we don't make changes during the season. To your point, 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 very good focus and initiatives by the whole organization, and I think also you shall read into 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, there is still more to do.
Excellent. Thank you very much.
The next question comes from Rasmus Engberg. Please go ahead and announce your company.
Yes, hi, Rasmus with Handelsbanken. Just coming back to the inventory situation, is this a level where you're happy? 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. 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. Of course, if you look upon historically here, before the acquisition, of course, the inventory was much lower here, then we had to add, of course, the acquisition we have done here. We continue to work with inventory reduction, and that is a part of the negotiation we are doing, both when it comes to our suppliers. We had to look upon the inventories, finished goods vis-a-vis components here. We are working both directions to lower the inventories of components as well as finished goods here. We are not satisfied with this level, not at all.
Okay. The second question is, you mentioned a strategic review. Is that to mean that you are considering significant changes, such as savings measures, et cetera, going into 2013?
I will not comment that part here, normally we always have a three years rolling strategic plan, which we update every year here, and that means the first year on a strategic plan is more or less 80% of the budget here. That's the only I want to comment when it comes to what we are doing with the strategic plan. First it has to, of course, be discussed with the board.
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 on that.
The next question comes from the line of Björn Enarson. Please go ahead, announce your company.
Yes, Björn at Danske Bank. One question on construction only, and it refers to the earnings mix. You mentioned that France was the weak market. You gave us the regional split in demand. Does that represent also a weak earnings mix for construction?
If you take France, 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.
If looking into customers, is it the rental companies that are not refitting or what are you seeing?
Very much, I would say hesitation from the rental companies, both in the first quarter, slightly better by the end of second quarter, but that is the major explanation, yes.
Okay, thanks.
One more time for our participants, press star one to register a question and the hash or pound key to cancel.
Okay, it appears we have no further questions from here. We have one more question? Yeah.
Question comes from the line of Stefan Lycke. Please go ahead, announcing your company.
[Rutger Schmidt. 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 Husqvarna, are there any reasons why there should be such a huge difference? If so, what sort of numbers would one expect, let's say, three, four years in the future?
Yes. It's in the market between Europe as well as U.S., in our business as well in local other business, 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. That will be a difference even in the future between the EBIT margin in Europe vis-a-vis U.S. Looking a little bit ahead here, no reason to change my opinion since we're public with my announcement when it comes to this here, to reach 5% EBIT margin in U.S. within, I said at that time, three to five years here. Now one year have left. I have no reason to change that opinion. Not at all. The opposite. I'm more comfortable with that statement today.
There will be, even in the future, lots of different reason why it's like this here. Mainly the market condition here when it comes to this here, the big retailers in U.S., a lot of volume-driven market in U.S. more than in Europe. Local 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.
To stress, it is really the channel mix that has a big difference between European market as well as the Americas. 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.
Very nice. I have a question, sir.
Okay. With that, we wrap up from Stockholm, and we say thank you and welcome back on October 26th, when we report third quarter results. Thank you.