Welcome everyone to this call regarding Husqvarna's first quarter results. We will follow the normal procedure here. Our CEO, Mr. Hans Linnarson, will start with an overview of Q1 operations, and our CFO, Ulf Liljedahl, will take you through some details of the financials. We will open up for questions and answers. With that, I leave over to you, Hans.
Thank you, Sofias. A very welcome all of you to Husqvarna's first quarter results here for 2010. Summing up is a little bit here. I'm very pleased with the results for the first quarter. I have to say that. This quarter, there's been a lot of discussion of what happened in the U.S. here, and there we have seen huge growth for us. The most growth in all segments for us, all product categories, both in forest and garden as well as in construction. We look upon Europe and a lot of flats vis-à-vis Americas. That's a little different between the different countries here. If you look upon the southern part of Europe, of course, affected with the economic situation in these countries. Central and north, now we have seen a more stable growth and remarkable growth here.
If you look at Americas here vis-à-vis Europe here. You've seen net sales growth is up 19% here, mainly driven by U.S. Americas up 19%. Of course, the markets have been up here, and we have grown with the market. In some product categories, we're even taking market share. More than the market in Americas, in U.S. It's a very good development there. In spite of all these problems we had with the deliveries here last year. We worked hard when it comes to the supply issues here we had, and I am very pleased to see how we have been able to capture all these benefits and be ready to deliver. I want to mention already now, as you remember, the focus for us was in U.S. to be able to deliver.
Supply our customers with good quality products, a little bit more from some costs. That's a little bit here what we need to really see here that going forward, that we continue now to work with efficiency and productivity in the factories. When it comes to construction, it has a double-digit growth. Very good and mainly driven from U.S. as well. With the same situation in construction in Europe vis-à-vis forest and garden in Europe here. You know that innovations and products is key for us. Last year, in autumn, we launched a lot of new products for the autumn markets, first quarter, second quarter. These new products have been very well received by the trade.
We're seeing a good potential when it comes to the McCulloch plants and the new Husqvarna professional chainsaw, as well as the robotic mower in Gardena in the retail channel here. Of course, we've had higher operating income here as well, driven a lot from sales. If you look upon the financial highlights here. As I said, group net sales increased 9%, with the U.S. as the main driver for this. The EBIT rise to 38%. Mainly driven by higher sales and lower production costs, as well as currency effects. We've said that we want to continue to look upon the channels we have here, and we have been focused to the growth in the dealer channel. We have been able to do that during Q1 as well.
The mix between the retail channel and the dealer channel has been good during Q1 for us. If you go into the business areas, I'll start with Europe, Asia, Pacific here. When it comes to sales, we were more or less flat with a very good Q1 last year. This is more than 1% here, as I said. At the outset here for Q1. As I said, the demand in Europe was a bit different. In the southern part, the Latin countries, we know what's going on in Greece, Spain, Italy, those countries. Of course, we have been affected by that. While when you take Germany and the northern part of Europe, we've saved the market share. That's a good mix for us as well.
There are a couple other markets which are very important for us here during the winter. It's Australia and South Africa. This is what we call down under. Australia, the market down there has been affected with lots of rain, flooding. That has an effect, as I said. While in South Africa, the weather is really good. In some countries, a little bit mixed, one up and one down. A lot of that during the quarter. I'm pleased to see that the EBIT level. This high margin we had here, almost 18%, we remain to keep that margin in a high level here, despite what happened in Europe here. As I said, product launches have been very successful here.
Heavy cycle went to a new product, which has been launched and sold into the trade here during Q1, has been very well received here. I think that's a good start when it comes to the new product here, under this McCulloch brand here. A new investment for us to do that here. As well, we have now started to sell the Gardena robotic mower into the retail channel. We haven't done that before. So far, very good selling. The trader received this product very positively. Let's see now when the season starts here, how the sellout can continue. So far so good. All new products we launched last year to start to sell this year to Europe as well, a very good start. Over to Americas.
Of course, to say here today, it is easier to put what Americas vis-à-vis Q3 and Q4 as well here. As I said earlier, a very strong Q1 Americas, especially U.S. A lot. Here, the weather has been in our favor. Very good start of the weather in spring here. Really high consumer demand as well here. We see some signs, as you have heard from all other companies who report one report. We see an economic recovery in the U.S. Of course, we do that ourselves. It has helped us as well here. Once again, this is the hard work we have done to cut when it comes to supply and the factory productivity efficiencies, giving us effect that we are able to deliver. No issues at all when it comes to deliveries from this famous factory we have down in Georgia.
Very good work here. As we said earlier during Q4, we do that on half or a little bit the cost. The key priority for us was to secure that we can deliver to our customers, and we are fulfilling that. We have even grown a little bit more in some purchase than the market. We have taken market share in some purchase risk. The lead times have improved as well here. Of course, not to the level that it should be as we go. There we need to continue to work with efficiency in the supply area and increase the productivity. More to do there. To go over then to our smallest business unit, Construction. During the quarter, the development for Construction have been very positive as well here. Double-digit growth and mainly driven by U.S. as well here.
Construction have been a little bit limited of the southern part of Europe here. The stone business is key for us in the Latin countries here, there we have had a slow development vis-à-vis the rest of Europe here. Construction in Europe followed a little bit Husqvarna as well when it comes to the Q1 results and when it comes to margins. EBITDA margin continue to recover. Very good development in the quarter for Construction. Of course, clearly a lot by volume. Have in mind here, the Q1 here vis-à-vis last year affects SEK 40 million in one-time cost for Construction here. I think Ulf will come back to that later on here.
All over, when it comes to Q1, I have to say once again, I'm very, very pleased with the development, that we've been able to fulfill what we said when it comes to deliveries here, which was key for us to really look into this year. With that, I hand over to Ulf.
Thank you. Good morning, everyone. Let's move over to the income statement. As you have heard from Hans, sales up guarantee just some 9%. Very good growth in the first quarter, very much driven by Americas then. If we need to move down to the gross operating margin and the gross operating income, you can see, as strong sales, we did deliver an improved gross operating income as well of close to SEK 290 million versus last year. Gross margin ended up at 26.7% versus 26.6% last year, same quarter. Again, we should have in mind, of course, that in the last year quarter, we did have both the disturbances from Orangeburg, SEK 120 million effect, as well as we had the restructuring of construction that did affect cost of goods sold last year. In all fairness, those should of course be adjusted for.
We have a gap. We did have some headwind of currencies, but the residual and the gap versus last quarter is very much related to that we have now a strong regional mix based on that we have much higher sales in America. That has a natural region mix involved. Also, as has been mentioned here, we are not satisfied with productivity as yet. Those related to the U.S. entities, but also in general, and here, of course, are some of the explanations from last year. If you go back to 2010, we look at this curve here, you can see that we are close to what we delivered in 2010. 2011, there is a gap. Again, two components, region mix as well as the productivity.
If we move further then and look into our SG&A, you can see that just the transportation effects, they were on the same level as last year, roughly SEK 1.7 billion. If we look in relation to sales, we had a leverage here. We ended up in 17.2% versus last year, roughly 19%. Also here last year, of course, we had the impact of the disturbances in Orangeburg, SEK 30 million, we did have some tailwind in this quarter of currency effects. If you take those into account, we have SEK 100 million higher SG&A versus last quarter, last year. Very much related to that we have a higher sales that drives higher transportation as well as warehousing costs. Those are quite variable. Also, we have higher spend on branding here. IT, we have talked a lot about last year.
Those costs we now see at a lower level than what we had last year same time. That was in accordance with what we discussed in Q1 2011. We did have a higher level of IT costs during 2011, now they are going further down, that is also with the benefit of the activities in 2011. The primary gap or explanation to the gap in the SG&A, transportation, warehousing, very much related to the higher sales, then we are spending more on branding and marketing building costs. Moving down to the EBIT, ended up in the Q1 of SEK 915 compared to then last year, SEK 862, and EBIT margin of 9.3% compared to last year of 7.5%.
We had total Orangeburg effect in Q1 of SEK 160, and we had here with some costs related to construction of some forty that should be also taken into consideration. Tailwind in total currencies, SEK 67 million year-over-year, very much related to that we have now positive effect of the hedge contract that we moved into 2012, signed up in 2011, and those who had it in the first quarter, a year-over-year effect positively of SEK 67. In the report, we have also now been a little bit more explicit than what we have been before to support you in doing your analysis here, and we hope that should help you in understanding the currency impact of the Husqvarna Group. In a minute, I will come back and guide for also how we are on the remainder in 2011 when it comes to FX.
Moving down to the finance net, we ended up in SEK 121, I guess compared versus SEK 73 last year. We do have a higher debt. We'll come back to that in a minute. Of course, that reflects the higher interest rates per se. Then we have some effect of the mark-to-market valuation of the interest rate component in our FX derivatives. There is a negative effect of those valuations, of those hedge contracts. That explains the gap between last year and this year. Tax, ending up to SEK 162 compared to last year, SEK 105. I told you previously that we have the average rate of 29%, and we get the benefit of our financing setup with Belgium that gives us on a yearly basis roughly SEK 180 million. If we spread that over four quarters, we come down to roughly this quarter, roughly 21% in tax rates.
Moving further to the balance sheet. I would say the line that still, of course, attracts some attention is the inventory value. As you can see, still on a quite high level, ending up in SEK 8.5 million versus last year, SEK 7.4 million. Should we adjust this for currencies? We have now a gap of roughly SEK 900 million, slightly less than what we closed the year. We had a gap of roughly SEK 1.1. We can see that we have in the first quarter, we have less build up of inventory than what we had last year. Still, we do carry this forward here, but there are, of course, continuous work now to drive the stock values low or down in terms of second and third quarter here. Trade receivables, just a brief comment there. We sense we have a good control.
You can see on our days sales outstanding, they are lower, quite significantly lower than last year, 66 days versus 74. That trend is in good control here. The main focus, you also know the background that we had a conscious build-up of inventory last year, and we are gradually driving that down as we go forward now. Here it is. Net debt ending up of some SEK 9.4 billion. Of course, very much related to the buildup of the working capital here, to be compared with last year of SEK 8.3. We have some negative effect of SEK 140 million related to changes in exchange rates. The main reason related to the higher debt is of course related to the working capital buildup here. Looking into the ratio net debt versus equity.
We are in the first quarter on 0.8 versus 0.697 in last year. That is due to that the equity is lower than what we had at the end of March last year. That lowers the equity with some SEK 159 million. That is one component. We did also have some translation differences in cash flow hedges that gave a negative impact of roughly SEK 400 million. Cash flow. This is a graph that we have showed you here the last quarters. This is to illustrate the buildup of cash during the season as well as during the year for the group. As you know, Husqvarna is normally then drawing cash the first and second quarter.
We have used, and I have used 2010 as a bit of a reference point based on the issues we had 2011. We think 2010 is a better reference point for good reasons, of course. As you can see, normally then we draw cash in the beginning of the year. We come to break-even mid-year. Then we generate cash at the end of the year related to the stock built and when we go into season. Then we get, of course, our payments from the accounts receivable at the end of the year. As you can see, we have now a trend first quarter is on par with what we did in 2010. So that we take as a good sign, although we still say that we are on a too high level when it comes to stock values.
That is our primary focus of course. We sense that we have activities now that also proves in the first quarter that we have drawn less cash than what we did in 2011. Also should be mentioned here we have less CapEx and of course, an improved earnings. This of course is benefiting to the operating cash flow. Key figures. I normally do not go through all of them. I mention a few and the one that attracts some attention is CapEx. As you can see, a slower pace, but this is primarily a phasing issue. I come back in a sec here to the guidance for the year. This is purely a phasing that we are running on a lower CapEx level in the beginning of the year. Average number of employees.
As you can see, this is as you know, defined as full-time equivalent and somewhat higher than where we were last year. Of course, we do have some more overtime et cetera in the process here that is explaining. If we look at the year-end number of heads, we are on par roughly what we were last year. We are not more people in the group than what we were last year. Before Hans coming in to the summary, some guidance on CapEx for 2012, I remain SEK 1.1 so on par with depreciation. No change here, although we do have some phasing in the beginning of the year. Tax guidance also remain 29%. Then you should knock off the roughly SEK 180 million-SEK 200 million, keep evenly over four quarters to arrive at a decent tax rate.
If you look at the FX, I told you end of last year that we should have a positive impact of some SEK 50 million-SEK 70 million. I would like to say I remain with that plan. We are in the lower quartile, that means we will have some negative headwind that will mine for 2012 regarding FX exposure. This is of course now based on the forecasts for FX exposure, outstanding hedge contracts and the exchange rate situation that we had end of March. I hand over to Hans to give some summary.
Thank you. Summing up this year, we've seen a very good top line for the group here, mainly as I said here, driven by U.S., where the European market has been rather stable since early last year. The top priorities for this year and for the quarter is to secure that we are able to give good customer service and deliver our products on time with right quality. I'm very pleased how we have been able from the factories mainly to handle this year, not only in U.S. all over. We have been very good all over factories to secure that we are able to deliver. Of course, there was a lot of focus on what happened in Orangeburg last year, but we worked with all factories to improve the quality when it comes to delivery on time.
We have even been able to take this growth of course with the market as well take market share. There's a lot of over forecast this year. Of course, we are not satisfied when it comes to the earnings of Americas. We need to, of course, continue to work hard to improve the efficiency and productivity, mainly that in our factories all over the place here. For the group, the operating income has improved as well here. We kept good high margins in Europe, and I'm pleased that we have been able to do that in spite of more or less a flat top line vis-a-vis last year. Of course, we have improved the operating income even in U.S. here, and we continue to develop the EBIT margins as well in construction.
Very good here, even if we need to do more, as I said, when it comes to the Americas. Cash flow are also a high priority for this group here. You see in the graph here, we have improved a little bit here from last year. What's key here, what we focused on, of course, is inventory. Really focused on this. We have a cross-functional team working with what we call stress management here, that we've done the inventory as well work with from receivers as well as payments here. Finally, a separate word of the future here. How we look for the near future of developing new markets? Still the same level, positive. Slightly more compared to last year. When it comes to Europe, Asia Pacific, more or less the same level as Q1.
A little down in the southern part, even better, slightly up in the northern countries. Of course, we need to really look into this year, continue the hard work to improve the EBIT margin. Main focus in the Americas as well in construction. Continue to keep these high EBIT margins we have in Europe here. That's the hard work we have to do there. We will need to continue. We are just into the season here. Continue to keep this pace we have now when it comes to delivery and keep focused here. Hopefully, we will have the weather with us here. I'm giving up here and hope the spring will come here as well here. Since we are, of course, a company where seasonality is, when it comes to garden products, and dependent on the weather a lot.
So far, very good in U.S. Hopefully you will see that will be the same development in Southern, Central, and North of Europe as well here. We open up for questions.
Hi, my name is Analyst. I was just curious about this market share gains you talked about specifically in North America. What about the ride-on mowers? How has your market share developed this year?
When it comes to ride-on products, we have to divide them in what we call the tractor of the U.S. That's what you focus on here. When it comes to the rider products, we lost some market share last year because of that. We have managed to recover a little bit here, but not in the same way as we have done with other categories here. Still more to do when it comes to the level we need to be on the tractors. When it comes to riders, we take the Swedish and Polish products. We have gained some market in the segment we are. The U.S. has still more to do.
What product are you taking most market share in right now, either North America or Europe?
On all over, in the professional chain saws, the robotic mowers, Swedish, Polish, and other riders. I think being there, we have taken a lot of market shares.
Finally, just how does the retail inventory levels look right now?
In North America, the retail inventory levels are low. When it comes to Europe, it's more or less same as last year. Normal level. They're very low in U.S.
Thank you.
Hi, I want to come back to the question of operating leverage. Looking at this for U.S. sales, FX-adjusted up something like SEK 850 million or so, and adjusting for the special cost from last year, I guess, and also after the FX cost in the U.S., a very low increase in EBIT actually, if you compare to the SEK 800 and some million increase in sales. I wonder if you could talk a little bit more about that and if we expect it to be better in the future.
No doubt. We expect it to be better in the future, we shall also now recall that we said very clearly last year our primary target for the seasonal and retail is to focus on delivery performance and with strong quality. Where we're now approved in Q1, and we have even exceeded expectations how good we have been able to live up to those delivery performance. Of course, this needs to be best. We have already started to secure now that we should keep up the leverage as we go forward here. That was, again, consciously a decision taken already last year.
I wonder, with 9% growth in America, you said that inventory levels or trade levels are low, does it mean of you have to take some actual sales to consumers have been high in the quarter as well?
Yes. Correct.
That's great. About weather. We know about up till March. What about April weather in the U.S. and Europe?
In the U.S., the weather seems to be very good for us. Seems very good. When it comes to Europe, yeah. You can look outside here, you are here in Stockholm here. Spring is not coming yet. If we want that, of course. When we look to Central Europe, normal, even if France is a very good market for us here. I put the thermometer down there earlier this week here, 10+ degrees, of course, that's not what you want in France. If you then go further south, very good spring is here, coming here. We know, of course, the weather will come in all parts of Europe here. As I said, in Australia, there we of course have problem with the weather and the flooding over there.
Good. Also, you mentioned you have above on Gardena business. Was that U.S. or Europe or both?
Both. As we have said earlier, we want to focus a little bit more on the dealer channels here, of course, the whole world here, but then, of course, not on behalf of the retail. We focus that well here, but we have said if you want to grow more in the dealer channel compared what we have done in the past.
Also, you mentioned about financial net that was some kind of one-time item in the inaudible of that.
Well, I would say, in order to guide you as we go forward here, of course, with the net debt we have now and how we look upon the financial position, the delta you had between last year and next year, rather roughly half of the delta is related to the revaluation of those asset hedges or forward contracts.
Another question. You mentioned you need more measures to improve productivity in the U.S. Are there any special type of measures except focusing on delivery performance? Is it just basically going back to normal situation when it comes to focus on cost and not only on delivery performance?
What we are focused on is the EBITDA margin, of course, as well, for cost as well as price, yeah. We are working more than ever with what we call KPIs, to really follow up the improvements we are doing here. Of course, we need to do more than normal when it comes to improve our efficiency and increase our EBITDA margins here. We can't do either what we have to do both.
Yeah. Kenneth. If we look at the U.S. operations, how much of your sales there is your own manufacturing costs or your own value added? What I'm trying to get at is how much of the cost base in the U.S. do you have to play with in order to increase efficiency, and
Well, based on the nature of the production, a lot is, of course, related to assembly. That means that we have a lot of costs in terms, if you take the engine, that is a significant part of the product cost at the end of the day. Where I want to come to is how fit and how good should we be able to get that ratio. We work on both. We have to work on efficiency as well as we have to work on our supplier base. Again, for America, for the first quarter, the focus has been very much on delivery performance as well as performing from a quality perspective. There is more, of course.
Okay. Another question. Last year, you said that in order to protect delivery security and so on, you started production much earlier, already in the fourth quarter for the selling season. Now you have proven that you have a good delivery time and so on. What will you do this year? Will you start earlier in Q4 this year ahead of the next selling season as well? Will you push it out into January in order to have a very high flow for this year?
When it comes to start the production here, of course, not only for the U.S., we need to start in the fourth quarter to ramp up. In the garden season, we have a very short time. It's more or less mid-January to end of maybe end of June. Of course, it's impossible to ramp up the factory when it comes to supply here. We need to continue to start up the production in the fourth quarter here. That goes for all factories here. Of course, we need to learn a little bit more and work harder when it comes to the forecast from what we call cold side team. As we work more inside out, we need to look and listen to what's going on in the market and focus more, of course, when it comes to long shipments we have from U.S. to Europe here.
We still have room for improvement when it comes to calculate what we call goods in transit overseas.
I guess with these higher inventory levels we saw at the end of this year to not easily go down to the level they were before, but they will be a little bit higher also in coming years.
We need to get back to normal level here. When we have a garden season, that's normally over in September. In September, we should have the lower inventories, and then we should start here mid end of October, ramping up again here. Of course, we need to come back to normal inventories. We don't have that now. No doubts to that.
Okay. Thank you.
Let me talk to a very practical question. How much of the extra cost that you identified with Orangeburg last year, how much of that was recovered in your minds?
Well, based on the extra costs of last year, the character of those was very much of mitigation character, meaning that we had consultants coming in, we had a lot of extra help coming in to secure, especially the first quarter. Secure, I mean, we have our deliveries. What we see now and based on the, let's say, the margin deterioration versus costs when we exclude those costs, is more of the natural lack of productivity. Right now it is, you could say that now we are back to running a plant in a normalized way where we want to utilize our skills in driving continuous improvement. The extra costs that were identified last year were a one-off character, and that we also had a lot of external support into the factory, and that support is not there today.
You referred to drop ship being better in the coming quarters. Could you elaborate a bit what measures have you taken? What are the identification that you're doing in Q2 to actually improve leverage?
From a productivity perspective, you mean?
Yeah.
Well, in general, we have all measures that the factory plant manager that has on his plate to ensure that we don't have to work more overtime than necessary. We don't have to take weekend shifts, et cetera, driving down productivity as a result. As Hans said as well, it's very much related to that we secure our forecasting and do that in a proper way. We get some leeway that we now have proven to the customer base that we've been able to deliver, and that of course gives us also some leeway to work with continuous improvement as we talk.
As you look into the next season in terms of pricing, as you plan prices and so forth, how is that discussion evolving within Husqvarna? Would you be thinking differently in terms of gaining more success, which you've done in this quarter, you claim, as opposed to pricing?
When it comes to prices, we work with that, I've been not seeing to that here. Because we work on here. As I said, we hope to improve the GP2 margin. That goes as well for cost as well as price. We don't have the luxury to do cost or simply we have to do both here. That's of course, working processes have already started up. We want to now develop a, what you call a line review. It was a little bit in line with the new colors we will have as well here to launch here during the autumn here for serving into 13 here. Of course, we look into the different ways how to work with the pricing going forward within the different regions and countries.
Just a final question. Could we get an update on the, let's say the state of the stock? You've had excess inventory for a couple of quarters now. Is it new product? Is it old product? Why should they be able now to sell it at normal prices?
If you look at what I said here, due to the shift we have and even to ramp up the factories here, so we secure the deliveries here. That was planned inventory. If you remember a little bit happened last year, because for all our producers, when it comes to lawn mowers, the market totally dropped for us for all here. Of course, we had a little bit more inventories coming into autumn here, and we kept this here otherwise we had to pull this through discount. We have done that. Of course, what we adjust now with these inventories, we produce a little bit less, of course. That's the work is to improve the forecast here. We need to look upon the forecast, the production vis-à-vis inventories here. That we're not hit, we go and have a lot of discounts on products here.
Of course, when it comes to place both in new products, that you normally need to do something here in terms of new products, which have to be on the market, and then we need to take out the old one here. Otherwise, we don't do that discount here. We have to work with the processes here to make sure that we are able to take down this year.
Maybe I'm thinking about this too much, but why wasn't it sold in the first place?
The first quarter, normally you have to try to fill up the, what you call the floor and shelf space in the showrooms here. There is second wave when it comes to repeat orders. When they have sell out, we start to sell in what you call repeat orders here. That was normally for three processes here. The last process here in June, you have a last, what you call sell-in here when it comes to robotic mowers and so on, that totally dropped for July, August here. It normally can be very good as well here. That was not the situation for us. It was all over for the supplies here. To be honest with you here, we have looked into this. No one really knows why it's happening here. We continue to sell the robotic mowers. Something happened there.
We don't see that yet it should be the same case this year.
I think we should also take note within that, actions are taken in terms of that the build of inventory is less than what we saw last year. We take actions now, as Hans said, to adopt and adjust the production here. We gradually dial it down, of course. Of course, we want to sell out to the trade, we are also looking from a supply perspective and securing what we sell to that for the purpose.
Hi. Rasmus Engberg with Handelsbanken. I just wanted to ask you people to clarify
Given the weather we've had in the Nordics and Central Europe in April, are you at this point in line with last year, or is that how we should understand?
Yes, correct. We are in line with last year. A little bit above in U.S.
In Europe, you are in line?
Yeah. U.S. is a little bit continuous, the same as we had in Q1.
I have a second question about Europe. You have some organic growth in Europe. You have SEK 72 million of assets on board. You have a positive geographic mix from the Nordics and Germany outperforming. You say you're taking market share in high-end products. Why is the margin flat? Is that because you are underproducing now?
It's flat as we've said. It's not only U.S. We are also now capturing productivity per se and leverage per se of the sales growth. We are not satisfied as yet. That's where the focus is. Both for Europe to a less extent, majority related to U.S. As you correctly say, tailwind, we have from FX and the mix is why we still see that there is potential for additional leverage that we have not achieved in the Q1.
Not related to Russia or Europe?
Some is related to that. Again, it's not one cause. When we say productivity and efficiency, we look all across the P&L.
Do you think that this working down of inventory will have a material impact on cost absorption this year? Is it small?
I don't think that will have a major effect on the absorption, no.
Okay, thanks.
Okay, operator, we can open up for questions from the telephone audience, please.
Thank you, Sam. Ladies and gentlemen, if you have a question at this time, please press star three followed by one on your telephone keypad. To cancel your question, please press hash or pound key. First question comes from the line of Peter from J.P. Morgan. Please go ahead.
Yeah, good morning. It's James here from J.P. Morgan. I have two questions, please. You talked about the productivity improvements that you still need to make and are planning to make. How much of that can you do within a garden season, and how much is really for next year? If you could give some indication how that breaks down. The second question, what have you seen in terms of price increases for engines, especially in the U.S.? A core supplier of yours was very vocal about getting prices up this year. Has that hurt your profitability in the U.S.? Thank you.
In terms of the productivity improvements here, of course, even if we are in the season, it's very important to work within the context of improvements when it comes to efficiency as well as productivity here. Two different things. We are working with that. That's something you need to work all of the time, whatever you are in the season or in the low season here. When it comes to the low season, there you of course can do a lot of changes if you want to change layouts and so forth here. That's what you're doing in the season here. Coming back to, of course, you need to really look upon if you have the right level now when it comes to overtime, as well as these temps, temporary people you have to take them in and out here.
That's the only flexibility we have in the season here. That's, of course, something we work on all the time. That's something that practically you work more or less daily on. With the price increase on engines here. Of course, we have been able to offset the price increase of engine here. You normally always have a price increase from the suppliers. Now we need to really work hard to purchase organizations to look upon to keep this under control here and be able to really look upon what can be done to offset the price increases here. We are fairly good when it comes to keep that under control here. Of course, not only for the engines, but for all other components as well here.
Of course, we're going to pay a little bit with oil prices going up here when it comes to plastic here.
Next question comes from the line of Aaron from Nordea. Please go ahead.
Hi there. Two questions, if I may, and just one clarification. It's only the connection government side. First of all, I just wanted to get your, and sorry if you've mentioned it, your expectations on growth in the U.S. in the second quarter. You said that you expect the sort of growth to continue into the second quarter. Are you expecting similar type of year-over-year comparison as in the first quarter? I assume not. If so, how much do you think was sort of pulled into Q1 because of the weather? Secondly, just on your cash flow development, you appeared sort of content with or relatively pleased with tracking the 2010 development. I was just curious to see if sort of the SEK 1 billion or so that we quote-unquote lost in 2011, if you expect to get back on back or if it's lost.
Finally, just a clarification. Are you now fully happy with the operational efficiency of Orangeburg? Apart from, as you mentioned, sort of general productivity improvements, as I assume that you're working on just the flow of product as was a big issue. Is that now and you're not sort of having any additional costs in relation to that? Thank you.
When it comes to your first question here, how are we looking for Q2 here? We'll have to see what will happen in Q1 here. I don't know. What I said here, we only can look a week ahead here. What you see in the start of Q2 here, we have seen the same development as Q1 in the U.S. What happened here in May and June, we need to come back to. I can't really predict what happened there. Let me take the last question as well here when it comes to operation efficiency in the Orangeburg factory, if you remember that here. Of course, the efficiency in that factory here, as I said earlier, we have seen and been very satisfied what we have done there.
Of course, to secure the priorities, to secure deliveries, we have been able here to do that. The pure work is not with overtime. I think that's a little bit what we need to really look upon here, is to increase the productivity. We normally talk of productivity, 6% productivity. I think poor English calls you 6% productivity here. What we are looking for is net offset inflation. We want to have a productivity of just 2%, not 6%. That's more important. We can see that we can offset the inflation and the cost here. We're talking about the net 2% productivity, that it can even be more than 6% cost. Normally, I think you heard from the industry, it's usually here. We focus on net because that's what goes into the bottom line.
Okay.
Finally, cash flow. Using the graphs more to secure that you understand the pattern of our cash flow generation. As we had a lot of extraordinary items in 2011, we felt and I felt it was more representative of 2010. It is showing that we have a less soft build after Q1 than what we had in 2011. That means the pattern more similar to 2010. Saying that, no more reference than that should be made versus 2010. Of course, we have ambition to improve and give an evidence 2010, but for now, we are quite satisfied what we have done in Q1.
That's very helpful. Can I just ask for clarification? Maybe I'm not getting it here. When you say that you've seen the same development or similar development in Q2 versus Q1, what do you actually mean by that? Do you mean that you're also seeing roughly up 20% from last year, or are you saying that the sales level in April is running similar to in March, or what do you mean?
You mean when it comes to the sales, yeah? Top line?
Yeah. Top line in the U.S.
Yeah.
Americas.
When it comes to the top line in Americas, what I've seen here at the start, more or less, hit the same level as quarter one here.
Absolute levels per week. Is that what you mean by that?
Yes. I can't predict what happens next week.
No, I understand.
I think we underline that all the time here, but so far in line.
Okay. Thank you very much.
Our next question comes from the line of David Adler from UBS. Please go ahead.
Yes. David here from UBS. Now, much of my questions have been answered on the U.S. productivity. You mentioned the CAM and the assembly process, et cetera, and you also mentioned prices up on the cost of the sold. Now, if I aggregate carbon plate, stainless steel, aluminum, and copper, I'm still sort of down 10-ish% year-on-year on materials, just sort of not particular as you mentioned oil price. What sort of levels are you hedging at for the rest of the year, and what sort of tailwind did you have from raw materials in the first quarter? That's something I can't see.
When it comes to raw materials for the quarter one, we haven't had any real tailwinds here. Rather more headwinds here due to the plastic here. That goes back to the transportation cost as well here. Due to them, the diesel have went up as well here. Of course, when it comes to quarter one, no real tailwinds when it comes to prices or raw materials here. You even heard the copper is up as well here. We've been able to offset a lot of this. We've kept a lot of efficiency within the organization here.
The input cost, of course, now bouncing up in January across the board, as you say. The question is for the rest of the year, when do you start locking in volume for next year? At what price levels? Is that during the third quarter, the end of third quarter, or?
When it comes to purchasing here, we have some areas where we have priced an agreement quarterly here and some for full year. That's something we saw around the whole year here. I can't really say that this is what we'll have for effect on copper or whatever, and oil price the rest of the year here. I will not go into that detail here. That's a little bit the market price as well here when it comes to this here.
Could you say which of the materials you have an annual sort of renegotiation on, and which you have more of a sort of monthly, quarterly renegotiation?
When it comes to steel and plastic, it's mainly quarterly here. When it comes to other components like the electronic components and that here for the engine, there we have annual. When it comes to steel and this, it's more or less quarterly.
Thank you.
That's all.
The next question comes from the line of Stefan Liget from DNB. Please go ahead.
Hi there. One question from me. If you could give us an update concerning the U.S. dealer side. Are you still adding dealers? What about the ones that you signed up last year? Are you able to sell more to them or less because of the mix up last year? Any numbers on that would be grateful.
During the first quarter, the dealer reception very good here, and we're able to have repeat orders from the dealers we gained last year. That's what's important, that you can continue to have these repeat orders with the dealers on board here. All over, there is development when it comes to increase the number of dealers as well as increase the space in this channel in the U.S.
Do you have any numbers on how many dealers you have signed up now?
No, we're not going into that.
Okay. The ones that you did sign up, you say repeat orders, but are you able to sell more to them or less because of the mix-up?
due to the market here, we are selling more.
Wonderful. Many thanks.
The next question comes from the line of Björn Enarson from Danske Bank. Please go ahead.
Yes, thank you, coming back to the issue with the European leverage again. Should we look at this as a continuous fine-tuning, or do you have expectations of seeing some major leap there in operation and leverage, or are there some specific items that you have pinpointed to address immediately? That's the first question.
No, I think you shall see, again, it is a continuous work. There won't be any leaps per se, although, we gradually should improve as slowly in Q3 and Q4.
Yeah, thank you for that. On the dealer side also, a follow-up. You mentioned last year, I think it was, that you had some initial costs associated with that launch and your intention to penetrate that market more significantly. Are margins coming up on the dealer side now when you are getting repeat orders?
When it comes to the margins with the dealers, we are in line what we had before in some areas or regions, slightly up. Of course, what we have done to support the dealer business here, as mentioned earlier, when it comes to SG&A, we have had some special marketing activities here when it comes to launch, have more brand awareness for some products here. As we've seen here that the SG&A and the market, of course, was up a little bit, basically last year. Mainly generally to support the new products as well here and the new launch of Collog.
Yeah. Thank you. I guess those launches will continue as long as you are continuing expanding that offering in the U.S. Because I guess for some time you will have a kickback from repeat orders from those that you penetrated initially, and at some point you should have a positive net development for that segment. Is that next year or is that some years ahead?
When it comes to marketing activities, which we are doing in this brand building, you can see that as a kind of investment here. You will have a payback later on here. When this will break even, that will happen next quarter or next year here. That's something I will not pre-empt or speculate when it comes to that here. Of course, the investment we have done last year, because we normally do a lot of marketing activities here. We've seen that have helped us for quarter one here as well here. We have a sign effect in terms of all these investments here.
You look here, dealers is that still some 20% of the regional sales?
Once again?
Dealers sales in U.S. is some 20% of the sales in the region?
I will not comment how much the dealers are-
Hans, how the share of regional sales is coming from dealers in the U.S. who are not here.
That's 30%. Roughly 30%.
Thank you. Last question. You have been holding back on major cost-cutting measures and also on M&A activity. I think you have been focusing on the productivity issues that you've had. Are you now again looking forward and more comfortable about initiating those kind of actions?
We will always continue to be cost-conscious in this company. We always have to look at how we use the cost going forward. That doesn't mean that we see now that we have a good top line development, we will change how we work. Repeat. GP2 is important. That means all costs as well as the price. We will not start to spend money which not give us effect. Of course, for marketing activities as well as the investment for IT activities.
On M&A, do you have any recent product now, which you said last year were a little bit back on hold due to the internal issues?
No, there's no reason for us to change how much we are spending in marketing activities. Not at all.
On M&A activity, I mean acquisitions.
Acquisitions? Okay. Acquisitions, we don't pre-empt and discuss acquisitions over here. Of course, as has been said here, if something pops up, of course, we will not neglect that, but I will not go into that. The company always look upon what's available out there, that's what we are doing as well here.
Thank you so much. Thanks.
We have no further questions from the phone at this time. I have the conference call again. Thank you.
Okay. With this, we wrap up, we thank you and welcome you back on the 19th of July when we report second quarter results.
Thank you.
Thank you. Thank you very much.