Welcome to this presentation of Husqvarna's Third Quarter Results. Here in the room with me is our Acting CEO, Hans Linnarson, and our CFO, Ulf Liljedahl. Hans, we'll start the presentation.
Once again, welcome to this quarter three result and going through how we have performed since last time. We met in this room here, and a lot of things have happened during these couple of months here, both positive and negative, of course, that's a little bit normal. I will start actually with the summary of the quarter three here, what it looks like. Of course, we have been affected, as we already said here last time we met here, that we see a slowdown in the demand among the consumer here, especially in our consumer business here. Of course, as all of you are aware, this summer was not good at all. It was a lot of rain. We like that, of course, when it's a long holiday, but in our business, especially with these Gardena products, we don't like a lot of rain.
Of course, we have been affected by this bad weather a lot in the quarter. We have a positive, as I said, both positive and negative. Construction has developed very good during the quarter and the full year so far. Of course, the debt of the group has been affected by both mixed and high costs. High costs have been very well known in the Orangeburg activities, so I'll come back to that. Of course, we have a very strong development on the snow throwers here. That actually continues as well here. If you look at the year-to-date here, methods for the group have increased. We have strengthened our market position with construction. Actually, we've been able to maintain the info in the garden as well here. We had a record year when it comes to this robotic mower, more well known for Automower, and Swedish-produced ride-on products here.
Coming back a little bit more to these in details here. If you look upon actually the financial highlights here, and I will not go too deep into the figures, Ulf will do that later on here. We have had high sales in the quarter in the U.S. and construction. If you then look upon the EBIT, it actually has been affected by high costs of SEK 83 million in the quarter related to the production disturbances we have had, mainly Orangeburg. Of course, we have the effect of that the CEO has left the company. Here, I can take the opportunity to avoid a question later on here. There is a process going on to recruit the CEO, and actually, then it's up to the board and the chairman to decide.
I will not actually ask any more questions about that part here because that's not my part to comment on that here. More than that, our approach is going on. I'll cut to that. Yes, the EBIT has increased due to higher costs. We've had actually high selling prices here that have been offered to this higher cost and a little bit of weather-related activities due to the mix we've had. As I said, nine months, sales have been actually very good. We have increased our sales in the daily channel. We have put a lot of focus in the daily channel here due to that actually a focus area for us. Of course, retail is important as well here, but we've been able actually to increase our sales in the daily channels here, both in North America as well as in Europe.
If we then go over to Europe-Asia-Pacific, we have had so far an extremely strong season when it comes to snow throwers, but we had to be as well as a rather small business, protected through the overall situation methods in the company. The EBIT has been affected, of course, that we have had a high selling price. We've been able to get out there some prices here, and negatively mainly due to the mix and weather. Last year in the third quarter, we had an all-time high when it comes to watering the Gardena parts here. We haven't had that, as I said earlier, due to more weather-related activities here. In nine months, we have had very good development in the old product categories. We had a record year when it comes to our Automower here.
It's an all-time high when it comes to that, and the robotic lawnmower actually has been a success here. We haven't had any disturbance at all when it comes to that, as well as the ride-on product. You question, have we really been affected by the disturbance we've had in Europe. Yes, we have. We have had problems when it comes to delivery of these tractors here, but we've been able to ship that over to some of these Swedish-produced ride-on products here. Of course, why haven't we done that in the U.S.? Because that's actually not the product of the U.S. market that I want to have, this normal tractor with a clipping deck underneath the product. The market share overall has been very stable. We've had higher sales during the nine months here. EBIT has been affected by that, of course.
We have had actually a negative effect of the weather as well as a higher cost. Higher costs have been that we have focused more on marketing activities. It was planned that we should do that, as well as focus more into R&D when it comes to new products here. All over year-to-date, we are satisfied with the development here for Europe-Asia-Pacific in spite of the problems we've had and the weather conditions, which actually we had to live with. Automower, actually, we will deliver almost 50,000 units here. Last year, it was 30,000. Good development. Of course, it's been a long journey that the market sort of accepted this as I thought it was a toy in the beginning here. We see, and this, of course, will continue here. A very good development when it comes to this here. Americas.
Quarter three when it comes to sales was very good for us in the Americas. The demand for chainsaws increased. Of course, a little bit weather-related. A lot of storms. Storms can be good for our business. That's when we had these ice storms in North America. We have the mixed effect here. Over to chainsaws due to that actually high margin on our professional chainsaws. We have been able even in the U.S. to take out higher prices and compensate for raw material effects. Materials have, of course, affected a little bit here because we can't compensate 200% in North America. A little bit better in Europe when it comes to that. We have even there higher, what they call SDNA, what you normally call M&A costs, and the effect of Orangeburg. When it comes to the first nine months, the market has been down overall in the U.S.
We've had actually a good growth in Latin America, especially in Brazil. Brazil has been very good this year. Even the other Latin and South American countries have been good. We've been able to actually keep all over the market share we have. A little bit high in sun. We haven't been 100% able to keep our market share when it comes to tractors in the U.S. due to the problems we've had with the deliveries from the factory. Price and mix again for the full year so far. We have the negative effect here. I will comment that. I think you're fully well that here. Construction. This year, actually, we've been extremely positive development of construction. I worked hard and delivered a lot of new products in the past. You might remember three, four years ago, we changed to only focus on Husqvarna products here. A very good development.
Sales increased both in the quarter as well as the full year here. The emerging markets have increased here in construction as well. I've been very flat in Western Europe. North America has been a challenge for us here. We have increased our market share, no doubt, but that when it comes to construction products, all equipment. Of course, EBIT has increased due to actually high sales here. We've been very successful when it comes to this demolition robot. The big one, the small one on this picture here. We have actually been able to sell a lot more than we thought when it comes to this big robotic demolition. Of course, there have been some actually extra costs affecting the construction as well. In spite of that, a good development for construction. Okay, coming into the retraction part here.
When it comes to the moves and the activities we've done in the U.S. mainly, all these changes from Nebraska down to Orangeburg and the Queen to Nashville when it comes to chainsaws, all these activities are closed. All the closed stone, then no production in the Queen, no production up in Nebraska when it comes to these products. That is fulfilled here. During the summer and the autumn, we have worked very, very hard to fix the problems we had in Orangeburg when it comes to inbound raw material. We have done a lot of investments with painting booths and docks when it comes to getting in and out of products. We have done what we call a stress test on the factories now to see actually have all these activities we have done during the last couple of months, have that had any effects? Yes, it has.
We see a very positive development there. Even lower costs per month. Lower actually what we forecasted when we were here last time. We worked close together with our main customers, the main retailers. They have actually demanded manufacturing people as well to go up and follow up what the customers are doing. We've seen now an acceptance from the main customers. They see that the activities we have done is actually in line with what they expect we should do. They trust us that we are able to actually do and come back to where we were before when it comes to Orangeburg and the deliveries. Of course, we have been able to actually keep the good listings we've had in the past as well here. When it comes to Europe, we have fulfilled all these consolidations with the sales companies that's done in all countries here.
Now, in each of the countries, we have only one sales company. A good example, we moved the Husqvarna sales company down to the Gardena company in the factory here during this year, actually in the season. We were able to do that and actually increase sales and even take market share in Germany. As you know, Germany is where we have one of our main purposes as well. We can see there are possibilities to do this and even keep and increase the market shares if you do that in the right way. We have the Mielec, the Polish factory. As we said already last time, that will be delayed one year. We have moved and stopped the production of all Swedish lawnmowers in Hälle and moved all these activities over to Mielec. That's done. Actually, no real problems when it comes to that.
This season, we produced a couple of products when it comes to the front of the riders as well. We have said we will not move over all products from Sweden. We will keep in parallel with what we are doing in Mielec when it comes to these Swedish-produced riders, both in Sweden as well as in Poland for another season. That means that actually the plan was to do this in one year. Now, we do that over two years. That means that this will be finalized in the autumn next year. For the season 2013, all these products will be produced in Mielec. I went through Orangeburg. We have no further comment when it comes to what we said last time regarding the savings related to this restructuring cost.
It will be delayed beyond 2012 as well as 2013 due to what I said regarding the Swedish riders as well as the startup of the Polish factory. We are coming into a normal phase now when it comes to all this restructuring. You normally always work through what you need to do in the manufacturing part, and you always work with productivity increase. That will continue now as before, that we will look for efficiency and productivity in all areas, not only in the factories. It goes for the entire company. Focus areas for 2012 will be to continue the relocation from Sweden to Poland to really plan that and execute that in a good way. Change a little bit the organization to actually have a more focused orientation when it comes to key areas for the company. Purchasing is one that has been out in the organization.
Now we're taking that into actually the group management. The Purchasing Director will report directly to the CEO and be part of the group management team as well to have more focus on purchasing and continue to, of course, focus on low-cost countries. We are below 30% when it comes to suppliers in low-cost countries. Of course, we will continue to focus on that to increase that. As well, reduce the number of suppliers we have. Roughly 2,400 suppliers. It's too many. We don't need all this. That will continue and we will start to focus even more on that. Of course, we will focus even more on product development, especially the time to market on new products.
You see how we can actually speed up that to actually have new products that are fast out to the market with actually low cost and, of course, better performance and good quality. There we have changed a little bit in that organization as well. We took out brand and marketing. We want to have that closer to sales. This product marketing will be more product management than development of new products that focus more on that part. Cost to serve is too high. We need to find a way actually to lower our SDNA cost in the company. Key is actually customer focus. We really need to secure that we have more customer focus. Normally, everyone thinks that's actually all customers and the consumers, but actually internally we have different customers as well. The customer for suppliers is actually a sales organization and so forth.
Even internally, we will have that more customer focus. Delivery performance, precision in launch of new products is one other example and work harder with quality, even if a well-known booth with the Gardena brand and Husqvarna for good quality, there is always room for improvement when it comes to quality. This is the focus areas going forward. Going over to the new products, we have now launched a complete new range of products under the McCulloch brand. This has been launched now in August and September. McCulloch brand will mainly be used in the retail channel. All retailers which we have presented this range for now in August and September have been very positive when it comes to these new products here. First of all, it looks very good. There might be some people coming from Stockholm who recognize black and yellow. Isn't that AIK? Oh, sorry, AIK.
That has nothing to do with that. When it comes to ice hockey, yes, you know we are the main sponsor for HV71. We actually use black and yellow here for the McCulloch. The listings for this have been very good for the season coming in here to 2012. That looks even better actually in real life, these products here. Yes, the chainsaws. The founder of chainsaws was actually in America in 1946. It was McCulloch. McCulloch is one of the oldest brands when it comes to chainsaws. It's not Stihl, it's not Husqvarna, it's not Jonsered. The origin is actually McCulloch, 1946 in the U.S. We have even launched now a product which will be available on the market here, a complete new line of battery-powered products. One system that means the battery fits for all handheld products. The same battery for chainsaw, hedge trimmer, and trimmer here.
Of course, not for the rider here. It's much bigger here. These have been launched. This will to start will not be high volumes here, but that is a trend that will be more and more even in our business here when it comes to cordless and battery-powered products here. Of course, with the same performance as the petrol chainsaws and trimmers here. We will continue to extend our robotic mowers here. We have a full range of Husqvarna, which are sold into the dealer channel here from 500 up to almost 600 square meters here. We have now launched actually a Gardena version, which will be mainly sold into the retail channel here. It's been very well received and actually good listings there as well here. That's up to 400 square meters here. With that here, I will hand over to Ulf.
Before we leave it to the financial here, maybe for at least the financial people are more interested here. Ulf, come to take over.
Thank you, Hans. Good morning, everyone. If we then move over to the income statement and start from the top, you have already received a teaser by Hans how the volumes look like. You can see that in Q3, net sales went down by some 2% adjusted for currencies. We ended up on roughly SEK 6.4 billion, SEK 200 million better than what we said in our profit warning. This was primarily related to the fact that Americas came out better than we anticipated in the profit warning. That means we did not get the full impact on the bottom line, as you know. If we then look at Americas as such, in the quarter, they increased by 1% adjusted for currencies. Europe-Asia-Pacific went down by 5%. You have heard that the major related issue is the product category watering. That explains the downward trend there.
Construction adjusted for sales was up 9%. If we then move over to the gross operating income and just switch over to another picture where we can see the development of the gross profit margin, the red curve is the 12-month rolling. In the bars, you can see each quarter. Looking at Q3, the gross margin decreased some three percentage points from 30.3% last year to 27.3%. We had also in this quarter, as you know, a pressure of Orangeburg that negatively impacted some 0.5 percentage points. The major effect was related again to Europe-Asia-Pacific. If we adjust for currencies, the major impact was related to the negative mix effect that we had for watering in Europe. There was also a non-recurring item related to further restructuring costs in Spain that has been allocated to gross profit of some SEK 24 million. That explains the 0.3 to 0.4.
If you then look at the gap as such of three percentage points on top of the three that I mentioned, we also do have some under-absorption of fixed costs, mainly related to the ramp-up of the Polish factory. We will live with that for this year. We are busy, as you have seen from Hans's previous slides, ramping up for the season of 2012. That means we don't fill that factory until we start up the season beginning of next year. That means we do have some negative impact on that this year. I move back again to the income statement. For you on the teleconference, I go back to the original slide called income statement. Then continue down and look at the selling and admin expenses. Again, adjusted for currency effects, we can see the SG&A that was up some SEK 30 million in the quarter.
We have SEK 21 million that is related to the termination of the former CEO. On top of that, we had some higher outbound costs related to Orangeburg primarily. We have some higher IT costs and higher costs for brand building. Brand building is very much related to what you saw before. We are promoting now primarily the McCulloch brand, and that is done now for the season of 2012. Moving down to the EBIT, ending up at SEK 113 million compared with last year, SEK 411 million. In that, you have roughly SEK 83 million that has a character of one-off costs. We have the SEK 24 million I mentioned before, restructuring costs, additional restructuring costs related to the Spain factory in the construction division. We took SEK 40 million in Q1. We take an additional SEK 24 million in Q3.
We have Orangeburg of SEK 38 million, and then we have the termination of the former CEO of SEK 21 million that you should then, of course, consider when you evaluate the EBIT for Q3 compared with last year. Moving down, we have the financial net ending up at minus SEK 89 million versus SEK 101 million last year, mainly due to positive exchange rates effect. That explains the majority of the gap there. Tax, you can see we have a positive effect here. I mean, a small result or a tiny result, but we do have a positive effect of our Belgian finance activity, same as we also attributed last year. If we then continue and move two pages and look into the consolidated balance sheet, I won't go through each of those. I think the major item here is, of course, related to inventories.
If you compare to what we said in Q2, I mean, we keep the level that we had on closing end of Q2, but you will see that we have a change of composition within that. We have more pre-built into the inventory now than compared with three months ago. We are still on a very high level. Again, related to that, we have pre-built. We have the ramp-up of the Polish factory, but we also have the interrupted season end of Q2. That, of course, means we do have some higher finished goods inventory. That, we will carry forward to the next season of 2012. We don't foresee that there is any risk in that inventory as such because this is sellable next season, but we do have to carry it through in our balance sheet into the next season.
The majority is related to the ramp-up of the Polish factory and the pre-production that we have told you before. If we compare them with Q3 last year, we are roughly SEK 1 billion above if we adjust for currency. If we move to the next page and have a look at our financial position, you can see that our net equity is at 0.5 versus last year when we were at 0.4. We had some tailwind of a currency effect that affected the equity of some SEK 275 million when we translate foreign operations into SEK. As you have seen in the report, I also want to highlight that Husqvarna is now basically refinancing our revolving credit facility. That is actually maturing in 2012 and 2013. We have just now launched, together with our core relationship bank, a new facility of some SEK 6 billion.
The ambition is to have this signed off before the end of the year. Cash flow. This is the curve that I think you normally have seen. Husqvarna as a group normally has a negative cash flow in the beginning of the year. We normally break even at the end of the second quarter, and then we generate cash in quarter three and quarter four. Already in the second quarter, you know that I told you that we are not managing that, very much then related to the buildup of inventory, working capital, as well as a lower result. We have generated cash in the third quarter, but as you can see, not enough to break even here. We are still below the normal level of cash generation here. The factors explaining that are the same as we had in the second quarter.
Some key figures, some of them have already been mentioned here. Maybe to just give you some input, we can move to the bottom there. You can see on the CapEx side, slightly lower, and I soon come back to some of the guidance for the rest of the year, slightly lower. Last year, we also had some related to the Polish factory. If we adjust for that, and if we adjust for currencies, it's roughly on the same level if we look for Q3. Average number of employees, you can see, is higher than last year, but it has gone down if we compare with the second quarter, still on a much higher level. You should have in mind that this is the average number of employees and also counted as full-time equivalent. Here you have, of course, overtime and temps included in that.
The important thing is we have a downward trend in the number of employees, and that will continue, of course. Again, higher though than last year, very much based on the pre-production that we have had in the quarter as such. Some guidance: CapEx is now judged to be below SEK 1 billion for 2011, so roughly SEK 1.1 billion in the second quarter. However, depreciation and amortizations we estimate to be on the same level, meaning SEK 1.1 billion. Tax remains, as earlier communicated, approximately 29% calculated on income after financial items. We have the financing activities of the Belgian setup that adds back some SEK 180 to 200 million. Currency effects are going down. You saw we had some tailwind in the third quarter.
We said in the second quarter, SEK 350 to 380 million, we remain on that negative effect, SEK 350 to 380 million for the year. With that, I hand over to Hans.
If we then go a little bit to the outlook here for the fourth quarter, of course, the fourth quarter is rather a minor quarter for us, a small quarter when it comes to sales, on top line. When it comes to this, we are a little bit affected with the economic situation because we are more and more a consumer company. Of course, we have an uncertainty when it comes to the effects. There are overall high inventory levels in the trade as well. When it comes to the frozen garden product, we actually estimate they will go down a little bit, maybe more when it comes to the garden product, of course, due to that we're not actually built up the inventories. When it comes to forestry, that depends a little bit on the weather as well. Sounds a little bit pessimistic. I want to have bad weather.
I want not a lot of snow in the fourth quarter due to the snowfalls. I want to have a cold, actually autumn, so all these harvest machines can go out in the forest. It's too much rain out there. We actually will have a cold wind, especially up in the northern part of Europe. The forestry part and the production chains will take off. I'm a little bit opposite here as I want to have with the private person and the business relationships. Sometimes I'm more on the business. I can sacrifice the private convenience when I have good weather, which actually should be good weather and bad weather for me as a consumer. Of course, we see actually the forecast now, the trend when it comes to the cost for fixed orders is going down. It's going down a lot, actually. We've seen that trend.
We see now it's actually in the quarter, it's actually approximately SEK 30 million. That means going into next year, Orangeburg will be a normal factory. We would have to have said this year, Orangeburg hasn't been a normal factory. That depends on that we screwed it up by ourselves. When it comes to the fourth quarter, more quarter for us, snowfall looks very good. Actually, it's more part of our business. We have products still which are actually available to ship, and we have orders for all the snowfalls we have. We just got in last week, a shipment from the U.S., so we are ready actually to ship them in the quarter. When it comes to the production chainsaws, we have launched our newest chainsaw, 560, which actually has been extremely well received in the market.
There was another good outlaunch we have done to fulfill all these environmental issues, the emissions and weight and cutting performance as well. Have in mind the fourth quarter is normally a very small quarter for us. Summing up this year so far, high sales in Europe-Asia-Pacific in construction. In Europe-Asia-Pacific, up to nine months, the down under countries, as we call Australia, New Zealand, and South Africa, if you take Australia as actually a very good and big market for us, we had actually now an all-time high in that market. They are into the garden season just now. Of course, they've been a little bit lower in the Americas. We have strengthened our market position for construction, and we have maintained all over in the forest and garden area. A record year for the Automower and the ride-on products, especially the Swiss-produced ride-on products.
I feel definitely comfortable with the situation we have in Orangeburg today. The listings are good, both for forest and garden, both in the retail channel as well as in the daily channel. Normally, we call that pre-orders in the daily channel, not listings that give us pre-orders, but they are good as well. We had adjusted the organization a little bit to actually be more focused. We have changed a little bit as well in the supply chain area. We have a new manager who is heading up supply to change that. The former one has left, or will do that at the end of this month. We will strengthen up that a little bit to actually have a bit more geographically, especially when it comes to the U.S. The U.S.
and Europe are a little bit different when it comes to the setup of how we run factories between U.S. and Europe. We are not as global as we think when it comes to that area. We have now a new local manufacturing head reporting direct to Mike Junsa. We have an American team then. We have a supply team in connection with them as well, especially when it comes to what we call the industrial engineering, which are global. We have also changed a little bit when it comes to product development, as well as that we focus actually when it comes to new products and when it comes to brand and marketing that will be closer to sales here.
We are strengthening the connection between the factories and the sales organization as well here to be actually more efficient when it comes to forecast as well as shipments and actually lower the inventories here going forward. The oil costs as well affected or slowed down here. We are feeding every day, as you know, in the media here what's going on here. Of course, we have seen in construction, especially in the stone business, we have Greece and Spain because we are affected by that and all this turbulence from Greece as well here. With the tax we have today, actually, so far in the quarter, even going into next year, it doesn't look too bad for us. With that, should we open up then for questions?
Yes, we will start from the room here in Stockholm. Please state your name and company name.
Hi, my name is Anders Trapp from SEB and Skill. I have a couple of questions. First, coming back to Orangeburg, could you, if I interpret you correctly, when if I say that you have now solved the issues in Orangeburg and from basically the first quarter next year, it will be no production problems remaining?
That's correct. As I said, we are going in now to that Orangeburg will be what I call a normal factory. We will start to work with the normal problems you have in a factory here like other factories here. At least I see that we can take off that huge problem we had in Orangeburg.
What cost level do you think you are at, would be at in that plant compared to what you expected before you made the move of the basket, etc., to Orangeburg? Will you be at where you planned for or not?
I think when it comes to looking for a new full year for Orangeburg, I think we will be close to actually the plan. Have in mind that, of course, volume will what's happening with the volume. It goes up and down here.
Okay, very good. Also looking into next year, if I read carefully and listen carefully to what you said about listings for next year, I still really can't understand if the unchanged listings are both for U.S. and Europe, or is it for the group as a whole, or is it both regions?
Both regions have good listings here. We are in line, actually, what you said in the report here. That goes both for North America or Americas, as we call that, as well as Europe-Asia-Pacific here. Yeah.
Okay, good. You also mentioned an improved mix. Is that for Europe in the listings? Is that for Europe?
I think it's both, both Europe and U.S.
Okay, very good. Also finally, we are this time of the year, we sometimes talk about also the pricing for next year. With the problems you've had in the U.S., it's not too difficult to arrive at the perspective that you might have a difficult negotiation with the American client and customers. Have your worst terms than usual for next year.
Of course, there have been tough discussions, especially in the U.S., easier in Europe to meet that here. We are able actually even in the U.S. to adjust the prices, actually. Of course, a little bit more in Europe than in the U.S. due to the fact you said.
Final question. Actually, two questions for France. First, have you had any sort of positive effect of the pre-production in terms of cost for the third quarter and the positive effect for the fourth quarter? Reduce volume and only do.
When it comes to the cost, when it comes to the SDK in the factories here, we actually haven't said that we will be better due to we have some extra resources into that here. We are at the level actually where we should be here. Of course, when you do this kind of stress test, you add a little more focus and add a little more people into that as well here.
I think to add, in the factories that are running as normal, of course, we do have some positive absorption there, but that is not enough to offset the ones that are not running according to normal here.
Just one final question. There's been a lot of changes on key personnel this year, if you'd say. In what way has that, if any, affected your executive effectiveness? In terms of when we go through changing so much in the company and a lot of the key people have left, what's that doing to your effectiveness really to execute this stuff?
I have to say actually nothing, rather more positive here. The only actual effect I have seen personally actually had to work more than I did before here. Even if someone said it can't be 100% here due to overhead half of the company here in my previous job here. Of course, when you do these changes here, you have new people focusing in different areas. Sometimes you shouldn't be too afraid when it comes to this year because new people have to prove that they can focus more here. I would say now really effectively here. Now the positive.
I think if I'm going with you on the focus areas that Hans was mentioning here, that is the confirmation that this has been very much a preparation and is a preparation for the season of 2012. That is what we have been busy working and dealing with both in the Q3 and we'll be dealing with in the Q4 as well.
Hi, that's by Anders Banken. I also had a couple of questions, so bear with me. Firstly, with regards to the Americas business, how should we think about the coming year? If we add back the extra production costs, the business is still loss-making even though we have a Q4 ahead, which typically makes a loss. Where should we think about that business for the next year?
For the next year, we talk about the 12 here. I think we will actually continue to, of course, have a low demand in the U.S. here. If I look for a little long-term here, one to three years here, I'm fully aware that we will increase our market share in the U.S. here due to all this investment we are doing in new products here. That will have a positive effect, actually. We will be able to get back what we have lost when it comes to the tractor business in the U.S. here. What we have seen here, even in spite of this problem we've had with the deliveries here, all the customers like our products, what we are doing, and have a full trust on us here. I think, of course, it depends what's happening in the U.S. here. If the U.S.
takes off, of course, we will follow that. I think we will even be able to take market share income back to a good result even in the U.S. here. It will take a couple of years to be back where we were once upon a time.
Being more specific then, is there a risk that we continue to have negative earnings next year in the U.S.? We're trying to get to the part of the costs which are very difficult to see from the outside. What else did it cost to have these problems?
For the time being, we don't give any projections for 2012. You have to be satisfied on the guidance that Hans is giving you on this. Of course, that is the ambition we have, but we don't give any projections as for now.
Would you then say that those costs, the indirect costs, are as big or half as big?
If you take the costs that we have announced related to Orangeburg this year, of course, those are to be seen to secure the season for 2012. At the same token, we have said already in the second quarter that we cannot see the savings that previously was announced to be materialized in 2012. That will be beyond 2012.
Okay. Is there a lot of goodwill in the Americas division?
We account for goodwill on a group level.
Okay. Good. Second question then. It seems to me kind of odd to have external financing in U.S. dollars when the company has a significant negative exposure to the dollar in the earnings line. How big are those external loans?
As I said, we are busy refinancing the company. That is one part of all what is working.
Okay, good. I also had a final question on the changes in management. I noticed that Mr. Bouchamp is leaving. Is that a plan? I mean, he came in with Gardena, as we would call it.
Mr. Bouchamp announced at the beginning of this year that he doesn't want to prolong his contract to the end of this year.
Good. There are no real sort of, not that there are any extra costs in the fourth quarter for?
No, the only way we are doing a change earlier than a plan here, but there's no extra cost at all.
Good. Excellent. Are there any other savings in 2012 that are coming? I mean, it's not going to be in Europe, or should we have any savings in our focus for the coming year?
We have said the savings that previously was announced is delayed, and they are postponed in 2012.
Jacobson, Pareto Erman, could you help us out, Ulf, maybe on the gross margin? How should we think about 2012? You say that you carry some inventory from this year's season, and also you have some dual-site production. Will there be any notable impact, sir?
What you see now and have seen, if you saw the 12-month rolling curve, it is having a downward slope. That is, as I said here, very much related to we have the Orangeburg effect. We have some items affecting the comparability in Q3 that we are not repeating or assume not to be repeating next year. Those, of course, should have a positive impact when you make your calculations for the next year. There is, of course, also that we have, as I said, a ramp-up of the factory, you know, means that we are not loading that fully. We have costs today that we cannot absorb in full. Of course, based on the volumes coming next year, that, of course, will disappear.
Yeah, Johan Thorlefwerk, Amfibanken. Firstly, on the inventory side, I was just wondering, when you assess the risks of having this excess inventory, I mean, you had it in the end of Q2. You're still with excess inventory. Why wasn't that reduced further in Q3? What are the risks for actually discounting this out? Will you be able to sell it next year? In association with that, when we look at your cash flow, have you already started talking about factoring starting ahead of next year's season? Or is that question premature?
I can take part of that question and hand over to you here. When it comes to the inventories we have, we have some inventories of the Husqvarna branded lawnmowers here. The same range as actually will be used next year. This was what happened here at the end of June, that the whole market when it comes to lawnmowers stopped, not only for us, all of us here. Even when it comes to the clipper products here. Of course, we have planned to have some high inventories due to the safety stocks for the move of the Swedish production down to Mielec here, what you normally do here. When it comes to the inventories we have, there is no risk actually that's old products. Old products are in the lineup we want to have for 2012, even for 2013.
When it comes to that, to have obsolete stocks of finished goods, there's no risk.
To give a brief answer on the factoring, yes, it's premature.
I interpret that this is moving on to the next question. On the European retail business, to me, it was quite a significant launch you're doing ahead of the 2012 season for McCulloch. Could you describe a little bit more the magnitude of that launch you're making, McCulloch, and how many of the existing products in retail do you replace? It just seems as if you're guiding for unchanged listings, and still it's a significant shift. Also, if you could comment a bit on the marketing costs associated this year and how you look on that 2012 in the European business.
I can't go back to that nice picture here. When it comes to McCulloch, McCulloch had been used in Europe in the center and south of Europe. That brand is well known in that part here. Of course, in the northern part, we are more well known under Partner. Partner, McCulloch actually in the past been exactly the same product. Both yellow, we are just trying to label. Now we actually have the McCulloch part here. Of course, what we have done now here, especially in the Nordic part and between Russia as well, we have phased out now the Partner range here that have been sold out here. We'll replace all this with actually the McCulloch here when it comes to chainsaws, trimmers, and lawnmowers, and so on.
What you said to the trade here, we will launch another full range in all categories here due to we start with this year with a couple of chainsaws, a couple of trimmers, and next year we come with more and more. It may take us through the season here to have a full range. That is what we really want to do so we actually can offer the customers new products even later on as well here. They are aware that, of course, there will come some more lawnmowers here, 12 and 13 and 14 here. That's a normal process here. We are going in a little bit to the rest of the business here that they want to launch new products and some new features every year here. That's a little bit the plan we have when it comes to this here.
What we are doing here, I know all these nice plastic parts here, lots of components are more or less the same here. That's a little bit what we are doing here. What is actually completely new here, and I don't know why we don't have that product, that actually we will launch a complete new ride-on product under McCulloch, which we don't have had before in the old range of Partner and McCulloch. That's a complete new product.
To comment just on the branding cost here, I mean, yes, we do have had a peak of those this year. Of course, that will fade out during the course of next year. This is part of the feeling that, of course, we have spiked during 2011.
Of course, there have been a lot of new catalogs and all these things here for McCulloch, and then filters and all the things here. Of course, that has been a peak here. We haven't sacrificed actually that we have reduced for Gardena and Husqvarna because we have kept that to the same level as well here. Of course, when you do such a big launch as we have done here, and actually Husqvarna has never done such a big launch with complete new products in the history as we are doing here. That's the first time actually we're behind this here. Of course, positive for all of us actually to have been so well received here.
Klaus Rasmus Hans, Medbank. Coming back to the cost for the Orangeburg facility, you had SEK 38 million and then anticipated another SEK 30 million. If I remember correctly, that is a lower amount than you guided for in the second quarter results. Can you give an explanation for this?
I think we should see it as very positive. We have got our arms around Orangeburg in a faster pace, and that means we have less of what we then define as extraordinary costs for the remainder of this year. That is the best positive sign that I think you shall bring with you.
Thank you. Also, with the snow throwers, you say that you have had sort of good listings here or sales for the third quarter. Should we expect even better sales for the fourth quarter, or is the boat already taken in the third quarter?
No, we will continue to actually ship the orders we have on snow throwers here. Have in mind, snow throwers is a large small part of the entire business here. Actually, it's just now the whole industry is not the only way to actually have a good demand of snow throwers here. All of us here as consumers, we want actually to use the snow throwers here.
Is there a limitation on how much more snow throwers that you can deliver?
We produce this in the U.S. here. Of course, you have normally from door to door eight weeks delivery times here. We have got now actually the last shipments here, week 41 here. We focus that we have enough snow throwers here. I've heard some actually have promised to deliver here. You can trade it with empty. You might even in Sweden find some on the docket. It's a little bit unusual situation for us to have to meet this when it comes to snow throwers. Still, nice weather outside. People like snow throwers.
All right. Thank you very much.
In the room, we will ask the telephone conference whether they have any questions. Operator, any questions?
Just to remind telephone participants to register a question, please press star one on your telephone keypad. To cancel a question, please press the hash or pound key. We have a question from the line of Kenneth Toll from carnage.com. Please go ahead with your question.
Yeah, hello. It's Kenneth Toll, Grey Carnegie. Just a question on the R&D changes you make. The former CEO had this idea that if you centralize R&D and product development, then you will have more common products through the group. That would enable you to have more, how should I say, more rational purchasing and cut the number of suppliers. You don't need to double develop products in the U.S. and in Europe and so on. Now you're saying that you're moving R&D much closer to sales. Is that opposite what the former CEO said, or what's your comment on that?
Not at all. I think you misunderstood me. What we are doing actually, we take the brand and central marketing to actually the sales. When it comes to the global product categories we have here, it remains as before. I share exactly the same as the former CEO when it comes to that part here. There is no change when it comes to that. It's just marketing activities here.
Okay.
The brand, which are more strategic issues here.
Okay, thank you.
No change.
Telephone conference. Let's continue in the room.
We have a nice side of the question.
Yes, hi, that's my name again. I'm Anders Banken. I had two questions. One that we've been touching upon somewhat earlier. Just to be absolutely clear on that, given that you carry quite a lot of inventory with you into the next year and the fact that you're ramping up production earlier in the fourth quarter as well, we must assume that production levels for next year would be fairly significantly down on a like-for-like basis. Is that correct? How should we sort of think about that?
It can be when it comes to some of the categories here, especially when it comes to some of the lawnmowers. That can be that we really start up the production a little bit later than normal here due to we have this safety stock, plus on top of that a little bit more due to what's happened here in June when that market more or less stopped for all of us here. When it comes to lawnmowers, yes. When it comes to the rest, I don't see that as the main problem here. Assuming a normal stable market here, I have to actually.
Would that be a European issue or a U.S. issue with inventories actually?
I think it's both here, but the inventory levels are a little bit higher in the U.S.
Okay. I have a question. I don't know if it's appropriate for you to answer that, but the board hiked the dividend payout ratio, and now we have implemented a hiring freeze. I'm just wondering how we should think about dividends.
That's a board question.
What is the payout ratio and does it include one-off costs or not?
We have a policy and that is stated in the annual statement, and it is a board issue.
What is the policy?
40%.
40% of net earnings.
Yeah.
Thank you.
I understand there should be a few follow-up questions. Just wondering really why you choose to delay the move to Poland. Is it really only the experience from Orangeburg, or is it something that also you have noticed when you have run the plant a bit?
No, actually. The reason actually is that, as I said, it's the customer first and secure delivery here. Of course, we don't want to repeat Orangeburg. We take actually a more safe approach than actually we've planned before here. It's just that we want to have this more under control and more safe. We don't overload actually the new factories here and the people as well here.
You had no real sort of negative experience from the production you have had in Poland so far?
No. I worked with setting up new factories for many, many, many years here, both brownfield and greenfield factories here. I have to say the starting up of the Polish factories, and some of you know that my background is from the electrical actually, so I'm from other companies here. I have never seen such a good starting up of a factory as we have done in Mielec here. Of course, we've seen that. I also seen actually.
You all know this and are too optimistic here. We have actually in Husqvarna, you'll miss here and see how that can affect the company. I want to take a safer journey going forward here due to my experience, but we can screw up a lot of things here. We don't want that once again.
One final detail also, you mentioned you have high branding and IT costs this year. How much will they go down next year?
Regarding branding, that is something we cannot reveal to you. It is as said, we have had the spike related to the McCulloch. There will be less of that, but it depends on what type of product launches we look forward into the future.
IT costs, I guess it's the STD project.
Yeah.
That runs with the same pace next year, or? Not the same pace next year, that will go down by 8.
We have a couple of questions from the telephone conference. Please go ahead.
The next question from the line of Certain Life. Please go ahead with your question.
Hi, there's definitely a quick question. Firstly, if I may, on aspects for 2012, can you give us a rough guidance what that would be?
Based on the development we see, of course, you will have a better year-over-year effect. I will not guide you more than that. We don't give any projection on that. Based on what you have seen this year and based on the currency level that we have, FX levels we have this year, we see, of course, a year-over-year effect that should be better.
When you say better, do you mean better than the 350 to 380? Is that what you're saying?
Yeah.
It's not positive, right?
I say it will improve year-over-year.
Sorry. Is it a big headwind next year? Is that what you're saying? It's about less of a headwind than this year?
Less of a headwind than what you have seen this year.
Excellent. Thanks. What about the input cost if the current sort of prices stay the same? What should we expect for 2012 then?
Sorry, could you repeat that?
Input costs for 2012, if the current steel prices, etc., stayed on the current level, can you give us a rough indication of that?
You follow the trends, of course, downwards here. That is, of course, having a positive impact on the steel side. On the plastic sides, we don't see the same trend going downwards there.
Okay.
As mentioning to typical and major product categories.
All right. If I rephrase that, with the price increases that you expect to get through here, will you see that being enough to mitigate the input costs?
We refer to what we have normally been doing in the past. We have quite a good track record in Husqvarna to actually offset the higher raw material price increases. That is our ambition for the coming year as well.
Anything else? Anybody?
Any further questions?
We have another question.
Hi, Antoinette here from Nordea. Can you just explain to me how good a visibility you have on these pre-booked orders or listings that you mentioned? You talk about inventory being fairly high among you as well as retailers. We may be going into a macro downturn, yet you choose to start your preseason production earlier. Isn't that a bit of a risky move?
All business is risky. I think we actually, when you look upon the listings we have in the pre-orders here, of course, we take that into account when we do the production schedules as well and the forecasting. We normally take into account what I call a normal weather. What's a normal weather? We look three years back to that average, then we look upon that. That's a little bit how we start to plan all these things when it comes to inventory reduction, how much has to be produced, as well as the shipments we have. When it comes to, especially, the pre-orders in the daily business, that orders, listings actually that they have now decided they will encounter. This product range or lineup we have, they want these products. We have an estimation of the volume and we can include the prices and all the things.
That's the only tool we have actually to deal with. If something happened, we need to be quick to adjust. It's hard to ramp up if it goes up. Sometimes it's even more difficult to break. There you have the risk. You have risk in both ends. It's a balance act for us when it comes to this. There is a risk.
Any questions? No? A closing remark from Hans?
Yeah. Actually, overall, over here, we've had to meet that. We've had a very tricky year so far. First quarter, second quarter, third quarter, actually, we see now the light in the tunnel here. When it comes to the situation in Orangeburg, I think the most well-known city or village in this group is Orangeburg. It's been mentioned a lot externally, even internally, of course, here. Actually, we've seen that we have been through that part here. It's been so far very turbulent here with external and internal as well here. We see now that we've got our arms around Orangeburg. I can tell you when we started up here during the summer, we had more every day follow-up with a new team over there. They established a core team here. We went to every second day. Now we actually have that every week.
We see that we actually can maybe postpone that so we don't have that every week, maybe every second week or every month here. We have been actually extremely to follow up this year in our upper or down there a couple of times here. I've seen actually improvement here. Of course, don't forget that even if you have such a huge problem in one part of your business here, you should, of course, don't forget that there are a lot of other things which you need to focus on as well here. That's what we are enabled to do as well here. Of course, there has been a lot of work, extra work for the people here. Actually, we try to neglect a little bit for some people what's going on there to concentrate to work on the normal thing as well here.
There are a lot of things that have been running extremely well as well in the company here. There are Automowers, riders, and so forth here. There are a lot of good things here. We've been able to launch all these new products as well here. The fourth quarter, this minor quarter, it's ups and downs. Of course, we are like others. It will concern what's happening around us. Of course, we are now. We try to calibrate this more or less weekly going forward here. Looking into 2012, of course, we are working with the budget. Let's see what happened here. We need to decide that actually this is what we think the market will be here for next year. We plan out for that here. We have to take more or less week by week. That's a little bit here.
I’d say we are not too disappointed with the work we have done here. Of course, we have stepped in here. We have to admit that we spent a lot of time over for now during the vacation to really dig into all things here. I think that has been good work for the company as well, that we have actually got good control over the activities here. Thank you very much. I hope to see you at the quarter four.
We now end the presentation. Thank you.