© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, everybody and welcome to Husqvarna Quarter 1 Result Presentation. Let me start by giving a flavor of the total quarter and how we look at it. Actually, we are quite pleased with the quarter to end up with an operating margin which is equal to last year Q1, which was a good quarter, it's a good result for us and you will be aware that there has been some headwinds this quarter talking about the weather, of course, and what is particular about the weather this year quarter 1 is that it has been cold both in Europe and North America. So talking North America particularly the East Coast, Midwest has been truly cold, Europe pretty much across quarter 1 even stretching a little bit into Q2, but not in any significant way. Despite that, operating margin remained at 11.2%, which is good and we have seen now that 3 divisions in profitable growth continuing that trajectory of improvements of earnings, EBIT, and margin. So that is quite pleasing.At the same time, we have faced quite considerable headwinds with the Consumer Brands Division and I'll come back to talk a bit more about that. If you look at the margin development, we are flattish, we are remaining on the 9.6% rolling 12-month operating margin since some time, and still, it's a good trajectory by and large and you will be aware that we are expecting to continue the improvements.I'll move over to actually the profitable growth divisions where we have talked about the organic growth being the primary focus, profitable growth, margin accretive, but growth oriented and you will see Gardena had a great start of the year, so they are actually now moving above 10% on the rolling 12 month basis. We see a downturn for particularly Husqvarna with flat quarter 1, but still being above 4% on a rolling 12 month basis just like Construction and then the average for the 3 division is actually a little bit south of 6%, give or take, 5.7% and that has also been the guidance for the full year that we expected the growth rate to be cruising along 5% to 6%. Quarter 1 didn't really give a great support with, but we still remain with the belief that that's doable for the full year. So that's a very positive signal, and I will say we have underlying momentum in these 3 divisions, which is positive. We'll talk about that soon, but first, let's look at overall group currency adjusted minus 1% from a sales perspective. However, a gross margin improvement, as you can see, from [ 27.7% ] to 28.8%, which is a good sign. And then as I commented upon, we managed to maintain the operating margin at 11.2%. However, then that left us a little bit with the operating income then being slightly below last year all in all. But still, we think that's a good result given the situation we are in. Cash flow is improved and just like the net debt, and Jan will talk a bit more about those in detail.If you allow me to get into the divisional perspective, I'll start with Husqvarna, and of course, we have the late spring impact here. And you know this is pretty much a [ stock-up ] load-in quarter, but nevertheless, normally, you do see some sellout in March that wasn't impressive. It was pretty empty actually on the floor at the dealers throughout March actually. So there is a delay here, as you will realize, and of course, now we need to see, and that goes, of course, for all the first [ and garden divisions ] that a sellout takes some pace pick up throughout April and into May. So we see the replenishment orders come.So far, I would say in April at least we see that the season is in full swing, which is good news, but we also need to see that maintain now throughout the remainder of April. We need to see it stay for May. If that is the case, we should be able to pick up what we have lost at the very beginning, if there is some questions around the remainder of April into May, then there is probably a difficulty to pick up that volume through an extended season later. So then it would imply a loss. It's too early, I don't have the visibility to say which of those 2 camps we're going to end up, but then you see the mechanism at least.So we saw some growth in Europe offset by the decline in U.S. and very much that growth was supported and fueled by the robotic lawn mowers which is positive and just like before, we also have support from the battery-based products. That is more equal I will say throughout the regions, but the robotics volume -- larger volume is as you will be aware, of course primarily a theme for Europe even though we are starting to work on U.S. that has less significance there at this stage.We had a favorable mix, geographic point of view, product point of view and some positive FX supporting, but we also do press on with the profitable growth initiatives and we have added costs for those compared to last year. So all in all, if you look at the numbers, you will see the margin improving from 16.8% to 17.7% and SEK 1.032 billion became SEK 1.070 billion and that on the flat sales as you will see. So a good result on that flat sales is my view.Gardena had an exceptional strong start of the year with 15% currency adjusted sales, great of course, and you see the operating income improved from SEK 251 million to SEK 301 million at pretty much stable margins and this is primarily due to if you look at the product dimensions, many new product categories have been brought into the trade may that be the new battery-based system [ HeartBeat ], modular system for handheld battery equipment, may that be also what you see in the picture, the SILENO City robot mower for smaller surfaces, but there are also many novelties in other categories, mobile watering, you have host boxes, hand tool areas, there are examples across all the product dimensions. So well received, good listings in that respect and, of course, we are pressing on with the [ year ] expansion in those markets we have talked about before and increasing the penetration of those markets. And we also see an effect in the quarter 1 here of a fill up into the online channel in expectation of the season.So all those contributing, so I don't think you should necessarily look at the [ 15% ] as the new expectation for the run rate of the year, it's a bit exceptional and it's related to those items I comment upon here, but nevertheless, it's a very good start. And just like with Husqvarna, we are continuing the investments into profitable growth, which is of course from a P&L perspective, a burden of the quarter as such, very, very nice start.Talking about the problem, which is Consumer Brands review, when we started this year that we would have a significant volume loss, that's not surprising at all. What we have seen is of course then the late spring putting more burden to this making the big box retailers more defensive in their purchasing pattern, which is not necessarily great and that goes beyond that particular account. So that combination has brought a 17% of sales decline currency adjusted which is not that easy to handle particularly not given a situation where we also have raw materials increasing quite significantly as a consequence of the tariffs even though we might have domestic suppliers, they have of course adjusted their prices in expectation, in anticipation of that tariff increase.And we also have some FX headwinds for the Consumer Brands. So all in all, it is a little bit of the perfect storm for that division at this stage and due to the contract structure with the big box retail, it is very difficult to make some negotiation around the price increases in a given situation in the season. So we need to work with that of course with a little bit longer time horizon and set the stage for next year, but we are pressing on with the footprint efficiency measures, we are pressing on with bringing new products into this division and of course it is a serious situation when you lose SEK 63 million in the quarter, that's far from great and that's not what I would have expected should we have talked about it 4 months, 5 months ago. So it's a tough start, no question, minus 2.2% operating margin.Construction, a lot more pleasant to talk about, 16% currency adjusted sales increase which is nice. Remember then, 12% of those being acquisition driven, we are talking about the Pullman Ermator primarily, it's giving fantastic -- HTC and then now lately Atlas Copco Light Compaction. And where we have said that there is no significant EBIT component related to the Atlas Copco acquisition for 2018, so there might be let's say a little bit less than half of those 12% related to acquisition that goes to -- allocated to Atlas Copco and that doesn't bring any margin [ content ]. So you could say there is a margin dilution maybe in the magnitude of 0.5 percentage point due to that as Copco top line and result contribution. Positive development, particularly in Europe, actually where we rarely see the correlation between the weather in Construction and [ the first encounter ] we actually have seen it and particularly North America where there has been delays of some projects in the quarter, East Coast, Midwest, but where we expect that to pick up again in quarter 2. So it's more a delay between quarters than anything about underlying pace that has changed. We still see a good momentum in the underlying business in all the geographies actually. 11.8% margin was increased to 11.9% margin. Okay, I think with that, I leave the divisional comments and let Jan talk more into the details of the financials.
Thank you, Kai. Moving over then to the group and whereas the divisions have experienced a fragmented and diverse start of the year, the group is as regards financial in general terms in line with the first quarter last year where we have pluses and minuses more or less offsetting each other. We have higher sales and EBIT in the 3 profitable growth divisions and those are offsetting then the lower sales and EBIT in the Consumer Brands. We have negative effect from the raw material price increases, but we have positive effects on FX offsetting each other.If you take a look on the top line, as Kai mentioned, it decreased slightly 1% currency adjusted. The currency effect there from [ minus 3 to minus 1 ] is related to the weaker dollar that was partly offset then by a stronger euro and of course then the lower sales in Consumer Brands offset by the very strong start in Gardena and in Construction division where we have both acquired businesses contributing and the organic growth. Gross income, slight improvement positively affected by product mix, but also of course of the divisional mix as we have Husqvarna and Gardena and Construction growing combined and Consumer Brands with lower than average profitability decreasing sales and also we have an impact across the division of improved product quality.On the negative side affecting these positive ones, we have additional costs for profitable growth initiatives and when we talk about gross income, that is R&D costs and we also have of course then the hit on raw material costs mainly related to steel and for our -- and for this group as well related to packaging material as well. We have a negative effect related to the lower volume. We also have an effect related to adapting our provisioning of bad debt for accounts receivables to IFRS 9 and that started to be valid from January 2018 and then affected this quarter negatively with some minus SEK 25 million whereas last year were unaffected since we did not adapt to IFRS or it was not introduced in '17, it was introduced here in the beginning of '18.Gross margin all-in-all improved by 1.2 percentage units to 28.8%. Moving over to our indirect cost, the selling and administrative expenses, the SG&A some SEK 85 million higher than last year. Also here, we have an impact then related to the additional cost for profitable growth initiatives and also, of course, an effect of the acquired businesses and when we talk about acquired businesses in comparison with first quarter last year, it's both HTC and Atlas Copco deal related to Light Compaction. That was offset partly then by the weaker U.S. dollar that impacted positively. Operating income, some SEK 50 million lower than last year, SEK 1.373 billion and as Kai mentioned 11.8% that is the same operating margin as we had last year. Financial items in line with last year, no big difference to what we experienced that quarter and net income some SEK 50 million lower than last year, SEK 940 million giving a net margin of [ 7.6% ] and an earnings per share of SEK 1.64.Moving over to our balance sheet and some comments related to that one. Also here of course, we have a currency effect because we have a big part of our operations outside Sweden, both in U.S. and of course, a big part of our business and sales is related to Europe and by that we get an effect of the appreciation of the euro and the depreciation of the dollar, all-in-all net very few effects if we take a look on each balance sheet row. So starting with the non-current assets, that has increased close to SEK 2.2 billion compared to March last year, SEK 0.2 billion is related to currency, SEK 1 billion is related to the acquisition of HTC and Light Compaction, and SEK 1 billion is related to a higher CapEx level reflecting our higher ambitions compared to where we were first quarter last year.And moving over then to inventory, of course, related to the weather we had an increase of some SEK 1.1 billion currency adjusted on our inventory compared to March last year. Late start of the season in both Europe and U.S. and also that we actually had expected higher volume for our profitable growth divisions and that has not still yet been turned into sales and accounts receivables. Talking about account receivables, they were [ some SEK 750 million lower ] in local currencies than last year mainly then related to the Consumer Brands reflecting a decision to cut back sales on a major retail account and also increased factoring in the Gardena division whereas acquired businesses in Construction division impacted with some SEK 100 million. Accounts payables some SEK 700 million higher than last year in local currencies mainly then reflecting the [ premium ] for the season and also then effect of the acquired businesses in Construction division.All-in-all, that meant that despite the impact of the late start of the season, operating working capital [ past year ] currencies on the total operating capital had a very limited impact, And with the improvement of operating working capital and the weaker dollar that also meant that we got a lower net debt end of March this year decreased SEK 0.6 billion compared to what we experienced in March last year down to SEK 9.2 billion and included here is also, of course, the effect of acquisition of light compaction here in February, Atlas Copco [ SEK 0.3 billion ] and also the acquisition we made in May last year for HTC if we compare it with the [ SEK 9.8 billion ], which we had March last year. One of our 3 financial targets, as you remember Kai showed 2 of them, the net sales growth in our profitable growth divisions, the EBIT margin and then we have the operating working capital in relation to net sales [ should be under 25% ] measured at year-end, that is our target with the improving operating working capital, it was enough to offset the lower sales that we experienced and that we continued even though not sure, but we continue the improvement trajectory and moving down 0.6 percentage units from 28.1% first quarter down to 27.5% and as you can see there is a seasonality effect in those first quarters. The seasonal pattern can also be seen here in operating cash flow where we have a buildup of working capital in the first quarter and in the beginning of the year where we have demand and deliveries and that was also valid this year, operating cash flow adjusted for acquired businesses was slightly over minus SEK 1.3 billion, that is an improvement [ with SEK 700 million ] compared to last year and that reflecting then the lower operating working capital, SEK 500 million of that improvement of SEK 700 million was directly related to Consumer Brands and their lower volume mainly then. Net debt to EBITDA, our ambition is to have an investment grade rating as a company and to be able to have that, we need to have a stronger earnings and cash flow from operation in relation to our net debt and to keep track of that 1 important key ratio is of course net debt to EBITDA and it increased somewhat from year-end to 1.6x following normal seasonality in the first quarters, but was still slightly lower than the first quarter last year. So continuing to decrease quarter-by-quarter.And ending with something about our key ratios and key figures, we have seen a somewhat deteriorated capital efficiency measured here then as capital turnover rate and we have more liquid funds in our balance sheet and that affects our return on capital employment measure that was slightly lower than what we had first quarter last year. On the other hand, return on equity was slightly higher than last year. We have somewhat lower average number of employees, some 400 employees lower than last year and that is related then once again to the U.S. footprint and the scale back of a major retail account as well as some structural changes from last year giving a full effect in this year. By that Kai, summing up.
Yes, summing up briefly before we start the Q&A. So as you've heard, we are quite pleased with the fact that we kept the operating margin given the circumstances of the late season start. We continue the growth trajectory with our profitable growth divisions, the improvements of the income and the margins and we are facing tough headwinds as I mentioned related to the consumer division. Talking about the volume decline, the raw material that's hard to compensate for in the given season and FX. I think that's pretty much it, but that we also have an underlying strong momentum. I'd like to leave it with that before I open up for the Q&A.
[Operator Instructions] And the first question of today comes from the line of Johan Dahl.
It's Johan at SEB, could you talk a little about the product mix improvements that you experienced in the first quarter, perhaps a little bit detail and color on that especially in the Husqvarna division, what's driving that?
So Johan, the mix improvement is pretty much driven by primarily I would say the robotics category and the statement that I have used before is along the lines of 20% or actually I have talked about, well above 20%, I can at least talk about 20% without any exaggeration in this quarter, but that is actually also true for the battery based products which is probably supporting to some extent as well here.
Okay also just a follow-up on your inventories, have you sort of shifted your production schedules looking in Q2 and possibly Q3 and just due to the inventory situation and are those inventories that you -- or you expect to move those in sort of follow-up orders here in [ Q ] in April, May, basically?
Of course, we are carefully following what is happening with inventory and demand and as Kai was into it, it's about also how much of the replenishment will happen and when will it happen in Q2. So we are following that. We have not made any major changes to our production schedule, but of course, we are more cautious now and we have been so coming into the end of the first quarter and beginning of the second.
Yes, in addition to that, of course with the sales we experienced in quarter 1, we are well stocked so to say. So there might be things coming up as Jan points as we see the replenishment kick in or alternatively to a little higher or lower degree.
And of course, there may be [ stop ] producing earlier than we had planned from the very beginning especially if we think about the U.S. footprint and tractors and walk [ behinds ].
Just finally on cost out, I think consumer product, can you update us on where you are -- where you stand currently, you talked about footprint planning et cetera. What the visibility there for savings in the remainder of 2018 and possibly '19, thanks.
If you look at the cost outs the last few years, I think we have been around 2 percentage points of improvement on a year-to-year basis. I think that's a good proxy for what that should be, but then with the understanding that -- when I talk about cost [ up ] I'm clear, I'm talking about product cost and footprint cost altogether and of course, now with the raw materials that is a burden on that improvement rate.
And maybe Kai then we should also give a little guidance for the coming year on raw materials because as we mentioned, we are more or less offsetting the raw material price increases with FX. We will have more of headwind coming from raw materials than we have tailwind from FX coming into the remaining 3 quarters of this year. So we are still talking about the negative net of around SEK 100 million net of FX and raw materials. So we have still a tough headwind to take actually on raw materials and that is the main portal that is actually, unfortunately, hitting consumer brands and their products.
[Operator Instructions] And the next question of today comes from the line of Johan Eliason.
Yes, hi, and I was just wondering about this raw material again, you mentioned it a headwind and I think already now in Q1 for Consumer Brands. Have you changed your hedging policy in any way, isn't it so that the cost of your short manufacturing period you would typically hedge most of it or have this lost turnover from a major retailer sort of impacted your visibility on what you could hedge.
No, it has -- that has not changed, but of course, we are comparing hedging levels first quarter last year and hedging levels first quarter this year, so of course there is always timing differences here. So no change there and what you can say is that maybe our hedges has been a little longer than we anticipated due to the lower volume. So, but no change in general talking about raw materials.
Okay and then financial cost, could you sort of give us any indications on whether it should end up going forward?
Well, we started the year in line with this year and the best guess, it will be in line with 2017 also, for the full year '18, maybe there will be some positives, but more -- if there is a risk or possibility is more on the downside, but if you are putting it into a spreadsheet, use '17 numbers.
[Operator Instructions] And the next question of today comes from Rasmus Engberg.
Can I ask you on the -- what do you see for the coming quarters for Consumer Brands. It seems that you are saying that there will be continued worsening of earnings there as the raw material is more heavier in coming quarters or am I my misunderstanding it?
No, Rasmus, I think you're not misunderstanding it, and I think the point is exactly that it's hard to be that optimistic about the rest of the year quarters, talking quarter 2, 3, 4 versus last year. And last year, we actually lost something like SEK 90 million to SEK 100 million in those 3 quarters combined. I'm not optimistic about improving that actually this year given the situation where we had to absorb those higher raw material cost [ FX ] and we have that scale back of volume to deal with. So it's all in all, if we guided last time a sideways move with a risk of the downside, that downside is actually a fact at this stage for those quarters. And if we think about that division for next year then, is it feasible to expect that you will be able to push those costs on to the retailers or how do you deal with that for next year? I would say the raw material burden is nothing unique for Husqvarna, I think everybody is struggling with that in this season, everybody is probably in some kind of pain versus the retailers with the contracts. So I cannot see anything else then that there will be a pressure upwards for next season. On that topic, there is no question about that.
[Operator Instructions]
And with that, I see there is no further questions. I'd like to thank you for your attention. Thank you very much.
Thank you.
Ladies and gentlemen, now that concludes our conference for today. Thank you all for participating. You may now disconnect.