Husqvarna AB
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Husqvarna AB
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Good morning, everybody, and welcome to Husqvarna Quarter 2 Result Announcement. We have a mixed quarter. We have a good sales. We have a somewhat disappointing leverage on the result. But I think this quarter will be more remembered for the fact that we are now announcing decisive actions related to the Consumer Brands Division, and I'll talk a lot more about that, as you can imagine, soon. So if we try to summarize the quarter, we have had continued good growth from the profitable growth divisions and improved EBIT, but lower margins from those division. And the disappointment from the Consumer Brands Division, result wise, continues. It's an underperformance. And if we look at the group altogether, we have lower operating income as volume increase and efficiency improvements did not manage to balance the high raw material costs, a strained supply chain and also continued investments in strategic and profitable growth initiatives. This is, of course, a new situation. We have had a very strong machinery in terms of efficiency improvements for the last 4, 4.5 years; and we are now a little bit out of balance with that versus the cost additions we have taken for the growth initiatives altogether with these other components.But let me move over to the big announcement, which is that we have now decided to build on the strength of the group, which is then the Husqvarna brand, the Gardena brands and we have decided to dissolve the Consumer Brands Division. It would be pretty much a 2-step [ rocket ], means a reduction of sales of SEK 2 billion for 2019, and there could be another up to equivalent step for 2020 to take. Why do we not do that immediately? All of it -- well, the answer is we can't because of customer commitments we have for the 2019 season. So we have to accept that that's a bit slower than we ideally would like to. But I think, altogether, this is really a good thing. We are now looking through the commercial strategies and its implications on the footprint and the organization because what this will give is also a lower complexity in the group. So it allows the resources to be reallocated to areas where we have much better chances to grow. And there are also parts of the Consumer Brands business which is more synergistic with the group activities as such, and we'll have the SEK 4 billion that I've talked about, up to SEK 4 billion altogether, that we will exit is then things that allow us to reduce brands, reduce categories, lower the complexity, allocate them to areas where we see we have strengths, may that be robotics in North America, may that be Zero Turns; may that be handheld or parts and accessories; or, for that sake, service offerings, which are becoming more and more important as well.So what we have said here is that we will review the impact of the commercial strategy and its impact on the footprint and organization during the course of quarter 3. Meaning, latest in the announcement of quarter 3, we will be back with quantifications of what this will mean in respect to various aspects, one-off costs being one element of it.Practically, the dissolvement will mean that we will fold the North American operations into the Husqvarna division; and we will fold the European part of the Consumer Brands into Gardena division, the remaining parts of it. I think that's the main key message around this change.Let me also put some perspective to the whole thing. I mean, you will recall that we made a larger reorganization in 2014 when we made the business model, differentiated organization, which ended up in the brand structure. And the hypothesis was that with Consumer Brands being a separate division, we will also get the issues on the table, we will isolate them and deal with them and solve them. I think we had a good development in 2015. We had a good development in 2016. We had a breakeven in 2016. And then, actually, I have to admit, it derailed a bit in '17. And there's no credible path back to the target, which we were setting out as 5% EBIT, within a reasonable near future term. And hence, I think we have given it our best try, and we have concluded that let's work on what has proved to be strength of the group and not waste more energy on areas where we are not the appropriate owner for it. And I think that's a pretty clear situation. But it is, of course, disappointing. But I think it's a fair conclusion and maybe not completely unexpected.Moving on to what we then usually look at, which is the EBIT development and the margin, we see we have a little tick downwards now with this year. And I'll talk more about the quarter 2 and how we can describe that soon. So it's a little bit disappointment also from us. But on the other hand, looking at the sales development, you will see that we are trending in the right direction with these divisions. So we're now at, as an average of the 3 profitable growth divisions, at 6% growth. And of course, Gardena sticks out after 2 great quarters. And if any division has benefited more from the strong season, of course that's Gardena, not surprisingly to anybody.Looking at then the financials, we have a 7% growth currency adjusted, so SEK 14.2 billion -- or SEK 14.27 billion. So that's pretty good. And we see then that the EBIT result reduced from SEK 2 billion to SEK 1.925 billion. And you heard me comment about the main reasons: volume and efficiency did not balance the raw material, the strained supply chain, given that we also pressed ahead with a fair bit of cost additions for the profitable growth initiatives. There is a bit of positive currency impact, I will come back to that. So altogether, for the first half year, we are about SEK 130 million lower than last year, SEK 3.3 give-and-take billion EBIT versus SEK 3.43 billion. And then you should remember that Consumer then have lost SEK 254 million in that first half year. So eliminating that, which would be about 1 percentage point, which we lost, and that's -- so the rest is moving in the right direction; however, somewhat weaker than before. Husqvarna then saw a good growth in both Europe and the U.S. following the late start of the season. You will recall we had a late winter, which pretty much turned into a summer without spending too much time in the spring phase, and that puts a lot of strain on the supply chain. I would say it went from nothing, nothing to pretty much a lot all of a sudden. And that, of course, is even more pronounced for the Gardena division, that pattern. But we have seen continued improvements of Robotics, of battery-based products. However, living up in Scandinavia, that's most of you sitting in this room, you will have noticed that throughout the quarter, towards the end of it, the grass hasn't grown that beautifully as it normally does. So it's pretty dry actually, without any rain during the course of May and June, by and large. There is a bit of a negative there. But I would say, still, on the overall scheme of things, it has been a good quarter in respect of demand. So somewhat higher operating income, 1 -- SEK 1,180 million becomes SEK 1,201 million. That's okay. You see the same comments as I made previously here, by and large, so I don't need to repeat them too much. 6% for the quarter, 3% for the half year of growth is still okay. Operating margin, 17.8% for the half year versus 18%, still on a good level altogether. Gardena then, of course, has had and enjoyed very favorable warm and dry weather, which is good and which has put even more strain on the supply chain, and we could probably have sold potentially even more. 12% in the quarter, 14% for the first half year of growth. Great numbers, of course. And we see then the operating income improving, absolute numbers, but being somewhat lower from a margin perspective. And what's happening here is that we are expanding geographically as well as with categories into areas outside of the core markets, which is of course then also relating to situations where the strength of the brand are not as reinforced as they might be in Germany, Benelux, Austria, et cetera. So there is a certain pressure on margins, I think, from that respect in the expansion of the Gardena that will make the leverage of the result going forward somewhat smaller. However, this quarter though, we see a lot of one-off characterized cost from the supply chain that we have taken. And of course, to some extent, I think we can also reflect that what we see out there is some bottlenecks with suppliers. This is not a unique comment for Gardena, it's also applicable for other divisions. So some bottlenecks. We see higher logistic costs. And typically, inflationary pressure that you see in the peak of the business cycle or maybe slightly having passed the peak or somewhere around the peak, hard to tell at this point in time, but it's inflationary pressure in any way. And that is an important aspect as we talk about going forward. And also reverting back to Husqvarna and North America, pricing will be an important component moving into the 2019 season to compensate for the raw materials, and then further on also other possible impacts like tariffs. But staying here, we are quite pleased with the development. If you look at the half year then, I mentioned the 14% sales growth currency adjusted. We have SEK 886 million versus SEK 816 million then last year. Somewhat reduced margin, but still very good levels. Consumer, I was fairly clear about the disappointment in the quarter and in the half year, so it's SEK 254 million for the half year of deterioration versus last year for the same period. And we have material prices which are difficult to compensate in the short perspective. And it's generally, of course, a challenging retail market out there in North America. So I think I'll leave it a bit short with those comments. Construction, another good story. 16% including the acquisitions. Now this is predominantly the last acquisition of Atlas Copco, that's in that and it's half of the quarter for HTC. 8% of those 16% of sales growth refer to organic growth. So that's good. Good growth in all regions. And particularly, the dust and slurry segment is doing fine; but it's throughout doing pretty good. But there are some mix aspects, and we have pushed the integration of the Atlas Copco activity that was a carve-out, which we have moved into our operations. And we have also put a lot of energy and taken some cost, actually, to finalize that. Because to safeguard that, there's appropriate attention on the sales side to bring a transfer of Atlas-branded products into Husqvarna, get them into the stock, and we are talking thousands of articles that has been transferred here. So that has had a negative impact. But I think it's a really good result here that we have achieved. Having done that activity, that's a good base going forward. So operating income, somewhat improved, similar pattern. Margin wise, not fantastic. But by the reasons I mentioned, still good levels. For the half year, we are up at -- we are at same level of sales growth, 16%; and 14% margin versus 14.7%.I think I'll leave it there for Jan to take you through a little bit more of the financial details.
Thank you, Kai. Well, financially, a quarter with more headwind than tailwind, and I will come back a little about that also related to balance sheet and cash flow. And as Kai were into one of the [ signal ] of Husqvarna, the last years has been actually the good balance between efficiency improvement, delivering cost savings, and our investments in profitable growth initiative, increasing our cost base for future-looking projects and initiatives. That balance does not exist that clear in 2018. And the reason is, of course, what Kai was into, related to raw material cost increases. We have the generally strained supply chain. We had shortages of supply, both on transport but also from suppliers of material, but also bottlenecks at those suppliers. And all of these resulting in cost increases. And then we have also, of course, the volume effect of scaling back of one of our major retail accounts for the season 2018 in U.S., whereby we lost or eliminated around SEK 1 billion of sales. The trend of improving sales and operating income in the 3 profitable growth divisions from the first quarter continued also in the second quarter; and also the sort of offsetting factor, the Consumer Brands, with lowering sales -- lower sales and deteriorating operating income continued also here in the second quarter and eliminating the positive effect from the profitable growth divisions.Net sales for the group, FX adjusted and in the quarter, 7%. First half year, 3% up, both currency adjusted and in nominal terms, close to SEK 0.8 billion to SEK 26.6 billion. Gross income in the quarter, up some SEK 140 million, positively affected, of course, by the volume increase for the profitable growth divisions. And as Kai pointed out, watering products, of course Robotics and other battery products improved strongly. And we also have a positive currency effect on gross income. That is then offset partly by higher raw material costs. We're talking about some SEK 80 million here in the second quarter, SEK 140 million more or less then the first 6 months. The strained supply chain putting pressure on both manufacturing costs and transports. And you also have the profitable growth initiatives, as we call them in here, related then to the R&D cost that is accounted for in the gross income. So gross income margin deteriorated 1.7 percentage units to 30.1% in the quarter. For the first 2 quarters, the gross income improved close to SEK 175 million, with the same explanations as in the second quarter. But also then when we take a look on year-to-date figure, adding the improved quality as one contributed to the improved gross income.Moving down to selling and administrative expenses, the SG&A, they increased in the second quarter with some SEK 250 million, but SEK 100 million is then related to FX and also acquired businesses, where then we have the Light Compaction business in Construction Division; and also the acquisition of HTC, which happened in May last year. So the SEK 150 million that is left is then mainly related to what we call then additional costs for profitable growth initiatives, and we also have some higher IT costs. And for the first 6 months, we are up SEK 340 million, where currency had limited effect. But excluding then the acquired businesses, we are talking more about SEK 250 million in increase. Same explanation as in the quarter, more cost for profitable growth investments and also, to some extent, higher IT costs. All in all, this means that we have an operating income that decreased some SEK 75 million to SEK 1,925,000,000 in the second quarter this year, and an operating margin of 13.5%. And for the first 2 quarters, close to SEK 3.3 billion of operating income, some SEK 125 million lower than last year and an operating margin of 12.4%. Financial items, both in the quarter and for the first 6 months, in line with last year. And taxes were some 23% of the income before taxes, somewhat then lower than last year, and that is then positively impacted by the lower tax rate in the U.S.Net income in the quarter, SEK 1,380,000,000, some SEK 20 million lower than last year, giving a net margin of 9.7%. And for the first half year, slightly over SEK 2.3 billion of net income, and then net margin of 8.7%. And earnings per share of SEK 4.05, that is SEK 0.10 less than last year. With a substantial part of our operations outside Sweden and a substantial footprint in U.S. and Europe, we get, of course, affected by the weaker Swedish kroner and the appreciation of the dollar and the euro compared to June last year when we take a look at the balance sheet. So the noncurrent assets increased by some SEK 2.2 billion, where SEK 1 billion more or less is currency and the rest is related partly then to the acquisition of the Light Compaction business, but around SEK 1 billion is related to the higher CapEx level we have seen the last 12 months. And adjusted for currency, the inventory increased some SEK 0.9 billion compared to June last year, partly due to late season, but partly also due to higher business activity in the 3 profitable growth divisions. Acquired businesses impacted somewhat negatively here, of course, as well on the inventory.Accounts receivable was close to SEK 1 billion higher than last year. 40% of that is related to FX, the other is related to the 3 profitable growth divisions and the fact that we had a very strong sales in May, because what Kai described was sort of even if we had, coming into the second quarter, the season really took off in May actually. So we had an extraordinary strong May. And that, of course, not even -- not also only impacted the costs, because we were very strained on the supply chain, but also the fact that we have around 1.5 to 2 months of turnover of our receivables means that, that strong month and also an improvement in June is still in our balance sheet. So that's the reason behind the pretty high increase of receivables in the balance sheet; and as you will see also, a negative effect on the cash flow.Accounts payable increased some SEK 750 million in local currencies, reflecting then high volume in the 3 profitable growth division; and also here, of course, a small effect coming from the Light Compaction business that was included in Construction in February. All in all, we have an operating -- working capital has increased SEK 1.3 billion. Half of that is currency, the other half is then related to past and future volumes. And the working capital that is [ higher ], of course, also reflecting in our net debt. But the main effect of our net debt that has increased now up to SEK 8.9 billion is actually currency, both direct and indirect effects of currency. And of course, the acquisition of Light Compaction from Atlas Copco impacted some SEK 0.3 billion on the net debt here in the first quarter. And we are some SEK 1.3 billion higher than we were on net debt last year in June.Moving over to our financial targets. Kai has talked about one of them, I will talk about -- or 2 of them, I will talk about the others. I would say that our operating working capital related to net sales, that should be under 25%. That is our target measured at year-end. The net effect then of increasing net sales but also higher operating working capital compared to last year second quarter was slightly positive. When we take the ratio here, it improved slightly with 0.3 percentage units from 26.8% to 26.5%. And of course, this is not where we want to be, and we have really to improve our mindset around operating working capital questions in general as a company.Operating cash flow. Seasonal pattern, as seen in the past, is of course happening in '18 as well. After a good start of the year from a cash flow perspective, where we saw the cutting back of business with a major retailer in U.S., giving positive effects on Consumer Brands but also improved or increased factoring in Gardena, rendering results we saw here, deterioration in the second quarter compared to the second quarter last year of some SEK 1.6 billion of cash flow. Of course, accounts receivable is a big explanation here. But also, we had the tax payment in the quarter, in the second quarter, related to a tax case where we have appealed but we're forced to settle that amount for the time being. Operating cash flow adjusted for acquired businesses was some SEK 0.7 billion in the first half year, that is half of what we saw in the first half year last year.And we have an ambition to have an investment-grade rating at the company, so we're following very closely different key ratio. This is the one that is most important: net debt-to-EBITDA. The ratio increased somewhat from year-end in the first quarter to 1.6x, and it has continued in that level in the second quarter. Still rather stable, but annoying that we cannot continue our trajectory of improvements. And as you can see in the past, this is actually in the second quarter where we make the improvements in the curve because that's our strongest earning quarter. And that is not happening this year, which is, of course, very unsatisfactory.And moving over to the key ratios. And of course, since we have a somewhat deteriorated capital efficiency and lower earnings, the return on capital employed and return on equity is around 1 to 1.5 percentage units lower than second quarter last year or actually full year '17. As regard number of employees, we are some 100 persons lower -- or FTEs lower than last year related to a decrease in our U.S. footprint, once again related to the scale back of major retail customers; and also, getting the full effect of some footprint changes [ done ] before '18 here in the year. That is partly then offset by the increases in Europe and Sweden, reflecting the higher activity and the higher ambition we have in the company. Kai, for you to wrap up.
Thank you, Jan. Actually, I suggest we go straight into the Q&A. I would expect there are some questions here.
And operator, we start with questions from the floor here in Stockholm.
Johan Dahl at SEB. I was wondering, Kai, when you look on the growth divisions in Husqvarna and you sort of calculate what normally has been the operating leverage in those divisions, there seemed to be a fairly big deviation here in the second quarter. Could you just help us understand to what extent are these deteriorations sort of sustainable in Husqvarna? What can you fix? And primarily, in terms of taking out productivity to meet the increased innovation cost, can you get that back on track? What's your view on these items?
First of all, we will get that back on track. But I think it's -- short term, we are committing, so to say, cost increases, may that be in R&D program, may that be to sales penetration. Brands and marketing and similar are easier to make a variable cost item. But I think, looking into '19, we will rebalance, of course, the costs versus the efficiency improvements we can materialize. That's one component. The other component here, which is usually important for '19, I think I alluded to it, is the pricing to meet the raw materials and the inflationary pressure we have seen. So the answer is, yes, we will get back to the leverage. I don't think we should overread it. But in the short term, we are, so to say, committed on certain levels of costs. So I wouldn't say that we will see a fantastic leverage. And as I said in Q3, it might be better, let's see. But hopefully, it should be. But I think back to the more normal leverage is we have to see '19 from an expectation point of view.
But are you launching new sort of productivity initiatives? Or is it just getting old programs back on track?
No, I think we are actually on a yearly cycle introducing efficiency measures. That might be SG&A related or COGS, cost of goods sold related, various types. So that's an ongoing movement, so to say. I think we have -- I shouldn't say excelled, but we have done that quite well, obviously, during the last 4, 4.5 years. And now we are a little bit off balance in that; and that, of course, brutally shown in the figures what it means when you get off balance in that point. So we need to get back. There's no question about that.
Just one follow-up. On the Consumer Brands Division, what avenues have you pursued until you took this decision to scale back? What -- sort of what routes for this division are closed the way you look at it now? Secondly, I mean, as you can quantify the sales effect potentially, I'm pretty sure you have [indiscernible] view of what this product is going to cost. Could you give some indications what cash flow is associated with this going out?
I mean -- first of all, I mean, we have talked about after Q1 that we're turning all the stones, and that is true. But for me it's, of course, very difficult to talk about any specific activities or trajectories that is involved in that. It pretty much means what I said. But what we are doing right now is actually what we communicate, so I can't talk much more about the topic than that. And what I maybe should have done even more clear is, I think I mentioned it, that we will revert back during the course of quarter 3 with more details about what this new direction means. First of all, let's sort out all the details around the commercial strategy, the brands, the categories, and then we take the implication on the organization and the footprint. So it needs to come in that sequence. So you need to bear with us for another couple of months, but not necessarily much longer than that.
Is the same ruled out [ a lot of the Consumer ]...
I can't comment that. I don't rule out anything. If we turn all the stones, I can't rule out anything. But I can't say much more than that.
What one can add, Kai, is of course, that there will be a working capital effect of this. I mean, if you're talking about for the coming year, SEK 2 billion and then potentially SEK 1 billion to SEK 2 billion more in '20, I mean, we have 25% of sales tied up in working capital. So I mean, that will, of course, help cash flow going forward. That's the other side of scaling back, so to say.
Björn Enarson, Danske Bank. Coming back to Consumer Brands. You have been hesitant to take these kind of actions previously, and you highlighted the contribution to fixed costs from that division. What has changed?
I think what has changed is what I was talking about, meaning that we were on an improvement trajectory for '15. We were on that trajectory on '16. We've missed it '17. There's nothing that supports in a credible way that we get back on the trajectory, which is required. So you end up with confronting the brutal facts, so to say, that are we prepared to invest all this energy into an area where we're not proving the results; or should we actually reallocate the resources, energy, the focus into areas where we do great result improvements. And if you look at the profitable growth divisions just the last -- since end of quarter 4 '16, they have increased sales with SEK 4.4 billion, the result has improved SEK 750 million and there's a margin improvement, EBIT margin improvement of 0.7 percentage points. So I think we have a success formula here. And we just need to work and put even more energy on that and actually leave other areas, and dare to do that decisively. Then, of course, ideally, I would have liked to have all this, so to say, done in one big go around. That's not possible, so I need to accept that. But I think we are clear about the direction, and that's the important thing. And I think, again, coming back to it, the reorganization in '14 was hugely important for us on a group going forward. I think we've proven that. This will be equally important to actually resolve this underperformance that we have displayed. And then, of course, we talked about is this synergistic for the group? There is scale, but I think what we've seen is also the specifications have drifted even further apart. What we have seen is also that the petrol to battery shift diminishes somewhat the scale synergies that we saw historically. So I think it's not a problem for us from that perspective. But of course, we need to work through the contribution aspect, and that's part of the calculation here now. How much of the contribution to fix is it that we need to compensate for -- with reduction in other areas. And that, of course, includes also the group part of it. I mean, a group that has 3 divisions instead of 4 brings about also some scrutiny of that side. So we have that exercise to go through as well.
Is there a big difference in gross margins for Consumer Brands group?
Can you repeat?
The gross margins for Consumer Brands, can you give some...
I mean, it's half -- magnitude of half.
Yes.
And on those...
So that's, of course, if you try to understand, I mean, if you have weak brand equity, you have low gross margins, it's not that easy to justify the R&D investment, the brand investments as you also continue to create that little -- try to create that little excitement and at the same time as doing the cost out. And that's where we haven't proven to be capable to pull that off. But -- whereas, we do that quite nicely, actually, with Husqvarna division or Gardena division.
And those categories that you are initially exiting within Consumer Brands, are those materially different from Consumer Brands in terms of profitability as well?
It's definitely categories which are -- can be characterized as mature, low margin and with not necessarily a positive prospect either. So walk behind, push movers, petrol, lower-price-point tractors. Particularly, if I would point at one of the brands or 2 of the brands: Poulan, Poulan PRO in North America, we will depart. And we are reviewing other brands as well.
Christer Magnergård from DNB. We can maybe start with a follow-up on Johan Dahl's questions about inefficiency, maybe the bridge for the core brands compared to last year. What exactly -- can you quantify the headwinds from bottlenecks, logistic costs and the efficiency in some way, so we can understand it for what kind of one-off, to call it that way, effects were seen in the second quarter? And what was the poor performance internally?
We have quantified the raw material, even though a big part is, of course, Consumer Brands of the raw material. But I mean, we also have the Husqvarna brand with a lot of movers that are affected by the raw materials as well. Logistics, it's very much related, of course, to Gardena. I won't say very much, but they have more sort of logistic issue due to the extremely strong sales improvement, but also how this actually happened during the second quarter. But the logistic problem is general, and it's existing both on this side of the Atlantic and the other side of the Atlantic. There is a shortage of transports. Then we have had some other disturbances related to supplies; and of course, that is not helping either because then you have to -- you cannot optimize the filling of the trucks, et cetera, if you are having backlogs. So there are different types of issues here. And we can also point on the product mix. We had it on Husqvarna, for instance, and we have it also on Gardena or maybe it was Gardena, where we have put it in there. I mean, they are selling more of houses (sic) [ hoses ] and trollies in the watering business, which is, of course, good products. But compared to selling the more high-yield products, it is sort of dragging down the margin -- the EBIT margin and the gross margin for the division. And then, I mean, we have some headwinds on mix. But taking a look on the group, we have a positive divisional mix, which you can say is product mix as well. I mean, we are decreasing Consumer Brands and we are increasing the other division. Of course, that's a positive when we go up to the group level. But we have more of product mix headwinds in the profitable growth divisions separately, which is, of course, also a burden. We were into the weather in Husqvarna. I mean, of course, Scandinavia is one -- and Northern Europe is one of our most profitable areas. And of course, you -- we talked about it, it stopped more or less after the warm weather really started. And so we saw a June that was not very strong actually in that area, of course, naturally. But we don't want to talk weather, really. But of course there are small bits and pieces here and there, which actually make the leverage not being where we want to be -- want it to be for the profitable growth divisions.
So long answer, not necessarily what you asked for, Christer. But...
If it would've taken one, I would've done that. But it is not one. That's the problem.
I think the other way to look at it would be to say that the cost additions versus the efficiency improvement is the major component, still significant all these other aspects of inefficiencies. So that's another way to tackle it, to give you some sense without being specific as you would like to, but still giving you a hint.
Yes. And the problem with Consumer Brands and the work with that, has that had a negative impact on, well, your focus for the rest of the group, which might have happened?
I think it's true. I think, inevitably, it's always the case that you end up spending more time with the problems than you ideally would like to. And I think there's -- we are not an exception and this half year is not an exception. And you will also know that we -- there were some unfortunate developments when the president passed away in March, et cetera. So all that has created a lot of, of course, need for attention and time spent on that. And so it's not optimal, but it's a more generic, I think, situation.
And the Atlas acquisition, did you have an extra cost? You mentioned extra cost, but can you talk about that a bit?
No specific one-off, so to say. But I mean, in general, when we are accelerating to carve out and get it into our structure, of course, it's a lot of costs around that, that is impacted like [ IT ] system, putting up things in our own warehouses, et cetera, which is not necessarily related to the Light Compaction business as is, but I mean, it's more spreading out in other parts of the Consumer division and also partly into the Husqvarna division due to the shared logistical center, et cetera. So there are some costs coming into that situation also here in the second quarter.
Just imagine, if we have, for the sake of it, 10,000 to 20,000 articles that needs to be brought into storage warehouses and transition over from -- or transition into Husqvarna products, R&D efforts, [ category ] efforts in [ catalog ], et cetera, there's a lot of value steps here that are impacted altogether. But as Jan says, no one-offs.
Then in media, you said this morning that 10% margin for 2019 is -- I can't remember exactly what you said, but it's something that we should basically target or look for. Can you comment anything about 2019 progression on margins, or given the [ exodus ] of Consumer Brands?
Yes. I think what we have said in the release is that the reduction or the SEK 2 billion, if anything, is margin-accretive. So that's what we expect. And then the question was, is 10% -- are you going to reach 10% the next year, actually that's a reasonable assumption was my response. So give and take, that was the language.
Olof Cederholm, ABG. Just a couple of follow-ups. On the pricing that we -- that you talked about before going into 2019, should we expect those to be fairly sizable then if you need to catch up with cost inflation this year and then maybe some cost inflation also next year?
I would say, particularly in the U.S., since many of the raw material increases are related to the North American market, if you look at steel prices, they're significantly higher in North America than in Europe at that time, very much as a result of the tariffs on incoming steel. So the domestic suppliers from which we, to large extent, buy have increased their prices in relation to the tariffs of imported goods. So that needs to be dealt with, of course. And then there are [ related ] tariffs which has been announced in the last month, which will need to be compensated for. And this is almost like looking at a Reuters screen when it's a little bit fresh, where -- which we need to deal with. But of course, we're starting to look into also alternative sourcing routes for components, typically engines, and other components, which to some extent come from Asia into North America beyond the raw materials that we talked about. So -- and that will need to be compensated for. So the answer is, depending on the category or the product, you will see a spread. Some are not going to be impacted necessarily at all, others are truly going to be impacted. So there can be quite a significant spread between the categories here.
What is your confidence level on being able to offset the underlying increases?
I think we have the strength to do that, and we are determined to do that. We're not going to absorb that at this stage.
Okay. And...
In many cases, this is generic, of course. I mean, steel is steel and we have more or less the same kilos of steel in our products as the competitors. So there will be competitive issues to take care of, of course, where we are sourcing, how you are having your supplies, et cetera. But in the end, it's pretty generic if you take an average.
All right. And then a question about robotic lawnmowers specifically. How is the growth during the quarter? Is that business still generating similar margins as last year? Or is there a pressure? Just a little -- your thoughts on that.
The way I talked about this before is battery-based products and robotics combined, and I talked about them growing well above 20%. I think that still is true. Number one. If we look through the quarter, we saw, of course -- and you can imagine up in Scandinavia, there hasn't been much of robotics sales in the month like June, so a decreasing rate up here. But we see other markets doing fine. If you look at the margin pressure, I will say the dealer channel holds up very well. If there is a pressure, that's in the retail channel, where, of course, with an offering of some 20 actors fighting this space, not very surprising. There is price pressure on that side. So -- but I would still claim that Gardena, given the brand strength, given the functionalities and the feature developments, is holding up pretty well. So it's not any large decline in that sense. On the Husqvarna side, I would say we don't see the erosion even.
Operator, can we please open up for questions from the telephone audience?
[Operator Instructions] And the first question of today for the audio comes from the line of Johan Eliason.
Quick question. You mentioned the product mix, there was lower-margin type of product like hoses and stuff like that in Gardena, and I think you also have some similar in the Husqvarna division. Is that just because of this extreme weather pattern here? Or is there a structural shift, so you would sell more of the low-margin products going forward?
If I kick off, I mean, I think what Jan talked about, to be specific, was the example of the Gardena watering products where the mobile couplings is, of course, one of the profit pools we have. And whereas hose boxes, where you roll out hoses or you have hose trollies that you carry around in the garden, has some more dense margin. So we have seen a mix amongst those in this quarter. Whether that's structural change, yes, I think it might be actually. It might be. And more and more, we've seen an inclination to have like a fixed coupling and hose arrangement which you can mount on your -- on the wall of your villa or similar. So there might be. But I still think we have, given the scale that we have built up in this area, we also have ideas for how to improve that margin going into '19 season. So yes, that it's a structural change, but we will make sure to improve the margin on that side as well. So I think that's a fair comment to the Gardena case. I don't know which Husqvarna case you refer to.
I mentioned that there were some effects also on Husqvarna. And I was -- you were into it, I was into it, talking about the northern part of Europe, of course, being affected by the warm weather and thereby affecting also, for instance, the sales of robotics in that specific end of the quarter.
And if I just continue then along those lines. Of course, the Scandinavian region, as such, is a very profitable Husqvarna region. So the average profitability is high. So there is a regional, let's say, mix component there. I think that's what Jan referred to.
And can you say anything about these growth in the -- initiatives, launching the robotics in the U.S. and then Gardena into the U.K.? Is that all going according to plan?
Yes and no. I would say, we are starting to build significant momentum in North America with robotics. Are we selling to according expectations, I wouldn't say that really. I think we are still building the momentum. And I think it takes quite a bit of time here to increase the understanding of this concept. But I'm -- if anything, I'm certain we will see the larger breakthrough for '19 season, because now we also see in social media and e-comm channels and other things that there is a huge raise of interest and visits. For example, one of the big retailers with which we worked have seen more than 100,000 visits into this category on their web page during the last 9 weeks. So things are starting to happen. And now we need to do the planning for expanding the amounts of floors, which will then be, so to say, equipped with robots for next season; whereas this was more still selective, the '18 year. And we will also take some other consequences as -- in respect of installation resources, et cetera. It's -- U.S. is, to a large extent, a service-oriented market. So not a -- the answer to the question is not a fantastic sell-through, but a lot of momentum building in terms of robots [ and ] U.S. Gardena [ and ] U.K., there has been a bit of a setback through the fact that the retailer chain that was applied or as an entry ticket has actually exited from the U.K., and that means we are reinforcing a garden center position stepwise. So a little bit of a temporary setback; but on the other hand, the garden center is the right channel for us and the most important one to sell the premium anyway. So it just forces us to push that even harder. So in the larger scheme of things, the right thing, temporary, maybe not as much of an increase in U.K. as we would have liked to see in this year. But you've seen that the numbers are not bad despite this, so...
No, that's fine. Just on robotics again. You are closing down Consumer Brands, but I saw that you have launched the McCulloch brands also for robotics this year, for example, here in Sweden in [indiscernible]. How is that doing? And will the strategy change regarding that, considering what you are doing to Consumer Brands?
I think the answer is still within quarter 3. But you're absolutely correct, the product is out in the market. The product is selling through. It has had, I should say, a really good development not only in Scandinavia but throughout Europe; and to some extent, e-channels in North America. No big numbers on that side there still. So it shows that the idea of that category -- and that maybe it's a good question in the sense that I can use it as an example of talking about synergistic Consumer Brands business that makes sense and which has a future. If we would put, on one hand, the petrol walk-behind mover on one side and look at the robotic side of it, it's a completely different answer. So it exemplifies, I think, in a good way what makes sense to keep as a category.
So the strategy is to keep some new entrants of your ground will still work within the areas where you are keeping the Consumer Brand, brands like in the robotics. Are there other areas where you want to still fend off entrants taking share in the mass-market segments?
I think the message is we are determined to be in that part of the market and to that customer segment. Whether that's going to end up being with the McCulloch or another solution, may that be Gardena, that is somewhat stretched downwards or not, that's still to be worked out in the review that I'm referring to in quarter 3.
Okay. And then just coming back to the tariffs and the price hikes and fee cost. Are you in any significant way differently positioned versus your competition in terms of your sourcing and manufacturing setup?
I don't know if I start, Jan, and then you add if you want to add. I think that, to a large extent, if you look at components like engines, petrol engines going into tractors, zero-turns, walk-behinds, et cetera, I think they are sourced from low-cost countries, maybe even particularly China. I don't think we are more exposed on that side than anybody else. We have a fair share of that, but we also have some domestic manufacturing. So no, I don't think there's reason to expect that we would be significantly asymmetric versus competition.
And then you can add also Construction Division are impacted well -- as well. And there, it's more of depending of what category you're in actually, how the competitors have their supply.
That's a good addition, yes.
Our next question comes from the line of Rasmus Engberg.
I had 2 questions. With regards to the sales -- this revenue that you're stepping away from, the initial SEK 2 billion and then the second step, is that sort of the U.S. only or is it in Europe as well? Or...
The proportion or the division is 80-20 North America-Europe, around about. And actually, the reduction in sales is pretty proportional to that -- to those proportions. So there is a 20%-something European, but 80% sits in North America.
And this does -- the push movers and the cheaper tractors, they are made in the U.S., right?
Correct, to the major extent. There is a little volume made in the southern part in Europe in Italy.
So your comment regarding the manufacturing footprint, should we take that to mean that taking out 4 -- SEK 3 billion, SEK 4 billion of sales from those factories means you need to redo your setup slightly?
I think you're correct in the respect that these are significant numbers. And if they kind of disappeared, it will have, of course, a fairly clear impact on the footprint and new optimizations needs to be reviewed.
There are no further questions at this stage. Please continue.
So with that, I'd like to thank you for your attention. Thank you very much. Bye-bye.