Husqvarna AB
STO:HUSQ B
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Husqvarna AB
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Good morning, everyone, and welcome to the presentation of Husqvarna Group's report for the second quarter 2021. My name is Johan Andersson, responsible for Investor Relations at Husqvarna Group, and I will be the moderator here today. On the call, we have Henric Andersson, our President and CEO; and our CFO, Glen Instone. Henric and Glen will present the report. And afterwards, we will open up for questions. And let me also remind you that this session is recorded and will later be published on our website. So with this, I hand over to Henric.
Thank you, Johan, and also a warm welcome from my side. We delivered a record strong quarter here in the second quarter. And we can see a strong and increased demand for gardening products. And we can also see that construction market is continuing to rebound from a quite challenging situation last year. Very good to see that we have a solid performance in all the divisions and in all main regions and in the vast majority of the core product segments as well. So it's a strong performance across the board. And of course, an important part of what we do is to execute our strategy. And today, I will take the opportunity to talk a little bit later about two very important product introductions that we did during the second quarter that really sets a new trajectory for us and opening up new opportunities in the future. With that very high-level summary, maybe we zoom out a little bit before we go into the details, and look at our performance over time. It's important to bring things into context sometimes. And what is evident looking at this graph is that we have purposely built a stronger Husqvarna Group over a number of years where we have really increased our focus on the -- divide a few brands and product segments that have the biggest opportunity for the future and that are truly important to the company. And that has also led to us reducing our focus in certain areas and even to exit others. Looking at 2020 and the last 12 months rolling, we are clearly above our 10% target, which is our target to be clearly above 10%. And there's, of course, an element in this of benefiting from the increased gardening interest stemming from the stay-at-home trend. But fundamentally, we have also improved the company over the years by changing -- purposely changing the mix, and that is giving us this kind of performance. If we now zoom in, looking at the quarter from a revenue perspective, we had organic growth of 14%, amounting to SEK 14.6 billion. And we have strengthened positioned -- our positions in general. We have strong performance in the main regions and in prioritizing the strategic segments. Strong performance, as I said, initially across the different divisions. Husqvarna is up 18%. Gardena is flat. Construction is up 31% organically. And let me spend a second on Gardena being flat. I think that is a remarkable performance, given that the weather has not been favorable in the core markets when it comes to irrigation products comparing to an exceptionally strong quarter last year, and that's because of the really good solid growth Gardena has been generating in the focused markets, primarily in Southern and Northern Europe. And we have delivered on this growth despite global supply chain constraints. Let's not overplay that, but of course, the growth could have been yet a little bit higher if we wouldn't have had those situations. From an operating income perspective, we increased this by 21% to SEK 2.6 billion, or just over 18% of sales, largely driven by revenue growth, by price increases and improved mix. And this despite pressure from higher raw materials and logistic costs. Our financial position is strong, and we strengthened it yet again during the quarter. The direct operating cash flow for the first half year is just about SEK 3 billion. And we have continued to reduce our debt during this time. And if you look at the net debt-to-EBITDA, it's now decreased to 0.7x, which is a very strong position to be in. Very good to see is the development of robotics and battery. This very important segment grew 27% during the second quarter, about twice the growth rate of the group average, and now accounts for 18% of the total. We can see growth both in the residential and in the professional segments. And the professional segment is no longer just significant from a growth rate perspective, but also start to become significant from an absolute term -- absolute amount perspective as well. And we have here a solid pipeline when it comes to new product introductions, et cetera. During the period, we unfortunately also experienced a quality problem with robotics affecting a large number of customers. And this is something we take extremely serious, and it's our #1 priority to resolve this as quickly as possible. And we truly apologize for the inconvenience that we have caused to our customers and trade partners inside of this. We are largely through the now. And over the next couple of weeks, we would have a solution for each and every customer. With that, as a summary of the quarter, I hand it over to Glenn to provide some additional detail to this.
Thank you, Henric, and welcome all. So a little bit more detail on the numbers, as Henric says. So we start off with the Husqvarna division. Of course, we're extremely satisfied. Our net sales grew by 18% organically. And actually, from a first half year perspective, that was plus 20%. We had a strong growth in all our regions and all of the main product categories, notably in robotics and handheld products, both petrol-driven and battery-driven. All regions have strong -- as said, have shown a strong growth in the quarter, particularly strong in emerging markets and our European region. This is the largest sales quarter for the division. And despite the supply chain challenges that we've had this year, organic sales growth, as said, we managed 20% through the first half year. Husqvarna CEORA was formally launched in the quarter. We've teased this a couple of times. We formally launched our CEORA product in the quarter, and that has been extremely well received. And that is a pro robotic mower designed for demand and co-applications, but cover very large areas. That functions with our EPOS technology, satellite-based navigation system, and that enables us to mow with virtual boundaries. And that launch really, truly emphasizes our commitment to sustainable technology and automated innovative future. The operating income for the division grew in the quarter. We went to 17.4% EBIT, actually growing with 42% overall, coming up from 13.4%, so an impressive leverage on that sales growth from the division. Same across the board, we've increased prices, and we've also had a strong product mix. There was a slight headwind in the division from FX, SEK 55 million in the quarter and RMI was approximately SEK 75 million a headwind, and we also have further logistics headwinds. On a year-to-date basis, I could say it's a pretty much copy/paste to what I said for Q2. Strong growth, as already mentioned, growth in all regions. Operating income actually increased by 50% to 17.4% from 12.8%, with a strong leverage from sales growth, price increases and product mix. On a rolling 12-month basis, the division, therefore, grows by 20% on a top line perspective, and as an operating margin, above 13%. Moving on to the Gardena division. Another strong performance, the division continues the growth journey that we have seen for several years now. Sales were strong in our strategic focus markets of Northern and Southern Europe, which offset the late start to the watering season in Central Europe. And still, we managed to maintain a flat sales development comparing to a record Q2 last year for the division. We actually had strong growth in all product categories, not just watering. There we -- outside of watering, we had a strong growth in robotic lawnmowers and hand tools where the division continues to strengthen its market positions. Okay. What was the decline in watering, I should add there, given the late start to the season in Central Europe? The solid mix and price increases were partly offset by increased raw materials. Raw materials for the division was approximately SEK 60 million in the quarter, and we've also continued our strategic investments, notably in brand and e-commerce activities during the quarter. But still, we managed to generate an operating margin of some 25.2%. On a year-to-date basis, despite the flat sales in the quarter, plus 15% sales through the first half year. The earnings for the division have increased to 22.1% year-to-date and benefiting from the solid growth, solid mix and partially offset by the headwinds of FX, which was SEK 40 million and raw materials at SEK 80 million. Looking at the rolling 12-month performance, we actually have a 15% sales growth and generating 15.9% EBIT margin. So extremely pleased with that. Moving over to Construction. A strong rebound, as Henric says, or a continued strong rebound with an organic sales growth of 31% in the quarter. And actually, we had a further acquisition benefit from Glass Park. We acquired there at the year-end, that would have generated a further 13% of degenerate for the 13%. We're organically 31% sales growth. The market has improved for the construction industry again during the second quarter, and the division continues to improve its market positions in all of our main markets. The operating margin improved significantly to 13.7% from 9.9% in Q2 last year, driven from the strong sales growth, increased pricing and the improved mix, notably power cutters and like conduction solutions. As per the other two divisions, we see headwinds in FX, it's SEK 35 million for the division, and also logistics headwinds with a slightly lower impact from raw materials impacting Construction. Year-to-date basis, organic growth, 23% and generating a 13% EBIT margin. On a rolling 12 basis, sales are now plus 12%. And you'll remember we're at a somewhat flat position at the end of Q1. So we've gone from a flat rolling 12% to a plus 12% on a rolling 12. And the operating margin is now at 12.7%. Moving over to the EBIT bridges for the group, and hopefully, these are well received. We actually had a very strong market-driven improvement, 21% growth overall in operating margin, but the market-driven improvements generating some SEK 700 million. Pricing was also positive in the quarter of SEK 155 million, and that represents approximately 1.2% price increases, which is very much in line with our previous guidance that I'll come on the next page. We continued to expand in our strategic initiative areas. This is approximately SEK 165 million in the quarter, somewhat similar there to that to the pricing figure I quoted of 1.2%. Just to put that into the gross profit and SG&A buckets, it was approximately SEK 70 million in gross profit and SEK 95 million in SG&A activities. Raw materials gave us a headwind in the quarter, SEK 140 million. Again, I'll come on to the full year guidance on the following slide. FX was negative in the quarter to the tune of SEK 80 million. Again, that is about SEK 130 million negative in the gross margin and a positive in the SG&A. Our full year guidance is in line with previous expectations on FX, where we are thinking SEK 300 million to SEK 350 million, and it's probably at the lower end of that guidance as we see it today. Moving on to the half year bridge and then I can really flavor with the guidance. The big increase there, of course, is the market-driven improvements, SEK 1.7 billion of positivity, which we're really pleased. And that's really the strength of the increased market positions, the strong growth, but also the profit pools, as Henric alluded to, and have grown well during the first half year. Price increases, we are now at SEK 270 million. That represents about 1.1% of sales, very much in line with our previous expectation. We would expect this can more or less offset our raw materials headwinds across the full year. So guidance of something in the magnitude of SEK 500 million. Strategic initiatives, SEK 260 million during H1, again, splitting that down into the 2 areas for you at SEK 95 million in the gross profit and SEK 165 million in SG&A. Raw materials were negative in the first half year. It was SEK 40 million in Q1 and SEK 140 million in Q2, so SEK 180 million on raw mats. We actually revised our previous guidance on raw materials upwards. We now think it is going to be more like SEK 500 million to SEK 550 million from the previous guidance of SEK 350 million to SEK 400 million. That would leave us a headwind of SEK 300 million to SEK 350 million in the second half year. As said, we expect our pricing should more or less offset our raw material headwind across the full year. FX, SEK 215 million negative in the first half year, as said, guidance of SEK 300 million to SEK 350 million, more likely on the low-end of that spectrum. So a further SEK 75 million to maybe maximum SEK 125 million to come in the second half year. Just to remind, of course, 2020 was a special year for us in terms of seasonality, more so in terms of sales, where we had 22% of the annual sales going through in Q3. That was really a periodization effect. I just want to remind you of this, but also, of course, we had an extremely strong earnings as a result of that strong sales. We'd expect somewhat normalized conditions during Q3 this year, especially comparing to the 2020 year. If we go to our cash, continues extremely strong. We've actually generated over SEK 3 billion in positive direct operating cash flow comparing to SEK 2.3 billion at the same point last year. There's actually a slight negative from the acquisition effect into this as well of about SEK 270 million. So excluding that will be near of SEK 3.3 million. Of course, the main movements are the strong EBITDA, generating some SEK 1.3 billion more than prior year. We have increased inventories during the period compared to the same period last year, partially because we put the brakes on last year when Q2 was very uncertain. We're also now increasing our component inventory ahead of our second half year and also preparing for the coming season. So we've increased componentry with SEK 800 million. Accounts receivable, actually lower than last year despite the higher sales, and that is really down to the periodization of the sales in the quarter. Last year, very strong sales at the end of the quarter, and therefore, it's still sitting on the balance sheet. This year, stronger sales in the first half of the quarter as per our normal seasonality, and therefore, that cash has been received already. Payables increased in line with our higher inventory levels, ultimately, we see that. CapEx, I would say, is pretty much identical to prior year at SEK 830 million, and we will maintain our full year guidance on CapEx, where we feel it will be around about SEK 2.4 billion, or around about 5% to 5.5% of net sales. Moving on to capital efficiency. Extremely strong performance, again, of course, significantly supported by the strong sales, but also strong improvements, as I alluded to, on accounts receivable, accounts payable, in particular. We would expect this to start flattening out and probably increase a little bit as we go through the second half year, but certainly well within our 25% target levels that we talk about. Just quickly on the balance sheet. Of course, extremely strong financial position. The main items probably to call out there are inventories. Inventories are up some SEK 700 million as reported, or 8%. Actually, a slight positive on the FX, it would have been slightly on a higher increase in like-for-like FX. But again, our inventory is very much in line with our plans. We are now preparing to Q3 and Q4 and also season '22. And as said, we have increased some SEK 800 million in component inventory and also around about SEK 200 million of blast track inventory in there. Receivables, I mentioned, is largely a periodization and payables also. Just on the debt situation, we paid down some SEK 2.7 billion of debt in the quarter. And actually, since the quarter-end during early July, we've paid down a further SEK 1 billion of debt. Moving over to the ratio, therefore, of net debt-to-EBITDA. As Henric mentioned in the intro, we are now at an extremely healthy 0.7x. This leaves us in a good position going into the second half of the year. And of course, the main benefit versus last year really the result of the cash flow from operations, generating some SEK 6.5 billion positive. So net debt, in absolute terms, down to SEK 3.4 billion. And ultimately, that is our pension and lease liabilities, that would make up that number. At that, I will pass back to you, Henric.
Thank you, Glen. And let's spend a few minutes on the strategy and executing strategy. And I would say, our clear sentiment is that we're executing well on a winning strategy. And I will not go through the components again, since we've done that in previous calls, but rather highlight two pivotal product introductions. Starting with CEORA. Glen gave quite some details as to what the product is. Let's now put that a little bit into context. Just like we have disrupted and transformed the residential market, we, with this product, set out to do the same when it comes to the professional turf industry, which is a very big market segment. We, of course, already are now selling quite a few robotics into the Pro markets. But this platform is really the first truly dedicated platform that we have purposely made for that industry. We launched it to the market in that sense that we showed it on June 22, and we have received very well -- very good response from customers here. And they see the same things we see when it comes to how this can actually support several ongoing trends. I mean, there's clearly cost pressure in this industry. This is a way to reduce operating costs. This is also a way to get to CEORA emissions, meaning that eliminate carbon in this market segment. It's also a way to provide a silent or low noise solution into these, many times, very public spaces. So there are several trends that this one will meet or can really benefit from, and that's also the response we get from the market. So a pivotal introduction where we now set off to also disrupt and transform the commercial turf industry. The other introduction that's very important is the K1 Pace. And this is a new kind -- new standard of battery-powered cutters. As you might know, in the Construction division, the most important product is the power cutter, and also the product that, to a large degree, has defined the brand in that market segment. It's also in an application that consumes a lot of energy. And here, we have developed a brand-new battery system, 94-volt, that can complement our other professional battery system that is 36-volt to basically enable us to step into applications that require more energy, more demanding. And here, we can actually bring to the market the first battery-powered cuter that has petrol-like performance. So this is really now giving the Construction division the opportunity to build a strong battery offering. So two very important introductions, not just as products, but as how they have the possibility to open up new markets for us. And as you can see, with the -- looking at the strategy to the left that it's clearly in strong support of our strategy. Shifting gears. When it comes to the strategy, spending a little bit of time on sustained rates and our commitment to sustainability, as you know, we have 3 targets: carbon, circular and people. When it comes to carbon, the target is to reduce our absolute CO2 emissions by 35% across our entire value chain, meaning scope 1, 2 and 3, relative to our 2015 baseline. And this is also our science-based target. Here, we are making progress. And we can actually take the next slide immediately, I think, Johan. And we are now at 30% reduction. Some of you might recognize that why do you say that you're making progress when that number was 32% or whatever it was here in the last meeting. But this is just a natural evolution with product mix that was a little artificial during the COVID, for instance, Construction that has more carbon still because the we are not as far along with battery, was depressed last year. It's now bouncing back, those kinds of things. But we are clearly progressing towards our 35% target. When it comes to circular, it's really about how do we reduce the extraction of virgin natural material. And we want to link this to our innovation capability. And hence made a commitment to launch 50 circular innovations by 2025. So far, we have no launched innovations, but that's also according to plan since there is a little bit of a lead time from you launch this program until you start to see things come to the market. So this target will be a little bit backed and heavy, so to speak. And then we have the people target with about to empower 5 million customers to make sustainable choices. And this is a target where we will have the measurement in place towards the end of this year. We're getting towards the end. If I summarize the quarter, we experienced strong and increased demand on products and we can see that the construction market is rebounding. We have a strong performance in the quarter. It's a record performance. and it's across all divisions and regions. Rolling 12 sales growth is 17%, and rolling 12 operating margin is 12.9%, so a very strong performance as such. And as we briefly discussed here recently, and we are making significant progress in our strategy execution, and we had two very important product introductions here during the second quarter that opens up opportunities for us for the years to come. And before I hand it back to Johan here and we can have some Q&A, I would just like to highlight here, save the date for December 1, where we will invite to a Capital Markets Day. It will be in Stockholm, and it will be a physical meeting that's at least what we are hoping and aiming for. And with that, Johan, over to you.
Thank you very much, Henric and Glen. And with that, we are ready to open up the Q&A session. So please, operator, start the Q&A session.
[Operator Instructions] So we have our first question from Fredrik Ivarsson.
A few questions from my side, if I may. Firstly, I guess, you mentioned pressure on the supply chain, and that's not the first time you mentioned that. But I think, it sounds like you're a bit more concerned about the situation now. So is that correct? And has it become even more tangible over the last months? And if you could maybe talk a bit about the magnitude of that situation?
I wouldn't say that it is necessarily more severe now than before. We have really experienced quite some challenges throughout this entire pandemic. Of course, the challenges are very much change in nature over time. But it's something that we have experienced all the time. And I must say that generally speaking, we have been very good at mitigate them, mitigating them. So they haven't become material. And let's remember that we have been able to meet a strong demand, and we're up 14% in the quarter. In robotics and battery, we're up 27% as an example. However, that could have been yet a little bit higher if we didn't have this situation. And also, our backlog is higher than it normally is.
Okay. Good. And then on the CEORA platform, if you could talk around your capacity here, what does that look like if you will try to sort of quantify that?
I think it's too early to quantify the ambition there. I think here early on, we need to zoom out a little bit and more look at a very big, very large commercial turf business. And we will try to disrupt that with something that's radically different. And of course, that will require some -- quite some effort and sometimes just like it did on the residential side until you reach sufficient penetration. So you reach a tipping point where the whole thing sort of snowball, if you see what I'm saying. So I think this has huge potential for us going forward. However, we need to have realistic expectations in the first few years.
Okay. Fair enough. And last question from my side. I think you mentioned the European and emerging markets as the key drivers. A bit surprised not hearing strong words about the U.S. market. Can you give some color on what you saw over there?
Yes, we still have a growth in North America, absolutely, a double-digit growth still, Fredrik, but it was even stronger in markets in Europe. So all double-digit growth actually in Husqvarna division that was in relation to.
We have a next question from Christer Magnergård.
Christer Magnergård from DNB. To start with -- on just the raw material costs you guide for, it's about 2.5%-ish of sales in the second half of '21. Given that raw material prices and especially then steel are continuing to move higher, can you say anything about what we should expect for next year or the first half of next year, at least? Is the 2.5% of sales proxy, or could it be even higher than that?
No. I think, Christer, we've got 2 dynamics, of course. This year, in the first half year, we were benefited from the hedges we had, particularly on steel. We're about 80% of our H1 steel consumption hedged, which was good, so we had a limited impact. So now basically, we'll take the H2 rates and pushing through to H1 next year. So it can be a similar magnitude to what we talk about in H2 that could hit we've had still impacts in H1, of course, as you know. But I would probably, if we're going to guide to think about a similar magnitude to what we say for H2 or H1 next year.
Yes. And in terms of promotional activities, in the first half year in '21. Can you put that into some kind of a historical perspective to the normal level, or is it lower promotions than normal?
Yes. against a normal historical norm, Christer, and I would say it's probably a little bit lower. We had a very low level last year of promotional activities for obvious reasons. We put the breaks on. And then when the month came, there's no need to overpromote. This year, we wanted to do more promotional activities going into the season, which we did. As Q2 has come through, it's probably still a little bit lower than we've seen in gains in '18 or '19 type year.
I guess, a question on Construction. EBIT margin was, of course, higher than in Q1. But from a historical perspective, it was quite low compared to a normal second quarter. Is it a result of last tracking integrated, or is it difficult to pass forward the increased costs on to customers is cost, et cetera?
No, spot on the blast tracker integration where we've seen good sales there, contributing some 13%, 14% to 13% the Q2 the sales. And that is dilutive at the moment to the Construction division EBIT margin. It's still positive, and we clearly aim at it will be the division average over time. But that is really the diluting factor, I would say, is blast track so far.
Great. Final question. And other costs have been higher, but I think Q1, Q2, I would guess that's related to both higher activity and also variable compensation. Hamlet, can you comment on how we should look at that role going forward?
Yes, it's -- you're right, and that's why it's higher, Christer. It's higher due to the both the short and long-term incentive programs that we've been providing for. We would expect in the second half year, that stabilizes to a normalized rate in the other cost line.
What is the normalized rates?
Well, we -- I say front loaded, of course, we try to have revenue recognition and cost matching as best we can. So we're taking costs in line with the higher Q1 and Q2 sales. And therefore, we'd expect it to be in relation to the sales in the best way I can probably talk about that.
So we have another question from the Gustav Hagéus.
Gustav Hagéus with SEB. Two questions. Firstly, I think you mentioned in the report that your ability to supply the market was perhaps a bit lower than demand. Does this mean that you lost market shares or that those volumes will come back to in Q3 and they will be able to build longer season, or how do you think that will play out?
It's always difficult to be precise on that comment, but I would say that we have a little bit of both, depending on market and product segment. There's a larger or smaller degree of the customer moving to something else or the customers waiting. So I think there is an element of both, and that's why also we're bringing a backlog larger than normal with us into the third quarter.
And when you look at channel inventories, would you say that there is low compared to normalized levels?
I will say that on the low side versus what is normal, yes.
Okay. And secondly, regarding capital allocation, as you mentioned, basically no financial net debt historically low compared to EBITDA, while I assume you're borrowing costs are also historically low if you were to gear up. So could you talk a little bit about optimal capital allocation in your balance sheet, and where are your priorities like going forward?
That's a question we were expecting, Gustav. So I guess, I should take it. No, of course, we are at a low level right now if we talk about our financial rating then we could probably have a net debt-to-EBITDA ratio of somewhere like 2.5x, should we want to go that far from a leverage perspective. So it doesn't leave us with a significant amount of firepower. I think ultimately, it's a question we don't have with the Board. But of course, we, as a management team, will give advice as we see fit. But I think we should come back to this, particularly during the Capital Markets Day how we see our future use of capital.
So our next question is from Johan Eliason.
I got a question on you were referring to the backlog...
Johan, if you can speak closer to your phone, Johan, if that's possible.
Okay. On the backlog on Husqvarna, and you talked about the higher backlog heading into Q3. Can you talk a little bit about what segment that is? Is that also related to Gardena? That's the first question. And the second one is on Gardena and regarding the situation on -- in Germany and Belgium and how does that play out. Now I guess, July is pretty important the month for the rewarding segment.
When it comes to the backlog, I think it is fairly well spread across the different product segments. There are a few exceptions. But I would say, generally speaking, we see something in all of them. also in construction. And therefore, we have a higher backlog tenor. Again, I do not want to turn this into a major problem. We have managed to take on a significant -- accommodate significant growth, and we have managed to mitigate most of it. So it's not necessarily super-material but it is there. And then when it comes to the Gardena, and, let's call it, the core markets, the challenge has been that there's been a lot of precipitation in those specific markets, meaning that the customer sentiment when it comes to watering and irrigation products has been lower than normal. And I must say that I think it is a very, very strong performance to be able to offset that by growing in Northern and Southern Europe and still match a remarkably high quarter for last year. No. I think you talked about -- you led it into Q3, et cetera. And I think, we haven't seen any big changes in that, in the weather, so to speak. And of course, it's going to be highly unpredictable. I mean, will it start to rain now or not? So we are planning for the worst and hoping for the best, meaning that we need to make sure that we maximize sales in Northern and Southern Europe and that we are ready to react if the opportunity opens up in the core markets.
So we have no further questions. [Operator Instructions]
Okay. It seems that we don't have any further questions at this point of time, and we know that it's a very busy reporting day today here in Stockholm. So I think with that, if you have any further questions, just reach out to us on the Investor Relations. And I think with that, we thank you very much for everyone participating today over the phone and over the Internet. And we wish you all a great summer. So thank you very much.