Husqvarna AB (HSQVY) Q2 2024 Earnings Call Transcript Highlights: Navigating Challenges with Strategic Cost Savings and Inventory Reductions

Despite a 6% decline in organic sales, Husqvarna AB (HSQVY) focuses on cost savings and inventory management to stabilize margins and reduce net debt.

Summary
  • Organic Sales Decline: 6% decrease in organic sales.
  • Group Operating Income: SEK1.9 billion, down from SEK2.3 billion year-over-year.
  • Cost Savings Realized: SEK215 million for the quarter, SEK400 million year-to-date.
  • Direct Operating Cash Flow: SEK3.9 billion.
  • Inventory Reduction: SEK3.2 billion or 18% decrease compared to last year.
  • Operating Margin (Forest and Garden Division): Improved to 13.2% from 13% last year.
  • Operating Margin (Gardena Division): 15.2%, down from 17% last year.
  • Operating Margin (Construction Division): 9.7%.
  • Net Debt Reduction: SEK1.3 billion since the start of the year.
  • Cost Savings Program: SEK800 million achieved to date, with a target of SEK1.2 billion.
  • Gross Margin: Stable due to cost savings and efficiency enhancements.
  • Currency Effect: Positive impact of SEK60 million for the quarter, SEK250 million for the half-year.
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Release Date: July 18, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

  • Strong growth in the professional robotic lawn mower business.
  • Stable gross margin driven by cost savings and planned exits of low profitable wheeled petrol products.
  • Good cash flow primarily driven by reduced inventory levels.
  • Growth in battery-driven products for consumers and parts and accessories.
  • Solid financial position with improved borrowing situation and reduced net debt.

Negative Points

  • Weak macroeconomic climate with cautious consumer spending affecting business negatively.
  • Heavy rainfall and cold weather in Central Europe and North America significantly impacted Gardena's watering business.
  • Organic sales declined by 6% with a significant drop towards the end of the quarter.
  • Lower operating income due to lower volumes, lower capacity utilization, and negative mix effect.
  • Significant decline in sales in the North American market for the construction division.

Q & A Highlights

Q: Can you elaborate on the negative price effect in the quarter and the outlook for promotional activity or rebates going into Q3? Also, what is the current status of channel inventories?
A: We had a negative price effect of 1% in the quarter, consistent across all three divisions. This was due to selective promotions and efforts to reduce inventory. We will continue with this strategy in the coming period. Channel inventories are generally normal to slightly higher than usual, varying by division and region.

Q: How has the inventory reduction impacted margins, particularly in terms of under-absorption effects, and what do you expect for H2?
A: Our gross margins have remained stable, supported by our cost savings program, positive currency impacts, and the exit of low-margin wheeled products in North America. While underutilization has impacted margins, we have managed to offset this with cost savings and other measures. We expect this trend to continue.

Q: Regarding the shift to boundary wire-free robotic mowers, has this impacted your market share, particularly for Gardena? What is the outlook for next year with new boundary wire-free models?
A: We have seen a shift towards boundary wire-free models, leading to some market share loss for Gardena. However, we remain the leader in robotic mowing overall. We will introduce new boundary wire-free models for Gardena and Husqvarna next year, which we believe will attract customers and strengthen our market position.

Q: How has the underutilization impacted EBIT, and is this effect consistent across divisions?
A: The underutilization impact on EBIT is material but not as high as SEK250 million. It has affected the Forest & Garden and Construction divisions more than Gardena. We expect this impact to lessen as inventory levels continue to decrease.

Q: Can you provide more details on the weather impact on Gardena's EBIT and the outlook for Q3?
A: The unfavorable weather significantly impacted Gardena's watering segment, which is margin accretive. This led to a decline in both division and group results. The weather remains a key variable for Q3, and while early July has been positive, it's too early to make definitive statements.

Q: How is the market growth for residential and professional robotic lawn mowers developing?
A: The market for both residential and professional robotic lawn mowers is growing. We are driving growth in the professional segment, while the consumer market continues to expand despite increased competition. We aim to double our robotics business to SEK12 billion in the coming years.

Q: What was the balance of factoring trade receivables at the end of Q2 last year versus this year?
A: At the end of Q2 last year, we had approximately SEK2.6 billion in trade receivable financing. This year, it is almost zero.

Q: Are you seeing any significant shifts in market share for Gardena's watering products due to new entrants at lower price points?
A: No significant shifts in market share have been observed. The decline in sales is primarily due to unfavorable weather conditions, not increased competition. The competitive situation remains stable.

Q: Can you comment on the recently announced partnership with Liverpool Football Club for robotic mowers in the professional segment?
A: The partnership with Liverpool is more than just a commercial agreement; it is a mutual respect and application partnership. It aims to raise awareness and visibility for our products. We may pursue similar partnerships in the future, but this will depend on strategic alignment.

Q: How is your strategy and expansion plan for the professional turf care market progressing?
A: We are progressing well and have only scratched the surface. We have established professional organizations and dealer partnerships, which are performing well. We see strong interest and benefits from our applications, and we are pushing ahead full speed in this segment.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.