Stockholm October 20, 2011
Hans Linnarson, Acting CEO and President: ”Husqvarna’s consumer business has been affected by the slowdown in the global consumer demand, the uncertain economic environment and the unfavorable weather. Operating income for the third quarter declined, mainly as a result of lower sales, unfavorable mix and higher costs.
We have maintained our market positions for forest and garden products both in Europe and North America, despite the supply chain challenges in North America. In some categories, like ride-on and robotic mowers in Europe, we have significantly increased our market shares. Accumulated for the year up until September, sales for Europe and Asia/Pacific and Construction have increased while Americas’ decreased, adjusted for exchange rate effects.
Construction’s performance has been strong all year, resulting in increased operating income and strengthened market positions.
Pre-season production for 2012 has started earlier than last year in order to secure a high customer service level. The Group’s listings for forest and garden products are estimated to be unchanged versus 2011, however with an improved mix among the retailers, confirming the success of our efforts to supply market leading, innovative products with strong brands.”
THIRD QUARTER
• Net sales for the Group, adjusted for exchange rate effects, decreased by 2%. Net sales for the Group amounted to SEK 6,410m (6,907) and operating income to SEK 113m (411). Income for the period amounted to SEK 55m (402), or SEK 0.10 (0.70) per share.
• Operating income was negatively affected by SEK -83m whereof SEK -38m is directly related to production disturbances, SEK -21m relates to the termination of the former CEO’s contract and SEK -24m refers to items affecting comparability. Changes in exchange rates had a positive effect of SEK 8m.
First nine months
• Strengthened market position for Construction and maintained for forest and garden products.
• Net sales for the Group, adjusted for exchange rate effects, increased by 1%. Net sales for the Group amounted to SEK 25,363m (27,446) and operating income to SEK 1,787m (2,508). Income for the period amounted to SEK 1,220m (1,873), or SEK 2.12 (3.25) per share.
• Operating income was negatively affected by SEK -453m whereof SEK -368m is directly related to production disturbances, SEK -21m relates to the termination of the former CEO’s contract and SEK -64m refers to items affecting comparability. Changes in exchange rates had a negative effect of SEK -335m (130).
THIRD QUARTER
Net Sales
Net sales for the third quarter amounted to SEK 6,410m (6,907). Sales prices increased slightly. Adjusted for exchange rate effects, sales decreased for the Group by approximately 2% and for Europe and Asia/Pacific by approximately 5%. For Americas adjusted sales increased by approximately 1% and for Construction by 9%.
Operating Income
Operating income for the third quarter amounted to SEK 113m (411). Costs directly related to the production disturbances in North America amounted to approximately SEK -38m. Costs related to terminating the former CEO's contract amounts to SEK -21m. Operating income includes items affecting comparability amounting to SEK -24m, referring to additional costs for the closure of a production facility in Spain, which was announced in the first quarter.
Changes in exchange rates, including both translation and transaction effects net of hedging, had a total positive year-on-year effect on Group operating income of SEK 8m (17). Hedging contracts had a positive effect of SEK 18m (36).
Adjusted operating income was positively affected by higher selling prices, which were more than offset by lower sales, unfavorable mix and higher costs. The Group operating margin declined to 1.8% (5.9).
Adjusted operating income and operating margin for Europe and Asia/Pacific and Americas decreased, while they increased for Construction.
FIRST NINE MONTHS
Net Sales
Net sales for the first nine months declined by 8% to SEK 25,363m (27,446). Sales prices increased slightly. Adjusted for exchange rate effects, sales increased for the Group by approximately 1% and for Europe and Asia/Pacific by approximately 3%. For Americas adjusted sales decreased by approximately 4% and for Construction adjusted sales increased by 12%.
Operating Income
Operating income for the first nine months decreased by 29% and amounted to SEK 1,787m (2,508). Costs directly related to the production disturbances in North America amounted to approximately SEK -368m. Items affecting comparability amounted to SEK -64m (-207) and costs related to terminating the former CEO's contract amounts to SEK -21m. Adjusted for exchange rate effects and items affecting comparability, operating income decreased by 22% or by approximately SEK -530m.
Changes in exchange rates, including both translation and transaction effects net of hedging, had a total negative year-on-year effect on operating income of SEK -335m (130). Hedging contracts had a negative effect of SEK -132m (88).
Adjusted operating income was positively affected by higher sales prices, which were offset by costs related to the production disturbances in North America, higher input costs and higher costs for selling and administration. The Group operating margin decreased to 7.0% (9.1).
Adjusted operating income and operating margin for Europe and Asia/Pacific and Americas decreased while Construction increased.
OUTLOOK FOR THE FOURTH QUARTER OF 2011
Due to seasonality, the fourth quarter is a minor quarter in terms of sales and earnings. The outlook is primarily based on an expectation of continued economic uncertainty and the current high inventory levels in the trade. Shipments of forest and garden products are estimated to decline while the positive trend for Construction is expected to continue. In total, the Group expects shipments in the fourth quarter 2011 to be lower than in the fourth quarter of 2010. The fourth quarter will be charged with costs amounting to approximately SEK 30m related to the production disturbances in North America.
FINANCIAL ITEMS NET
Net financial items for the third quarter amounted to SEK -89m (-101) and for the first nine months to SEK -277m (-258). The increase for the first nine months is primarily due to higher interest rates and higher net debt. The average interest rate on borrowings at the end of the third quarter was 4.1% (3.6).
INCOME AFTER FINANCIAL ITEMS
Income after financial items for the third quarter amounted to SEK 24m (310) corresponding to a margin of 0.4% (4.5). For the first nine months, income after financial items amounted to SEK 1,510m (2,250) corresponding to a margin of 6.0% (8.2).
TAXES
Taxes for the first nine months 2011 amounted to SEK -290m (-377), corresponding to a tax rate of 19% (17) of income after financial items.
EARNINGS PER SHARE
Income for the third quarter 2011 amounted to SEK 55m (402), corresponding to SEK 0.10 (0.70) per share after dilution. For the first nine months, income amounted to SEK 1,220m (1,873), corresponding to SEK 2.12 (3.25) per share.
OPERATING CASH FLOW
Operating cash flow for the first nine months amounted to SEK -328m (1,275). The lower cash flow is mainly due to the lower result and increased inventory mainly as a result of pre-production.
FINANCIAL POSITION
Group equity as of September 30, 2011 increased to SEK 12,813m (12,358). Equity per share amounted to SEK 22.38 (21.54).
Net debt as of September 30, 2011 amounted to SEK 6,628m (5,109). The major currencies used for debt financing are SEK and USD. The increase of net debt was mainly a result of lower result, an increase in working capital and higher paid dividend. During the second quarter a dividend of SEK 859m (574) was distributed to the shareholders. The impact on net debt due to changes in exchange rates during the first nine months was an increase of SEK 140m.
The net debt/equity ratio amounted to 0.51 (0.41) and the equity/assets ratio to 43% (42).
On September 30, 2011, long-term loans including financial leases amounted to SEK 5,516m (6,942) and short-term loans including financial leases to SEK 2,445m (368). Long-term loans consist of SEK 2,723m (3,148) in issued bonds, and bank loans of SEK 2,793m (3,794). The issued bonds and the bank loans mature in 2012 and onwards.
Husqvarna has initiated the refinancing of its existing SEK 9bn revolving credit facility maturing in 2012 and 2013. A new revolving credit facility of SEK 6bn has been launched to Husqvarna's core relationship banks and is expected to be signed before the year end.
PERFORMANCE BY BUSINESS AREA
Net sales for Europe and Asia/Pacific in the third quarter decreased by 7%. Adjusted for exchange rate effects, sales decreased by 5%. In the first nine months, sales decreased 2%. Adjusted for exchange rate effects, sales increased 3%. Sales prices increased and volumes were slightly negatively affected by the production disturbances in North America, since some of the production is sold in the Europe and the Asia/Pacific region.
Total market demand in the Europe and Asia/Pacific region was strong but slowed down toward the end of the second quarter. The weakness in market demand continued into the third quarter which also was impacted by unfavorable weather conditions.
For the first nine months, Husqvarna’s sales increased in several major markets including Germany, France, UK and the Nordic countries. Sales for the robotic lawn mower, Automower, have increased substantially year-to-date and snow-thrower sales increased significantly in the third quarter. Sales to the dealer channel increased while sales to the retail channel were flat. Over-all, Husqvarna’s market shares in the region are estimated to be unchanged.
Operating income and operating margin for the third quarter decreased, mainly due to lower sales of watering products. Adjusted operating income for the first nine months was positively affected by higher selling prices and volume while an unfavorable product mix and costs for materials, RandD and selling and administration had a negative effect.
Costs directly related to the production disturbances in North America amounted to SEK -5m for the third quarter and SEK -45m for the first nine months.
Changes in exchange rates had a positive year-on-year effect on operating income by approximately SEK 60m in the third quarter and a negative effect of SEK -80m in the first nine months.
Net sales for Americas in the third quarter decreased by 10%. Adjusted for exchange rate effects, sales increased by 1%. For the first nine months, sales decreased by 16%, or by 4% when adjusted for exchange rate effects.
Total market demand for garden products in North America has decreased during the year to date. Demand for chainsaws increased due to weather conditions, while industry shipments for most other major product categories, such as consumer garden tractors, have decreased. Husqvarna’s over-all market share has been stable during the year.
Operating income for the third quarter decreased to SEK -172m (-92). Changes in exchange rates had a negative year-on-year effect on operating income of approximately SEK -36m. The higher costs directly related to the production disturbances amounted to approximately SEK -33m. Costs for marketing and IT were also higher.
Operating income for the first nine months decreased to SEK -364m (191). Changes in exchange rates had a negative year-on-year effect on operating income of approximately SEK -216m and the higher costs directly related to the production disturbances amounted to approximately SEK -323m. Costs for marketing and IT were also higher.
Operating income in the second quarter 2010 was charged with items affecting comparability amounting to SEK -110m and the first quarter 2010 was charged with SEK -50m. There were no items affecting comparability in the first nine months of 2011.
Construction
Net sales for Construction in the third quarter increased by 3%. Adjusted for exchange rate effects, sales increased by 9%. For the first nine months, sales increased by 3% and by 12% if adjusted for exchange rate effects. Sales prices increased slightly.
Total market demand for construction products increased in emerging markets and was flat in Western Europe while the market environment in North America was more challenging. The business area’s sales increased on the back of a strong product portfolio with several new innovative products as well as a replacement need in the rental channel and by construction contractors. Market shares are estimated to have increased in North America.
Operating income and operating margin increased. Adjusted for exchange rate effects and items affecting comparability, operating income for the third quarter increased by 183% or by approximately SEK 48m. For the first nine months, the corresponding increase was 176% or SEK 110m.
Adjusted operating income was positively affected mainly by higher sales.
Items affecting comparability referring to restructuring costs amounted to SEK -24m in the third quarter 2011 and SEK -40m in the first quarter 2011. In 2010, the second quarter was charged with items affecting comparability referring to restructuring costs amounting to SEK -47m and the third quarter SEK -16m referring to a legal settlement cost.
Changes in exchange rates had a negative year-on-year effect on operating income by approximately SEK -16m in the third quarter 2011 and SEK -39m in the first nine months 2011.
PARENT COMPANY
Net sales in the first nine months for the Parent Company, Husqvarna AB, amounted to SEK 8,906m (8,416), of which SEK 6,794m (6,452) referred to sales to Group Companies and SEK 2,112m (1,964) to external customers. Income after financial items amounted to SEK 1,133m (2,505). Income for the period was SEK 983m (2,093).
Investments in tangible and intangible assets amounted to SEK 237m (205). Cash and cash equivalents amounted to SEK 109m (503) at the end of September. Undistributed earnings in the Parent Company amounted to SEK 17,500m (17,985).
RESTRUCTURING UPDATE
During 2009 – 2011, the Group has implemented a number of structural changes, aiming at eliminating overlaps and increasing efficiency within production and administration. The changes involved mainly consolidation of production in Sweden and the US, and of the sales organization in Europe and Asia/Pacific.
As production capacity and flexibility to guarantee customers the highest delivery performance will be prioritized, the pace and priority of ongoing restructuring projects is being reviewed. As a consequence, remaining savings from manufacturing footprint restructuring will be delayed to beyond 2012.
Extensive efforts to eliminate the supply chain disturbances in the Orangeburg production facility in the North American supply chain organization have progressed successfully. To ensure a successful delivery of committed volumes in 2012, the ramp up of pre-season production has also started earlier than in the previous year.
ORGANIZATIONAL CHANGES
On August 29, the Board of Directors’ terminated the former President and CEO Magnus Yngen’s contract. Hans Linnarson, Executive Vice President, Head of Sales Europe and Asia/Pacific, was appointed acting CEO and President on June 9 and will continue as Acting until a permanent CEO has been appointed. Hans Linnarson will also remain as Head of Sales Europe and Asia/Pacific.
Per Ericson, previously head of Human Resources at Haldex, has been appointed Senior Vice President, Human Resources as of October 5, 2011, replacing Lars Worsöe-Petersen who has left for a position outside Husqvarna.
Martin Austermann, Vice President Purchasing, has been appointed member of Group Management. Sascha Menges has been appointed Acting Head of Logistics and Manufacturing and will also be a member of Group Management. Thomas Andersson, Head of the global supply chain organization, and Martin Bertinchamp, Head of Products and Marketing, will leave Husqvarna as of October 31, 2011.
CONVERSION OF SHARES
According to the company's articles of association, owners of A-shares have the right to have such shares converted to B-shares. Conversion reduces the total number of votes in the company.
In July 2011, 3,262,684 A-shares were converted to B-shares at the request of shareholders. In October, another 1,057,629 A-shares were converted to B-shares at the request of shareholders. The total number of votes thereafter amounts to 174,148,682.9.
The total number of registered shares in the company at September 30, 2011 amounted to 576,343,778 shares of which 130,517,968 were A-shares and 445,825,810 were B-shares.
LEGAL MATTERS
In a judgment of February 2010, the criminal court of Tournai in Belgium acquitted Husqvarna in a case regarding a gas explosion on Husqvarna’s property in Ghislenghien, Belgium in 2004. The ruling was appealed by the public prosecutor, as well as by other parties, to the Court of Appeal. Eight of the 14 parties were judged guilty by the Court of Appeal in June 2011, among them Husqvarna Belgium. Husqvarna has appealed to the Belgian Supreme Court.
In December 2011, the Court of Appeal in Mons will commence proceedings adjudicating the damages for each victim and is also expected to rule on the distribution of liability for damages between the parties finally found guilty. Today, the damages claims are only partly known, but it cannot be ruled out that, if the verdict is upheld, this may lead to negative financial effects for Husqvarna. The damages claims are expected to become fully known latest at the commencement of the claims proceedings in the Court of Appeal in December. A final outcome of these damages proceedings may take 1 - 2 years.
RISKS AND UNCERTAINTY FACTORS
A number of factors may affect Husqvarna’s operations in terms of operational and financial risks. Operational risks are managed by the operative units, and financial risks by Group Treasury.
Operational Risks
Operational risks include general economic conditions, as well as trends in consumer and professional spending, particularly in North America and Europe, where the majority of the Group’s products are sold. An economic downturn in these markets may have an adverse effect on Group sales and earnings. Shifts in product technology as well as shifts in distribution structure could also have a negative impact on Group sales and earnings.
Demand for the Group’s products is also dependent on weather conditions. Dry weather can reduce demand for such products as lawn mowers and tractors, but can stimulate demand for watering products. Demand for chainsaws normally increases after storms and during cold winters.
Husqvarna’s operations are also subject to seasonal variations. Demand for consumer garden products and commercial lawn and garden products normally peaks in the second quarter, while the peak season for chainsaws is normally in the third quarter. Husqvarna has adapted its production processes and supply chain to respond to these conditions. However, parameters such as cash flow and production levels follow the seasonal variations in demand, which results in relatively greater risk exposure for the Group over short periods of time.
The Group is currently implementing a number of structural changes as well as a new organization. Restructuring and organizational changes always involve the risk of creating higher costs than anticipated and loosing key personnel.
Financial Risks
Financial risks refer primarily to exchange rates, interest rates, financing, and credit risks. Risk management within the Husqvarna Group is regulated by a financial policy established by the Board of Directors. A higher indebtedness resulting from the seasonality of the Group’s operations involve greater exposure to changes in exchange rates and interest rates, as well as financing risks.
Acquisitions
Husqvarna has completed a number of acquisitions. Although the Group has historically demonstrated ability to successfully integrate acquired businesses, such integration always involves certain risks. Net sales can be adversely affected and costs can be higher than anticipated.
