Here Comes El Nino, Good News for U.S. Weather Woes

WASHINGTON – March 6 -- Relief may be on the way for a weather-weary United States with the predicted warming of the central Pacific Ocean brewing this year that will likely change weather worldwide. But it won't be for the better everywhere.

The warming, called an El Nino, is expected to lead to fewer Atlantic hurricanes and more rain next winter for drought-stricken California and southern states, and even a milder winter for the nation's frigid northern tier next year, meteorologists say.

While it could be good news to lessen the southwestern U.S. drought and shrink heating bills next winter in the far north, "worldwide it can be quite a different story," said North Carolina State University atmospheric sciences professor Ken Kunkel. "Some areas benefit. Some don't."

Globally, it can mean an even hotter year coming up and billions of dollars in losses for food crops.

The National Oceanic Atmospheric and Administration issued an official El Nino watch Thursday. An El Nino is a warming of the central Pacific once every few years, from a combination of wind and waves in the tropics. It shakes up climate around the world, changing rain and temperature patterns.

Mike Halpert, acting director of NOAA's Climate Prediction Center, says the El Nino warming should develop by this summer, but that there are no guarantees. Although early signs are appearing already a few hundred feet below the ocean surface, meteorologists say an El Nino started to brew in 2012 and then shut down suddenly and unexpectedly.

The flip side of El Nino is called a La Nina, which has a general cooling effect. It has been much more frequent than El Ninos lately, with five La Ninas and two small-to-moderate El Ninos in the past nine years. The last big El Nino was 1997-1998. Neither has appeared since mid-2012. El Ninos are usually strongest from December to April.

Kevin Trenberth, a senior scientist at the National Center for Atmospheric Research, who wasn't part of NOAA's forecast, agreed that an El Nino is brewing.

"This could be a substantial event and I think we're due," Trenberth said. "And I think it could have major consequences."

Halpert said it is too early to say how strong this El Nino will be. The last four have been weak or moderate and those have fewer effects on weather.

Scientific studies have tied El Ninos to farming and fishing problems and to upticks in insect-born disease, such as malaria. Commodity traders even track El Nino cycles. A study by Texas A&M University economics professor Bruce McCarl found the last big El Nino of 1997-1998 cost about $3 billion in agricultural damage.

Trenberth said this El Nino may even push the globe out of a decade-long slowdown in temperature increase, "so suddenly global warming kicks into a whole new level."

Kunkel said if this El Nino is a strong one, global temperatures, probably in 2015, could "be in near record breaking territory."

Halpert, however, says El Ninos can be beneficial, and that the one being forecast is "a perfect case."

After years of dryness and low reservoirs, an El Nino's wet weather would be welcome in places like California, Halpert said.

"If they get too much rain, I think they'd rather have that situation rather than another year of drought," Halpert said. "Sometimes you have to pick your poison."

Australia and South Africa should be dry while parts of South America become dry and parts become wet in an El Nino. Peru suffers the most, getting floods and poorer fishing.

The climate event got the name El Nino, meaning the boy in Spanish, when it was first noticed off the coast of Peru and Ecuador around Christmas time and was named after Christ child, according to Trenberth.

Is The Dry Season Over for Briggs and Stratton?

The Milwaukee-based manufacturer hopes global diversification and a focus on higher margin products will help it escape the effects of drought and add green to its bottom line.

January 17 -- Too little water, and then too much. That's a very abbreviated description of the conditions in the United States that tugged at Briggs and Stratton in 2012. For the outdoor power equipment company, drought and then flooding had very different results.

Last year, a light snow season impacted Briggs and Stratton's sales of snow blowers and also helped set up the most severe drought to hit the country in 50 years. According to the Department of Agriculture, approximately 80% of the agricultural land in the country was impacted by drought conditions.

Briggs and Stratton's CEO, Todd Teske, 47, notes that 2012 started off hopefully as there were signs that the U.S. housing market had begun to recover. That and a warm spring helped company sales get off to a good start. But then came the drought and lawnmower sales tanked. "I didn't mow my lawn for seven weeks," he recalls.

Briggs and Stratton's second largest market, Western Europe, didn't fare much better. "Europe had been extremely strong for us up until 2012," says Teske, but austerity measures in Greece and other parts of the eurozone took a huge bite out of consumer confidence. Teske says sales in the European market were off 15% year over year. 

The company finished its fiscal year 2012 in July with sales of $2.1 billion, down 2.1% from fiscal 2011. The first quarter of fiscal 2013 fared even worse, as sales dropped 22.2% to $309 million.

Still there were bright spots last year for Briggs and Stratton in Australia and emerging markets such as Latin America. They reinforced Teske's decision to pursue global diversification as one element of a three-part strategy that also included growing the company's core engine business and focusing on higher margin products. That strategy, announced in April 2012, prompted a series of restructuring moves. The company will no longer sell lawn and garden products at national mass retailers, though its engines will still be found in garden equipment OEMs who sell through those channels. Instead, Briggs and Stratton will focus on higher margin products sold through its Simplicity, Snapper and Ferris dealers.

Teske also announced that Briggs and Stratton is reducing its white collar workforce by 10% (approximately 210 employees), explaining that the company does not expect the lawn and garden market to return to the peaks seen in 2004-05 "for the foreseeable future." 

Briggs and Stratton shifted production of horizontal shaft engines -- typically used in power generators and pressure washers -- from its Auburn, Ala., plant to its factory in Chongqing, China or to third parties in Southeast Asia. Those engines are sold in both China and the U.S. In 2007, Briggs and Stratton had moved manufacturing of smaller horizontal shaft engines to the Chongqing plant. The company laid off 250 employees as a result of the move.

The company had already decided to close its plants in Newbern, Tenn., and Ostrava, Czech Republic. It also downsized the workforce by 210 and reconfigured its Poplar Bluff, Mo., factory.

As a result of those restructuring moves, Briggs and Stratton expects to save $30 to $35 million in fiscal 2013 and $40 to $45 million in fiscal 2014.

Teske says he has been communicating constantly inside and outside the company to make sure that workers and investors understand what the plant closings represent. "Simply because we are downsizing doesn't mean that we are in trouble. It means we are refocusing and making sure we are a really great company going forward," he says. "This is an exciting place to be."

While drought severely impacted Briggs and Stratton in 2012, the company has benefited from damaging storms that knocked out power and boosted the sales for both portable and standby generators. Its fiscal 2012 results were helped by both Hurricane Irene and major snow storms that hit the east coast.

Teske tells IndustryWeek the company typically keeps a "storm stock," an inventory of portable generators in strategic locations around the country. Working with its channel partners, those generators are put on trucks and shipped to where a storm is occurring.

Superstorm Sandy followed a typical pattern in spurring portable generator sales, Teske observes. "We were moving generators from throughout the country to the affected areas on the east coast," he says. But he adds that it was unusual in that it was a late season storm, occurring when inventory stocks were typically being depleted so it did not have the same magnitude of impact on sales as an earlier storm would have had.

Storms such as Sandy also prompt consumers to purchase standby generators, Teske says. "A lot of people say they want something that is more permanent. They say, 'I don't want to have to do anything when the power goes out. I want an automatic solution.' The standby generator sits next to your house, turns off and on once a week to make sure everything is good and when the power goes out, everything is automatic."

Briggs and Stratton admits that the potential impact of drought and storms could "cause wide variability in our sales results for fiscal 2013." The company has projected sales at $1.95 to $2.15 billion for the current fiscal year.

The company is trying to fight some of this unpredictability by expanding into growing markets. Last month, it announced that it had purchased Companhia Caetano Branco in Brazil for $57 million. Briggs and Stratton said Branco is a leading brand in the Brazilian light power equipment market, producing generators, water pumps and light construction equipment. The company sells its products through a network of 1,200 dealers throughout Brazil.

"With Branco's brand strength, employees and customer base, we will have an established, well performing company in a country that has aggressive infrastructure needs and a history of higher growth opportunities, which can only add to the operating performance of our company," says Teske.

The company is also betting heavily on innovation to drive improved results. In October 2010, Teske moved the company's research and development operations out of the individual business groups and had them report directly to him.

"Over the last year, we have made tremendous headway in filling the innovation pipeline," says Teske. "This upcoming season, we are introducing 40 new models of lawn and garden and outdoor power equipment for our dealer channel. We have never done that much."

Teske says the company doesn't typically take a blue sky approach to innovation. "We have user-driven innovation. We do a lot of consumer research. We also do a fair amount of going out and observing the users of our products and really trying to figure out the problems they are having. We come back and ask, 'How can we solve their problem?' That is how we look at product development."

Teske says Briggs and Stratton also tries to be "as simple as we can in new product development." He notes that there are many companies "are viewed as innovative, but really what they are doing is taking what is out there already and repurposing or repackaging it. When you look at it, it was pretty simple but at the end of the day it was really innovative."

"Focusing on the consumer of the goods is the key to product innovation," says Teske.

While the company is focused on innovation, Teske says it holds to its traditional belief in the importance of U.S. manufacturing. On December 3, 2012, the company announced that it had produced its 70 millionth small engine at its Murray, Ky., plant since its opening in 1985. The 300,000-square-foot facility performs die casting, machining and assembly of engines and related components.

Teske says the company's U.S. workforce is "very productive and very efficient." Still, like many other U.S. manufacturers, Briggs and Stratton has been investing in advanced tooling in an effort to boost its productivity.

"It really comes down to helping our workers be more productive," Teske says. "I have been with company 16½ years. When I would tour one of our plants back in 1996 when I started, we would have a handful of robots. Now there are a lot more robots, perhaps more robots in one cell than we had in an entire plant back then. Obviously, the cost of robotics and automation has come down dramatically over the last several years and it makes it more economical. What that has caused us to do is enhance skill sets and go out and look for people who have different skill sets than we had in the past."

Teske has been involved in a number of efforts at the local, state and national level to address the skills gap. "It's real," he says emphatically. "As technology becomes more important in our plants, we're doing a lot to train our workers and to work cooperatively with those who can help educate and develop those skills so we can have a pipeline of workers that meet the needs of today's manufacturing environment."

After three years as a CEO, Teske says he has learned that constant, consistent communication is critical to his job. "It is really important to make sure our employees understand where we are headed and what we need them to do. Being available to our employees and making sure we are doing all the right things -- that is absolutely critical." 

Teske employs a variety of means to facilitate that communication. "We have quarterly meetings with our employees. We shut down the production floor for an hour or two and I talk to all of our employees. I do video blogs every two weeks on different topics. We post those on our Intranet. We have lunches where we'll get 10-15 employees together once a month, at random. We sit around and talk about what is going on and take their questions. It is one of those things where as a CEO from an internal perspective, you just can't communicate enough. And then also you need to meet with customers on the external side, to make sure you understand what is going on in the field."

Now, at the start of a new year and new political season, Teske says he hopes there is "an understanding and realization by policymakers that manufacturing is really important. It is not just clean tech or high-tech. It is basic metal bending, metal forming, metal machining that makes this country great. Policies and regulation and legislation that support that are significantly important to the future of our country."

Steve Minter    www.industryweek.com  

Husqvarna Interim Report January - September 2012

Hans Linnarson, Husqvarna President And CEO:

“Demand in our two largest markets continued to be challenging during the third quarter. In North America, sales were negatively impacted by the worst drought conditions for many years. In Europe, demand was adversely affected by a cautious consumer sentiment and continued unfavorable weather conditions. As expected, preseason demand for seasonal products such as snow throwers was soft.

We were able to deliver a better result in comparison to last year. Group operating income for the third quarter increased to SEK 182m (113), with Americas reporting improved result while sales and income for Europe and Asia/Pacific declined. Construction continued to improve, both in terms of sales and income.

I am also pleased to note the continued positive progress in our cash flow, which is one of our top priorities. Year to date operating cash flow rose to SEK 1,595m (-328), with clear improvements across the Group mainly from working capital improvements.

As we enter the low season, we intensify preparation of the Group for 2013; securing new product launches and enhanced customer service as well as measures to improve efficiency by reducing the fixed cost base and increasing flexibility throughout the Group. More details will be communicated during the fourth quarter 2012.

Looking ahead, we see many of our trade partners managing their inventory levels conservatively,

as the global economic uncertainty is expected to continue for 2013.”

Third Quarter

•           Net sales amounted to SEK 5,841m (6,410). Adjusted for exchange rate effects, net sales declined -8%.

•           Operating income increased 61% to SEK 182m (113).

•           Operating cash flow improved to SEK 1,503m (894).

•           Earnings per share increased to SEK 0.19 (0.10).

First Nine Months

•         Net sales amounted to SEK 26,358m (25,363). Adjusted for exchange rate effects, net sales increase  1%.

•           Operating income increased 25% to SEK 2,233m (1,787).

•           Operating cash flow improved to SEK 1,595m (-328).

•           Earnings per share increased to SEK 2.65 (2.12).

Third Quarter

Net sales

Net sales for the third quarter decreased by -9% to SEK 5,841m (6,410). Adjusted for exchange rate effects, net sales for the Group declined by -8%, for Europe and Asia/Pacific by -6%, for Americas by -14%, while Construction increased by 3%.

Operating income

Operating income for the third quarter increased by 61% and amounted to SEK 182m (113) and the corresponding operating margin rose to 3.1% (1.8). Operating income increased for Construction and Americas.

Operating income was positively affected mainly by lower costs for materials and lower expenses for selling and administration, while the decline in sales and changes in exchange rates impacted negatively.

Changes in exchange rates had a total negative effect on operating income of approximately SEK -69m, compared with the third quarter 2011, of which transaction effects amounted to SEK -130m (-44), translation effects amounted to SEK 0m (8) and change in value of currency hedging contracts amounted to SEK 43m (18).

In the third quarter 2011, operating income was negatively impacted by SEK -83m, of which SEK -38m referring to costs directly related to production disturbances, SEK -24m referring to costs for the closure of a production facility in Spain and SEK -21m referring to the termination of the former CEO’s contract.

First Nine Months

Net sales

Net sales for the first nine months increased by 4% to SEK 26,358m (25,363). Adjusted for exchange rate effects, net sales for the Group increased by 1%, for Americas by 8%, for Construction by 6%, while sales for Europe and Asia/Pacific decreased by -4%.

Operating income

Operating income for the first nine months increased by 25% to SEK 2,233m (1,787) and the corresponding operating margin rose to 8.5% (7.0). Operating income increased for Americas and Construction.

Operating income was positively affected mainly by lower production costs and improved pricing, while product mix had a negative impact, partly due to weather related lower sales of consumer watering products.

Changes in exchange rates had a total positive effect on operating income of approximately SEK 35m, compared with the first nine months of 2011, of which transaction effects amounted to SEK -195m (38), translation effects amounted to SEK 0m (1) and change in value of currency hedging contracts amounted to SEK 135m (-134).

In the first nine months of 2011, operating income was negatively impacted by SEK -368m referring to costs directly related to production disturbances, of which SEK -323m affected Americas and SEK -45m affected Europe and Asia/Pacific, as well as items affecting comparability of SEK -64m referring to Construction, and costs related to the termination of the former CEO’s contract of SEK -21m.

Financial Items Net

Net financial items for the third quarter amounted to SEK -80m (-89) and for the first nine months to SEK -307m (-277). The average interest rate on borrowings at the end of the third quarter was 4.0% (4.1).

Income After Financial Items

Income after financial items for the third quarter increased to SEK 102m (24) corresponding to a margin of 1.8% (0.4). For the first nine months, income after financial items increased to SEK 1,926m (1,510) corresponding to a margin of 7.3% (6.0).

Taxes

Taxes for the first nine months amounted to SEK -404m (-290), corresponding to a tax rate of 21% (19) of income after financial items.

Earnings Per Share

Income for the third quarter increased to SEK 105m (55), corresponding to SEK 0.19 (0.10) per share. Income for the first nine months increased to SEK 1,522m (1,220), corresponding to SEK 2.65 (2.12) per share.

Operating Cash Flow

Due to the seasonality of the Group’s operations, operating cash flow is normally negative in the first quarter followed by positive cash flow in the second and third quarters. Operating cash flow for the first nine months improved to SEK 1,595m (-328), mainly due to higher income after financial items and a reduction of operating working capital, which was positively impacted by lower inventory and trade receivables.

Financial Position

Group equity as of September 30, 2012, excluding non-controlling interests, amounted to SEK 11,976m (12,813), corresponding to SEK 20.91 (22.37) per share. Group equity was negatively affected by exchange differences on translating foreign operations to SEK amounting to SEK -911m.

Net debt as of September 30 amounted to SEK 6,355m (6,628) of which liquid funds amounted to SEK 1,285m (1,632) and interest bearing debt amounted to SEK 7,640m (8,260). The major currencies used for debt financing are SEK and USD. In the first nine months, net debt increased by SEK 30m as a result of changes in exchange rates.

The net debt/equity ratio amounted to 0.53 (0.51) and the equity/assets ratio to 44% (44).

On September 30, 2012, long-term loans including financial leases amounted to SEK 5,089m (5,516) and short-term loans including financial leases to SEK 2,306m (2,445). Long-term loans consist of SEK 2,572m (2,723) in issued bonds, and bank loans of SEK 2,497m (2,793). Long term bonds and long term bank loans mature in 2014 and onwards. The Group also has an unutilized SEK 6 bn syndicated revolving credit, with maturity in 2016.

Performance By Business Area Q3

Europe and Asia/Pacific

Net sales for Europe and Asia/Pacific in the third quarter decreased by -10%. Adjusted for exchange rate effects, net sales decreased by -6%. For the first nine months, sales decreased by -5%. Adjusted for exchange rate effects, the decline was -4%.

Due to continued unfavorable weather and economic uncertainty, sales declined in the European markets as trade inventory levels were conservatively managed. Pre-season demand for snow throwers was, as anticipated, soft.

Operating income for the third quarter amounted to SEK 225m (291) and the operating margin amounted to 7.3% (8.5). For the first nine months the operating income amounted to SEK 2,062m (2,185) and the margin remained at a high level, 15.7% (15.9).

Operating income for the third quarter was negatively impacted mainly by the lower sales volume, unfavorable mix and changes in exchange rates.

Changes in exchange rates had a negative year-on-year effect on operating income of SEK -39m in the third quarter and a positive impact of SEK 73m for the first nine months.

Americas

Net sales for Americas in the third quarter decreased by -11%. Adjusted for exchange rate effects, net sales decreased by -14%. For the first nine months, sales increased by 15%. Adjusted for exchange rate effects, the increase was 8%.

The drought weather conditions in the US had substantial negative effect on industry demand and sales of lawn care equipment declined. Pre-season demand for snow throwers was also soft, partly due to trade inventory left from the previous season.

Operating income for the third quarter improved to SEK -99m (-172) and the corresponding operating margin was -5.0% (-7.7). Operating income was positively impacted mainly by lower costs for materials as well as lower costs for selling and administration, while the lower sales volume had a negative effect.

For the first nine months, operating income increased to SEK 67m (-364) and the corresponding operating margin was 0.6% (-3.8).

Changes in exchange rates had a negative year-on-year effect on operating income of SEK -30m in the third quarter as well as for the first nine months.

Construction

Net sales for Construction in the third quarter increased by 3%.  Adjusted for exchange rate effects, the increase was also 3%. For the first nine months, sales increased by 9%. Adjusted for exchange rate effects, the increase was 6%.

The higher sales were primarily driven by the U.S. market where construction activity rose for residential and infrastructure construction, although at a slower pace than previously in the year. Sales were also positively impacted by market share gains.

Construction market conditions across Europe, especially in southern Europe, were difficult as the uncertain economic development continued. Sales decreased, partly due to lower demand from rental operators. Emerging markets had a mixed development.

Operating income for the third quarter increased to SEK 89m (50) and the operating margin improved to 11.7% (6.7), mainly as a result of improved pricing and factory productivity, as well as items affecting comparability of SEK -24m that was charged to operating income in the first quarter 2011.

Operating income for the first nine months increased to SEK 213m (108) and the operating margin increased to 9.2% (5.1). Operating income for the first nine months of 2011 was charged with items affecting comparability of SEK -64m.

Changes in exchange rates had a negative year-on-year impact on operating income in the third quarter of SEK -2m and a negative effect of SEK -11m in the first nine months.

In the third quarter Husqvarna acquired the remaining 20% of Hebei Husqvarna Jikai Diamond Tools Co., Ltd for SEK 46m.

Parent Company

Net sales in the first nine months 2012 for the Parent Company, Husqvarna AB, amounted to SEK 8,955m (8,906), of which SEK 6,962m (6,794) referred to sales to Group companies and SEK 1,993m (2,112) toexternal customers.

Income after financial items amounted to SEK 1,504m (937). Income for the period was SEK 1,390m (838).

Investments in tangible and intangible assets amounted to SEK 235m (237).

Cash and cash equivalents amounted to SEK 34m (109) as of September 30, 2012.

Undistributed earnings in the Parent Company amounted to SEK 17,915m (17,500).

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 2012, 6,036 A-shares were converted to B-shares at the request of shareholders. The total number of registered shares in the company at September 30, 2012 amounted to 576,343,778 shares of which 127,770,610 were A-shares and 448,573,168 were B-shares.

In October 2012, another 71,552 A-shares were converted to B-shares at the request of shareholders. The total number of votes thereafter amounts to 172,563,530.

Briggs to Temporarily Shut Down Production at McDonough, GA Facility

MILWAUKEE -- Sept. 17 -- Briggs and Stratton Corporation announced today that the Company will temporarily shut down its production facility in McDonough, Georgia in order to reduce inventory levels of lawn and garden products that are produced at the facility. Market demand for lawn and garden equipment remains soft as a result of the ongoing drought that is affecting a large portion of the United States since May 2012. 

Production will be suspended from October 29th to November 25, 2012; however, shipments of products and service parts to customers will continue during this time. Plant personnel will also utilize the shutdown period to complete the movement of certain equipment from the Company's recently closed Newbern, TN facility into the McDonough plant and to re-tool for new products for spring production. 

Approximately 340 hourly employees and 200 temporary employees will be temporarily laid off during this plant shutdown.  The Company does not anticipate that this temporary plant shutdown will have a significant impact on its previously announced estimates for fiscal year 2013 net income of $60 to $75 million, or $1.25 to $1.55 per diluted share. 

Briggs and Stratton Corporation, headquartered in Milwaukee, Wisconsin, is the world's largest producer of gasoline engines for outdoor power equipment. Its wholly owned subsidiary Briggs and Stratton Power Products Group LLC is North America's number one manufacturer of portable generators and pressure washers, and is a leading designer, manufacturer and marketer of standby generators, along with lawn and garden and turf care through its Simplicity®, Snapper®, Ferris® and Murray® brands.  Briggs and Stratton products are designed, manufactured, marketed and serviced in over 100 countries on six continents.