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Edited Transcript of HUSQ B.ST earnings conference call or presentation 4-Feb-20 9:00am GMT

Q4 2019 Husqvarna AB Earnings Call

Stockholm Feb 11, 2020 (Thomson StreetEvents) -- Edited Transcript of Husqvarna AB earnings conference call or presentation Tuesday, February 4, 2020 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Glen Instone

Husqvarna AB (publ) - CFO and Senior VP of Finance, IR & Communication

* Johan Andersson

Husqvarna AB (publ) - Director of Group Corporate Communications & IR

* Kai Wärn

Husqvarna AB (publ) - CEO, President & Director

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Conference Call Participants

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* Carl-Oscar Bredengen

Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst

* Christer Magnergård

DNB Markets, Research Division - Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive

* Fredrik Moregard

Pareto Securities, Research Division - Analyst

* Karri Rinta

Handelsbanken Capital Markets AB, Research Division - Research Analyst

* Klara Jonsson

SEB, Research Division - Research Analyst

* Olof Cederholm

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

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Presentation

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Johan Andersson, Husqvarna AB (publ) - Director of Group Corporate Communications & IR [1]

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Ladies and gentlemen welcome to the presentation of Husqvarna Group's report for the fiscal year 2019. My name is Johan Andersson, responsible for Investor Relations and will be the moderator here today. Here in Stockholm, we have Kai Wärn, our President and CEO; and Glen Instone, our CFO.

Kai and Glen will have a presentation first, and then afterwards, we will conclude with the Q&A, and start with the floor here in Stockholm, and then we have a number of participants over the telephone conference that will also have the opportunity to ask questions.

So with that, I hand over to Kai.

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [2]

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Thank you. And a special thanks for you who are taking the time to come here and participate in this announcement call. Given that Q4 is a seasonally smallest quarter, I will spend more on the larger perspective on '19 and then conditions going into 2020, which we would expect you are quite interested to learn more about.

But first, of course, inevitably, some comments as to Q4. First of all, I think it's fair to conclude, it's a mixed market, we see in the quarter. Starting on a positive note, Construction North America, actually pretty strong. And that also proves that the new management is starting to get traction in the changes they have done. It looks very promising for the future. For instance, garden North America continued the destocking situation, particularly larger trade partners.

And on the backflip -- backdrop of the relatively weak demand in the season, second half, which, of course, was expected. It wasn't really in any way surprising for us. And we took a very firm stance in the quarter to lower our manufacturing rates to, on one hand, compensate for the decreased volume, which is minus 2% comparable currencies for the group in the quarter, and actually reduce inventories with SEK 600 million in the comparable currencies, which is a fairly significant amount, as you realize. And that means that the production rates were a lot lower, of course than the demand as such in order to reduce with that type of number. And hence, we saw quite some under absorption coming through.

And that, combined with the mix, of course, burdened the quarter. On the other hand, there were some positive one-offs from the net of asset sales and write-downs. But all in all, excluding items affecting comparability, minus SEK 310 million versus SEK 282 million prior year. So I think we don't have much more to say about it. I think the important thing is that we'll talk more about it in 2020. We've taken the beating, so there is no knock-on effects going into 2020 when it comes to, for example, under absorption. That's behind us. I think that's an important message at the start.

But staying a bit in 2019, looking at the larger picture of the year, it's actually, despite a very challenging for us in garden season, a truly good year for us. Maybe to start with some positions in the market, we have kept our shares. We might even have gained something on the robotics side, despite less impressive growth numbers. We are somewhere between 5% and 10% for the full year, but the market has not been very favorable. So that might still be a positive. We definitely gained share in the watering. That's pretty clear as well as in concrete floor and surfaces, where we have acquired entities. And as you will remember, the Pullman Ermator, the HTC and the takeover, the carve-out of light compaction from Atlas, which has delivered double-digit growth in that space. So that's a pretty good result.

Operating income, of course, if you look at the group, plus 1% in total, adjusted for exits. And then to achieve operating income of plus 21% is not necessarily bad either. We're quite pleased with that.

And in parallel to that, you also see on the cash side, significant improvement, of course, from the result to start with, but also the working capital. Glen will talk more about details. But that's pretty good. So reinforced positions and good results. And I think that's what we need to do to look at that once in a while. Also, on the annual basis, we'll see more of that soon.

So if we then move over to the 2020 season, destocking is behind us. Now it's about ramping up for the season. And so that's good. That's a strong thing. If you look at the offering, and I'll give some more details later on here, we have quite a lot, both on the product side as well on the solution side. So we feel pretty strong on that side.

But it's also important to emphasize, we continue on the same path, meaning we have pretty strong efficiency program to start with. On top of that, we have also the additional restructuring we announced Q4, which is supposed to give SEK 150 million of improvements. And we are also continuing to press on with cost additions into strategic initiative areas. So we're balancing these things.

Then not to forget the fact that we are finalizing the exits of the consumer brands business we started to announce already in 2018. And in total, over the 2 years, '19 and '20, it's very much in line with what we said at that time. Actually, we ended up a bit lower in '19 with SEK 1.4 billion. But then yet again here, it's going to be a bit above what we said at the time. But in total, that fits very well with what we said from the beginning. So -- and that's an important piece here to leave that behind and then be, so to say, clean in this structure going forward. So that's all looking pretty good.

So the growth rate, not that impressive, the 1%, all in all. Still, I think that can cater for heavy gain market share. So you remember, our ambition of being 2 percentage point ahead of the market. I wouldn't exclude that. We actually are that indeed, with that number, but that's still to be verified.

Gardena 3%, Construction 5% and Husqvarna 0%. So that's how it splits out. But then looking then at the operating income since '13, you can see then that we actually have had a CAGR of 16% in this period of time. So we are 3.9%. As you know, margin has shaped up. Yes. We took the dip in '18 as a consequence of the really long and dry summer extending into the fall, which was not great for us, of course. But all in all, I think that's not a bad development. And if you remember then the number for last year, 21% above that. So there's nothing that actually says anything else than this group should continue on a positive note going forward.

Looking at the financials, more -- a little bit more granularly, minus 2% in the fourth quarter. Net sales currency adjusted, minus SEK 310 million versus the SEK 282 million, you saw that. And the gross margin impacted, of course, primarily by the lower volumes, the under absorption and the product mix. And product mix in this context relates also quite a bit to Gardena in the way that you recall that, that season, 2018, was extending all the way into October. So they were selling watering products all the way throughout October, which is not at all normal. So it was more a normalization of the season for Gardena in '19 that we saw. But of course, it had an impact also on the group.

Full year. The minus 1% adjusted for the exits -- sorry, plus 1% -- correction, plus 1%. The 21% we talked about, the margin improvement from the 7.9% to 9.3%. And the main constituents of that being on the positive side and the price increase, restructuring efficiency and some positive FX, but also offset by the raw materials and tariffs, which close to balance the FX advantage and the continued investments in the growth initiatives.

I mentioned additional restructuring that we launched very much also as a consequence of the fact that we were so successful with the ones we initiated 8 of '18, going into '19. So we had the momentum to carry through that.

Looking at Husqvarna, the quarter, not a fantastic story, of course. But if we look at the sales, minus 5%, adjusted for exits, you realize that that's not too bad actually, and particularly then considering the strong reduction of manufacturing rates in order to enable that inventory reduction. Some growth in Europe. But as I mentioned, weak in North America.

Looking at the full year, flattish, but then operating income, 15% up. And 1 percentage point of operating margin improvement. Not what we expected, but still, I would say, acceptable from that perspective.

Gardena being a bit more negative on the operating income in the quarter than maybe some of you would have expected, but that very much relates to exactly what I mentioned being -- the watering season being normalized, not having watering sales in October, so -- yes. And again, the volume, of course, supported that. And we are also pressing on with a good pace with cost additions for the strategic initiatives, positioning ourselves for the season 2020. You will see a bit more about that soon.

Altogether, a record year, 30% improvement of the operating income. We're pretty pleased with that on the 3% of increase, excluding consumer brands and the FX adjusted. So that's good. So from 8% margin to 10.2%, quite strong. Of course, there's a fair bit of both price and mix improvement in that and as well the restructuring of the bits and pieces that was taken in from the consumer side as well as efficiency improvements. So a great year for Gardena.

Construction also ends up quite well, 7% in the quarter, seemingly a great improvement of the operating income with 42%. But remember their reference, Q4, was fairly weak to start with. And then they also had some tailwind with the currency here. So the quarter ended up favorable.

The full year, 5% top line growth, margin-wise, 12.4% became 13.2%. SEK 760 million, SEK 836 million, so 17% increase in absolute number. And what supported that was, of course, volume, price, efficiencies -- currencies as well as the integration that they have taken. And as you heard me say, it's behind us, actually, and they're starting to see the top line growth of those activities now, definitely have delivered fully on the improvements of the results that we foresaw at the time when we did those acquisitions.

Leaving the financials a bit aside, looking at other important aspects, sustainability, which we implement under the terminology or the headline of sustainovate, and that's how we integrated into operation. We're quite proud of what we have achieved. We actually set in '15 a target in terms of intensity reduction, but we have actually achieved an absolute reduction of 25% versus 2015 of 25%.

So we are soon to launch new, even more ambitious, targets on the backflip of this success. And there's no difficulty at all to motivate our organization to continue to lead. And you will recall, we were the first one to actually have scientific-based targets, validate our ambitions and have them approved, our targets on the 2-degree trajectory of CO2 reduction. And as you can imagine, we are aspiring a bit higher than that now. But let us come back to that in March, but there's a lot more to be said on this topic, but we are doing pretty good, actually.

Moving on to look at some of the products that are worth mentioning, starting up at the left, AquaBloom is actually a solar-driven flower watering system for balconies and terraces. There's quite a lot of city gardening going on. So that's quite an interesting product. So you don't need to have electricity at all. So you just put it there and the solar light will drive that. We're quite optimistic about that. It's a completely new innovation.

We will have new high-performance Pro battery products, like chainsaw, is going to be launched tomorrow, actually, which is taking -- is showing yet another level of performance of battery-based products, which is not there in the market.

We talked about the EPOS technology, the virtual boundaries, which is then being introduced to selective professional users. With the acquisition of the trowel business from Wacker Neuson, quarter 4, we also have power trowels that are being introduced right now, as we speak, at the World of Concrete in Las Vegas, U.S., that's being introduced and Husqvarna base, so that's quite an intensive work to bring them into our system. That's good. We have entry models for robots, 305 Husqvarna to compete on somewhat lower price points as well in the market as well as hybrid-based riders for professional use, just to mention some few physical products. On more the app side, the most exciting launch is actually myGarden, the myGarden app, which is then containing things like the garden planner that we talked about. We have 130,000 gardens uploaded, which is not bad. And I mentioned this before, people spent last season about average 68 minutes sitting, working in this app, the garden planner as such. Now it's integrated in this myGarden app. Tutorials, inspirational content feeds, et cetera, but also for some countries, like Germany, you can start to book your garden services through this app. So we take on a new level here of trying to build services and interact with end customers, all in line with the strategy we talked about at the Capital Markets Day in September. The Automower connect app is packed up a bit with the user interface, we'll get more statistics. We start to be able to buy spare parts, blades for a robot or other things.

Gardena smart system is also then being equipped with chatbots, some optimizing when it comes to scheduling as well as if you want to protect your hedgehogs or other animals that are night -- active during the night, there are ways to deal with that.

So that's just to give some flavor on what's going on. I think with that, I'll leave it to Glen to talk through a bit more the details of the financials.

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Glen Instone, Husqvarna AB (publ) - CFO and Senior VP of Finance, IR & Communication [3]

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Thanks, Kai. Okay. Good morning. So a little bit of detail. And then, of course, we'll no doubt have some more detailed questions as well.

So as Kai mentioned, on the quarter, the sales adjusted for currency and exited positions, exited positions are actually just over 200 in the quarter, 1.4 in the full year. It was actually a minus 2 and the full year at plus 1. The gross income came down from some 26 percentage points to 23.5 percentage points. Large constituent in there, of course, is, as Kai mentioned, under absorption rates. So we had a positive impact of FX of roughly SEK 90 million, positive hitting the GP and a negative of about SEK 60 million hitting the SG&A on the -- from a translation perspective. And then we had some tailwinds that continued through the year on price. And then, of course, as I said, really, the negative mix volume effect and the under absorption in the factories was a negative impact onto the gross margin.

Down into the SG&A, that moved up slightly in the quarter actually from 30.6% to 31.4%. Again, that is really the impact of that translation effect through FX, which was a SEK 60 million negative effect onto the SG&A. A little bit of SI is also flowing through in the quarter, SEK 30 million hitting the GP and SEK 20 million hitting the SG&A. So SEK 50 million in the quarter on the strategic investments, which culminated, of course, in a SEK 310 million versus SEK 282 million.

There is a line in there, which is standing out pretty much on the other operating income. We had the sale of an asset in the quarter, which was very much planned. Just to be clear, it was a sale of a warehouse and logistics building. That was netted off, unfortunately, with a bad debt in the quarter as well as a small asset impairment. So of the magnitude, SEK 100 million on the quarter.

Items affecting comparability. We talked in November that we would have a restructuring largely relating to fixed cost reduction of magnitude SEK 200 million. We've booked SEK 183 million in the fourth quarter. There could be some small carryover for costs coming into Q1. But again, no more than the SEK 200 million accumulated.

Finance net, I think it's pretty close to last year, and the big differential being the IFRS figure, which actually is the differential of SEK 7 million in the quarter.

Tax rate, I think, is a bit strange to talk about, given it's a negative result in the quarter. I think it's more appropriate on the full year. So the full year, which I think this is what we're here to really talk about and not about the seasonally small quarter.

Gross margin improving now from SEK 28.2 million to SEK 29.9 million. SEK 670 million of positive FX flowing through into the GP. And then SEK 320 million negative flowing through into the SG&A. So a net SEK 350 million coming from FX, which is very much in line with the guidance we issued, as we went through the year.

We also have strategic investments, which we've continued with, albeit at a lower pace, SEK 130 million hitting the GP and about SEK 90 million hitting the SG&A. We, of course -- we'll see it soon on the cash flow. But as Kai alluded to, we did put the brakes on significantly in our facilities, our manufacturing facilities purposely.

We came out of Q2 with a high inventory. We continue Q3 with a slightly higher inventory. We've continued in Q4 to really adjust our inventory position. The balance sheet shows some SEK 200 million of inventory reduction. But actually, if you FX adjust it, it's a SEK 600 million reduction we've made in inventory, which I think is notable. And of course, has a negative impact on absorption, but absolutely the right thing to do. And of course, makes our balance sheet somewhat leaner.

SG&A, we actually moved up from 20.4% to 21.4 -- to 21.1%, sorry. And the main impact of that, as I said, is the negative FX, with a little bit of the continued investments into strategic initiatives.

Moving down the P&L. I just want to again highlight the asset sale. On a full year basis, the comparable figure is actually SEK 60 million. And that is a gain from the sale of an asset, bad debt and some asset impairments netting to SEK 60 million on the full year. That is comparable with SEK 55 million in the same period of 2018.

So I think in the full year, that figure now is comparable with the one-time benefit we had in 2018, which again, came about through an asset sale of a facility in China. So not a notable item on a full year basis. A record operating income, SEK 3,915 million. That is a record for this group, and we're pretty proud of that. 9.3% is where we landed on the margin level.

Items affecting comparability. It's basically the carryover from the 2018 program and then -- which was roughly SEK 42 million, and then the SEK 183 million from the 2019 program. As said, there could be a little bit of top-up in Q1, but maximum SEK 15 million.

Items affecting comparability, some negative impact from exchange rates there. IFRS 16, which is SEK 28 million and a little bit on the interest net, but pretty much comparable on a full year basis.

Tax rate. We guided actually at 22% to 23%. 19% was the full year tax rate. So we're pretty pleased with that. A couple of reasons for that. This sale item actually had a positive impact on our tax rate. And actually, we had a geo-mix that actually played into it a little bit from a taxation perspective. But long-term view, again, I think we stick with the guidance of 23%, plus/minus 1%. So 22% to 24% is good for guidance.

So full income for the period, SEK 2,528 million versus SEK 1,213 million, resulting in an EPS, which is more than double prior year. So I think a pretty solid and strong performance.

Cash flow, and we do say, cash is king, and we should spend some minutes here. We moved up from 1.3% to 3.8%. And the big items in here, of course, are the improved operating result, which was about SEK 700 million. The IFRS impact of SEK 400 million or the depreciation, which would be, give or take, SEK 200 million. And then the big working capital release was actually SEK 2 billion on inventory during the course of the year comparable '18.

Because we slowed down the facilities in the third and fourth quarter, we actually had a lower payables level. Accounts payable, that was roughly SEK 1 billion lower. So between inventory and payables, you can say there's a net SEK 1 billion gain. Accounts receivable was slightly better than the prior year, about SEK 200 million, and CapEx levels actually landed at the same level as 2018. So a real positive on the cash flow.

The disappointing one and we were really disappointed compared to Q2 here, is on the capital efficiency, looking at it in relation to net sales. We maintain, and we said this in September, to have a 25% of net sales as our target. Coming out of Q2 with such a high inventory, and this being a rolling figure, we knew we were going to fall short of our target.

I expect this is not going to be a 1-year turnaround. I think it's going to be more like 2 years before we get to the levels we talk about, i.e., the 25%. But I would expect going through Q1 and Q2, you start to see the trend in the right direction, down towards the target levels.

As said, the balance sheet, we feel it's in a better position than it was 12 months ago, particularly when it comes to inventory. SEK 200 million as reported, but SEK 600 million when FX adjusting.

The net debt, which we normally try to call out and the bridge item is on there. We've increased net debt from SEK 9.9 billion to SEK 11.3 billion, so SEK 1.4 billion increase. And that's some positives coming from the cash flow, of course, give or take SEK 3 billion. And then we have some negative effects from the cash flow from financing, SEK 1.3 billion.

We've continued with the dividend payment in relation to '18, payable in '19, of SEK 1.3 billion. And then a slight increase on the pension liability of SEK 300 million. And that actually culminates in our net debt to EBITDA ratio staying somewhat flat of where we've been on a rolling basis of 1.9%, so well within the investment grading that we're working with, and we're using this metric for.

And at that, I'm going to pass back to Kai for some closing comments.

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [4]

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Thanks, Glen. Okay. So we looked at the financial development this last 6, 7 years. And we noted the CAGR growth rate. But I think if we want to summarize it, I think we also need to look a little bit without getting into any details here and now, but at what we have been doing in parallel to improving the financial results. And it's a fair bit of ranging from the customer-focused organization that we installed in '14, '15, then customer -- moving out the decision-making much closer to the customer, bringing accountability and speed. I would also like to emphasize the culture of strong efficiency programs, which has been a key pillar, a cornerstone for us, funding, of course, the strategic initiatives and in that sense. But I think the word to emphasize is the culture, this is the way how we do things each and every year, and that will not change. The focus on the leading brand and the positions has been quite significant in this period of time. And some of you will remember that Gardena Husqvarna has gone from some 60-plus percent to 85% of total revenues, we dealt with the consumer brands topic. We had one hypothesis, it failed in '17, we dealt with it. And now with this year, it's going to be behind us completely.

And the capability expansion we have put into everything that relates to the software side, IoT, smart, et cetera. And I think in parallel to that, we have dealt quite successfully, also, with the petrol to battery shift, which is a reality in our industry, just like in so many other industries. So in total, it's a fair bit of transformation, which is actually both organizational as well as strategic, and we're quite proud of that journey.

Now I would have liked to have Henric Andersson, also standing here, but we discussed about it, but we choose to conclude that he is doing -- bringing more to the sales force in North America with whom he's together at the World of Concrete that you will see him soon enough. But I'm personally very glad actually with Henric taking over in April because he has a lot of experience from this group. It brings continuity, which is quite important at this stage. And he has, of course, been part actively putting down the strategy, which we formed last year. So that's a good thing as well.

I think I'll leave it with that, and then we can open up.

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Questions and Answers

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Johan Andersson, Husqvarna AB (publ) - Director of Group Corporate Communications & IR [1]

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(Operator Instructions)

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Christer Magnergård, DNB Markets, Research Division - Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive [2]

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Christer Magnergård from DNB. Firstly, a question on inventories in the trade channel, if you can comment on that because it has been an issue this year. Going into 2020, what do you see in North America especially, but also in Europe?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [3]

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I can start. Inventories in trade, I would say, are lower than they were 1 year ago. And I would describe them as normalized by now. Actually, we probably misjudged a bit the inventory level, particularly at the dealer structure, beginning of '19. Because of the upbeat purchasing, we thought it was already averaged at that time, but actually ended up being a little bit above. So if anything, it's somewhat lower. But I would describe them as average, by and large, I think that's the important comment. So there is no reason to be fearful of, so to say, production rates being lower as a consequence of further cautiousness. But there is maybe to -- one more point relating to it. For example, in Europe then with 2 seasons, not being fantastic either, a bit more cautiousness. So maybe there is a little bit more push towards the later part of the quarter as such, but the inventory level is not the topic.

And quarter 1, as you remember, by the way, it's always about March. It's January, February, March, so everything is actually decided in March in the quarter. That's the magnitude of them, the numbers.

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Christer Magnergård, DNB Markets, Research Division - Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive [4]

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And in terms of the order book you have for 2020 with the listings, can you comment a bit on the mix you have in that order book in terms of where you see the strongest growth? And where you see less growth? And also, if you see more price pressure on robots for 2020?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [5]

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So let's start by answering the question, going back into 2019 and remembering how the season played out, actually, Q1 in '19 was great. For example, Husqvarna had plus 9%, adjusting for exits. In the quarter, Gardena had plus 6%, adjusting for exits. It was a good start to the season. I think the disappointments actually came with Q2, Q3 and Q4. So they were kind of mediocre, those quarters. But the first quarter was fairly -- well, it actually was very strong. So that means it's a tough reference, particularly for Husqvarna. So give and take, a wash, it's not unreasonable to expect again adjusting for the exits. And remember, exits for Husqvarna are going to be big first half of the year. So this might be as much as SEK 1 billion sitting in the first quarter for Husqvarna, just to give you a number here on the magnitude.

Gardena situation is maybe a bit more favorable in the way that the purchasing pattern here from many of the multichannel universe is actually pushing to get orders in and fill up the shelves earlier. So it's a little bit different than the dealer channel. So they might be a bit stronger in that situation and definitely should be a plus, all circumstances. If the Husqvarna situation is more flattish, I think realistically Q1 and then the upside comes in the other quarters. Gardena starts -- will reasonably start very strong. And there's no reason to expect anything else from Construction than what we've seen. So just to give you that flavor.

Then as to the second part to your question, price pressure on robots, I don't think that will go away. But it's more the matter about the performance of the products versus the customer target groups you're heading. If you go to build them out, whoever, you will find, of course, opportunities, price-wise. But still, I think we are proving to be the ones that work throughout the seasons and people recognize that. So -- but you also see that, as I mentioned, we're also introducing a lower price point product with Husqvarna. So of course, we've noticed this and we take impression of what's going on so. But I think performance and quality, even performance throughout the season is, of course, components of what we bring, may that be Gardena or Husqvarna, that others still are working to get close to.

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Christer Magnergård, DNB Markets, Research Division - Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive [6]

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Then the final question, the Holy Grail, 10% margin. We have chased that for a couple of years now. And do you think that would be achievable in 2020? What are the positive factors and what are the risks?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [7]

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Is it achievable? Of course, there is nothing that fundamentally has changed our view since the Capital Market Day in September about the journey going forward. And I think, again, please look at '19 as a sign of strength that despite the disappointing season, the difficult season, we ended up with 9.3%. That also shows that we could have been there already this year, should things have moved with us. But the -- in a somewhat normalized season, there is a fair chance to get there, actually to be a bit above the 10%, but don't extrapolate that too far but on the right side. And then remembering the minus SEK 2 billion exits on the consumer side, on the top line side.

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Johan Andersson, Husqvarna AB (publ) - Director of Group Corporate Communications & IR [8]

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I think we had another question there.

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Unidentified Analyst, [9]

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Yes. I always thought you would leave when you have -- had achieved the 10% margin, and now you run away a bit earlier. But we'll see how far you get into -- by April. I was more curious about this petrol-battery transition. If you look at '18, how much of your revenues were sort of petrol based versus battery based?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [10]

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As you know that we are not specifically calling out the battery products. We lump them together with robotics, that total is about 15%. But we also talk about the expectation of those 15% growing pretty much with the same number, plus 15% versus market. That average over time should be 2 to 3%. So that gives a couple of percentage points per year of improvement of that. And the rest is, of course, everything from electrical products, but net connected on construction site to petrol and watering, et cetera. So I'm not sure whether I just want to talk battery versus petrol one-to-one like that. But you see the magnitude of what we're talking about here.

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Unidentified Analyst, [11]

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And the SEK 2.2 billion on sales you're leaving, is that all petrol?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [12]

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Yes.

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Unidentified Analyst, [13]

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So the mix will definitely be better this year?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [14]

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Yes. Correct.

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Johan Andersson, Husqvarna AB (publ) - Director of Group Corporate Communications & IR [15]

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Do you have any other questions here in Stockholm? Then let's see we have -- if we have any questions over the telephone conference. Please, operator, can you start the Q&A session over the telephone?

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Operator [16]

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(Operator Instructions) We'll now take the first question.

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Klara Jonsson, SEB, Research Division - Research Analyst [17]

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Klara from SEB. I was just wondering if you could quantify how much the under absorption cost on the gross margin in the quarter?

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Glen Instone, Husqvarna AB (publ) - CFO and Senior VP of Finance, IR & Communication [18]

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I'll give a big magnitude, Klara, on this. I think if we try to put it together with the volume and the mix change in the quarter, it would magnitude SEK 200 million.

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Klara Jonsson, SEB, Research Division - Research Analyst [19]

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All right. And then Gardena, it was a bit too weaker, again looking at earnings. And if I understand correctly, then it was, in part, explained by higher marketing costs. How did you say that this would develop into this year?

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Glen Instone, Husqvarna AB (publ) - CFO and Senior VP of Finance, IR & Communication [20]

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Maybe if I start? So Gardena in the quarter did look a little bit weaker in some cases. Two reasons for that. As Kai mentioned, we had a prolongation of the watering season in the prior year. Really, the October sales were high on watering in 2018, which had an impact, of course, in the '19 comp.

And then we've continued with the strong SIs, which, by and large, in that division, of course, is marketing that we want to, of course, strengthen the brand outside of the core markets as well. So that's continued. And that puts us in a stronger position going into 2020.

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Klara Jonsson, SEB, Research Division - Research Analyst [21]

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All right. So if I interpret that correctly, then you will increase marketing costs a bit?

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Glen Instone, Husqvarna AB (publ) - CFO and Senior VP of Finance, IR & Communication [22]

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That is the intent. Absolutely.

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Klara Jonsson, SEB, Research Division - Research Analyst [23]

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And then the last question, it's about the coronavirus. You mentioned in the report that you do not expect any significant disturbances related to the outbreak, but they could become material if problems remain in March. Could you explain your exposure?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [24]

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I think to start with I mean, we have worked with Chinese component suppliers for decades. There's nothing new, we have production ourself there. We normally take some [height] for what we foresee, it's usual after the New Year in China, meaning that they have higher attrition among people. They struggle a bit to get up the production rates. So that's all normal. That's nothing new. The question is, if the lock down that has been -- they're now -- the extension of the New Year is going kind of continue for longer time. And then the statement was, well, we don't -- we are not too concerned over the next few weeks. But if this would be a situation that we would see also in March, of course, it will be an impact, which is then becoming material, not only in the Asian product sales but also into Europe and North America. And I think you should interpret it in the way that even the product that has, for the sake of it, 100 components if there's one, which is missing, you still have a big problem. So -- and that's how you should see it. So the backlogs would start building in that event.

So I don't think our situation is any materially different than many others. And part of the problem is, of course, also to detect the sub supplier behind the supplier and to see perfectly the whole chain. And that we haven't kind of worked through to the full extent yet. But we are, of course, looking into that as we speak to see what could we then alternatively source elsewhere, et cetera. And how could we, for example, deal with getting booking, priority logistics for critical components, et cetera. So I think what we will do now going forward is to try to be as proactive as we can to deal with the contingencies that might arise because it's in nature unpredictable here. So we just need to deal with that with scenario-based planning.

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Klara Jonsson, SEB, Research Division - Research Analyst [25]

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All right. So just -- do you have any idea of how much of your products that actually have components that are sourced from China?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [26]

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There's quite some few. Of course, maybe the most obvious example would be petrol/battery trimmers. That's a typical product with a fair bit of content from China, but there are also components in other categories, all the way into robotics. But again, we're not worried about it. If this is being, so to say, deliveries are normalized towards the end of the month, we should be okay. You shouldn't have to worry about that. It's the March scenario that starts to become troublesome. So Klara, of course, also being in amidst of the season then, which is -- would be less good as everyone else.

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Operator [27]

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We'll now take the next question on the phone.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [28]

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Fredrik from Pareto speaking. Questions on robotics in North America and on the commercial side as well. Obviously, [wheels] is a bit weak in North America, but how are you progressing with robotics? I think you told us that you were doubling your sales in robotics in North America over the last season. And also, if you can give us an update on the commercial progress as well within robotics, please?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [29]

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So that's absolutely correct. We talked about, give and take, a doubling rate for North America. That also holds water for the full year. And again, I think what -- we walked into the season with even higher ambitions. I think some of you know that. But I think what we saw is what we've seen also in other markets, like Germany previously, France, et cetera, it takes some time to build a category. And maybe we were overoptimistic about how quickly we could do that. We are putting quite a lot of resources to build even more installation capacity, competence about the category as such. And hopefully, we will see that paying off.

As to the professional entries, there has been a huge demand for the virtual boundary product. And we try to, so to say, select, together with the one -- so there's a goal with the ones who have the best conditions to really do something with that. So that's where we are at with that. And then, of course, we have other models, which are increasing with a good pace for the professional space. But in the total, it's still fairly small. So doesn't change the big numbers yet. But again, we are very optimistic about where this can take us for the next few years.

So it's going to be a lot about, so to say, ramping that up, of course, for that period of time. But it's a very huge interest, I should say, to participate with virtual boundary-based products.

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Fredrik Moregard, Pareto Securities, Research Division - Analyst [30]

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Okay. Good to hear. And on the EPOS technology, could you provide us with some pricing details or at least in comparison with your other solutions, with the wired solutions?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [31]

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I refrain from talking price at this stage about that. So we want to put the season behind us and come back to that topic a bit more in January.

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Johan Andersson, Husqvarna AB (publ) - Director of Group Corporate Communications & IR [32]

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Any other questions on the phone?

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Operator [33]

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So we'll just take the next question now.

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Carl-Oscar Bredengen, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [34]

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Hello? Can you hear me?

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Johan Andersson, Husqvarna AB (publ) - Director of Group Corporate Communications & IR [35]

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Yes. We can.

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Carl-Oscar Bredengen, Joh. Berenberg, Gossler & Co. KG, Research Division - Analyst [36]

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Yes. Hi, this is Carl from Berenberg. I was just -- I'm wondering, in terms of the production of robotic lawnmower units, from my understanding, a lot of it is being produced in Durham, U.K. Now that Brexit is a fact, how should we think about the production units of this fast-growing category going forward?

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Glen Instone, Husqvarna AB (publ) - CFO and Senior VP of Finance, IR & Communication [37]

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If I start? Well, we did already a couple of years ago start up a second manufacturing plant for robotics, pretty much as a risk mitigation at that time because we can't have so much of a key category in one plant. Imagine if they would have -- would be a fire or something. So in Vrbno, in Czech, we have our second plant for robotics. So we have the capability actually to deal with this situation. We are not particularly stressed over the Brexit situation and what that would cause. We have stock at the right places. We should be well-equipped to deal with this season. So it should be a small issue, actually. Shouldn't be an issue at all for us.

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Johan Andersson, Husqvarna AB (publ) - Director of Group Corporate Communications & IR [38]

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Do we have a final question over the phone, I think?

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Operator [39]

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We'll now take the final question.

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Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [40]

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It's Olof with ABG. Just very quickly. First, on robotics, is there any change in your profitability in this segment, if we look at 2019 versus 2018, maybe? And how do you see the outlook for this, given that maybe you have higher growth in -- I would suspect higher growth at least in Gardena, robotic lawnmowers at a slightly lower price point than Husqvarna?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [41]

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I think we commented last year around that we expected gross margins to reduce as a consequence of increased competition. We have kept it up fairly well, actually, also for '19. So it's not a huge difference on that side if we look at the Husqvarna side. But it's correct to say that there is a bit of more pressure on the Gardena side, but still looking quite strong. And not the least, also, because of the whole smart offering that goes with it, and which is an important piece, meaning automatic watering irrigation in combination with robot moving and what's related to that. So I think that's part of the larger piece. I don't know if you want to add something to that, more detail.

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Glen Instone, Husqvarna AB (publ) - CFO and Senior VP of Finance, IR & Communication [42]

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That's fair enough, Kai.

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Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [43]

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Fantastic. And on working capital, Glen, we would love to see the 2 percentage points improvement over 2 years. What will be the main drivers? What actions are you taking to give us some confidence that this will come through?

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Glen Instone, Husqvarna AB (publ) - CFO and Senior VP of Finance, IR & Communication [44]

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It's very much on inventory, Olof. We need to be more proactive on our inventory management. We've recently, over the past 2 years, at least, invested in a system that will help us with our S&OP planning on a much broader scale. And that's important to us. That's now rolled out globally in most of the categories. So that's going to be our #1 item.

We can't come out of Q2 like we did in 2019, having such a high inventory level, then we are chasing it. So we need to be much more proactive in season and not reactive out of season, I would say, to the inventory situation. So I'm pretty comfortable with the payables and receivables. Of course, there's always housekeeping, we can improve that in slight tweaks, but it's really going to be an inventory matter.

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Johan Andersson, Husqvarna AB (publ) - Director of Group Corporate Communications & IR [45]

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Okay. Thank you very much. I think we don't have any further questions on the telephone conference. Do we have any final question here in Stockholm? Yes. We have one, Karri.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division - Research Analyst [46]

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Karri Rinta, Handelsbanken. Maybe a follow up on the robotics. In the U.S., you mentioned that you would put more installation capacity in place and you have some campaigns with Lowe's and with dealers. But don't you think that, that -- or do you think that you need to put more effort into direct-to-consumer marketing? Because my sense is that consumer awareness of this category is still very low. So as long as they don't know that this product exists, then they are pretty early in the journey of buying one of these things. So do you have any plans on increasing your direct-to-consumer marketing in the U.S.?

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [47]

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I think you're making a good point, Karri. The awareness of the category as such, in the larger scheme of things, is still relatively low, and it's a bit of an exotic thing. So I think your conclusion is the right one. We need to further reinforce that. That's absolutely correct. And there are ideas about how to do that. But it has also been a lot about having the right type of understanding for the category, the competence relating to it and the installation capacity because we see the worst thing that can happen to us is that people who do not understand the category take on to install, and they leave the customer with a bad experience. That is not allowed to happen. That's why we need to build it with that type of base of people who really have the competence and know-how to deal with the category to bring the customer experience we want to see. But your conclusion is correct, Karri.

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Johan Andersson, Husqvarna AB (publ) - Director of Group Corporate Communications & IR [48]

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Okay. Thank you very much for that answer. So I think with that question, we conclude today's conference and thank you very much for participating. And then we will see you next time in the end of April. So thank you very much.

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Kai Wärn, Husqvarna AB (publ) - CEO, President & Director [49]

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Thank you.

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Glen Instone, Husqvarna AB (publ) - CFO and Senior VP of Finance, IR & Communication [50]

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Thank you.