Husqvarna's (HUSQF) CEO Kai Warn on Q1 2017 Results - Earnings Call Transcript

| About: Husqvarna AB (HUSQF)

Husqvarna AB (OTCPK:HUSQF) Q1 2017 Earnings Conference Call April 21, 2017 4:00 AM ET

Executives

Kai Warn - President and Chief Executive Officer

Jan Ytterberg - Senior Vice President and Chief Financial Officer

Analysts

Christer Magnergard - DNB Markets

Johan Eliason - Kepler Cheuvreux

Erik Gunnarsson - UBS

Kai Warn

Good morning and welcome to Husqvarna Quarter One Results Announcement. I'll jump straight into the situation of the overview of the quarter one and actually we are quite pleased with the start of the year, it's a very confident and purchasing behavior of the trade partners that we see and particularly a strong preseason in Europe.

I think you are all aware that quarter one for us is pretty much a sell in to the trade partners. So it actually doesn't say much about the sell through, but it says of course a lot about the confidence in amongst the trade partners. And we see particularly that there has been strong in Europe.

We see also that the volume we have had on the top line has materialized into significant improvements and operating income as well as the margin. And we are pressing ahead with the profitable growth investments, but you see already in the quarter that it has paid off in a good way.

Also like to draw your attention to the buildup of our capabilities and position and concrete surface and floor area where we have now, I would say created a leadership position, and talk a bit more about that. But let's come to the result improvement to start with.

We have shown this picture I've seen some time back and you will see the margin respectively the operating income, and you'll see that the margin takes another uptick, so we are on the rolling 12 month basis at 9.3% to be compared with 8.9% for the full year of 2016. This statement we have had before is that we expect to reach the 10% margin in 2017 or latest 2018 if anything quarter one gives confidence to believe that we have a chance potential already this year, but I think we want to remain with the previous statement, but quarter one at least gives confidence that we are developing in the right way.

Looking at the financial targets, we also have top line growth as one of them for the three profitable growth divisions you will recall Husqvarna, Gardena and Construction being in profitable growth where we expect to outpace the market and also from a profitability point be above average of the market. And if we look at quarter one for those three divisions we will actually see 10.5% percent, which is really pleasing and satisfactory to see, so we are really glad with that start of the year. So that's good.

Looking at the financial highlights for the group 7% FX adjusted top line where of six are organic one percentage point and relates to the acquisitions in the Construction division. You will see the margin have improved with two percentage points you will see the gross margin story and operating margin with 0.9% and of course in between there is an element of burden from the strategic initiatives that we are pressing ahead with for the profitable growth.

To go forward for the second year, we took quite some efforts last year to put into what we said inject energy into their profitable growth journey and we are continuing this year with yet another step level on that. So that's a little bit of burden, but still zero point nine percentage point operating margin improvement for the quarter 10.3% to 11.2% we think is good and the operating income then is up 22% compared to last year.

Looking at the weather in the season it has been favorable in continental Europe. Let me be clear about that not necessarily that much up in the Nordic countries, but definitely in the continental European space. North America from a weather point of view has been okay with the exception of the first couple of weeks in March, which still are important weeks for us, so there is a an element of burden for the North American market for the first half of March. Looking at the situation right now the weather conditions are okay, so there's nothing that indicates any problems in North America for that sake or for Europe.

Returning back to the bullet points here, we have had of course beyond the volume impact also mix impact both in terms of because a country mix as well as product mix and divisional mix and we have a net of raw materials of positive currency effect and Jan will come back give some more details on that, earnings per share 30% up, so all in all that's good numbers.

Husqvarna Division 11% up currency adjusted growth, which is really nice to see and the margin that operating margin here going from 15.5% to 16.4% strong development robotics and battery based products, but also traditional products will like walk behind petrol on over et cetera are doing well.

Not surprising from the comments I gave, Europe is really what's leading the quarter, and it's really the region that's pulling ahead here, North America stable in that sense. From a result point of view, yes volume, product mix, currency supports particularly the Husqvarna Division here, but we also do continue with our growth initiatives in the quarter.

Gardena, maybe this is a bit of a surprise also versus the guiding we gave last quarter, where we actually talked about an expectation of a flattish quarter pretty much on the back drop of the week end of the season last year. We didn't expect that, but the net effect of the continental European weather and the confidence that brought together with new products, new channels, new geography penetrations has actually changed the picture, so we ended up with a 9% increase, but let me also tell you that the February year-to-date was still not at all looking that fantastic, so that was in line with the guiding, so actually March that tipped it. And I think to some extent there is an element of sell through in parts of continental Europe that we have seen.

Hand tools is doing great, so is robotics and just to continue on the path, I think quarter four we showed the fruit collector another hand tool that had a huge success at that part of the season, now we have that what we call the star cut, the pole sector [ph], which is doing really great and has received fantastic reviews in Amazon and other locations.

We are pressing ahead, as I mentioned from a geographic point of view, we are making now taking on the UK market and this is a start of let's say a three year journey rather than anything else to grab a position in that market where we have been under represented historically. We haven't higher operating income yes, but we have a little bit of margin deterioration pretty much burdened by the efforts from the strategic initiatives in growth, but I would say under control.

Consumer brands the little negative for us amongst all the good stuff here minus four sales wise currency adjusted, so we had two things, I mentioned whether piece the first couple of weeks of March, but the big thing is actually a different purchasing behavior we see from a couple of the big box retailers who have played a more stricter just-in-time purchasing pattern, meaning that there is some shipments that has been pushed over into quarter two.

I want to emphasize from our point of view this is a periodization effects, so there's no change in any expectation of the area the way we have talked about the sales for the year was flattish to some single percentage point of increase and that still remains so nothing has happened in that respect, but the quarter looks a bit weak, but you need to have some patience here into quarter two, and also remembering quarter two wasn't that spectacular last year was actually burdened by a tough weather situation in North America.

But I also want to emphasize on the positive note here, Europe has been equally good for consumer brands, so that's a good consistency. And the McCulloch robotic lawn mower look at that has been introduced not turning and in numbers around big time this year, but it will become important for the next years to come. I'd say some more words around that.

From a results point of view, a little bit disappointing, I think that we couldn't beat last year's results, but the combination of the lower volumes, but also the lower production pace as a consequence were flatter production schedule that we run of the season made that difficult, but that should look a bit different for quarter two.

1.5% operating the margin versus 1.9% of course many of you see think what about the 5% EBIT margin 2018, I think we were very clear at capital market day that's a stretch goal that remains a stretch goal we are not leaving it in any sense, but everybody realizes, this quarter doesn't make it an easier for us, but we still hang on to it, and I look and I'll comment after the main part of the season is behind us earlier at quarter two about that, but we are still on that journey nothing has changed, but it's a tough call of course, given the starting point of where we are now.

Construction great story, 18% currency adjusted increase were on 9% organic, the major part of that acquisition based increase is Pullman Ermator talk a bit about them as well, but I think talking about the organic part it's both geographically well spread as well as from a product category point of view. So the most pleasing part here, I would say from that point of view is that Europe as a broader geography is doing a lot better than we have seen before. I mean construction has been pulled the last couple of years from the North American market. We communicated that quite clearly, but now we see a broader based European demand increase which is nice to see.

Operating income and margin of course takes a big step up here for 9.2% volume to 11.8% which is nice, no question about that and Pullman had a good contribution to that as well, and I guess Jan will make some comments specifically as to that. But I would like to draw your attention to is actually what we are doing here. We are building a leadership position within the concrete floors solutions and actually the three acquisitions DTS last year, which is the resin based tool manufacturer, and floor grinding consumes a lot of tools, it's a perfect application for consuming tools.

And then we now have the dust and slurry market leader with Pullman, SEK300 million turnover with them and then HTC, which is the market leader in grinding, so together with our own abilities, together with our penetration and reach into the market that these two actors haven't had any comparison to. We think, we can do something really great and really great here and really talking about complete solutions from the tool to the grinding to the dust and slurry part and optimizing that, the maker is strong and good across environmental law legislations are getting tougher, which puts higher requirements on dust and slurry and then fundamentally come back to the picture these type of floor solutions where you don't put any proxy paint or anything just grind it and polish it to the right surface, it's becoming much popular, much more popular.

So it is some of over average growth in the segment, is an over average profitability, and we have taken a very clear leadership position off, so give and take some SEK750 million there of revenue increase through those three entities and of course is coming, yes we need to make something really visible and tangible out of this.

With that I'll leave to Jan to make some more specific comments about the financials.

Jan Ytterberg

From an income statement point of view but more as soon as the challenging from a capital efficiency perspective for the asset consequence of the higher volume that affected more substantially towards the end of the quarter resulting than among other things in the high level of accounts receivables that we were unable to cash in.

During the quarter and also want to remark about the weakening Swedish kronor that happened towards the end of last year. With that the comparison with first quarter 2016 becomes affected by those differences and this is especially the case as for Gardena net sales and as for Gardena balance sheet items.

Operating income was positively impacted affected by around SEK100 million positively due to the general weakening of the Swedish kronor that was more positive down the negative effect we get from strengthening dollar with our U.S. footprint.

Moving over to net sales of the group, as Kai mentioned up 12% in Swedish currency and Swedish kronor in the quarter, but adjusted for currency for 7% and as Kai mentioned around SEK100 million was the effect of acquisitions that is close to a percentage units and acquisition is down what happened in the beginning of this year for Pullman Ermator and then we had DTS that happened in the second part - second quarter last year.

Gross income improved with over SEK600 million compared to last year, here we also have a positive effect then on the currency, but except for that the improvement was mainly related to the higher volume in all divisions except the consumer brands that Kai mentioned. We also got a mix effect that was positive with the substantial improvement or volume of robotics, and also quite substantial effect from the divisional mix i.e. Husqvarna, Gardena and Construction are growing where as consumer brand with a lower than average profitability and gross income level is down decreasing sales. At the same time we must mention that also consumer brand despite the volume decrease were able with cost deductions to maintain the gross income level they had in last year.

On the positive side, we have continued cost out activities mainly related to direct material impacting positively of course, then somewhat affected by the increased raw material prices, but net positive effect. And we also have in the gross income additional cost related to our profitable growth initiatives and when we talk about gross income that is mainly related to R&D costs.

Kai was into it, selling and administrative expenses, SG&A increased with some SEK375 million and the increase of SG&A costs was partly related to currencies, but also partly related to our profitable growth initiatives where the bulk of cost actually are concentrated. We also see that the logistic cost, which is part of SG&A increased and that is, of course, due to higher volume, but also due to the higher inventory level.

All in all in operating income improvement of some SEK250 million to SEK1425 million where some SEK80 million was related to the net of positive currency effect and increased raw material cost and the guidance we are giving for the full year is that that will be somewhere north of SEK200 million for the full year of a positive effect. All in all for the quarter and operating margin that is 11.2% close to 1% units better than last year.

Financial net pretty stable compared to last year where we have higher interest costs mainly related to our increased funding needs and also as relates to interest rate differences from financial instruments, but that was offset with somewhat lower negative currency effects this year compared to last year. So all in all in net income that was very close to SEK1 billion around SEK225 million better than last year and net marginal 7.8% meaning in EPS of SEK1.7 to SEK2.

Balance sheet, this is of course something that is heavily affected by currencies insists we are using the balance sheet rate when we are transforming this into Swedish kronor. We do substantial part outside Sweden of our operation and substantial footprint in U.S. we get affected by the general depreciation in Swedish kronor and deprecation of dollar compared to March last year.

So if you take a look for instance on the non-current assets, they increased by some SEK2.4 billion where SEK0.7 billion was pure currency, SEK1 billion was related to Pullman Ermator acquisition, and SEK0.7 billion was related than to the higher CapEx level that we saw in 2016.

Adjusted for currency, the inventory increased with some SEK350 million compared to March last year mainly related to the higher volumes in Husqvarna division and Gardena partly offset by a lower level of inventory in consumer brand reflecting their lower look volume this first quarter.

And as I mentioned, we had higher accounts receivables taking out a currency effect in local currencies, we are talking about SEK0.5 billion more or less, and as I said the higher volume that we saw in the quarter happened very much towards the end of the quarter and thereby leaving the accounts receivables on the high level.

Accounts payables on the other side were on the same level as last year, if we take out currencies despite the high volume and this was a consequence of an earlier pre-build for the season 2017 than last year, and also partly related on to our new production concept in major U.S. factories with more fixed and less temporary employees and also a concept where we are flattening their production curve compared to what we did before.

With higher inventories and receivables in local currencies and a stable payable level of course we get an operating working capital that has increased has increased in local currencies of SEK800 million and if we take in also the currency effect we are up SEK1.6 billion of operating working capital compared to last year. And of course, this SEK800 million of currency effect is also transferred into high net debt that end of March were up some SEK1.6 billion to SEK9.8 billion compared to March last year. Besides the currency effect of around SEK800 million we also have here an effect of the acquisition of Pullman Ermator.

So whereas good things are happening in the income statement, we cannot be satisfied with the capital efficiency here in the first quarter, and as you know one of our three targets is related to that it's related to have an operating working capital that is under 25% of net sales measured in the year at the yearend. And this first quarter actually brought us further away from that target with an increase as you can see here it more or less one percentage units compared to March of last year and now we're up to 28.1%.

With the unwinding working capital that starts in the second quarter this ratio really improve and measures are put in place to improve this further, but capital efficiency is very much about changing behavior and it takes time to change behaviors and it will take time before we see the leverage of such activities in the operating working capital.

The fact remains we were last working capital efficiency in the first quarter of the year and that of course affected cash flow negatively. The seasonality pattern over built up all working capital in Q1 reflecting then the demand and how the pattern of sale in sale through is we can see that is valid for this year as well.

So operating cash flow adjusted for acquired businesses was likely over or under minus SEK2.1 billion and that is the deterioration compared to last year of some SEK400 million, once again related to the operating working capital that increased, but partly offset by the improved earnings.

And our ambition is to have an investment grade rating as we have today and to fulfill that ambition we need to have a strong earnings, strong cash flow in relation to our net debt. One important key ratio that we are following is of course the net debt to EBITDA it deteriorated as you can see in this slide slightly compared to end of the year despite then the increased EBITDA, but that was not enough to offset the increased net debt that we saw in the first quarter. We are presently just below 1.7 times.

But despite the deterioration of capital efficiency the profitability measures are improving for example return on capital employed as well as return on equity they are 1% to 2% units better than March last year, and also have improved since year end. And as regards the number of employees we can see that they are still decreasing and we were some 225 less of full time employees when we ended this quarter compared to the first quarter last year.

With that Kai, before you're summing up, I think you have something around the milestone for the company.

Kai Warn

Yes, we do, we do. And the milestone is about robotics and actually you will know that we were the innovator of this category already in 1995 and we these machines they work too well almost so we have to buyback if then the solar power that this is actually a unit number one or two or something, it's really one of the very first ones, we bought it back just recently. But that's how it looked and you may think that a solar power driven robotics mover was a bit ahead of its time 95 when actually it was.

But I think it was quite innovative a good start of a great journey that we are on, and I think the point to that several points to be made of course, but I think that was the first generation back in those days 1998 and iteration up to generation 1, 2003 then the second generation and now being in generation 3 mode, of course, we have learned a lot throughout these years, how you create reliable results over a season? How you make it silent? How you how you avoid tracks in the grass and how you make it safe?

I think these are probably the main criteria by people use to do this with robotics and actually you buy more or less a solution for maintaining your lawn in the garden. So one million units sold by far the biggest actor in the market is of course, quite pleased - pleasing for us to see and I think there that's one milestone. But I think the more important thing here is a couple of other points what about the penetration level in the market from a value point of view, of course, from a volume point of view those are going to look even tinier at these shares in the various countries. So Sweden from a value point of view would be close to half of the lawn moving market value.

Whereas you would see Germany being less than a quarter, and France even less than half a quarter. So there's a lot of potential, I would point to Sweden, Switzerland as the more most mature European markets, UK being pretty much nowhere still just like U.S. so there's a lot of untapped potential here of course, I think is one of the messages. And again if you would have looked at the volume shares these would have been about half of what you see here those shares.

So this is a value game so far, but there is pointed about volume, because you will be aware I would expect that we have since quite sometime of course, Swedish kronor being the main brand, but also had products with Gardena since some years back with the group technology. But I think the point is, we do see now that the entry levels are starting to create volumes, and we don't want to be only a value play in this category. We also want to tackle the volume play and the entry levels, so we will position McCulloch for that part and that's why I say strategically it's an important decision from a P&L perspective it doesn't make much difference in 2017, but in a couple of years it will make a difference as well.

So I think that's there's a couple of messages about robotics, which we think are important. But it's not all about robotics. It's also like to emphasize the battery based product. I think we have the approach that we want to have an equally competitive offering for the battery based products as we have for the petrol offering, which is still going to remain the most important for quite some time to come. So I think that way where we started this was to have the high performance range from Husqvarna some three years back. And Gardena that introduced some products, but the weakness of our position was rather into the consumer space where we have been fairly thin.

So we have now introduced Husqvarna branded consumer based range this year and one of the big retailers actually is also included in that in U.S. And we are pressing ahead with more products here may that be Gardena may that be flame for UK, I think the point is we have expanded offering 75% since end of 2015.

So in five quarters we have 75% more SKUs and to be technical about it stock keeping units, but it's really widening of the range so that's not all get stuck with the robotics thought in my mind, but actually this is equally important the message that I've been giving at the capital market is that we are growing with well above 20% and that's, as much as I will say today, as well and I can only reiterate that there is no change, it's equally valid for both these categories.

And we are positioning ourselves to be an important player in this area. We're not going to get stuck in the petrol even though it is very important for us. But that I mean the trend with petrol to battery is taking place all around us and will happen of course in the forest and garden spaces as well.

Summing up, I think we are pleased with the start of the year the pre-season good confidence in the selling and you heard the comment particularly about Europe. We have the profitable growth strategy same place in some time we see in quarter one a good positive impact of that it's working. We continue to press on with further investment, so this is like walking in a stair we took a certain amount of additional costs last year we add to that now again this year.

At the same time as of course, as we work with the efficiency improvements to get some leverage was on the bottom line. And I think the other point to make here summing up is the position we are taking concrete grinding and floor solutions where we are very optimistic of what we can do in some time.

So by that I think I will leave it, open for questions.

Question-and-Answer Session

A - Kai Warn

And we will start with questions from the floor here in Stockholm first.

Unidentified Analyst

Good morning. The first question I have is related to the operational leverage you have in the business, which is good on the gross income, but as you pointed out very high selling expenses here in Q1. What can we expect here going forward, is this a step up you expect to continue with having also in 2018, 2019 or this is kind of the level we have now as a percent of sales on the selling costs?

Kai Warn

You can start.

Jan Ytterberg

Yeah, I can start. Of course, as I mentioned, SG&A is to some extent impacted by currency natural, and the other part is, of course the profitable growth initiatives, and of course, we stepped up the game in 2016 and are doing this year as well, which means that we are creeping up the level of SG&A, but of course, our aim is to get leverage on this and that is something we are focusing on. Then there are some effects, which is spilling more over to the Q1 this year than it did last year commercials, logistic cost as I mentioned, et cetera, so there are some things, but the trend is that we will have with these profitable growth initiatives somewhat higher SG&A cost, yes.

Kai Warn

I think that's a fair comment. And then adding to that, I think after the second year now that be press on say with investments we will make a review of whether we find the payback of these investments were will we redirect something will be so to say put their foot on the brake in some in some areas. So I think we give it to go now based on the strong efficiency improvement we have underlying in the business and then at some time you always need to make that review and see what makes more sense or less sense and rebalance, but fundamentally, we have I think a melody where we have so much growth opportunities that we want to explore, so we will need to be a bit bullish about it. I think that's probably from a direction point to answer to your question.

Unidentified Analyst

And then the second question is related more to the Easter and particularly I mean basically to Gardena which I think I had a strong March is that related to these effects or what do you see in terms of that?

Kai Warn

If I start, yes we had a positive day effect in quarter one, which will be a burden for April so to say that that's true, but I think the dominant influence was rather than the weather I wouldn't –that's why we didn't emphasize today's eventually actually that in some pre earlier version here of the release it was in and where we took it out because the dominant effect was actually the weather in this season in the continental Europe that was dominating it rather than the Easter effects actually.

Christer Magnergard

Christer Magnergard from DNB Markets. If you can talk a bit about the Gardena you seem to be surprised by the growth during the quarter, do you feel that you're taking market share and can you also elaborate on your activities and expanding to new geographies and new sales channels?

Kai Warn

It's much too early to talk about taking market share in quarter one, knowing that it's predominantly a sell in, I think to some extent actually that has started as sell out within retail and Gardena products that actually tipped it to become so positive, but I wouldn't dare to talk about taking market share based on that, but if you look back with Gardena then being at 8% to 9% of course, that is well above the market and the watering categories such is probably just a couple of single percentage points of growth, so for the full year basis looking back. So definitely Gardena is on a very strong track, but it's pretty much channel penetration, it's geography and is product innovation, it's all those dimensions.

And then talking about geography the major bit that we had this year is UK of course, we took on the Nordic last year and we have increased the penetration in the Nordics, I think that's visible for those who might have made detailed studies into it. And of course, we are equally interested in the southern European space to take a stronger position, so these are some geographies, but also looking a bit east of Poland, Russia important markets, which we tackle.

Christer Magnergard

And then just one question on the robot lawn mowers, if you can take a look at the penetration chart that you showed, can you just clarify if the penetration rates relate to the sales, annual sales rather than the fleet that is out there?

Kai Warn

This is sales that should have been clearer about it, thank you. This is penetration in terms of sales as share of the total sales in the lawn moving market.

Christer Magnergard

And just as indication for us if you could guess what's the penetration in volumes for example in Sweden, when it comes to the whole fleet?

Kai Warn

That's less than half of that, if you say the accumulated installed base it's a lot less, so it's less maybe now I'm really guessing I looking at Sophia in the back end, but I wouldn't say if you say 10% to 20% probably it's a fair guess.

Christer Magnergard

Okay, thank you.

Kai Warn

Volume wise installed base.

Unidentified Analyst

[indiscernible], Carnegie. One question from me, the group initiatives that you're investing in, which is driving SG&A cost upward in this quarter, and also last year how force do you expect those in initiatives to start to generate growth.

Kai Warn

I think actually part of what you saw this quarter is generated by that, it's always very difficult to be that specific about the quarter, it's probably not meaningful even, but definitely there is an element of that in the quarter that you see, there's no question about that. If you look at the character of the strategic initiatives, it's branded marketing investments, it's about R&D and sales penetration I would say as areas I would say this was probably the most important part and we see already and you saw it here for example in the battery based product with 75% increase of SKUs that's available in the market that that means something of course, so I think there is a direct one to one effect in that particular case.

Sales penetration normally you would say it's a year to year and a half before sales person pays off I would say it definitely a year before they pay off and really impact, but given that we started a year ago, yes you will see that impact from that part throughout 2017 and increased of course, into next season reasonably.

Jan Ytterberg

And the investments to take in this year we should assume 2018 this will start to kick in as well and then some extra impacting on 2019 and onwards.

Kai Warn

Yes that's the whole idea, let's see need to prove it, but that's the idea and the positives.

Unidentified Analyst

Maybe I didn't follow, but did you quantify your costs or investments for the growth initiative that holding back leverage a little bit?

Kai Warn

And I didn't do that specifically, but I think last year we talked, we gave some visual impression of it compared to the FX hit that was SEK430 million or something if I remember correctly. And I said it was not far from that type of level and give and take we're pressing on with a similar type of level this year we ask to give you an idea.

Unidentified Analyst

And we should expect to see that also next few years.

Kai Warn

I didn't say that, I think what I'm trying to verbalize is that we will make a review of this strategic initiatives towards the second half of the year, and see what really has paid off and maybe redirect stops on things add in another areas and I mean all the natural things you do the continuous assessment and then we will look at 2018 and see whether we make yet another step in equal size not that's not defined at this point in time. So that's an open question but definitely for this year we press on.

Unidentified Analyst

Perfect.

Jan Ytterberg

It's not only SG&A these amounts you're talking about as Kai mentioned, there are several things R&Ds part of that as well and that comes and affects the gross income.

Unidentified Analyst

Okay. And how much do you buy back the slower mover for?

Jan Ytterberg

Something help me out. Wait I'll know, I think, but it's a great story, I mean that it continue to work, I mean it's fantastic.

Unidentified Analyst

More than the cake.

Kai Warn

Operator, can we open for questions from the telephone audience please?

Operator

Thank you. Your question first on the phone comes from the line of Johan Eliason of Kepler Cheuvreux if you could please ask your question?

Johan Eliason

Yeah. Hi, this is Johan Eliason from Kepler Cheuvreux. Congratulations to good numbers. I was interested in your move into this grinding business in the construction part. Is it correct that you paid almost three times turnover for Pullman Ermator, if I look at in your cash flow you've spent total SEK942 million in the quarter and is this sort of same price you're willing to pay also HTC to come later on? Thank you.

Jan Ytterberg

You have been reading the interim report correctly. And we are not saying anything about HTC, because there are not the same animals so to say, but let's see when we come into the coming quarter and then we will reveal what those numbers are, if we are successful with the HTC acquisition.

Kai Warn

Yeah, and adding to that I mean Pullman Ermator is an exceptionally profitable business. So that that I don't think this what you should expect necessarily or what we pay in general terms. Somewhere at extrapolate that too much.

Jan Ytterberg

And my remark since we're into accounting, of course, this means that the purchase price allocation with goodwill and immaterial assets or intangible assets or of course high meaning that they are depreciated or amortized in this first quarter and that's why we're saying that Pullman Ermator impacted positively but when we also made acquisition we said that it would not have a significant or substantial impact for the full year. So of course, in the good performance of Pullman Ermator is to somewhat offset by these amortizations that we do on a group level for acquisitions.

Johan Eliason

Yes. And that was actually my next question for these PPA is how much were they in the quarter and what do you expect for this year and going forward from the acquisitions that you have closed so far?

Jan Ytterberg

As you can see in the interim reports some SEK450 million was intangibles and they are depreciated between five to 10 years meaning that the impact was not that big all in all Pullman Ermator. We're not giving any clear figures on the different depreciation rates et cetera, because they are different types like brand, like licenses, et cetera or technology et cetera.

Johan Eliason

Okay. Great. Thank you very much.

Operator

Your next question comes from the line [indiscernible]. If you could please ask your question.

Unidentified Analyst

Yes. Firstly, thank you. Wanted to ask you, what was the impact of raw materials in the quarter roughly?

Jan Ytterberg

We are actually pretty specific in this quarter since you're saying that the currency was 100 and net currency a raw material was 80. So then it's 20 to 25.

Unidentified Analyst

Thank you so much. And the acquisition how much that impact EBIT [ph]?

Jan Ytterberg

The raw material impact, so may be, we are not talking amounts, but a small impact and also in of course, that this related them to construction. So the improvement of construction is too limited as we talk about operating income, limited extent impacted by Pullman Ermator the rest is down the line business that they're doing great. But of course net sales is 100% impacted by Pullman Ermator.

Unidentified Analyst

Yeah, yeah. That was I trying to figure that out. Okay. And then a question on this changing by impact in the U.S what do you make of that? Are you maintaining your production plans for the year and can you also update us what channel inventory looks like in the U.S.?

Kai Warn

I want to be clear, and I try to be clear, I mean we don't see any change in the amount as a consequence of this different purchasing behavior it's just that they are more strict about just in time ship and so they put more burden so they are not, not very surprising, but and some of those orders slipped into quarter two, but again it doesn't say anything about and the customer demand and sales sell through. So that we yards and assess equal to before.

Unidentified Analyst

Okay. So you haven't changed any?

Kai Warn

But of course it's a bit burden on the inventory that Jan talked about before.

Unidentified Analyst

But that's only your inventory, but not channel inventory.

Kai Warn

Correct.

Unidentified Analyst

Okay. Thank you so much.

Operator

Your next question comes from the line of [indiscernible]. If you could please ask your question.

Unidentified Analyst

Hi, it is [indiscernible] from ABG. Just a quick one on growth particularly in Husqvarna and Gardena, your financial target talks about growing faster than the market and do you have an assessment of what you think the market was growing for those divisions and how much you were able to surpass that?

Jan Ytterberg

Actually we are in the midst of making a very thorough review of the market growth, but I mean the general statement we have made is that it's historically been very much in line with GDP over a period of time, and value advice if you say 3% probably is not it's probably a good proxy for the thing here for the last few years in that magnitude. But I think, we need to be very cautious about extrapolating this number a 10.5 now for the three profitable growth divisions and that 11 for Husqvarna 9, for Gardena for example.

To any market share gain or loss it's too early in this season and in the year to talk about that we need to see a lot more sell through data before we can dare to do that. But it of course, shows that they think that we have a very competitive offering that's of course natural interpretation, which stay will promote that's obvious.

Unidentified Analyst

All right. Perfect. And Gardena specifically since there are a number of things really the geographic expansion and penetration, sales channel penetration that you know and can control is it possible for you to spill it out how much that added to organic growth?

Jan Ytterberg

I'm not in a position that I want to do that necessarily here and now. That we will need to I think build a story, which is more solid over longer serious of quarters rather than one specific quarter and make that meaningful. So I'm sorry, all of be declining terms so that question.

Unidentified Analyst

Fair enough. Thank you very much.

Operator

And your next question comes from the line of Erik Gunnarsson - UBS. If you could please ask your question.

Erik Gunnarsson

Hi, everyone. Yeah, I have follow-up question under raw material impact during the quarter and also what you expect during the years. So you said that you have about SEK20 million headwind of raw material in Q1. How much of that spot price increase year-on-year do you see feel to prove on that number and do you expect it to accelerate as we go through the year?

Jan Ytterberg

We saw limited impact and that's also of course how we are doing the contracts with our suppliers et cetera. And that will be of course then as we go on to be somewhat more material than we saw in the first quarter.

Erik Gunnarsson

Do you want to give any guidance of where we end up for the full year and also where we could end up for even the current spot prices for 2018?

Jan Ytterberg

Well. I have said that North of a 200 the net of currency and raw materials, and then we can say that maybe we are closer to 300 as regard to currency and closer to 100 if we talk about raw materials.

Erik Gunnarsson

And in terms of contracts and so would you start expecting that the current spot prices are feel to prove all the contracts and also the lag that you had that in outsourcing product pricing?

Jan Ytterberg

This is based on the best of our knowledge and the knowledge we have of over our contract as well. So yes, everything that is the recent information you seen there.

Erik Gunnarsson

Okay, thank you.

Kai Warn

One additional piece, I think you have to remind you, I mean the main part of the production is of course, the first half of the year, so the main material impact is also going to burden in the first half, so lower rate in the second half.

Erik Gunnarsson

All right. Thank you.

Operator

And there are currently no further questions.

Kai Warn

Okay. There seem to be one more question.

Christer Magnergard

Christer from DNB again. When you talked Gardena entering the UK markets, how big is the addressable market in the UK for Gardena maybe in comparison with the Germany or in other markets, and what kind of market share do you normally have in Europe not like Germany, but other countries?

Kai Warn

If you look at the mobile watering Gardena is the number one by far in Europe since many years back, in some of the other categories it might look different, if you look at hand tools, it's also huge player in the premium segment, whereas of course, the volumes and the more entry points it's also considerably in the hand tools region. But as the premium player it's a number one together with other actors like just to mention one name. Electric not that large, if you would look at these type of products in our handheld products saw a fairly small player in the biggest scheme of things still robotics becoming as a significant player actually throughout the last years.

The addressable market, I don't want to be very specific, but UK is the garden market in Europe, it's an enormous potential for us in there, I don't want to quantify, but I can just leave it with it's a huge potential, so the potential is there, it's more what can we do art of it, and I think you should look upon this as a start of a journey that's going to take more than three years to really materialize anything that's in the near the ambitions, but we will need to invest.

I think you should look upon 2017 and probably 2018 also as an investment years for us, net investments to build the brand awareness, the brand preference to create the channels in the markets. We have taken a retail position this year, and there's a lot more to be done in the garden centers and other channels. So it's I think we're trying to shape it, it's going to take at least three years to make something meaningful, but that potentially is enormous for them.

Christer Magnergard

So to think about Gardena has the high growth division with more flattish margin profile over the next years, is that a fair resumption.

Kai Warn

I think that's - it's not bad I think that's what we're striving for, yeah.

Christer Magnergard

And then the last thing you said in your presentation by consumer - also construction products is that you have the ambition or is something like that's to make this tangible and visible in the future, I'm not really - I mean you have said it in the last part of the presentations, maybe mean anything, but do you have any more plans to do more M&A and to do this division even large in the future?

Kai Warn

Ideally I would like it to become a larger share of the group to get the right such as valuation, because it has been a little bit too small in the group, and hidden in the group, so from that point of view it would be nice to expand and I think fundamentally we have all what it takes to expand it in a good way, I think we have the technology, we have the geographic reach, and we have the leadership so to say from a product point of view.

A very good momentum and I think this is a good test now how do we tackle and a quiet growth of SEK700 million plus and what do we out of it and depending on the success of that, we will be more bullish or more cautious, but if you has been today quite upbeat about what the reasonably should be able to do in this constellation with two market leaders, which fits the structure and the culture of our construction division.

Christer Magnergard

All right thanks.

Kai Warn

With that thank you very much for your attendance, and attention. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

About this article:

Expand
Tagged: , Industrial Equipment & Components, Sweden,
Error in this transcript? Let us know.
Contact us to add your company to our coverage or use transcripts in your business.
Learn more about Seeking Alpha transcripts here.