Strong performance during the first year with our new organization
Husqvarna Group had yet another year of solid increases in operating income and margins with contributions from the Accelerated Improvement Program through cost improvements and selective growth in product leadership areas. 2015 was also a year of major change for the Group as we introduced a new organization. Along with the completed improvement program, this gives us a strong foundation to build on in our journey to reach the full potential of market leadership in 2020.
Since 2015, the Group has been operating under a new organization. The brand-based divisions focus on their specific end-customer segments’ needs and respective business models. This is our solution to combine distinct focus with the breadth and strength of the Group. The new structure empowers each division through operational resources, accountability and global profit and loss responsibility with a clear focus on executing their strategies.
But there are strategic synergies in acting as one group as well since there are important dependencies between the divisions. Husqvarna depends on Consumer Brands to provide sourcing and manufacturing to enjoy scale advantages, while Consumer Brands will benefit from innovation and technology developed in Husqvarna. Exploited correctly, this should give the Group a competitive advantage. Increased focus and capturing vital scale synergies will support us in achieving long-term profitable growth and maintaining our strategic direction, and also help us realize our goal of market leadership by 2020.
Three of our divisions, representing about 70 percent of total Group sales, are performing above the Group target margin level of 10 percent, while Consumer Brands has yet to break even. This view is beneficial for us as it pinpoints where issues are and guides us in drawing the right conclusions and taking the right action to drive sustainable improvements. Consumer Brands will focus on a turnaround while Husqvarna, Gardena and Construction have the foundation to start their strategic profitable growth.
Continued improvement in financial performance
The Group’s performance improved significantly compared to 2014, to a large extent driven by the Accelerated Improvement Program that was launched in late 2013. Operating income increased by 27 percent to SEK 2,980m and the margin rose by 1 percentage points to 8.2 percent, excluding items affecting comparability.
The Husqvarna Division generated an increase in sales mainly driven by product leadership areas, especially in robotic mowers, which contributed to earnings growth as a result of favorable mix. Gardena delivered an increase in sales and earnings where one key contribution was the launch of a re-designed line of watering products and strong execution and flexibility in supply to fill demand driven by a strong season.
Consumer Brands has focused on improving margins and consequently, it reduced the size of its business. Despite a 16 percent drop in volume and unfavorable currency impacts, earnings were higher than in the previous year. This is a strong sign of the turnaround case for Consumer Brands, which aims to reach a 5 percent operating margin by 2018. The turnaround will include a range of actions such as product cost improvements, changes in manufacturing footprint, more efficient logistics as well as adjustments within sales and administration, and it will also require a consistent business model execution over several years.
Finally, the Construction Division enjoyed another year of steady progress with growing sales, income and margins. In particular, in the North American market, sales developed favorably. Continued investments to secure efficient products for our end-users and a high level of local service are paying off.
Proud of our achievements to date
Both 2014 and 2015 have shown the impact of selling more of the right products to drive improved gross margin through product mix. It has also shown the success of another part of the Accelerated Improvement Program – direct material cost reductions. These excellent results were partly offset by unfavorable changes in exchange rates. In 2016, currency will be a major headwind for the Group and we have initiated improvement activities to compensate for this. The currency impact is estimated to be up to SEK -500m compared with 2015, with the biggest impact in the first quarter.
We have every reason to be proud of what we have achieved during this journey of change. In just two years, the Group’s operating income has improved by more than 80 percent and the margin has increased from 5.3 to 8.2 percent, excluding items affecting comparability, despite a margin dilution of more than 1 percentage point due to currency translation effects on net sales. As a consequence of the negative currency development, it is no longer realistic to aim for the targeted 10 percent operating margin in 2016, but the target remains.
Create funds to invest in profitable growth activities
Our stronger foundation gives us the opportunity to gradually shift focus towards profitable growth, which will require new initiatives and actions. The funding of these activities and the need to offset negative currency effects will demand that we implement additional cost efficiency measures in 2016 and 2017. We see this as an opportunity to further strengthen the Group’s competitiveness. The additional measures will focus on continued direct material cost reductions, indirect material and logistic costs, capacity adjustments in the supply chain and improved efficiency in terms of selling and administrative expenses.
Innovation and business development
We believe in success through the courage to invest in technology based on an understanding of how this will add customer value and thus enable future business. We have several exciting growth initiatives that we expect to yield results in the coming years – commercial lawn and garden concepts, robotic mowers, smart garden solutions, battery-powered products as well as accessories and parts.
One example is Gardena Smart System that will be launched in selected markets in 2016. By connecting water control systems and robotic mowers with sensors in the garden and allowing the user to monitor and operate the system via a smartphone or tablet, the system brings the Internet of Things to the garden. This allows gardening to become convenient, smart and sustainable, and also frees up time for other more exciting gardening projects.
Another investment area is professional landscaping and park maintenance in urban areas where we are investing in new technology as well as services and solutions. Petrol products are, and will remain, important, but they need to be complemented by battery-powered products. The advantages of these products range from lower noise to better working conditions through reduced emissions – both of which are vital in urban areas. A commercial landscaper has the option to add connectivity features to collect data from products to optimize use and service intervals for higher productivity and less downtime.
The ongoing shift in power sources may change some of the competitive landscape since there are new players entering the market. We possess valuable know-how built up over many years that will be key to leveraging in this area as well – a wealth of relevant applications and end-user knowledge, well-recognized brands and global distribution power.
It is also crucial for us to invest in business development for our trade partners, the many thousands of often small dealers that sell our products and services to professionals and consumers. We want to be their business development partner to keep the dealer channel relevant and the preferred choice for professional forest, park and garden products. For this reason, we are developing shop concepts and solutions to create better in-store experiences. We are investing in online platforms and strategies to increase customer retention rates and help dealers build attractive service businesses by providing service plans and offering a high availability of spare parts.
Sustainability is a competitive advantage
Innovative products and profitable growth go hand in hand with our sustainability statement “respecting nature – caring for people.” During the year, we further refined our sustainability strategy by adding sustainability targets on a divisional level to make it a part of everything we do. We strive to be a company that acts responsibly in respect of people, products and processes throughout the value chain.
Husqvarna Group is a signatory to the UN Global Compact’s ten principles on human rights, labor, environment and anti-corruption. We will continue our dedicated work to promote good workplaces, reduce negative environmental impacts and ensure responsible sourcing and good business ethics. By innovating and manufacturing high quality products we can make the biggest difference in terms of environmental and social impact.
Margin improvement focus remains
The brand-driven organization introduced in 2015 was a proactive measure to position the Group for the next phase to realize the full potential of profitable growth and our aspiration for market leadership by 2020. The priority of margin improvement remains in 2016 at the same time as we will start investing for profitable growth while offsetting negative currency impacts.
Looking back at the success of the Accelerated Improvement Program, our achievements in the past year and the stability in the new organization, I feel that we have a strong foundation and new confidence to manage the challenges of the coming years. With these achievements behind us, I would like to sincerely thank all of our employees for your hard work and dedication in 2015. Indeed, you are the most critical part of this exciting journey.
Stockholm March, 2016
President and CEO