Continued journey to achieve market leadership by 2020
In 2016, we continued our aspirational journey that was started in 2014 – to achieve market leadership by 2020. Having delivered on the first promise to grow earnings and improve our margin, it’s now time to shift our attention to profitable growth. A firm focus on customer-centric innovation and market development will be key going forward together with continued operational efficiency and reinforced sustainability efforts.
What attracted me to Husqvarna Group some years ago was the combination of a company with the qualities of a true leader, a fantastic heritage, strong brands and distribution partners, combined with world-leading products and innovation, to mention just a few things. A company that was still somewhat of a financial underperformer, but with much higher potential. This was a journey I really wanted to be a part of. And this is what we are doing right now. If 2015 was a year of major change for the Group with the introduction of a new organization and the finalization of the Accelerated Improvement Program, 2016 has been a year of implementation. The divisions have started executing their business plans, laying the foundation for profitable growth. We are investing to create a platform for growth and at the same time pursuing cost and efficiency measures to finance these measures. On Group level, two important and interlinked cornerstones of our 2020 market leadership ambition, excelling in digitization and battery-based technologies, promise to radically reduce the environmental impact of our products and help transform our business in many areas. These include commercial lawn and garden, robotic lawn mowing, connected gardens and business development concepts involving our trade partners.
Building the foundation for profitable growth
When developing our new organization, we aimed for a higher degree of end-user focus and further strengthening of the entrepreneurial spirit, faster decision-making coupled with empowerment, accountability and stronger business acumen. Close to two years down the road, we see exactly this materializing. We have created the conditions for executing profitable growth. Three divisions are already in profitable growth mode while our Consumer Brands Division is successfully building on its profitable core and maintaining a strict profitability-first priority. But however much we have accomplished so far, including reaching the milestone of a break-even result for the Consumer Brands Division in 2016, the target of a 5 percent operating margin for the division by 2018 is a stretch given the negative currency developments in the last two years.
Earnings doubled in three years
While operating income doubled between 2013 and 2016, the operating margin has increased to 8.9 percent compared with 5.3 percent. The improvement has been accomplished primarily by reducing product cost and complexity as well as improving our product mix by focusing on core brands and product leadership positions, for example, in robotic lawn mowers. Focus and execution have been the key words in achieving these results.
Continued strong financial performance in 2016
To briefly summarize the developments over the past year, I am pleased to see that we continued the positive trend. Operating income for the Group increased to SEK 3,218m (2,980) excluding items affecting comparability, despite some SEK 430m in unfavorable currency impacts. That is quite an achievement, especially if you take into account that we have also added significant costs for our growth initiatives. In the Husqvarna Division, sales grew by 2 percent adjusted for changes in exchange rates and the margin remained at a high level of 12.9 percent, partly driven by continued growth in Europe in general and in robotic lawn mowers in particular. The Gardena Division had a strong year, truly demonstrating its growth capability. Sales were up 8 percent this year following a successful geographic expansion and the introduction of many new innovative products, the most notable of which was the Gardena Smart System that combines automatic watering and robotic lawn mowing. Construction fundamentally had a good year, primarily driven by the US market, but balanced by weak demand in the stone-related part of the business. In total, the division delivered margin expansion from an already high level. In Consumer Brands, the dedicated and relentless cost and efficiency focus continued to yield results. As I said earlier, we managed to reach a break-even result for the year despite continued currency headwinds and a larger than expected weather-driven drop in sales volumes. The Group’s positive development is also reflected in our first public rating process where we received a BBB long-term corporate rating from Standard and Poor’s. Furthermore, the proposal from the Board of Directors is that that the dividend for 2016 be increased to SEK 1.95 per share (1.65), another reflection of the continuing good earnings trend.
New financial targets to support growth ambitions
In line with the strategy and priorities we presented in 2014, we are now taking the next step, which is to put stronger emphasis on profitable growth. For us, a profitable growth focus means increasing our sales by around 1 to 2 percentage points more than the average market growth. We also expect that profitable growth will lead to continuous improvement of the operating margin, which will be carried out in a capital-efficient way. These are our cornerstones for growing the value of the company, and we have adjusted our financial targets to reflect this.
Reinforcing leadership in robotic lawn mowers
We were the pioneer in the robotic lawn mowing market more than twenty years ago and today, we have a strong position that we are determined to maintain. The global market, which is still mainly a Western European one, is expected to grow by more than 20 percent per year and many countries still have low penetration rates. This is a fantastic opportunity and also a challenge as new competition enters the market. Our mindset is to continue pioneering this market by investing to maintain our market position with the most innovative and reliable products. Following the success of the Husqvarna and Gardena brands, we will launch a McCulloch robotic mower targeting the broader consumer market. We are also investing in additional manufacturing capacity at our current site as well as expanding and building new capacity at an additional site.
Strategic partnership for battery-powered products
To further increase the competitiveness of our offering of battery-powered products, we signed a strategic partnership with BMZ, a leader in the field of battery technology. Combining the core expertise of both companies will reduce time-to-market, increase innovation capability and capture an important part of the rapidly growing battery-powered market. Through this partnership, we will turn our current relationship into a strategic cooperation to claim a leadership position by developing differentiating technologies as well as cost-competitive, low-carbon, battery-powered products for our industry.
Contributing to sustainability in a changing world
As a global supplier of outdoor power products and solutions, we have an important role to play in addressing some of society’s biggest challenges. Through our products, we can connect people with nature and through innovation, we can reduce the environmental impact of our products. As an employer and company, we can promote high standards of business ethics. The way we do business matters to people. It is important to our employees, customers, investors and the general public. We need to do our part to address the challenges that our society faces. We also know that our engagement in the sustainability agenda will have a growing impact on our bottom line. In our sustainability strategy, Sustainovate, we have prioritized the most important issues and defined targets that are most relevant to our business. Tackling climate change is the biggest and most urgent challenge the world faces today. Our Carbon Challenge aims to reduce our emissions of CO2 through the entire value chain, from product development to our suppliers, manufacturing and when our products are in use. With a climate target approved by the Science Based Target initiative, I am proud that we are fully committed to doing our fair share to limit global temperature increases to below 2°C compared with pre-industrial levels. In the future, I am convinced that we will be proud to tell our grandchildren that we understood what was going on and did our utmost to tackle it. The Group’s other priorities are the Team Challenge that aims to attract and retain the right people, the Supplier Challenge that aims to gain an overview of and develop high sustainability standards at our suppliers, and the Safety Challenge that aims to continuously improve safety across the entire value chain. We also aim to strengthen our cooperation with local society initiatives.
Building a winning culture
Building a winning culture is fundamental to becoming a leader in the long term. Our core purpose and vision, our key behaviors and Sustainovate are all equally important to inspire us and define our direction to create value. The essence of why we exist as a Group is our core purpose: we turn technology into opportunity. Shaping great experiences is how we choose to apply our skills and resources: our vision. These are closely linked to our key behaviors, the way we act as individuals and as a company, always putting the customer first. Every great company owes its success to devoted people who are driven by a cause. The will to be part of something bigger. To act in a meaningful context. That is why I believe that our work with our core purpose, vision and key behaviors will build a winning culture that will support our ambitions and take us forward. Aligning culture, strategy and targets brings clarity, meaning and excitement. At the same time, it is the way to create long-term value for the Group. I would like to say thank you to all of our employees who are making this their everyday life and I am looking forward to continuing this inspiring journey.
Stockholm, March, 2017
Kai Wärn, President and CEO