Husqvarna AB (publ) (HUSQB) Earnings Call Transcript & Summary

Hello, and welcome to the Husqvarna Group conference call. [Operator Instructions] Today, I'm pleased to present Johan Andersson. Please go ahead with your meeting.

Hello, everyone, and welcome to the presentation of our acquisition of Orbit Irrigation. My name is Johan Andersson, responsible for Investor Relations at Husqvarna Group, and I will be the moderator here today. So, joining us today, we have Henric Andersson, our President and CEO; Pär Åström, President for the Gardena Division; and Glen Instone, our CFO. So Henric, Pär and Glen will do a presentation. And afterwards, we will open up for a questions-and-answer session over the telecom conference. So with that, I hand over to you, Henric.

Thanks, Johan, and also a warm welcome from my side. Today, we have some really exciting news to share. I mean, we're about to acquire Orbit, the market leader of residential watering in North America. And with that, we are creating a global market leader that really can transform the industry towards smarter and more sustainable watering. As you all know, and as we discussed at the most recent quarterly call, we are building a stronger Husqvarna Group. We have, for several years, purposely been disproportionately investing and focusing on the truly attractive segments. And we have been dialing back in some others, and we have even exited some segments. And of course, what is guiding us inside of all this is our strategy that is depicted here on this slide. We also have a very specific focus on some of the key product areas that are -- where we see a lot of value creation potential in the future in terms of robotics products, professional products, but also watering products. Another way of looking at how to build a stronger Husqvarna Group is that we would see a strong benefit with a larger Gardena and a larger construction division. Construction because it's less seasonal, there's a large share of consumables, it is a strictly professional business. Gardena because it is really complementing the larger lawn-mowing business of Husqvarna with other applications and in particular, one interesting aspect is watering since that creates a built-in weather hedge. As weather might become more harsh going forward, the risk for drought is higher, which would affect the mowing business. And then, of course, watering is increasing in demand at the same time. But also, it simply just makes sense to build on the fantastic track record we have in the Gardena Division here over quite a few years. Given our strong financial position, we can also accelerate or sometimes derisk our organic growth strategy by M&A. And Orbit is, of course, here is a great example. It naturally plays straight into the winning core part of the strategy. Watering is an integral part of that winning core. And with this acquisition, we expand that business significantly. It also supports Gardena's strategic focus area in terms of geographical expansion. But it also supports the strategy from a sustainability perspective since both Gardena and Orbit are leaders in smart watering and more efficient watering solutions. But they also have -- it supports the strategy from a smart perspective and from a robotics perspective, which we can talk about a little bit later here. With an acquisition of Orbit, just like I said here in the beginning, we will form a global residential watering leader that truly is poised for growth. And the growth opportunity is actually for both Orbit and for Gardena. For Orbit it is, to a large degree, about leveraging Gardena's innovation capability and Gardena's broad product portfolio. Whereas for Gardena, it's about leveraging Orbit as a platform for establishing the Gardena as a premium brand also in the North American market. So as you can hear, we are quite excited about this opportunity. And now Pär will take us through some of the details of this.

Thank you, Henric, and good morning, everyone. First of all, I'd like to say that I'm, of course, very excited about this opportunity, and I really look forward to welcoming the Orbit team to Gardena division and to the Husqvarna Group. We will start by looking a little bit at who are Orbit Irrigation. They are the North American -- they are a North American market leader in residential watering and the market leader in North American smart watering. They had, last 12 months, net sales of USD 320 million. They've been able to show a strong growth trajectory. And in the last 30 years, they've got a growth rate of 9% CAGR. The EBIT margin is slightly below the Husqvarna Group average. And I think the next one we are very excited about being a North American smart watering leader, they have 1.4 million connected devices, which is, of course, a great contribution to the number we have already under the Gardena smart system. The organization has 300 employees. And the reason why they are not more is because they run a very asset-light operation setup. They are headquartered in Salt Lake City, Utah, in the U.S. And they have their R&D in-house, but they work with a network of manufacturing partners to produce most of their products. They have 1 manufacturing plant in the U.S. They also have a fully built-out nationwide distribution network for logistics, which is exciting. And I think their asset-light operation setup will also be very exciting to get learnings from to the Gardena Division. If we look at their watering positions and their sales split, they have a well-balanced split when it comes to watering. In the U.S., there is really quite a difference between underground and overground in the market. And actually, the Orbit brand has strong presence in both those segments. So roughly 40% of their sales comes from system watering underground, mainly plus Micro-Drip, and 45% of the sales comes from hose and overground applications for water. We also have a smaller emerging business around gardening tools and gardening accessories. What we also really like with Orbit is that they have an omni-channel strength. Their smart system under the B-hyve brand has made it possible for them to expand into all the relevant watering and also gardening channels in the U.S. landscape. And this means that they actually reach very far in the distribution platform. If we look a little bit more at the U.S. watering markets where Orbit is a market leader in residential watering in North America. And they also have strong brand positions, both overground and underground. I think it's important to note that the U.S. watering market is a bit different to our European. First of all, there is quite a large commercial irrigation market. And then there's also a large residential part, and this is the part which Orbit has been focused on. And within the residential part, you have the split between the overground and underground solutions. Looking at where they are placed. We see, of course, a very strong position in smart watering with 1.4 million connected devices. Here, they operate with the B-hyve brand, and they have a #1 position in a fast-growing market, which is driven by trends such as, of course, the smart home trend, but also the climate change, which is creating the need to water, to keep a green garden. And then, of course, also that water is a scarce resource, which we need to be careful with and smart systems allow us to save water and water plants efficiently. Looking at the more traditional watering segment of overground and underground applications, they are the #1 in hose-end applications, and they are one of the top 3 brands within the system side of the residential watering business. Also, the fundamentals around this part of the U.S. market is good. And similarly to the smart side driven by trends such as changing weather conditions, dryer, hotter climate, water being a scarce resource. And then also, we see also in the U.S., similar to in Europe, a strong trend when it comes to passionate garden, actually spending time in the garden, growing things and taking care of nature. They also, like we said, have an emerging position on the tools and -- garden tools and garden accessories. Here, we have a fairly small position And we, of course, are quite excited about this in Gardena, given our innovative strength and high-quality products within this area. If we look at the opportunity we see, it is really a twofold opportunity. Orbit, they have, we believe, a very attractive stand-alone position in an attractive market. And we also see that Orbit can accelerate Gardena's geo expansion strategy and provide a platform for a real push to build the Gardena brand in the U.S., where we today have a very small position. The strong stand-alone opportunity comes first and foremost from 3 leadership positions within residential watering, within smart and also having the 2 leading brands within these 2 feats. And then also from their broad omnichannel distribution strength, reaching all the relevant watering and gardening channels in North America. Having spent some time with them in the last months, I can also say that they are a very passionate and experienced and dedicated team, which we look forward to collaborate with. In terms of accelerating Gardena's geo expansion, I mean this is, of course, the real opportunity we see. And here, beyond creating a global #1 position in residential and garden watering and also within smart watering, we see an opportunity to leverage and complement each other, where their go-to-market experience in the North American market, where their operations infrastructure and where the smart technology can help Gardena. And where Gardena with our branding knowledge, our innovation, product and application innovation and broader product portfolio within the watering and gardening space can help Orbit. So we think it's a good platform for our geo expansion. And looking a bit more at what is it that we intend to do, to expand Gardena into the U.S. market. Well, if we go back to our core purpose, that is really to reach passionate gardeners around the world and realize their gardening needs. And that's, of course, what we want to do also in North America. And we think there is a good opportunity to long term be successful and position Gardena as a premium gardening brand, leveraging the technology positions we have developed the last year. And this means that we, in Gardena, in turn to participate in the buildup of the North American robotics market. We intend to contribute with our innovative watering technologies. And also, we intend to start to position Gardena as a complementary offering when it comes to system tools. So this way, we hope to continue to contribute to sustainable gardening and the existence of green environments. And then I hand over to you, Glen.

Thank you, Pär. So just some details on the transaction now. The acquisition price of this on an enterprise value basis is some USD 480 million, and that will be on a cash and debt-free basis. We are acquiring this from Platinum Equity. It is a portfolio company within Platinum Equity today. And we expect to close this deal before the end of the calendar year, i.e., before December 31 this year. However, of course, usual note that it is subject to the customary regulatory approvals. When it comes to the impact on the key metrics of the group, we will fund this deal using existing cash, and if need be, undrawn credit facilities. So we're in a strong position to fund this deal, this transaction. From a net debt-to-EBITDA perspective, we closed Q3 with a net debt-to-EBITDA ratio of 0.6x. So on a pro forma basis, this will therefore increase to 1.1x. So still well within the credit rating that we work within. When it comes to the impact on the P&L, of course, the deal is accretive from an earnings per share perspective. As Pär mentioned, the sales of this in the last 12 months has been some USD 320 million. That represents roughly a 6% sales increase for the group with an operating margin which is slightly below the Husqvarna Group average. So it will be slightly dilutive to the group margin, both to the divisional margin and the group margin. And we expect that this entity will be fully consolidated into our business division, as Pär has alluded to. I think from a transaction perspective, that pretty much covers it. And with that, Henric, I will pass back to you.

Thank you, Glen. As you can hear, we are quite excited about this opportunity, and it's also quite logical, I think, that we build on the success that we have in the Gardena Division and that we have proven for quite a few years here. This is a natural step in how we execute on our growth strategy. It's also a natural step in how we are building a stronger Husqvarna Group. It's a very interesting opportunity here now that is presenting itself in terms of forming a global leader within the residential watering to really drive this transformation towards smarter and more sustainable watering. The business case is, to a large degree, around driving growth both for Orbit and the Gardena brands. And ultimately, and as I said here just recently, we really believe in this opportunity and in -- first of all, we believe that the watering business will continue to grow, depending on how the climate is developing. At the same time, water is a scarce resource. And that's why we have this huge opportunity in driving the transformation in the whole industry towards smarter and a more sustainable watering. So that's pretty much, if I believe, and Johan, I mean, back to you, and hopefully, we also have some questions.

Great. Excellent. I can absolutely say that we have some questions in the queue. So many thanks for that presentation. And please, operator, let us start the question-and-answer session.

[Operator Instructions] And the first question is from Christer Magnergård DNB Markets.

Christer Magnergård from DNB. To start with, can you talk about the watering market in the U.S. a bit? So we get some kind of more historical context, given that the last 12 months have been exceptionally strong for other outdoor products in the U.S. Are we at the peak now? And what can we expect in terms of market growth from here?

Yes, it's correct that the market in the U.S. has been strong also this last season. So I think it's both attributable to climate and weather and also, of course, to the stay home effect during the COVID time period. What we believe, seeing the same in Gardena, is that people that start to enjoy the outdoors and start to garden, they actually continue to do it. So we actually believe that it fuels the trend of passion gardening and the interest to take care of your home outdoors. We do not think it's a peak, but of course, it is a weather-sensitive sector.

And then in terms of the Gardena expansion in the U.S., can you talk about your strategy a bit more here on when you will actually expand into the U.S. with the Gardena brand? Is that happening already next year? Or is it more a '23 effect we should expect? And also, if there are I would expect that there will be some step-up in terms of strategic initiatives, costs for this over the next years?

Yes. We're quite close now to the new season starting. So of course, the first priority is to start up really well in the Orbit business and also in our current Gardena business. But of course, we will take some immediate steps to not lose the momentum and take some clear steps in 2022. But the Gardena journey in the U.S. needs to be seen as a long-term journey, which we are committed to and where Orbit will provide us a great platform and the infrastructure to walk that path.

Okay. And then finally, a question to Glen, more of a modeling purpose, given the seasonality in Gardena's business, can you talk about the seasonality for own revenues and EBIT for Orbit, if there will be a step-up amortization? And if there are any costs related to the acquisition?

Yes, there will be some amortization, amortization, sorry, Christer, associated with this, absolutely right, which we will have as part of the normal margin over the coming 3 years. From a seasonality perspective, I guess, it's going to follow pretty much the Gardena seasonality if you take that as a proxy. And then from a margin perspective, then I think it's fair to say that it is dilutive to the division and to the group.

In terms of Gardena, I mean, Q1, Q2 is exceptionally strong and Q4 is deeply in the red. So is that a similar profile for Orbit as well?

I think we have to come back on the quarterly phasing of that, Christer.

Okay. And then finally, the costs, if there are any costs related to the acquisition in Q4 or Q1?

There'll be costs already taken into Q4 actually related to this, particularly transaction and legal costs, so we'll call them out in the Q4 report.

The next question is from Gustav Hagéus, SEB.

Congrats on a similar exciting opportunity here. So I appreciate the sales CAGR figure you gave here for the 30 years. So could you talk a little bit about the organic growth since 2019 pre-pandemic, how that has developed?

Yes. So looking at a 5-year CAGR, you will end up on a similar level. And then, of course, they had very strong growth during the pandemic.

Okay. So organically, sort of 9% over the -- yes?

Yes, it's a similar level.

Okay. And you state here that it's sort of an omni approach. Could you talk a little bit about the channel mix? And also if there's a geographical mix? Or if they are truly nationwide?

Yes. So less than 5% of their business is outside North America. So they are really a North American player, if we start in that corner. On the channel mix side, they have, of course, big box retail. I think what's important to mention there is that they managed to serve all the major accounts, which we think is good, so it's a multichannel aspect of that. Then of course, there's a multitude of retailers in the U.S., regional retailers and others, which they are online. They have a good starting point and it's, of course, a fast growing piece of a consumer business. So we look favorable at that platform. And then they have access, the B-hyve via their smart watering into also channels, which may be residential water players have a hard time to access like commercial irrigation distributors, et cetera. So we look favorable at the distribution landscape, also a fairly good presence with garden [indiscernible] which is interesting from a Gardena point of view, given that, that's usually where we find the more passionate gardeners in our industry.

But is there a DTC component in the e-commerce? Or is that fully on other player...

Yes, it's a smaller piece of it.

Okay. And then in terms of -- I recognize that you talked a lot about expanding Gardena into U.S., which seems logical, but there is no scope here to do the reverse to bring some of Orbit's product into Europe either on their own brand or rebrand them and maybe talk a little bit about the patents or innovation portfolio that you acquire here?

Well, there is a B-hyve opportunity for international expansion as we see it. When it comes to the Orbit brand, we believe that it's a strongly recognized brand in the U.S. and North America, and that's where it should be focused long term. It has some business outside, but it's not a big piece like I said. And what we found in Gardena having some other brands from the Gardena brand is that it can be very supportive to Gardena's expansion journey to have a strong brand on the side in the market. I mean this is the case with, for instance, Flymo in the U.K. and also with the Neta brand in Australia. And it gives critical mass and credibility to a long-term journey, which we are committed to.

Okay. And finally, on the margin side, which is lower than the group and Gardena is higher than the group, so quite a material difference than to Gardena. Could we talk a little bit about what the main elements are to that margin bridge between the two? If it's product mix or if there's sort of higher SG&A or what is the main difference between the two?

Yes. I think maybe before going there, I think what's important here is, of course, that we do this for growth. We believe that we can really grow the Orbit business, and we believe that we can grow the Gardena business as a consequence. And that way, we will, of course, having more Gardena business in the U.S., the margin will mix up. We also see that the positions where Orbit have their strength are good positions or better positions. So we believe there's a mixed journey ahead of us when it comes to it.

Okay.

I think it's fair to say from an SG&A perspective, it's on a similar level to Gardena's core business and then the gross margins are slightly lower if we put the two positions in context.

Yes. Congratulations again.

The next question is from Johan Eliason.

Hi, Johan at Kepler Cheuvreux. Congratulations to an interesting acquisition. Now I remember when Gardena was acquired back in 2007, it was already, at that point in time, sort of discussed bringing that business into the U.S. market, but nothing has happened. And I think the sort of comment was later on that the U.S. watering market is completely different technology and it's just cheap stuff with very low margins. And now, obviously, see that Orbit does have a significantly lower margin than Gardena. Are there any synergies you think that you can generate? Or is it just sort of growing the top line and hopefully getting the Gardena brand into the U.S. with a higher margin mix? Or has the U.S. watering market changed in any way that could allow you to have better margins in the future over there?

Yes. That was a little where I also tried to say on the last question is that we see some new dynamics in the watering market with smart technology and water-saving technologies in general, both on wholesale products and also on -- like Micro Dripper is a good example when it comes to system installations. And we believe that being an innovative provider of water saving solutions, we and Orbit, have a good opportunity to mix up our margin positions in segments which are fundamentally faster growing than the traditional watering segments. And I think it's important to remember also that Gardena is a quite different business today compared to 15 years ago with a very different technology position in terms of garden technology, whether that is balcony watering automation or robotic lawn mowing. So I think it's not only right to look at it as a watering play, Gardena is a gardening play.

And to make this comparison, can you sort of indicate how big proportion of the Orbit turnover is sort of related to the smart watering business? You talked about 1.4 million connected devices, but what was its sales over the last 12 months-or-so?

At this stage, I think we do not want to say that.

Okay. And then just on the margin, you say slightly below growth margin. Is that the most recent 12.6%? Or is it sort of the historic 8% to 9% you are comparing with?

We're comparing to the latest 12-month data. So it would be dilutive, as we said, to the Gardena division [ all styled ] into the group but of course, less so to the group, given that Gardena is above the group average. Maybe just 1 comment there on the different U.S. ordering markets, et cetera. I think one of the key strengths here is that we're acquiring the market leader in North America, meaning what the market is today, and it provides us an opportunity to position Gardena above that with a more premium differentiated watering solution. And I think we should look at them as complementing one another rather than one or the other. So I think there's an opportunity here really to build something. And this is a way in with the premium Gardena offering.

And the next question is from Alec Rinta, Handelsbanken.

Yes. I think that was me. Hi, it's Karri from Handelsbanken. Firstly, on the deal itself, can we just confirm that there is no earnout in the deal? And then secondly, how has the management been incentivized? And what's your plan on retaining them?

You're going to take that, Pär?

Yes. Okay. No, there's no -- the enterprise value is as stated in the press release, there's no earnout on that. And I've had very good interactions with the management team. They are committed and excited about this opportunity, and we are excited about teaming up with them. So I think that part feels actually very good from my side.

All right. Then this plan of launching Gardena as a premium in the U.S., can you discuss a bit about the other players in the market? So which players would Gardena then meet in this premium segment of the market?

I would argue there is no player with as a similar position to Gardena in the U.S. market. I think important here to note is that we have a strong position with Gardena in Canada. And I think that also shows that it is possible to take a strong position with Gardena in the North American watering landscape. I think the other players underground, of course, we're talking about Rain Bird, Hunter. And I think overground competitors would be, for example, Gilmour announced Gilmour on Melnor to mention some examples for you.

All right. And then you mentioned Rain Bird and Hunter and the more sort of commercial focused players. I mean, of course, this -- maybe this opportunity presented itself and was too good to pass up. But the -- I mean how do you see the commercial segment maybe a bit more longer term? Is that still to commodity priced? Or too low end for you to be attractive? Or could that be something for the longer term? And how large is that market compared to residential?

I mean they are both big markets, as you can imagine and -- but they're also quite different. And the residential market is, of course, where Gardena has its strength and its focus. And that's why this acquisition is an extremely good fit to create that global market leadership position, but also to really have the market leader in the North American market and with the solution that is today the preferred one and allowing Gardena to position itself as truly a premium and to grow that segment in a controlled way over time. The professional space is a different market and with different dynamics and different opportunities. And it's nothing that we are actively pursuing at this point in time. And we see it as something quite different and something that Gardena is not engaged in today.

Your next question is from Carl-Oscar, Berenberg.

Carl-Oscar from Berenberg here. Just in terms of the market strategy, are you -- there's been a lot of talk, obviously, about the expansion for robotic lawnmowers and you've been saying that it's been progressing slower than previously anticipated in various quarters. So is there a strategic push to rebrand and sell robotic lawnmowers under the Orbit brand going forward? Or will there solely be a geographical expansion of the Gardena market into the U.S. through the various same channels as you're doing with Orbit?

I think that one way of looking at it is that I think that primary push from the group is with the Husqvarna brand, that's where we see the biggest opportunity. At the same time, we have proven in Europe that this is also a very important and attractive segment for Gardena. So I would say that this would be more of a Husqvarna and Gardena play in North America. We believe, actually, it's a good benefit to provide an option for the consumer, especially when you're establishing a market. It gives this perception of the segment is more established and it's becoming more mainstream where you have options out there. It's kind of difficult to drive it with only the Husqvarna brand. It will not be the focus for the Orbit brand.

Okay. And in terms of sort of channel partners in the U.S., obviously Lowe's has been quite important for the Husqvarna brand. Is there now a scope to go for some of the other larger retailers? Or will you -- is there any cross synergies in terms of sales channels here?

I think with the acquisition of Orbit, we, of course, get access to a lot of different channels that makes a lot of sense for our consumer offering. But the focus for us is really to drive that for the Gardena business to really see that opportunity. When it comes to the Husqvarna strategy, we are primarily focusing on driving a dealer-centric business, go more online from an omnichannel perspective. And I think you should more look at it as an exception that the Husqvarna brand is selling in one of the big retailers in the U.S., if you look at it from a global perspective.

The last question is from Henrik Christiansson.

Two questions, please. I'm a little bit surprised about the relatively low margin here given the strong market position. You also had the pandemic boost and there's also a decent amount of tech content here. Could you give some more detail? Is there a big difference in modern in the various segments, overground, underground, smart garden? And also, what was the profitability pre-pandemic? Has there been a significant uptick in margin during this time? That's the first question.

I mean maybe before you give potentially some more detail here, Pär, I mean, I think one way of looking at this well is that Gardena has created a very unique premium position. And with such a position and also with a very, very strong mix, you get a very good profitability. In the U.S. market, that premium position does not yet exist. So that's one way of looking at why is there a big difference between the two. And of course, part of our play going forward is that given that we have Orbit that is -- that are selling the products that the market today prefer at the price levels where the market is used to, we can build this premium position with Gardena over time. So it's a long play, so to speak. That's one way of looking at it. And then, of course, there is a mix element to Orbit as well. I don't know, Pär, if you want to share any additional details, but I think that at least gives a little bit of a context to the whole conversation.

Yes. No more detail on the mix. I agree with you, [ Henrik ]. And I think what we see is, to give some more detail, is that the faster-growing segments, the ones that go towards the more sustainable solution side came with better margins. And they are fastest-growing. Orbit has strong positions in them. And that, we believe, is a good thing.

Great. And then the other question, maybe this is completely irrelevant, but just browsing through the web page of Orbit, it seems like they are selling other brands as well. I understand the FatMax hoses and muscles, you have Aeroflex hoses, et cetera. Are those own products? Or is there an opportunity to plug in Gardena tools and hoses there to lift profitability quite quickly?

Yes. Like also, we -- they have more brands they sell. And I think it's an opportunity for any company to build out a good brand portfolio. And this is, of course, something we have to look at together in the future. But are they -- they are their own branded products, Aeroflex, Stanley, Bloom. No, what you stand is, of course, on a brand license, so [ indiscernible ]

Perfect.

Operator, do we have any...

No further questions, sir.

so if we don't have any further questions and if you have some -- if you have any questions after the call or later today, please reach out to the team. And I think with that, we then conclude this session. And of course, are very much looking forward to meet you at the Capital Markets Day then the 1st of December. Thanks very much for today, and see you soon again.