Good afternoon, and good evening, or good morning, wherever you are. As usual, we will start this conference call with about a 20-minute long presentation by our CEO, Keith McLoughlin , and our CFO, Jonas Samuelson . The slides you have here are available at our homepage, electrolux.com. After the presentation, we will have a Q&A session, and we will conclude the conference call around 16:00 or 4:00 P.M. Central European Time. My proposal is, as usual, in this Q&A session, to make that as efficient as possible and let everybody have the chance to put forward questions. Therefore, I would like each of you to ask only one question at a time. With this instruction, I will turn over the word to you, Keith.
Okay. Thank you, Peter. Welcome, everyone, to this discussion of the Second Quarter Results for 2011. With me today, as Peter mentioned, is also our CFO and COO, Jonas Samuelson . Let's get into it. Let's start with the presentation. If I can refer you to slide two, which is the second quarter highlights. The second quarter was a period when some of our most important earnings drivers were working against us. We had lower volumes in key markets, lower prices, and higher input costs. Our operating income declined to SEK 745 million, and this includes a positive one-off effect within our professional business of SEK 90 million. Our volumes were adversely affected by the weak demand in North America, particularly in comparison with the strong growth subsidized by government stimuli during the second quarter of 2010. Our European operations also suffered from weak market development in Western Europe.
Lower market prices had a significant negative impact on earnings during the quarter. Compared with the same period of last year, prices were lower in our three largest markets: Europe, North America, and Latin America. However, we did see sequential improvement in North America and Latin America. In addition, the cost of raw materials peaked during the quarter. We also saw a sharp rise of cost of sourced product and transportation from Q1- Q2. In order to improve our results, we are taking actions, including raising our prices in our most important markets and implementing decisive cost efficiency measures. While we're implementing short-term profit improvement actions, we continue focusing on sustainable, profitable growth. It is thus particularly satisfying that we have reached the final agreement acquiring the Egyptian appliance company, Olympic Group.
The acquisition will make us the leading player in the emerging markets of North Africa and the Middle East. Now, let me hand over to our CFO and COO, Jonas Samuelson , to talk about our cash flow, as well as the important acquisition of the Olympic Group. Before that, Jonas, if you would also shortly talk about what we're doing and how we're doing in global operations to drive improved results. Please, Jonas.
Yeah. Thank you, Keith. The global operations strategy to modularize our product offering and truly utilizing our global scale is progressing according to plan, with a clear line of sight to deliver SEK 2 billion- 2.5 billion of savings by 2015. Importantly, we now have confirmed and agreed modernization plans, which is what we call modular books, covering about 35% of our product cost base. Savings projections for these are ahead of target. We expect to have confirmed plans covering 90% by mid-2012 and start realizing significant savings in 2012. Turning to the next slide, I will cover two areas. First, the operating cash flow in the second quarter, and secondly, our recent agreement to acquire Olympic Group. First, our operating cash flow in the second quarter. Cash flow from operations and investments in the second quarter of 2011 amounted to SEK 930 million.
Our cash flow was supported by continued favorable development in change of working capital. Compared to the previous year, cash flow from operations in the second quarter has, of course, been adversely impacted by the decline in operating income, as well as timing of tax payments. Outlays for the ongoing restructuring and cost efficiency measures amounted to approximately SEK 190 million. Investments in the quarter referred mainly to new product investment. The dividend payment for 2010 of SEK 1.9 billion was also paid to shareholders in the quarter. Let's turn to the next slide and talk about the Olympic Group acquisition. Along with our strategy, we need to strengthen our presence in emerging markets. About a week ago, Electrolux signed a purchase agreement with Paradise Capital to acquire its 52% controlling interest in the leading Egyptian major appliance manufacturer, Olympic Group.
Electrolux will launch a Mandatory Tender Offer to purchase all shares in Olympic Group at a price of EGP 40.60. The offer is expected to be finalized at the end of July or beginning of August, and the results for Olympic Group are expected to be consolidated in the Electrolux Group during the third quarter of 2011. Electrolux has also agreed to sell Olympic Group's ownership in its two associated companies, Namaa and B-Tech, to Paradise Capital. Both companies are listed on the Egyptian Stock Exchange. Based on the above transactions, the total equity value of Olympic Group's operations, excluding Namaa and B-Tech, will be about EGP 2 billion. Olympic Group has a net debt, including minority interest, of about EGP 740 million, which will be included in the transaction. This acquisition will improve our long-term ability to grow in the strategically important North Africa and Middle East regions.
Electrolux and Olympic Group have developed a successful commercial partnership for almost 30 years. The cooperation covers technology, supply of components, distribution, and brand licensing. Excluding Namaa and B-Tech, Olympic Group has annual sales of about SEK 2.5 billion and a recurring EBIT margin of about 11%. In addition to the potentially strong demand growth in these regions, once the political situation is stabilized, we also expect to find synergies in utilizing Electrolux technology and product platforms and to use Olympic as a cost-efficient sourcing base. Back to you, Keith.
Okay. Thank you, Jonas. Now let's look into our operations in Europe, if I can refer you to slide five. Results for our European operations were weak in the quarter. Intensified competition has led to increased pressure on prices and some market share losses, particularly in the value segments. Electrolux tried to stay as disciplined as possible, which consequently led to some volume losses in those mass segments. Our volumes were adversely impacted by the weak trend in Western Europe. The Italian market of appliances declined by 8% in the quarter. Italy is the second most important market for us in Europe after Germany. The combination of strong market growth in Eastern Europe, which is primarily in the mass market segment, and weak demand in Italy, which is more in the premium built-in segment, had a negative impact on our mix in the quarter.
The cost for raw materials peaked during the second quarter, which was compounded by a sharp rise in the cost of sourced products and transportation costs. Given these results, we are taking the following actions. One, we are increasing prices 5%- 7% and will be implemented in October. Mix will be improved during the second half based on the launch of new products, in particular the AEG launch. We are accelerating global operations activity, as Jonas mentioned, to improve competitiveness in the mass market. We have a new range of high-end Electrolux-branded products that will be launched during 2012. Of course, we will continue to implement decisive cost efficiency measures. Now, some comments on the European market development on the next slide. The European market grew by 1% in the second quarter, driven by strong growth in Eastern Europe. Demand in Southern Europe was particularly weak.
The important Italian market showed a substantial decline, and the market for appliances in Spain showed a double-digit decline. As for the economy in general, demand in Central and Northern Europe has continued to be stable, with the exception of the UK. We have recognized positive growth in both Germany and Scandinavia. Industry shipments in Eastern Europe were up by 12%, driven by strong growth in Russia. We estimate demand for the year in Europe to grow in the low end of our forecast range of 1%- 2%. Now, let's turn the slide and talk about North America. The demand for appliances in North America declined substantially compared to the same period of last year. Our operating income declined to approximately SEK 140 million. First, year- over- year, our sales prices were lower compared to last year's prices. Sequentially, however, we have been able to increase our prices.
Our previously announced price increases have been accepted and will generate a positive effect. Going forward, the full impact will be seen in the third quarter. Second, our volumes were negatively impacted by the weak trend in North America, partially compared to the robust growth subsidized by the government stimulus during the second quarter of last year. Thirdly, cost from raw materials peaked during the quarter. In addition, our results were negatively impacted by a higher cost for source product and transportation. Following the first round of price increases, we will target a second round of price increases beginning in August. Furthermore, we will continue cutting nonessential costs in order to improve our results. Now, let's turn to slide eight and talk about the market development in North America. Market demand for appliances in North America is estimated to have declined by 10% in the quarter.
The weak demand can be partially explained by the strong comparable figures from last year's second quarter, when the market rose by 13%. In addition, we also saw a pre-buying impact in March from retailers before the price increase in April. However, market development in North America has been weaker than expected. Consumer confidence in the U.S. has come down from 72% in February to below 60% in June. Unemployment has gone up. In addition, we've seen weaker numbers in the service and housing sectors. We estimate industry shipments to grow by not more than 3% in 2011 compared to 2010. Now, let's turn to the next picture and talk about Latin America. Market demand for appliances in Brazil is estimated to have grown by 7% in the second quarter. The market is still growing, but at a lower pace than previously conceived.
Our net sales exceeded the market growth, and we continue to gain market share. The markets outside Brazil showed another quarter of solid growth. Our operating income declined in the second quarter to SEK 114 million. First, retail consolidation among the larger retailers in the Brazilian market had an adverse impact on our customer mix. Second, our earnings were negatively affected by higher raw material costs. Thirdly, price pressure prevailed in the market overall, and our sales prices were lower compared to the second quarter of last year. Finally, we have increased our marketing investments, particularly related to the launch of new products. In June, we began implementing price increases in the Brazilian market. Going forward, we will continue increasing prices in the third quarter. Furthermore, we will continue launching new innovative products in order to improve our mix. Now, let's turn the slide and talk about Asia Pacific.
Our operating margin in Asia Pacific amounted to approximately 9% in the second quarter. This is a good achievement, although somewhat lower than last year. In Australia, the market showed a healthy growth of 5% compared to the corresponding period of last year. Our operating income declined somewhat due to higher raw material costs and increased price pressure. The price pressure is partly driven by the strong Australian dollar, which makes imported volumes more competitive. The markets in Southeast Asia and China continued growing considerably in the second quarter. In addition to the high market growth, we were able to regain market shares. As a result of the higher volumes in Southeast Asia, our operating income in that region rose in the quarter as well. Now, let's talk about our small appliance business. On slide 11, the results for our small appliances operations were weak.
In the second quarter of 2011, market demand for vacuum cleaners in Europe decreased compared to the same period of last year. Demand in North America increased compared to the same period of last year. Group sales of vacuum cleaners and small appliances rose in comparable currencies in the second quarter compared to last year, primarily as a result of higher sales volumes of small domestic appliances and improved product mix. Our operating income declined substantially in the second quarter. This was mainly due to higher product costs, including raw materials and source products, increased spending in developing our small domestic appliance business, and lower sales prices. In order to improve our profitability, we will continue launching new products and leveraging from our investments in the small domestic appliance business and necessary cost improvements. Now, let's talk about our professional products business.
Operating income for our professional operations amounted to SEK 270 million. In the results, we have a positive one-off effect of SEK 90 million related to a divestment of a facility. The facility is part of the previously divested non-core asset in Switzerland. For our food service operations, lower project sales in Southern Europe, particularly Italy, and higher raw material costs had a negative impact on our operating income. We were able to mitigate some of the negative impact by increasing our sales prices. Operating income for our professional laundry business increased compared to the same period of last year. Despite the negative foreign exchange and mix impact, our earnings increased thanks to higher volumes and price increases. Now, some words about the third quarter and the second half of 2011, which is the last slide in this presentation.
Looking ahead into the third quarter and the second half of 2011, market volumes in the third quarter will be slightly higher, driven by the markets in North America, Latin America, and Asia Pacific. In North America, comparables will be easier, as we saw a drop in demand during the third quarter of last year. For the full year of 2011, we expect to see growth in both North America and Europe, but at a lower pace than previously anticipated. We expect prices to be flat in the third quarter year- over- year. In North America, the April price increase will be fully implemented during the quarter. A second price increase is announced as of August. In Latin America, we are gradually raising prices.
In Europe, we do not expect the price environment to improve much during the third quarter, but for the fourth quarter, we will see gradual improvement of prices. Our product mix will be positive as we continue launching new products. However, this will be offset by a negative country mix in Europe and customer mix in Latin America. The cost for our most important raw materials continues to be higher than the prior year, but less than in the first half of this year. We expect the cost for raw materials in 2011 to increase by about SEK 2 billion compared to 2010. The second half of 2011, the increase will be around SEK 800 million, where SEK 500 million will impact the third quarter. In addition to increased costs for raw materials, we expect a continued impact from the increase in cost of sourced products and transportation.
We will benefit from previous cost-cutting programs. Cost savings from our manufacturing relocation program will amount to SEK 500 million for the year, basically evenly distributed over all the quarters. We also have great expectations for savings by utilizing our global strength through global operations, as Jonas mentioned. This initiative is expected to save SEK 2 billion- SEK 2.5 billion/ year with the full effect from 2015. Initially, the cost for these investments will be SEK 500 million/ year for 2011 and 2012. Summarizing the above, we expect fourth quarter earnings to be stronger than the third quarter, and we do not expect earnings in the second half of 2011 to reach the second half of 2010. That concludes our remarks. Peter, if we can open it up for questions.
Okay. Thank you, Keith. We are now ready for the Q&A session. As I said in the beginning, we should use this session as efficiently as possible and give everybody a chance to put forward questions. Therefore, I would like each of you to only ask one question at a time. If you have more questions that have not yet been answered in this conference call, you can just line up again. Operator, we are now ready for the first question.
Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad and you enter a queue. The first question comes from Mr. Johan Trocmé, Nordea. Please go ahead.
Good afternoon, gentlemen. If I could ask you about pricing, it seems like the pricing environment has deteriorated during the quarter, particularly in Europe. What level of confidence do you have, both regarding Europe and regarding North America, in having full impact from the price increases that you intend to carry out in that type of difficult market environment?
Yes. You're accurate in that the pricing environment in Europe during the quarter has been quite difficult. As we mentioned, we did begin the implementation of the price increases in North America in April and then sequentially by month in May and June. We expect that full increase to take effect in Q3 and going forward. We've also begun to raise prices in June in Brazil. We will have additional price increases going forward in Q3 in Brazil as well. We've had some modest increases in Asia, specifically Southeast Asia. We've announced the increase in Europe for October. As we've talked about previously, given the heterogeneous nature of the European market, it's the most difficult market to pass price increases through. In this difficult market environment, that doesn't make it any easier.
We are committed to get those price increases through to the marketplace and have already begun the work to do that. As you know, we've been in this situation before, both in the 2004-2005 timeframe as well as the 2008-2009 timeframe, which arguably was an even more difficult environment, and we were able to get prices passed through. We have the same intentions this time as well.
That's great. If I can just ask for some clarification, regarding Europe, because obviously we can see with competitors sort of being on your side and already having announced initiatives as well in the well-consolidated North American market. In Europe, it seems like things have gone incrementally worse when it comes to pricing during the quarter, and yet you have the intention of getting your 5%- 7% through. Is there anything to suggest that mix or product launches or any signals from competitors in Europe would make this possible, or would you be less confident about what you can achieve now than before you announced this report?
Yeah. I don't think we're less confident. Of course, you know we're going to pay attention to the marketplace, as you would expect. We do have signals from certain competitors who compete with us also in other markets of their intentions that they've been public about. Of course, we're waiting to see what other European manufacturers do as well.
Thanks.
Thank you.
Thank you.
Next question comes from Mr. Kenneth Toll at Carnegie . Please go ahead.
Hello, Kenneth.
My question was also regarding prices, actually. It has pretty much been asked already. Thank you.
Hi, [audio distortion]. Thank you.
Next question comes from Mr. James Moore, Redburn Partners. Please go ahead.
Hi, James.
Hi, everyone. A question on pricing. Could you say what percentage you intend to raise the gross prices in August in the U.S. and how much you raised in Brazil in June in terms of %?
Yes. You know we announced about a 5% increase in August for the U.S. We'll see what that net effect is. Like we did with the first one, as soon as we get that net effect, we will communicate that to you. The increases in Brazil, it's actually a different market, which is you actually increase prices literally a month at a time. We had about a 1% price increase in June in Brazil, and we expect another 100 basis points- 200 basis points over the coming quarter in Brazil as well.
Just to be clear, that 5% is in addition to the 8%- 10%?
I'm sorry. You're talking about North America.
Right.
Okay. Just to be clear, we stated that we actually realized around 3%- 5% in the April increase. That's gradually hitting throughout the second quarter with full effect in the third. On top of that, we've announced another 5% or so in August, and we'll see exactly how much of that flows through. We'll get back to you on that.
If the U.S. is sticking at 40% of your gross price, do you think 40% is a fair read for what you get in Brazil or Europe, or is the degree of stickiness lower there?
Yeah. It's hard to, it's a difficult direct correlation to make. Again, in Brazil, it's a different market. You increase them really a point at a time, and you just do it. You don't announce five and get three. You push one through, and it goes through. That's how Brazil works. Europe and North America, obviously, it's a negotiation with all the customers and all the market. I'd be a little bit cautious to say, "Hey, you get 60% of it or 40% of it," it partly depends on the market and depends on the competition and depends on the customer. I wouldn't try to make that too predictive. We will communicate as soon as we see the net effect, like we did with the April increase, to you as soon as we see line of sight to that.
Thank you very much.
Okay.
I'll jump back in.
Thank you.
Thank you.
Next question comes from Mr. Anders Trapp at SEB Enskilda. Please go ahead.
Hello, Anders.
Hi. Guess what I'm going to ask about? Prices. I'm just wondering about when you talk about that you expect prices in the third quarter to be flat. What does that mean sequentially compared to the second quarter?
Yeah. When we say flat for the quarter, Anders, what we're talking about, of course, is we expect it to be up within North America and Brazil. We don't expect, and we expect them to continue to be down in Europe. The net effect, that's why we say flat, is Europe negatively offsetting the increases in.
Yeah, this flat to me is relating to the third quarter last year, right?
Yes.
This year over here.
This year.
What is it compared to the second quarter of 2011?
It's positive. Again, as Keith mentioned, driven by realizing the price increases and getting them through in North America and Latin America. We're not expecting anything in Europe, even also sequentially.
Flat sequentially in Europe, but up basically in most other parts of the world?
Specifically North America, Latin America.
Yeah.
Asia Pacific is positive in Asia, if you will, and more negative in Australia, driven by the exchange rate situation there.
All right. Thank you.
Thank you, Anders.
Thank you.
Next question comes from Mr. Andreas Willi at JP Morgan. Please go ahead.
Hello, Andreas.
Good afternoon. I also have questions on pricing, but I'm going to ask a different one now. On your balance sheet, dividend acquisitions going forward, with the cash flow being weaker, the earnings weaker, you've just done or about to do a larger acquisition, the press reports you're looking at, other acquisitions as well. At the same time, I get people asking about sustainability of your dividend. What's your priorities going forward in terms of maintaining a dividend that may not have the same earnings cover as recently relative to acquisitions, relative to credit rating?
Yeah. I'll make a couple of comments, and maybe, Jonas, I'll ask you to jump in. Of course, first, you know the board is making the dividend policy decisions. We have not changed our direction either relative to the strategy, relative to our intention to continue to be shareholder-friendly, relative to the free cash flow generation. We are, in fact, continuing to go forward on our strategy to look for profitable growth opportunities, both organically and through acquisitions in emerging markets and in adjacent product categories. Obviously, we're monitoring the balance sheet, and we're monitoring the cash flow, free cash flow generation. We've got good working capital productivity that's liberating lots of cash off the balance sheet as well. We actually feel quite comfortable relative to our strategy. Jonas, we just had a board meeting yesterday and good support there.
Absolutely. I just maybe add a few points on the cash flow. I think we're actually quite happy with our underlying cash flow performance in the quarter. Of course, cash flow is pretty volatile on a quarter-to-quarter or period-to-period basis. Again, the underlying drivers, such as continued strong performance on working capital, is a key factor. The first half of the year is a seasonally weaker earnings period, so the reported cash flow doesn't look as strong as it has. We're happy about our underlying cash generation capabilities. That's very important in supporting our strategy. I think secondly, to Keith's point, for sure, we have a high priority on remaining shareholder-friendly. At the end of the day, the board determines our dividend policy, but that's for sure very high on our agenda while driving our both organic and M&A-driven growth strategy.
I think we certainly have the firepower to do both.
Very clear. Thank you.
Okay, Andreas.
Next question comes from Mr. Rasmus Engberg at Handelsbanken. Please go ahead.
Hi, Rasmus.
Hi. Can I ask you with regards to your guidance slide? The way I read it, unless I'm missing something, you're basically expecting earnings growth in the fourth quarter or more or less, given that you've given Q3 in the second half. Is that a correct interpretation?
Right. I mean, I think you're reading the chart well. You know we're not going to give you a specific guidance by quarter.
Thank you.
The next question comes from Mr. Kenneth Toll at Carnegie . Please go ahead.
Hello, Ken.
Hi again. I'm just asking about the trend during the quarter. Did you see any significant changes in consumer demand from the beginning of the quarter compared to the end of the quarter, especially in Europe and North America, please?
Yes, I say we did, and actually, it wasn't positive. Specifically in Western Europe, Southern Europe, and North America, it's going to take a while. I think it's our assessment for those mature markets to recover and to de-leverage and get through their issues, whether it's debt issues or default issues. I just happened to be talking to a couple of U.S. customers a couple of days ago, and they described it as essentially a single-item replacement market that's driven by promotions. What they would call the glamour purchases, where they would say normally a consumer would come in looking to buy one item, and if they do their job well, they walk out with two or three. They said, "That's not happening today in the U.S." If you look at the consumer confidence, if you look at the unemployment, you look at the housing numbers, the U.S. market is weaker than we originally anticipated at this point in the year when we started out the year. You all see what's going on in Western Europe as well as we do. In Southern Europe, we were significantly over-indexed, particularly in Italy with built-in product. Spain was down 10.5%. Italy was down 8%. I would say that as the quarter went through, the mature markets were weaker. Having said that, we continue to see strong growth in Latin America, in Asia, in Eastern Europe.
I think specifically for us, just to make that point again, Italy is such an important market. They have up until now come through this last phase of the sort of the debt scares and all those things quite well until just recently. We'll see how that develops. Usually, the Italian consumer is not that highly levered. It's a state that has, which typically makes them more resilient. Just recently, we've seen a pronounced weakness in Italy, which obviously has a big impact on us.
Okay. Thank you.
Thank you.
Next question comes from Mr. Stefan Lycke at Deutsche Bank. Please go ahead.
Hi, Stefan.
Hi there. You're basically raising your hand here in Europe and saying that this price war can't go on. My question would be how mindful you are about the fact that you continue to lose quite a bit of market share there. How do you think about that balance of margins [Foreign language] market share?
Very good question. We're very mindful of it. To your point, you have to manage both. We have probably pushed the pendulum quite a bit on the margin side and have walked away, and we've talked about this in meetings throughout the year so far, walked away from some lower margin business. There is a point where you can't keep doing that. Some of the work that we're doing within global operations is to make sure we have the offering that's costed such that we can compete profitably and offer a product profitably into that segment of the market. Obviously, as you say, we've raised our hand, and we have to manage both.
Do you think with the Ukrainian factory and Olympic and the global operation things and all of that, that you can make a comeback on the mass market side? Is that it?
Absolutely.
Yeah, okay. Thank you.
Thank you.
Thank you, Stefan.
Next question comes from Mr. James Moore at Redburn Partners. Please go ahead.
Hi again.
Yeah. Hi. Just a question on your full-year EBIT outlook. We've been through a couple of quarters where there's been some disappointment and then some ratcheting down of expectations. When I look at your full-year guidance, it looks like you've materially moved more negatively on mix and a bit more on price, so that you're no longer keeping as much as we might expect from a bottom-up analysis of the price rises you're putting through. Is that because you've just decided to gut it and just say, "We're going to low ball expectations here. We need to put something out into the market that we can't miss on"? Or is it the best guess where we sit today?
Yeah. It's the latter. I mean, this is what we're seeing, and we're trying to be transparent with the market. I mean, we think those big mature markets where we're very exposed in North America and Western Europe are not healthy. You know they're going to take a while to recover. With that difficulty, we think it's appropriate. Now we're at a lower point in Q2, and we're saying, "Okay, even though there sequentially is going to be improvement," which we're confident there will be improvement, whether that's in cost or price or mix and even demand volume, but we're starting from a lower base here. We think it's appropriate just to be, you know we've concluded that, and as recently as yesterday with the board, and we just think it's appropriate to be transparent about that picture.
Are you more confident on your full-year outlook today than you were on your full-year outlook a quarter ago?
A quarter passed, right?
Right.
We're closer, yeah. No. I think also to Keith 's points before, it's not that we're changing our view of the world. It's just the pace of the recovery. The strategy that we're driving on profitable growth that we're executing on with the Olympic acquisition, the strategy about driving the benefits of global operation, in fact, we're increasing our confidence level on both those parameters as we've talked about here. We are seeing the savings from global operations, the modernization. They're going to kick in starting next year. We are seeing strong growth in our emerging markets and supported by M&A. It's not that we're changing our view of the world, but certainly the pace of the recovery and the starting point is challenging in our big mature market.
That's right. Just to follow up on that, these transportation costs seemed quite new, and whether it's a couple of hundred million in the quarter, whatever the run rate is, is that something that's going to carry on at the same sort of level in each of the third and fourth quarter?
Yeah. I think what you're seeing there, of course, is we originally premised oil at $81 a barrel, and it's going to average over $100. When you translate that into diesel fuel with the amount of trucks we're rolling around the world, that's a lot of transportation costs, and that's what you're seeing. When we look at it, if we look at all the commodities, we see several of them peaking and actually coming down, including some of the key metals like steel. When you look at the petroleum-based raw materials, they haven't turned yet. They're still rising. Yes, I would expect that transportation costs will be difficult and a headwind for us going forward.
Okay. Thanks.
Thank you.
Thank you, James.
Next question comes from Mr. David MacGregor at Longbow Research. Please go ahead.
Hi, David.
Yes. Good afternoon, everyone. You mentioned that the consolidation in retail was adversely impacting your business, and you referenced weaker mix. Could you just elaborate a little bit on that? Do you think the consolidation of Brazilian retail is maybe impacting you a little more than some of your competitors? Could you just talk about how that influences your ability to secure better pricing? Thank you.
Yeah. That's a good question. As you know, the top three or four retailers in Brazil have consolidated over the last year. As a result, those three big companies got together, the lowest price wants to be pervasive, and it is. Now with the GPA, the group that has both Casas Bahia and Ponta Frio, that consolidated customer, which is 50+% of the market, has got lower prices. There is a negative customer mix that's happening as a result of that. I don't think that's particular to us. I think anybody that's been supplying those customers is now supplying them at a lower net price. Part A of your question, part B of the question is, okay, now you started a new base, and now you start negotiating going forward.
Part of the price increases that we referenced in June in Brazil were specifically and included all customers, let's just say it that way.
Do you have a limit in terms of how frequently you can go back to this consolidated group of retail and secure pricing? Are they kind of telling you, "Keith's, it's once a year, and so give us your best number," or can you go back on a more frequent basis?
Yeah. In Brazil, it's different. In Brazil, it's different than most markets you would think of. I mean, in some cases, you know it's negotiated by month, and you know there has been, and obviously, there will be in the next several months, increases.
Okay. Great. Thanks very much.
Thank you.
Thank you, David.
Next question comes from Mr. James Stettler at UniCredit. Please go ahead.
Thank you. Good afternoon. Markets are obviously tough, but how do you feel the competitive position of the company is in terms of products, the quality, and I guess cost base? You've put so much money into lowering the cost base. Could you maybe just talk about that? How are you doing relative to the peers, specifically in small appliances, where obviously the drop-off in profitability has been most pronounced?
Yeah, no, that's fair. Actually, let me just kind of quickly go around the world. I think our competitive position in Latin America is strong and is strengthening as we speak. I think our competitive position in Southeast Asia and China is improving. Still lots of upside there, particularly in China. I think we've gained and are gaining market share moderately in North America. I think we've lost position in small appliances and in Europe. I think that's kind of the take. In Australia, we have such a strong position. It's just trying to defend that usually strong and profitable business. That's kind of a quick go around the world. Specifically, relative to small appliances, we got hit particularly in the floor care business in North America and Europe. In Europe, the market was down, and as a significant player there, we took a shot there.
In North America, actually, it was up, but we lost. We had a huge retailer, let's just leave it at that, who was destocking and just didn't buy during two of the three months in the quarter. That hurt our volume significantly in actually two retailers in the U.S. That hurt our floor care business there. Actually, our small domestic appliance business is growing, growing significantly, and we are investing heavily in that business, which is a little bit where we're investing, anticipating continued growth there. I'd say we lost some position in floor care, particularly in North America, and we lost some position, as we talked about, in major appliances in Europe and gained in most other parts of the world. Professional continues to be strong for us.
Okay. Thank you.
Thank you.
The next question comes from Mr. Christer Hagberg at ABG Sundal Collier. Please go ahead.
Hi, Christer.
Hello.
Hi. A question to Jonas about the global operation program you talked about. You said that there were significant savings already in 2012 and that program was ahead of targets on the mobilization part. Can you give us any numbers on how much savings you expect for next year on that program?
No. It's a little bit too early. As I mentioned, we've only gone through 35% of the product cost base yet. Our point is we're on track, and it's not all in 2015. It's coming significant numbers already in 2012. We'll come back to you in the fall with more specific guidance on that for 2012.
Do you expect that you just say 90% of all products being a part of the modernization program in next year?
Yeah. By mid-next year, we will have signed and agreed plans for 90% of our product cost base in terms of global modernization. It won't mean that that's all done by then, but we will have agreed plans, timelines, and actions to get there. Of course, some of the savings are shorter term in terms of just, you know, changing suppliers or consolidating components. Others are more embedded in the core design of the product and take longer time to change as we update our product architecture. That is why there's a bit of a longer timeline on this, even though we have the plans fully identified. Again, we'll come back to you in the fall here with more clarity on the 2012 number and the timeline going forward.
Thank you, Christer. Next question.
Next question comes from Mr. Anders Trapp at SEB Enskilda. Please go ahead.
Yeah. Hi, Anders.
Hi, there again. I'm wondering if you could sort of describe the nature of the price competition in Europe in a bit more color. I mean, is it only mass market segment? Is it only countries where you have consumer weakness, or is it only certain competitors that are aggressive? You know, some bit more color, please, on the price competition in Europe?
Sure. Yeah, Anders. Actually, it's in both segments of the market, the mass and the premium, but it's a different nature. Let me try to give you some color around that, Anders. Obviously, in the mass segment, it's pretty straight ahead. It's just lower prices, right, and more aggressive, volume-oriented, market share-driven competitive intensity. That's just straight ahead in that part of the market. In the premium part of the market, what's actually happening is that products that were at certain price points, and in some cases, pretty well-featured and well-designed products that were at certain price points, they actually are trading down. Those features are being offered at lower price points. For example, if something was being offered at EUR 899, that same product is being offered or promoted at EUR 799. It's more features being loaded into existing price points.
Say it differently, if there was a EUR 799 product that didn't have steam historically, and it was the EUR 899 product that had steam, now the EUR 799 product is being offered with steam. It's actually bringing more features into existing price points.
Is that latter driven by that so many come with product launches this year?
That's probably some of it, Anders. Honestly, I think the bigger part is that the premium part of the market is soft. I mean, I think the market is trading down in the mature markets to more value. I think that's the primary reason.
It's like when you buy a car and you get the stereo for free.
Exactly. Exactly.
All right. Okay. Thank you.
Thank you, Anders.
Thank you.
Next question comes from Mr. Andreas Willi at JP Morgan. Please go ahead.
Hi, Andreas.
Yeah. Good afternoon. To follow up on Olympic Group, you say the recurring margin is, I think, 11%. What's the actual margin? Is there a lot of restructuring going on? Also, when you made your calculations for the acquisition in terms of recovering the cost of capital and all that, what profitability have you assumed in the longer term, given that current margins there seem to be higher than what's implied or what's normal in the global appliance industry?
Yeah. Want to take that, Jonas?
Sure, I can take that. Yeah. It's a good question. First of all, when you think about what you consider to be normal margins in the mining industry, it's important to look at that relative to what the company's market share is in their key markets and then the amount of, let's say, protection that that market incurs in terms of tariff protection. If you look at this, you know that's actually a major driver of the average profitability. Of course, Electrolux is a major player in a protected market. I would say their profitability is probably, you know, on average in that type of circumstance, just to put a little bit of reasons around their profit levels. Now, of course, the 2020 numbers that we're quoting is before the turmoil in the market there. The first half of this year has been tough, and particularly the first quarter was very tough.
We've seen sequentially from March and forward reasonable recovery in the demand situation in Sweden. While that's the case, we expect this year to continue to be relatively tough on the demand side. As the region stabilizes further going forward, we expect that the growth track record there to resume. Now, I'm sorry.
No, please go ahead.
Yeah. Of course, we have the things that we're bringing to the party in terms of much higher sourcing volumes and ability to get commodity and raw material and component costs down substantially for them. By combining efforts in terms of product and distribution in the rest of the region, we see a lot of potential benefits going forward. In the longer term, we also see opportunities to source parts of Europe out of Egypt. That's more of a that takes a little while before that's possible. When you add all that up, we will see continued tough market conditions there in Egypt and in the region for the coming six months to a year. We are as excited as ever about the longer-term opportunity there.
Which of the North African countries are part of that tariff zone where you have the protection? Is that almost all the sales that Olympic achieves?
Yes, it's basically the sort of, call it, Arab North Africa and the Gulf States are all in basically the same tariff zones.
Is there anything that stops another manufacturer from opening a plant and selling appliances like LG or Samsung?
No, no. There is nothing stopping them, obviously, that's a lot of work.
But.
I'm sure they will as that region continues to grow. Obviously, being a strong incumbent is a very strong factor in that.
Thank you.
Thank you, Andreas.
Thank you.
Next question comes from Mr. Johan Eliason at Cheuvreux. Please go ahead.
Again, Johan?
Yeah. Hi. I was just wondering about the mix development. You say it's negative. You had the country issues, etc. One of the remedies you talk about is, once again, the AEG launch. I think already Hans talked about that last autumn. What is happening there? Is it delayed, or why aren't we seeing positive impacts already?
Yeah. Actually, the AEG launch is continuing. It's taken a little bit longer because basically what has to happen for these built-in products to get on the floor is the retailers have to change out their displays. What we're finding, candidly, is that that's a long, drawn-out process to get them to pull out existing fixtures and redesign and refixture their floor. It's literally one store at a time, one retailer at a time. It continues to go, but it's taken a while to get all those displays changed out in the retail store. I would expect that the impact, a positive mixed impact on AEG, and also, as we mentioned, the new line of Electrolux coming forward will have positive product mix impact for us. Just to say, just to be clear, we're not saying the product mix impact is going away.
What we're saying is it's been more than offset in the current quarter and perhaps Q3 as well with the customer and geographic mix impact. We'll continue to have positive impact from product mix.
Exactly. Just to be very clear on that, we did see positive product mix impact in the quarter. Right.
Again, just this Eastern Europe versus Italy specifically is a tough mix combination for us.
Okay. Great. Finally, any news on Đại Lý ? Is that still on the table for you? Any negotiations or what's up?
We currently don't have any conversations going on with Đại Lý . We're anxious to hear what they intend to do.
Okay, thank you.
Thank you.
Next question comes from Mr. Johan Trocmé , Nordea. Please go ahead.
Hi there. Johan again.
Hi again. Another question regarding Cost Initiatives. You helpfully clarified what you're intending to do there in speeding things up on global operations. I have seen that the guidance is intact for the spread of costs there. Did I understand right that you were considering other cost initiatives as well? Is there going to be anything significant, do you think, on top of what's already going on within the company as a response to the challenging market environment, or is this more general everyday business initiatives?
It is certainly not business as usual given the market environment and given the results. We have already begun cost-controllable fixed cost reductions. You can see in our M&A cost that they're lower in the quarter. You should expect that to continue as we naturally and obviously adjust our fixed cost base to the current market environment. It is not business as usual. Each of the operating units have aggressive cost-out targets for their operating units. What we're not doing is we're not doing a big restructuring program. We're not doing an across-the-board peanut butter, everybody take out 15% or 10%, where you wind up cutting the arteries. You wind up cutting the fuel lines to the future relative to product development and R&D and modularization and design. That is not what we're doing.
To answer your question, each of the operating units have been on and are increasing their cost-out work within their businesses.
Thanks very much.
Thank you.
Next question comes from Mr. James Moore at Redburn Partner. Please go ahead.
Just to follow up on your volume assumptions in your guidance, you talked about maybe 1% in Europe, the bottom of the range, and you said not more than 3%. I suppose - 5% could be not more than 3%. Could you say what you're thinking on U.S. volumes for the full year?
Yes. We think they'll be positive. We probably got a little bit too froggy when we saw the big uptake in March and came back and said, "Hey, instead of 3%, it could be 3%- 5%." Of course, we saw April down 20+%, right? We said, "Whoops." As we talked about, the U.S. has gotten actually softer on a comparable basis going forward. We're just saying we think 3% is the top end of the positive range. We think it will be slightly positive, but low single- digits.
The reason I ask is because we're sort of broadly zero for volumes in the first half in Europe and in the U.S., and to do two, for instance, for the year, you need to see + four in the second half. To do your one in Europe, we need to see + two. Baked into your assumption seems to be quite an improvement. Given that what we're seeing month-to-month at the moment right now is a sequential weakness in the consumer, I wonder where you're getting this confidence for a decent second half or a better second half.
It's got more to do with the comps than it does the economy turning around. I mean, if you look at the Q3 U.S. appliance demand last year, it was negative. It's got more to do with the comps versus last year than it does that we think the whole market is buoyant.
Right. Just to be clear, in total Europe is up 1% year to date, and that's what we expect for the full year as well. We don't really expect any kind of trend shift in Europe. In North America, we have to look at kind of the adjusted trend rate given that Q2 of last year was driven by stimulus. We saw payback in the second half of the year from that stimulus. This year, we're seeing the reverse of that. Again, to Keith 's point, we're not really seeing any change really in the underlying trends.
Right.
Okay. Thank you.
You're welcome.
Thank you.
Next question comes from Mr. Rasmus Engberg at Handelsbanken. Please go ahead.
Hi. Again, just very quickly, which fiscal year do you expect the Olympic Group to be EPS accretive?
Next year.
2012.
Yes.
Okay, thank you.
Thank you, Rasmus.
Next question comes from Mr. Ben Maslen at Merrill Lynch . Please go ahead.
Hi, Ben.
Yeah. Hi, good afternoon. Just two very quick ones. Firstly, just on currency, that gave you a positive impact on EBIT during the second quarter. What are your expectations there for the second half of the year in terms of transaction, translation, and hedging benefits? Secondly, on Olympic, just to clarify, what margin will Olympic come into the business at post the 2.5% management fee and any PPA effects that you may have on the deal? Thank you.
Yeah.
Go ahead. Take it away, Jonas.
Yeah. Starting on the currency effect, this gets a little tricky because a lot of the positive operating currency effect that we're seeing is driven by the strength of the Australian dollar and the Brazilian real. Of course, that in turn has an impact on the ability of everybody that imports into those markets to be price competitive. That's actually what we're seeing here in the first half of this year. Helped by the strength of those currencies, our competitors have dropped prices in those markets. If you just look at currency, you get to draw one conclusion that's not necessarily relevant for the company result as a whole. We expect more or less that to continue for the rest of this year, that same pattern. We don't really see any major trend shifts. That's the nature of currency. Suddenly, they change and you don't know why.
We don't really see any, right now, any major change to that type of impact. With the Olympic Group, of course, we will have the management fee, 2.5%, that obviously impacts that 11% sort of run rate margins that we've seen historically. We will have some impact of PP&A adjustment. On the other hand, as I mentioned, we see significant benefits from sourcing leverage and so on. Net net over time, now I'm not talking about the coming six months or even maybe next year's, but over time, we expect to further improve the realized EBIT margin.
From 11?
From 11.
Post the management fee?
Correct.
Great. Okay. Thank you.
Thank you, Ben.
Next question comes from Mr. Johan Eliason at Cheuvreux. Please go ahead.
Hi again. Just one question. It's probably difficult to answer for you, but I want to get your feeling on prices [Foreign language] your raw material costs. This year, obviously, your raw material costs are up significantly, and you only manage to get average positive pricing towards the end of the year. How confident are you that there will be sort of a positive net effect from the current price hikes and the raw material development in 2012?
Yeah. That's a good question. Normally what happens, which again, we've been through this before, is when a commodity cycle spikes like they're doing and have done, it's not direct and it's not efficient pass-through, right? Just to say the obvious. It takes time, and it's clunky, and you don't get it all at once, and you don't get 100% of it. That's what we're seeing again, and we're going to see throughout this cycle. You partially have to offset it. In addition to price, you have to offset it with better product mix, and you have to offset it with better cost efficiency measures. That's what we're doing. Now, relative to 2012, we'll come back to you when we get, I think, better line of sight to the markets and pricing and commodities here in Q4.
You could see a shift in those dynamics, I mean, in terms of which way the commodities are going and what the base of pricing is. I think it would be better if you give us another quarter to give you a straighter line of sight to what we think is going to happen in those key levers for 2012.
Do you have any sort of raw material items fixed already for 2012, or is this upcoming and during the autumn as well?
No, that's the fun we have in the second half of the year as we speak.
Yeah, okay. Thank you.
Thank you.
Thank you. I guess looking at my list here, that was actually the last question. Keith, maybe you should summarize this Q2 conference call.
Yes. Okay. Let me do that. Let me wind it up for everybody. Some summary or ending comments. Q2 was a tough quarter for us and actually a tough first half. What we're trying to communicate as best we can is transparency on what we see is happening in the markets, particularly in those mature markets. In the second half, while sequentially, quarter- over- quarter, better year- over- year, we see it will continue to be tough. Having said that, we're absolutely convinced, I'm convinced that we will and are taking actions to deliver. In the short term, we're increasing prices, and those price increases that we actually can read about now in North America and Latin America, and we're committed to do the same in Europe. We've been through this before, in some cases in weaker markets like 2008, 2009. We can get that done.
We're going to improve our mix. The negative mix we talked about is not caused by our products. It's more of a country and customer mix. We have a number of new launches in the pipeline that will continue to generate a positive product and brand mix. This is number two. Number three, as we've talked about quite a few times on this call, is our focus on improving our cost, both our fixed cost and, importantly, our manufacturing cost per unit and driving those efficiencies. A little bit mid to longer term is we're keeping our eye on the ball in terms of where we're going, which means we're focused on profitable growth and specifically growth in emerging markets. We're seeing good growth there. We're investing in growth there, both organically and with acquisitions, number one.
Number two, we're continuing to invest, and we're not cutting the fuel lines of investment in innovation in our product, in our R&D, and in our design. As we talked about, we are accelerating and driving the global operational excellence through the Global Operations Group. One thing, we don't know, of course, exactly when these market forces will start to turn, but we know they will. We're doing everything we know how to do to manage the enterprise to navigate through this short-term turbulence while focusing our energy simultaneously on creating consistent and sustainable value for our customers and our shareholders. We're confident that staying focused like this as the market shifts, we will be able to deliver on our financial objectives of 6% EBIT through the cycle of a capital turnover of 4+ times and a resulting return on invested capital in the mid-20s+ .
Thank you very much for your time and your very good questions today. We look forward to seeing you again. I wish everyone is taking some vacation and have a good summer. Thank you.
Thank you.
Thank you.