Good morning, and a warm welcome to Elektra's second quarter 2020 results presentation. With me today, I have our CFO, Theresa Bay, and our Head of Investor Relations, Doctor. Arneos. I'd also like to mention that this session is recorded and will be available on our website as an on demand version. Let me begin by updating During April or May, we experienced significant volume drops across most of our regions due to the strict countermeasures initiated by local authorities.
As restrictions were eased or removed, demand picked up in June, even if the pace of recovery varies directly between regions. In some markets, such as most of Europe, the recovery pace in the latter part of the quarter has been faster than predicted. It was therefore encouraging that whole group had an organic growth of 3% in June compared to the 30% decline we experienced in April. All in all, the organic sales in the quarter declined by 17 percent. As for production in April, we produced at an average rate of 40% compared to our normal run rate.
Towards the end of April and continuing into May, we could slowly reopen the vast majority of the factories previously closed. This means that in June, we were more or less back to normal run rate with the exception of Mexico. Looking closer at our business areas, for 3 of our 4 business areas, the impact has primarily been on the demand side, So we've been able to start our production to meet demand, albeit with some backlog. For North America, on the other hand, where we've had where we have production and sourcing in Mexico, we had a major production constraints from our 2 factories as these were mandated to be close for a large part of the quarter. End of June, all factories are open again, including also our laundry factory in Mexico.
Our US factories were also impacted by strength in supplies for Mexican suppliers. Looking specifically at our financials in Q2, organic sales decreased by 17% as a result of lower volumes across all business areas due to the shutdown in the markets following lockdowns and restrictions to limit the spread of the virus. In North America, volumes were also impacted by production constraints. As I previously mentioned, the market situation overall improved during the quarter resulting in organic growth in June. I'm very pleased that despite these very challenging conditions, we improved our mix also this quarter Price also impacted positively, primarily related to Latin America and Australia, where we increased prices to mitigate significant currency headwinds.
To reduce the large volume impact on earnings, we executed on comprehensive cost cutting measures that were initiated towards the end of the first quarter. Including reduced discretionary spending and furloughs of employees. It is primarily on marketing, travel and consulting that we have the highest traction in the quarter, but we also had a lower impact from manufacturing inefficiencies than forecasted. I'm very proud of how well we have delivered on these mitigation actions. Well above our expectations.
The ongoing consolidation of manufacturing in North America, however, continued to have a negative impact on operating income as we're running 2 factories in parallel. Despite the strong cost reduction execution in the quarter, it was not possible to offset the large sales drop and the quarter was slightly loss making. The coronavirus has quickly changed many things in the world, including how we all act as consumers, and we see some new trends in the market. 1st, as we spend more time at home, we realize how crucial appliances are in our daily life and how important it is to have the right, really useful features for the best experience. It's the everyday experience they use to really care about preserving freshness of groceries in the fridge or washing the favorite clothes in a way that makes them last longer.
Secondly, consumers pay more attention to health and hygiene, meaning that there is an increasing need for products that can boost personal resilience and physical well-being. Hence, we see a clear demand for vacuum cleaners and for air and water purifiers, but also for dishwashers and washing machines. Finally, consumers are becoming more digital, which shows significant growth in online purchases. The development we have seen in the last 3 months is what we had expected to happen in the coming several years. We're therefore accelerating our e commerce capabilities, including how we drive sales conversion, do our marketing, and managing our supply chain flexibility.
These trends in consumer behavior makes our strategy even more relevant and will keep accelerating innovation also going forward. Let me give you some current examples. Our dishwasher quick select supports our commitment to sustainability, which is used with its user interface that intuitively indicates how you can save energy and water. This has been highly appreciated achieving 4.7% in consumer style ratings by the end of 2019. These dishwashers have driven a gain of 0.9 points of value market shares since 2018.
With a potential market of over 6,000,000,000 consumers, emerging markets are essential to the long term success of Elecora. Our experience of entering new markets was used experience in emerging markets to develop a range of products well suited to meet the needs of local consumers and achieving double digit market share in 2019. So looking at our business areas performance in Q2, starting with Europe, organic sales declined as volumes dropped significantly in the quarter, reflecting the restrictions imposed in the markets across Europe. However, we saw a strong rebound in sales in June, In the quarter, drop with e commerce to the same extent as electrical retailers were. We significantly cut our marketing spend in the quarter to meet the drop in demand.
Going forward, however, if we see market market demand continuing to pick up, we will scale up our marketing activities again. Furloughing of employees also contributed and mitigated the production inefficiencies that were triggered by the lower volume I'm very pleased to see that our strong cost cutting measures, together with the continued mix improvements, offset the significant part of the impact of the large volume drop. In this challenging environment, our premium brands AEG and Electrolux continued to gain value market share. In the second quarter, we saw a significant drop in demand, heavily driven by the most lockdown countries such as France, Italy, Spain, and the UK. Overall market demand in Europe declined by 13% year over year, where Western Europe declined by 17% and Eastern Europe by 3%.
As restrictions eased or were removed, demand picked up. Market demand recovered at a faster pace in the northern part of Europe than in countries with strict lockdowns. In June, the recovery pace we experienced was faster than we had predicted, primarily driven by strong pent up demand, This confirms that household appliances are essential for our daily lives and about 60 plus percent of the market demand is driven by replacement of product. However, markets in the UK and Russia are still challenging and uncertain. In our North American business area, organic sales declined in the quarter as a result of a significant volume drop.
As I commented on earlier, this was primarily due to production constraints. The restrictions in Mexico to limit the corona pandemic was not only not only restricted us from operating our 2 factories in Mexico for a large part of the quarter, but also resulted in shortage of component supply to our U. S. Factories. It was not until the end of June, that we were able to open up our loan refractory in Mexico as restrictions were particularly severe in the Mexican state where this factory is located.
The U. S. Factories were also constrained by absenteeism and confirmed COVID 19 cases that forced us to post production to allow us Sun attached facility to ensure safe working environment before starting our production again. We were also in a lower inventory position going into the quarter, especially in refrigeration as a consequence of the previous capacity constraints related to the ongoing manufacturing consolidation in Anderson. Due to this situation, we could not fully meet the high demand for our products, which is unfortunate as we are well positioned in the current quarter, the current market with our offering.
We reported loss of SEK 173,000,000 in the quarter, and this was mainly a result of the lower volumes but also increased costs related to the manufacturing consolidation in Anderson, where we're running 2 facilities in parallel. Comprehensive cost cost cutting measures partly mitigated the severe drop in volumes and the mentioned production inefficiencies, despite the absence of government fertile systems. Slide price increases contributed to earnings, while tariffs had a negative impact. During the quarter, market demand for core appliances in the U S decreased by 6% year over year. Demand in June better than the rest of the The reopening of the Mexican facilities that serve the U.
S. Appliance industry also contributed. Overall, in Q2, we estimate that sell out I. E. Consumer demand to be higher than sell in to retailers.
Market demand for all major appliances including microwave ovens and home comfort products declined by 7%. Let's move on to Latin America, which in a way has been the epicenter of the pandemic during the quarter. In our largest market, Brazil, consumer demand for core appliances dropped in the quarter, However, demand recovered as restrictions were eased and stores reopened in the month of June showed growth. In Argentina, demand declined significantly in the quarter, driven by political instability as well as coronavirus quarantine procedures, even if we saw some recovery in June. In this challenging market situation, our organic sales in Latin America declined by 24.2%.
With price increases and mix improvements, we managed to partly offset the sharp decline in sales volumes. Strong growth in our e commerce sales mitigated partly for lower volumes in the traditional channels. We reported a loss of SEK 183,000,000 in the quarter. We continue to implement comprehensive cost cutting measures to mitigate lower volumes and the related inefficiencies in production. Our factories were to a large extent close in April, either mandated or demand driven and were reopened gradually in May.
We're also working constantly with pricing and managed partly to offset the significant currency headwind we faced in the quarter. Mix improvements driven by product launches, primarily in Brazil, impacted earnings positively. And finally, turning to Asia Pacific, Middle East and Africa, Consumer demand is estimated to have declined in the quarter due to the coronavirus situation, particularly in Southeast Asia and Middle East Africa. In June, we saw market recovery in Southeast Asia and Northeast Asia is now more or less back to normal. Market demand in Middle East and Africa, however, still weak.
In Australia, which have imposed fewer restrictions than kept doors open, market demand was strong throughout the quarter and improved further in June. Key drivers are that people spend increasing time at home and focusing more on cooking and cleaning, but also government stimulus packages giving allowances and grants for renovation. Unfortunately, we've seen that authorities in the Australian early July in both new restrictions from parts of the country. Our organic sales declined due to lower sales volumes, although sales increased in June year over year. We had strong growth the launch we made in Q2 of cooking products under the Westinghouse brand in Australia gained good traction and contributed to improved product mix.
Our Electrolux branded products launched last year also performing very well. Operating income declined somewhat year over year, strong execution on cost savings measures partly offset the impact on earnings from lower volumes. Price increases compensated to a large extent for currency headwinds related to a weaker Australian dollar against imports denominated in U. S. Dollars from China and tiebacks from Thailand.
And with that, I hand over to Derrek.
Yes. Thank you, Jonas. Looking at our financial overview, I would like to come on a few items organically sales declined by 16.6% in the quarter due to significantly lower volumes. All business areas were impacted by the coronavirus pandemic and lower demand, although we saw volumes picking up in June as market demand started to recover. In North America specifically, supply constraints impacted volumes negatively.
The gross operating income, defined as net sales minus cost of goods sold, declined compared to last year. The gross operating margin of 14.3 percent for the second quarter this year decreased 4.3 percentage points compared to the second quarter last year. Operating income declined significantly. As Jonas said previously, we continued to cut costs in the quarter and the result was well above our expectations, but we could not compensate for the significant volume decline. So now let's look at the drivers behind this year over year change.
The sharp decline in volumes was partly mitigated by mix improvements across most business areas, as well as price increases despite that tariffs still had a negative impact year over year. Currency had a negative impact on EBIT and was to a large extent indirectly related to the coronavirus impact driven by the temporary cost mitigation actions initiated in March. We significantly reduced discretionary spend, primarily in marketing but also travel higher consultancy fees and social tools, including furlough, contributed in the second quarter. However, the ongoing manufacturing consolidation in North America continued to result in higher cost year over year, and in several countries, there are no government support for closed down factories. If we then take a deeper look at the price and mix development, The EBIT margin accretion from the group from pricemix was 1.3 percentage points in the quarter.
In Europe, we had a favorable product mix driven by growth of our premium brands, while price decreased slightly compared to last year. In North America, price increased slightly, while production constraints resulted in a negative mix. This was a consequence of lower production in Mexico, where we are producing our more premium products. In Latin America, we had a good contribution to earnings from price as we continued to implement price increases, and we also had a positive mix development. In APAC and EMEA, price impacted positively I'm also very pleased to see that the product launches we have done lately in Australia have been very well received by consumers and we see this impacting earnings positively through an improved mix.
As highlighted in the EBIT bridge, currency had a negative impact of SEK 364,000,000 on our earnings in the second quarter, and this is linked to the corona pandemic impact on the global economy. Overall, the major negative impacts in the quarter year over year are related to weaker currencies in Latin America. But we also had movements impacting our operations in Europe and in Asia Pacific. Towards the end of the quarter, some of our important currencies such the Brazilian real and the Australian dollar strengthened somewhat. And looking ahead, we calculate the 3rd quarter to have a negative year over year impact from current related to Latin America of approximately SEK 200,000,000.
For the group, we expect around SEK 1,400,000,000 in currency headwinds in 2020. And these calculations are built on current exchange rates as per July 10, and our forecasted future flows, which remains very uncertain. And then looking at our operating cash flow. Operating cash flow for the quarter was slightly better than last year. EBITDA was significantly lower due to spended payments of taxes and VAT, but also reduced investments.
Within working capital, we had some significant movements due to the lower sales and production. And looking ahead under these conditions with rapid shifts and high volatility in sales and production, This will continue to create large swings in our working capital. And during the first quarter, we took measures to further in our liquidity buffer and these activities continued in the 2nd quarter and transactions were also executed to extend the maturity profile. The issue we issued bond loans of approximately SEK 5,500,000,000. And further in July, a new credit facility was signed of SEK 10,000,000,000.
In addition to this new credit facility, we also have 2 unused committed backup revolving credit facilities of approximately SEK14 billion. In the second quarter, long term borrowings in the amount of SEK 1,800,000,000 were amortized, including loan repurchases. During the remaining part of 2020, long term borrowings only amounting to approximately SEK0.2 billion will mature. And we continue to have a strong balance sheet and liquidity position in this challenging environment. And with that, I hand back to Jonas for the outlook.
Thank you, Tres. As we earlier communicated, the coronavirus situation has also impacted our investments in the reengineering programs, And so far, forced us to delay some of them, such as the 1 in our U. S. Springfield cooking factory and the projects in San Carlos, Brazil, with up to half a year. This as the restrictions around travel and work have made it impossible for our suppliers in Europe and Asia to produce the equipment and assemble it on-site according to our original timetable.
The pandemic has also affected the ramp up of our new Anderson facility, where we're now in the face of adding shifts to increase production, but with higher absentee levels in normal social distancing measures, as well as COVID-nineteen cases, ramp up pace is of course impacted negatively. We have therefore decided keep our legacy Anderson factory until mid-twenty 21 instead of Q3 2020 to avoid potential capacity constraints. The fine tuning to reach full benefit in terms of cost savings, always necessary in such a project will also be attained somewhat later than previously planned. On a positive note, I'm very pleased when pressure testing the equipment at a higher pace, but that's part of a normal ramp up. So all in all, the actions we have taken due to the pandemic mean that cost savings from parts of the investment programs are pushed forward near term.
Most importantly, the Anderson savings will mainly materialize in 2022 Springfield in 2023. Our reengineering activities in Curitiba, Brazil and in Europe, as well as our streamlining measures, are progressing well with limited impact from the coronavirus situation. Despite the delays due to the corona pandemic, we're still expecting our reengineering and streamlining initiatives to generate approximately SEK3.5 billion of annual cost savings with full effect from 2024. These savings are net of expected ramp up costs and transition costs through 2020 to 2024. I would also like to emphasize that these investments are far from only about savings, but also about fantastic new products, delivering relevant innovation to consumers and driving positive mix.
Looking at our view on market demand, it's important to consider that the demand drivers for appliances are in the 60 plus percent of the demand is replacement driven in mature markets. And for most consumers, appliances are essential to data life in their homes. Long term, based on our experience, the more discretionary demand is mainly impacted by consumer confidence and interest rates. As these factors impact willingness and funding costs for refurbishments and new construction. Short term, the store closures and restrictions on movement we've had the March to May period have driven demand below the natural replacement level, despite large increases in online sales.
But that should tend to recover as restrictions are gradually lifted. This is what we are currently experiencing. Demand picked up as restrictions were lifted and in June, sales in several markets was driven by pent up demand. As I'm sure we're all aware, the pandemic development remains fluid. Creating an extraordinary degree of uncertainty over what the full global impact on demand would be for the second half of the year.
In the near term, however, we see good demand in most European countries as well as Brazil and Australia, partially driven by pent up demand from April and May, as well as the strong stimulus programs implemented. In North America, the disposable income in the first half of the year was strongly supported by government incentives and it's uncertain how this will play out as these social programs now start to lapse. Macro indicators such as GDP, unemployment rate and consumer confidence indicate a risk of a year over year demand decline Overall, our visibility when it comes to Q4 is limited as demand is impacted by several factors such as virus resurgences, extent of additional restrictive measures and the duration and effectiveness of the massive stimulus packages, on consumer confidence. Given the very weak market development in H1, we expect market demand for the full year 2020 in most of our main markets to be on balance negative. Turning then to our business outlook.
In Q3, we anticipate a favorable organic contribution driven by price increases already implemented and announced as well as by our positive view on short term market demand and mix. We see volumes picking up due to good retail demand near term in several of our main markets. At this stage, it's hard to see how this will play out. Since some of our markets still are impacted by the pandemic. We might also continue to experience production constraints, and we were entering Q3 and the high season at a lower inventory level than at the normal as our production rate in Q2 was impacted by the pandemic.
We continue to expect unfavorable organic contribution for the full year 2020, driven by lower demand and supply constraints from the coronavirus pandemic. Primarily as a result of the first half year development. Q4 is still very uncertain as mentioned. For the full year, lower volumes are expected to be partially offset by price increases and the aim is to continue to drive favorable mix. In 2020, we estimate that the positive year over year impact from raw materials to more than offset the negative year over year impact on tariffs.
As well as the indirect currency headwinds, primarily impacting Latin America. The raw material improvements are mainly due to more favorable pricing for steel but also on chemicals and plastics. We continue to expect a favorable impact to our net cost efficiency for the full year driven by the temporary cost actions that we've implemented to mitigate the impact on earnings and cash flow from this exceptional market situation. These actions include significantly reduced discretionary spending, such as marketing, travel and consulting. In Q3, we also assume a favorable net cost efficiency, even though the savings we achieve in Q2, specifically from lower marketing spend and furloughs, will be at a lower level contribution from furloughs and social tools will be negligible.
The impact on the coronavirus situation not only shows in the organic but also indirectly through a significant currency headwind of approximately 1,400,000,000 for the full year 2020. And finally, we still expect FX investment for the full year to be approximately EUR 5,000,000,000. Thank you. So as mentioned, even though we're heavily impacted by this unprecedented market situation. It truly is unprecedented.
We conclude that we're well positioned to execute on our strategy and to create value. We're continuing to realize mix improvements, driven by our new great product launches and driving our premium brands. We're continuing to work to consolidate our U. S. Fridge and freezer production and we're continuing to be agile and flexible short term, while we keep our focus on the long term value creation.
And as mentioned, the accelerated consumer trends that we've seen, are right in line with our strategic focus. And before we open for Q And A, I'd like to mention, that we are going to hold a virtual capital markets update on November 17. And I'm looking forward to all of you participating in that. We'll now open for questions.
Thank you, Jonas. We will now open up for questions. And to allow, as many of you to ask questions, we Kindly ask you to limit it to one question at a time. You're, of course, welcome to dial back in and ask a question if time allows.
Our first question comes from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.
And I was just wondering a little bit. You mentioned that, especially in the U. S, you were not able to meet demand because of this ongoing manufacturing problems you have there. Could you quantify that in any way? And is that similar in Europe and elsewhere as well as you have your plans closed?
So Is that where you see a thing if we can pent up demand or is it so that competitors have taken those volumes instead?
So for sure, in North America, we could have sold much, much more if we were had been able to produce. And again, there are couple of different factors here. The most important one is and we also supply a lot of components out of Mexico, and we had extended shutdowns of those facilities. Our refrigeration facility in Juarez was closed for 6, 7 weeks. We had, I think, 8, 9 weeks of closures of a laundry facility.
So So for sure that had a big impact. Compounding that was the fact that we did enter the quarter with low inventories as a consequence of the manufacturing constraints we've had in Anderson with the consolidation of the facilities there. So even though we were ramping up throughout the quarter, were far below what we could have sold. And we also saw some challenges in the pace of ramp up as it was difficult to get people to hire people into the facility as a result of the, of course, that people have about the pandemic and as well, the very generous unemployment checks that are out there. So we were really disproportionately impacted in in the U.
S. Versus the or North America versus the rest of the company. I would say, and also, as I mentioned, in most of the other parts of the group, the main impact on our sales was demand. It wasn't production constraints per se. Although we have some backlogs here and there, with, as demand came back much stronger than expected in June, of course, we were a little bit overwhelmed.
There's some backlog, but by and large, the production constraints were mainly focused on North America.
Okay. And then just finally raw materials. We keep your guidance unchanged on the tailwind there. Guess, you are locked for this year. But what will be your strategy going into next year?
Do you think we could see even lower raw material cost implying that you will not lock up as much for next year? What, how do you think about it?
Yes, I mean, I think overall, we have quite favorable contracts this year. So we're pleased with where we are. And We're seeing a little bit less volatility, honestly, than we've seen in previous economic downturns at this point where I think suppliers have gotten better at adjusting supply and capacity, both in steel and primarily in plastics. So honestly, at this point, I'm not ready to give any guidance because we're far away from it, but we're not seen massive tailwinds from raw materials into next year. At this point, that can change.
Thank you.
Thank you. Our next question comes from the line of Andre Kligman from Credit Suisse. Please go ahead. Your line is open.
And
that take off, recovering the
Sorry, Andre. We missed the first part. Can you do it again?
Sorry, yes. Good morning and thanks for taking my question. I wanted to focus on Latin America and on the kind of pace of recovery of that FX headwind there through pricing. I guess it requires somewhere around sort of 7, 8 points of price increases. You give us an indication of whether you're already there in terms of the run rate or can you get there by the year end?
Or maybe just more broadly, Is this potentially triggering a rethink of how that business is set up given that kind of exposure to volatility currencies and mismatch of the revenue and cost base?
So, yeah, we actually have raised price to fully offset. So in Q3, we expect to be fully offsetting the currency headwinds. And, we're not reassessing our we I mean, we have, as you know, a very local manufacturing base for Latin America. So in that sense, it's difficult to do more. It's just the fact that Several raw materials and components are priced either directly or indirectly in U.
S. Dollars. So so that we just need to get price for that and over historically we have. Then of course, the volatility creates a bit of, sort of backlog or time lag until we get there. But we've always been successful in getting a recovery of the currency over time.
So We see definitely no need to adjust our business model. What we are doing though is we're continuing to invest in increasing the productivity of our factories in Latin America as well as the attractiveness of the products, of course.
Just to double check, you've increased prices to offset the whole of the SEK 900,000,000 run rate and that's price kind of announced and realized.
Yes. Well, we're not going to cover the stuff, the part that we already experienced in the first half, but the forecast for the second half is that we will compensate for price for raw material or sorry, for raw material and currency in price.
And that should stick into the next year. So you kind of compensate 900, but not in 2020, but you compensate 900 over say second half twenty twenty and first half twenty twenty one roughly? Correct. Yes. Great.
Thank you very much. I'll go back in the queue.
Thank
you. Our next question comes from the line of Gus Sandstrom from F. D. Please go ahead. Your line is open.
Thank you. Good morning guys. This is Krista Sandler with SVB. Regarding Anderson, you've mentioned now, if I understand correctly, there are no bottlenecks as of now, you're running on low capacity or not full capacity anyways. Could you please elaborate on what type of capacity you you have been running on in Anderson without experiencing any bottlenecks or how many lines out of the total you're running on?
And sort of what's the fiscal next steps forward for
Yes. So actually we're the 1, the shifts that we're running, we're running at a pretty good efficiency. Now it's about adding more shifts at that pace. So that's a less I'm sorry, a less complicated move than getting the shifts up to capacity. Where normally it should be.
And the challenge we've had now is actually hiring people, honestly. And we think that would get a little bit easier as we go forward. As the pandemic levels out and some of these very significant unemployment checks are being phased out as well. So it's not so much about technical capacity right now. It's more about adding shifts and adding more production through those shifts.
So, yeah, that will take time and it will take time to get those shifts and very productive. That's the other part. And that's the reason why we're also kind of highlighting that the savings will be pushed out a bit as there's lots of productivity work to be done and that will take some time.
Next question comes from the line of Will Turner from Goldman Sachs. Please go ahead. Your line is now open for your question.
Good morning, everyone. Could you just provide a little bit more color on the net cost efficiencies numbers and what was the impact in the quarter from the furloughs and also the kind of lower discretionary spend relating to advertising. If you can just break that out, that'll be useful. Thanks. And then also like going into the next to the next half of the year, So you clearly stated that you expect 3Q will also benefit.
Obviously, there's still going to be further schemes across Europe. Does that imply that by the time we get to 4Q, you're expecting the net cost efficiencies than between negative, assuming that there is no second wave of the virus and your advertising spend has picked up and these further schemes in many countries have kind of, have been reduced?
Yes. Hi, it's a little bit more, more complicated than that. So actually the furlough support that we've received, which is, of course, extremely welcome, has only really managed to reduce the inefficiency in manufacturing that we've had. So we still have a negative contribution from manufacturing inefficiency in the quarter. And so it's not a material amount.
It's a good amount, but it's not a material amount support that we've achieved. And as you know, in many, many markets, there are no government support programs available, such as most of Eastern Europe, such as North America, such as most of Asia. So it's really only in Italy and Germany and Brazil actually that we've been able to receive any kind of significant furlough support. So that's not a huge driver in the quarter. And as I said, manufacturing efficiency is still a negative contributor in Q2.
So the big And also because of Anderson. So the big contributions to, to, manufacturer, to our net cost efficiency are from the short term cost reductions we've made, biggest part of that comes from reduced marketing and sales promotion spend. Also, again, as mentioned, hiring freeze, travel freeze, entertainment, consulting, all of those have been absolutely stopped in the second quarter. And here's where we on both account of, let's say, manufacturing and efficiency and the speed of stopping previously transplant has been faster execution than what we had planned for. As we then go into the third quarter, the furlough support will essentially be nothing.
But on the other hand, as our factories are running at high capacity, we also expect to not have these manufacturing inefficiencies. So that should be that should be good. On the other hand, we want to and we are planning to increase our marketing spend probably not as much as we would like long term, but definitely an increase on run rate versus Q2. And we are slightly releasing on our hiring freeze, even though we're going to be quite restrictive and we're only hiring absolutely critical positions at this point. So we will continue to have a positive performance or contribution net cost efficiency for that.
And as we go through the rest of the year, the ongoing work that we have to drive manufacturing efficiency, product cost efficiency and so on will will continue to yield positive results. So that's why we're guiding for a full year positive contribution for net cost efficiency also going through in the second half of the year.
Great. Thank you.
Sure. Thank
you. Our next question comes from the line of James Mulveen Redburn. Please go ahead. Your line is now open for your question.
Yes. Thanks for the
excellent color on the savings in North America. I think you mentioned last quarter, you might be able to expand a bit on the phasing of the 3,500,000,000 net savings and how they might look across the years. I'm thinking more medium term, 2021, 2 with the changes you've made in Anderson and how that changes the numbers in those years. And also can
I 21, yes?
Yes. So would it be possible to give us a flavor for what the savings look like in the next 3 years now versus the previous plan in terms of quantification.
Yes, I mean, yeah, we have that on Slide 21. So yes, you can compare that what we said before. But yes, no, it's a delay as we talked about, mainly impacting 2021. And then we're recapturing much of that in 2022 and all of it in 2023.
And is the change in those numbers? Is that simply relating to Anderson or have you moved anything else?
No. We as mentioned, we're also forced to delay the Springfield reengineering and also the San Carlos, Brazil reengineering by about 6 months. And that sort of pushes the entire ramp up curve and efficiencies forward. So it's a combination of those 2, 3, actually.
And when you talk about 1,000,000,000, does that exclude the positive effect of the double cost dropping out?
Well, so if you look at that slide, you see this negative borrowing 2020. And that is the mainly the effect of running 2 facilities in parallel. In 2021, as mentioned, we'll do that for 6 months. So we'll have some of that. And then the fact, as I mentioned before, that we will be producing, but we will not producing at full productivity.
So we'll have to work through that through next year and then get the full kick in 2022.
So the positive effects of the double costs dropping out are in the 3.5?
Yes. Well, yes, but if you remember, the baseline is a normalized 2019 where we did not have a double run loss.
Okay. So it's net neutral over the whole period. Thank you, Dennis. Thanks.
Sure. You're welcome.
Thank you. Our next question comes from the line of David MacGregor. Research. Please go ahead. Your line is now open.
I wonder if you could you made passing reference about inventories and I was wondering if you could just elaborate on what you're seeing in retail inventories and perhaps distinguish within your response, what you're seeing in the European retail inventory situation versus the U. S. Inventory situation. And our understanding is that they're relatively lean. So I guess the question is, to what extent do you think retailers rebuild inventories here as availability improves and as demand improves versus and by rebuilding inventories, I mean, in terms of weak weeks on hand, or how you would consider that versus perhaps taking more defensive measures as a consequence of maybe their confidence having been rattled deciding that they're maybe going to hold off on rebuilding.
But if you could just talk about that whole retail inventory dynamic both in U. S. Versus Europe, that would be a big help.
Yes. I mean, this is mainly in North America discussion, but even though there are some aspects of it in some of the other markets as well, but in North America, I think the industry as a whole, but in particular, we have been, of course, impacted by these constraints that I talked about and our days on hand in many of our retailers are are at low levels. So that's why we're indicating here that in North America, even though we're concern this, I think everybody is about the pandemic spread and the impact on that on demand here in the second half. In the short term, we actually see good good demand and good shipments, driven by still solid consumer demand, but also rebuilding those inventory levels. How long that will last.
I think it's difficult now to predict because of some of the incentives lapsing or stimulus packages lapsing, but on the other hand, as you know, new ones being in the works that we don't really know when and how they will be coming and impacting. So that's the uncertainty in North America. In Europe, it's really the pace of recovery in in June that has led to some reduction in dealer retail inventories. And and we're now working full time to replenish those. It's much less dramatic than in North America.
We see some of the similar things in Australia and also in Brazil, actually, where, again, the snapback in demand has surprised everybody a bit. And and we're kind of working to replenish that.
Thank you. Our next question comes from the line of Martin Wilde from Citi.
Yes, thanks for taking the question. It's Martin from Citi. Just to continue on the pace of that recovery, I'm not sure, to what extent you've got any July data yet, but if it has been a sort of a rebound based on income demand, is that expected to be a sort of very short term thing only last Lantoshock, so can it continue into Q3? And is there a continuum from that? I mean, you mentioned STAVR briefly in the U.
S, but obviously in Europe, there's also to talk about the green deal, could appliances be part of that? And just how you see sort of governments perhaps stimulating energy efficiency and then will that sort of be some help, going into next year? Thanks.
Yes. So this has been as you can imagine, we've done about 500 scenarios here over the last several months. And the whole sort of dynamic is driven by exactly those points, right. So what is the, effectiveness in containing the spread of the virus and what is the damaging of recurrences that we know are happening and will continue to happen versus then the effectiveness of the stimulus programs. And then in our case, then also we have this factor of pent up demand.
So it becomes a very, very complicated equation. And then with different possible outcomes, right, as you can imagine. So we are a little bit careful in issuing clear guidance on that. What I would say and that is what we're saying is that for Q3, we do expect these drivers that we talked about here. Combination of pent up demand strong stimulus packages, rebuilding, retailer inventories that in combination with the good work that we're already doing on pricing and mix will give a positive or we expect we give a positive, organic contribution.
Now there's still a lot of time to go in the quarter and we could have lockdowns, we could have supply issues, whatever, right? So assuming that that doesn't happen, then the short term view is relatively optimistic. But of course, they can occur. As we then go into Q4, We have, as a lot of people are predicting, going into the winter, we can see virus resurgences, what is the, stamina of consumers, what is the stamina of stimulus programs especially as we look at emerging markets where the ability to sustain those is questionable. If you look at Brazil and the like, U.
S. Being in an election year to me would indicate that probably they will continue with aggressive stimulus, but that's the speculation, right? So I think we're all kind of navigating through this as we say together with limited visibility. Okay. Thanks.
That's helpful. Thank you.
Thank you. Our next question from Handelsbanken. Please go ahead. Your line is now open.
Hanspanken. I had a question on the discretionary spending because you have shown in the past and also in Q2 that you're very good at that. Reducing that when necessary, but have you made any scenarios on what kind of truckshore reduction you might be able to achieve in discretionary spending, whether it's the use of office space, SG and A and any sort of potential savings related to channel shift from physical to online? I know it's early days and maybe an unfair question, but do you have any early thoughts on that? Yes, no, no, it's a very fair question.
I think that's exactly what we're indeed working on. I would say that the transformation of the company that we've been doing for the last several years, but that we accelerated last year were again integrating major and small appliances, spinning off professional, really focusing on consumer experience innovation, digital transformation of our go to market. All of those things are, I would say, at least in our view really validated in these, in the situation we're in right now, all those trends are accelerating. And we need to accelerate further with that, both in kind of simplifying our business, simplifying our product creation, simplifying our go to market, and increasing the effectiveness of the marketing and R and D spend that we're doing to against drive profitable growth, to drive mix improvement in the most efficient way possible. So there is absolutely more to come on that.
We're not ready to talk about numbers at this point or at but for sure, that's an ongoing very, very strong focus that we have. And of course, with the corona pandemic, again, some of those are accelerated further. To a point. So absolutely, that's top of mind for us.
Thank you. Our next question from the line of Andre Kukhnin from Credit Suisse. Please go ahead. Your line is open.
Hi. I've got a couple of follow ups, if I may. On Europe, think, Theresa, you mentioned that pricing was down in the quarter. Could you elaborate a little bit on that? And maybe just a bit more broadly on pricing given that tight inventory situation, does that present an opportunity to maybe dial down on any promotional activities and to maybe push the price a bit more?
Yes. Yes. So actually the European unfavorable on pricing, I think it's actually a little bit it's quite small and it's more, I would say, almost technical, let's say, consequences of of how we account for pricing. But honestly, I see a fair amount of opportunity here in going forward in realizing net price, meaning both list price and promotional spending and promotional spending effectiveness as as you said, as in many cases, we are a bit tight on supply. We can of course manage that through our promotional activities.
That's always a balance, that's always a balance with our trade partners, but that's definitely an opportunity that we have.
Got it. Thank you. And then on the net cost efficiencies, I guess the second half, if I can ask for any quantification of those kind of savings that you see flowing out compared to the Q2 run rate. Do we talk about 1 half of what you delivered in Q2 or is it more of a fraction of that?
Yes, I mean, as you know, and our forecast accuracy when it comes to net cost efficiency is so so, right? Then And that is because we really kind of we determined how much to spend on marketing and some other things. Based on the opportunities that we see inside of the quarter. And that's why it's really not productive to give you detailed forecast because it will change depending on circumstances. Now, what I can say is that For sure, the break that we put on marketing in Q2 is not sustainable.
So unless we really see a terrible resurgence of the crisis, we will increase spending compared to the pace quite a bit compared to the pace the second quarter. But then on the other hand, that will be at least to some extent mitigated by the fact that we will see much better manufacturing cost efficiency. And product cost efficiency in the quarter, and going forward. So I expect the run rate to be lower than in Q2, but still fairly decent. And as we go into Q4, again, that will be determined by circumstances, but the underlying sort of product cost and manufacturing efficiency.
I expect to further accelerate as we go through the year. Again, if we don't have major shutdowns and things like that.
Got it. Thank you. And just extending this into 2021 and not to kind of drive a forecast. I just wanted to really more get a gauge of where the highest priorities are for you, if we assume a kind of benign volume environment, so no second wave, but no dramatic recovery. And say we roughly tread water as a run rate, in 2021, without repeat of the shutdown.
So maybe slightly up as a result. So in that kind of volume environment, should we think about that NTE line as basically just the swing between the cost savings on that Slide 21. So I. E, the what looks like minus SEK 500,000,000 becoming a positive SEK 400,000,000. And that's that.
The rest kind of being a wash in terms of cost efficiency versus increasing marketing spend, etcetera. And then we should really rely on kind of price and mix as the next kind of key driver of the profit bridge. Or should we think about this differently? And kind of the priorities question, I guess, is, how high on the list of margin restoration 2021 already? Or is it really more 2022 story, and 2020?
No, I think, look, it's a, of course, a combination of many things, but of course, the first half of twenty twenty has been terrible. And of course, we will have a very strong on improving significantly on that in 2021. So for sure, we intend to to unless something happens, continue on our recovery pace also in 2021 overall in EBIT. And as mentioned, the swing factor from the reengineering programs is quite significantly favorable. We also on top of that have our regular productivity work which is ongoing with full force.
On the other hand, we do see that if markets normalize, we will get a strong return on investment from increased marketing spend and also, frankly, increased R and D spend compared to to the slightly lower run rate we have this year. So yeah, I mean, those I want to have them increasing because we would only increasing them if we think there's a good return on investment on that. And we think there is. So overall, I would say, the reengineering programs will be positive. We'll have continued manufacturing cost efficiency and product cost efficiency.
We will spend more money on marketing and R and D. Hopefully that should support a strong continued mix development.
Thank you. And very final one. The 1.3 price mix that you saw in Q2, I think given everything we've just discussed right now, that number should be high in Q3, or am I missing something, was there anything kind of in Q2 that particularly helped that is not going to happen?
We don't guide on that specifically, but let's put it this way, understand your reasoning.
Okay. Thank you. I really appreciate your time.
You're welcome.
And as we have no more time for any more questions, I will now hand back to
today for all of you. And, as we've covered extensively during this call, we're in a very challenging time. But I think it is really important to realize that we are extremely well positioned to create value in this environment. We're really continuing to accelerate on the execution of our strategy, to drive demand and drive profitability through relevant and sustainable consumer experience innovation. This has once again shown up in an improved mix in the quarter despite, as you're all aware, the typical effect that we see when demand goes down, that typically the market mix this down, we've improved mix, which I think is a strong validation of our strategy.
Our innovation, together with our reengineering activities, are resulting in more efficient manufacturing and with great new products. And this will set us up for strong long term competitiveness. With that, Thank you all. Wish you all a great continuation of the summer and look forward to seeing you soon. Thank you, and bye bye.