Good morning, and a warm welcome to the first quarter 2020 Electrolux Results Presentation. With me today, I have our CFO, Terje Svedari, and our Head of Investor Relations, Sophie Arnius, Before I start, I'd like to mention that this session is recorded and will be available on our website as an on demand version I also want to highlight that this presentation will be slightly longer than normal due to the coronavirus situation, which will, requires to be efficient in questions asked later on. Let me begin by updating you have been severely impacted by the strict lockdowns initiated from mid March in many of our key markets, resulting in factory and retail closure We've seen a significant increase in online sales but not enough to materially offset physical retail. Initial outbreak in China cost delays in component of finished good deliveries and higher logistics costs in the first quarter, but due to our strong actions, the impact Q1 was relatively contained. In Europe, we had sharp sales declines from mid March as physical retail stores were closed in most of Western Europe.
The effect in Eastern Europe was mitigated by Russia, where we saw significant pre buying as a result of the currency devaluation. In the second half of March, We temporarily closed the factories in Italy, and at the end of the month, factories across Europe to adjust output to near term demand. Unlike in Europe, appliances have, in general, being classified as essential goods in the U. S, and most stores remain open. Demand remained strong through March, but availability constraints in Refrigeration impacted our sales negatively.
In Latin America, demand dropped significantly in all markets at the end of Q1 as most retail stores were closed and several of the markets were fully locked down. In addition, political instability in Argentina and Chile exacerbated the negative development. In late March, we had to temporarily close most of our factories in the region. In APACMEA, consumer demand is estimated to have declined in Q1, primarily in East Asia, China was the first market to impose restrictions and later in the quarter, many countries in the region followed. However, consumer demand in Australia and Egypt, for example, are estimated to have increased.
In light of the sharp demand decline, we have implemented comprehensive mitigation actions to reduce the impact on earnings and cash flow. As we navigate through these through the crisis, we see 3 phases. The 1st phase with major demand and supply disturbances started in the first quarter and actions focused primarily on cash management. We have strengthened processes to monitor working capital, implemented production reductions and employee furloughs and secured new loans and a new credit facility together summing up to CHF11 billion to further strengthen our liquidity buffer. We've also received support from our shareholders to withdraw the annual dividend to preserve balance sheet strength.
The 2nd phase, which is currently ongoing, focuses mainly on further cost efficiency act cost efficiency actions, including significantly reduced discretionary spending, adjusting production to be in line with expected sales volumes and reprioritizing capital expenditures by deferring and scaling back some investments. This means that some of our investments in the reengineering program will be impacted. When it comes to our 2 U. S. Strategic investments, the Anderson refrigeration factory is largely completed while the Springfield cooking facility will be delayed by up to we see we will further strengthen our go to market approach, including online sales capabilities and increased supply chain flexibility.
Our core strategy of relevant and sustainable consumer experience innovation and modularized and automated production at scale is well suited to the more challenging demand landscape we anticipate. The actions taken to streamline and focus the company on the consumer business with clear strategic priorities, makes us stronger and combined with a strong liquidity position and an action oriented company culture, we're well positioned to execute our strategy also in a lower demand environment. But in these difficult times, it's not just It's also about being a good citizen and helping people in need. To support society, the Electrolux Food Foundation has made funding available and our people have donated time and product to contribute to the health care efforts. Organic sales decreased by 5% as a result of lower volumes.
In North America, volumes declined mainly due to the manufacturing transition in Anderson, while the other three business areas volumes were impacted by the pandemic towards the end of the quarter. Mix improvements and price increases partly offset the volume decline. Operating income amounted to SEK 122,000,000 corresponding to a margin of 0.5% significantly impacted by North American Manufacturing transition. The EBIT impact of the coronavirus was approximately SEK 400,000,000 negative In addition to the decrease in demand impacting volumes, it also resulted in production constraints and increased logistics costs. Currency headwinds linked to the coronavirus impact on the global economy also had a significant SEK 600,000,000 negative impact on earnings in the quarter.
This was partly offset by price increases, mix improvements across all business areas as well as lower costs for raw materials. In the quarter, Electrolux Professional was distributed and listed on NASDAQ in Stockholm. Hence, the financial information presented here refers to the Consumer business unless otherwise stated. Also in the to drive demand and profitability. A great example is our range of UltraCare washing machines that combine the best in gentle care with leading energy efficiency resulting in margins that are twice the average laundry products.
During last year, we launched a new range of Electrolux branded kitchen products in Australia, leveraging the strong Swedish heritage, which is associated with sustainability and quality in Australia, resulting in a 45% sales increase We will continue to Organic Sales for Business Area Europe increased slightly as a result of mix improvements in the built in kitchen area. It's great to see that our new built in Electrolux Kitchen range continues to do very well. The mix improvements compensated for the volume decline we experienced from the second half of March. Operating income declined year over year, impacted by currency headwinds. The volume decline was offset by cost cutting measures, mix improvements, and lower costs for raw materials.
In the first quarter, overall market demand in Europe declined by 1% year over year. This was driven by a decline of 4% in Western Europe mainly driven by France, Italy and Iberia, where demand dropped sharply in the last 2 weeks of March due to the extensive lockdowns. Demand increased by 7% in Eastern Europe, driven by Russia. In North America, organic sales declined 13.1% in Q1 due to lower volumes, primarily relating to the ongoing manufacturing consolidation to the new facility in Anderson, which resulted in capacity constraints as we've already communicated. Lower sales of private label products as well as of air conditioners also impact volumes.
Operating income declined significantly year over year, excluding last year's nonrecurring items, as a result of the lower volumes and increased costs related to the manufacturing consolidation. On a positive note though, aftermarket sales increased. Finally, I'd like to give you a short update on the situation in In the quarter, we increased production in the new factory, and we now have less bottlenecks. We've also, during the course of Q1, ramped up the legacy Anderson Pacific factory, However, absenteeism and social distancing measures due to the coronavirus situation have impacted output negatively in both facilities as well at our other facilities in North America. During the quarter, market demand for core appliances in the U.
S. Increased by 2% year over year, Going into March, there was strong order intake by retailers driven by solid consumer demand. However, overall in March, we estimate sell out to be lower than sell in. Market demand for all major appliances in Q1, including microwave ovens and home comfort products, however, declined by 7%. In the first quarter, consumer demand for core appliances in Brazil is estimated to have grown in January February.
Demand in Argentina and Chile declined significantly in the quarter, driven by political instability as well as coronavirus quarantine procedures. In the second half of March, the demand dropped significantly also in Brazil. To give you some flavor, in Brazil, more than 80% of retail stores were closed for the last 2 weeks of March, while Argentina implemented total quarantine since mid March and Chile closed the most populated areas. Electronics operations in Latin America had an organic sales decline of 1.9%. Lower sales volumes were partly offset by price increase and mix improvements.
Operating income declined year over year, excluding last year's nonrecurring items due mainly to accelerating currency headwinds. Price increases and mix improvements more than offset lower volumes. We are working constantly with pricing to offset external headwinds such as currency, and implemented price increases in the quarter in our main markets. In Asia Pacific, Middle East and Africa Consumer demand is estimated to have declined in Q1 due to the coronavirus situation. Some countries like Malaysia, South Africa and New Zealand implemented lockdowns, while other markets such as Australia remained more open.
Electrolux reported organic sales decline of 3.2%, due to lower sales volumes in Southeast Asia and China. And this was partially offset by increased sales in Egypt and Australia. Operating income declined year over year. Strong currency headwinds mainly from the Australian dollar impacted earnings negatively, Cost statements activities were implemented, which to a large extent, offset the negative impact of the lower volumes. To mitigate the currency impact, we're implementing price increase in Australia and other countries around the region.
With that, I turn over to Threis for the financial overview.
Thank you, Jonas. Looking at our financial overview, I would like to comment on a few items. Organically sales declined by 5.1% in the quarter due to lower volumes. In North America, this was primarily due to the manufacturing transition while the other 3 business areas were negatively impacted by the coronavirus pandemic towards the end of the quarter. Total sales were down 3%, including a positive translation currency effect of 2.1%.
The gross operating income, defined as net sales minus cost of goods sold, increased slightly compared to last year However, the first quarter last year was including a nonrecurring item of approximately SEK 1,000,000,000. And adjusting for this the gross operating margin of 15% for the first quarter this year decreased 4.5 percentage points compared to the first quarter last year. Operating income, including last year's nonrecurring items, declined significantly. So now let's look at the drivers behind this year over year change. The organic sales decline had a limited impact on earnings.
As mentioned before, volumes were significantly down, but the lower volumes were compensated by mix improvements across all business areas as well as price increases, mainly in Latin America. The combined impact from raw materials and trade tariffs was slightly positive. Currency had a significant negative impact on EBIT and was to larger them indirectly related to the coronavirus impact on the global economy, and I will come back to that later in the presentation. Net cost efficiency was negative. The ongoing consolidation of Manufacturing in North America continued to impact earnings negatively, but we also had effects production inefficiencies and logistic cost increases related to the coronavirus situation.
These were, however, partly mitigated by implemented cost cutting measures and reduced discretionary spend towards the end of the quarter. The negative impact on EBIT from the coronavirus situation approximately SEK400 million affected both volume and net cost decisions in negatively. If we then take a deeper look at the price and mix development, The EBIT margin accretion from the group from pricemix was 2.9 percentage points in the quarter. Mainly coming from mix, but also from positive price. In Europe, we had a favorable mix driven by growth from our premium brands and in built in kitchen, while prices decreased slightly compared to last year.
In North America, mix had a positive impact on earnings, partly driven by increased sales of our front control cookers. Price also increased slightly year over year. In Latin America, we had a good contribution to earnings from Price as we continue to implement price increases in APAC and EMEA mix improved in several important markets such as Australia, New Zealand, Northeast Asia and Egypt, while price remained flat. As highlighted in the EBIT bridge, currency had a major negative impact on our earnings in the first quarter. In our outlook given on January 31, we calculated the currency effects to be approximately negative SEK 150,000,000.
With the coronavirus impact on the global economy and the implications on exchange rates, we saw that increasing to almost negative SEK 600,000,000 in the quarter. The major effects are movements heavily impacting our operations in Europe And Asia Pacific. And then looking ahead, we calculate the second core to have a negative year over year impact from currency of approximately SEK500 million and the full year 2020 of around SEK 1,700,000,000. However, these calculations are built on current exchange rates as per May 4th and our forecasted future flows. And given the current situation, the size of those future flows are much more difficult to predict than normal.
Therefore, our calculation regarding current CFX includes a significant degree of uncertainty. And then looking at operating cash flow. Operating cash flow for the quarter was in line with loss year. EBITDA was on a lower level, but this was compensated by a lower outflow from working capital than last year. Our operating working capital developed better in the first quarter than last year, partly as we do our best to quickly adapt to this very different market situation.
Hence, we were not building inventory to the same extent as we usually do this time of the year. With our lower level of both sales and production, we also decreased our trade receivables as well as our accounts payable. The more favorable development of operating working capital also compensated for the timing of some large payments, which we mentioned in our last earnings call that was impacting cash flow negatively in the first quarter. We had, during many years, successfully worked with lowering our levels of working capital, but looking ahead under these conditions with rapid shape and high volatility in sales and production, this will temporarily put pressure on managing inventory levels paying our suppliers for deliveries received at a period of higher turnover as well as collecting receivables from our customers that are going through a period of low revenues. And to safeguard our liquidity in this turbulent time that significantly impact both earnings and cash flow.
We have further strengthened our liquidity buffer. In March April, we issued new debt of approximately SEK8.4 billion and we secured a new credit facility of SEK3 billion. We have very good relations with our financial institutions, which is an important asset in times like this. In the first quarter, we amortized long term borrowings 20, we have a very limited amount of long term borrowings that will mature of approximately SEK 300,000,000. In addition to the new credit facility, we also have 1 unused committed backup revolving credit facility of 1,000,000,000, Given our cash position at the end of March and then adding our credit facilities and new borrowings in April, we currently have accessible cash and unutilized credit lines of more than SEK 30,000,000,000.
And with that, I hand back to Jonas for the outlook.
In assessing the market outlook for 2020, it's important to evaluate the demand drivers for appliances. 60 plus percent of the demand is replacement driven in mature markets. And for most for most consumers, appliances are essential to daily life in their home. Short term store closures and restrictions on movement can of course drive demand below the natural replacement level. That should tend to recover as restrictions are gradually lifted.
Based on our experience, the more discretionary demand is mainly impacted by consumer confidence and interest over time, as these factors impact willingness and funding costs for refurbishments and new construction. To be significantly impacted in most fluid situation, and it's very difficult to assess the full impact on market demand for for the full year, with Q2 most likely being the weakest quarter. This, of course, depends on how long the sell crisis will be the pace and extent of easing of restrictive measures and resurgence in effect infections, the effectiveness of stimulus measures and how these factors will impact unemployment and consumer contracts over time. So looking specifically at Q2, In Europe, the negative demand trend continued into April, and our sales were down approximately 40% heavily impacted by the most locked down countries. We expect May June to be somewhat less negative as more markets and retailers open up.
However, yet to be seen to what extent shopping traffic and consumer spending recovers. Factories were soft opened end of April, and production is now aligned to demand. In North America, consumer demand in April was softer than in March, and our sales were down approximately 15%. We expect sell in to decline in Q2 with increased unemployment rates and lower consumer confidence impacting demand. We also anticipate production constraints related to social distancing and component supply and production in Mexico.
For Latin America, we expect the demand in Q2 to decline significantly, but at a somewhat lower pace than in April where our sales declined by approximately 15% as more retail outlets are opening, particularly in Brazil. And in addition to the coronavirus impact, political instability is also a factor behind the expected negative development. The negative currency developments are leading to significant price increases which in turn will have an unfavorable impact on demand. The coming development on the currency front will be important in all the main market. We have started to gradually reopen several factories in May in order to ensure sufficient supply.
Finally, a few words of our Q2 market view for the APAC and EMEA region. Also here, the market downturn extended into April, and our sales were down approximately 25%. The main impact is in Southeast Asia and Middle East Africa, while Australia have imposed fewer restrictions than kept stores open. We expect the APACMEA region as a whole to have negative demand in Q2 but less so than Europe and Latin America as the region has progressed further in the pandemic. Production is aligned to demand.
For the group as a whole, sales in April was down by approximately 30%. And although we foresee a gradual recovery going forward, we expect a significant loss for the group in the second quarter. So to sum it all up in the business outlook We expect unfavorable organic contribution in both Q2 and for the full year 2020, driven by lower demand from the coronavirus pandemic. We also expect production constraints in North America in Q2, as mentioned on the previous slide. These effects will be partially offset by currency driven price increases mainly impacting the second half of twenty twenty.
In 2020, we estimate the positive year over year impact from raw materials to more than offset the negative year over year impact on tariffs in the U. S as well as the indirect currency headwinds, primarily impacting Latin America. The raw material improvements are mainly due to more favorable pricing As I previously mentioned, we have implemented comprehensive actions to mitigate the impact on earnings and cash flow from this exceptional market situation. Our actions include significantly reduced discretionary spending, such as marketing, travel, consulting, but also furloughs on employees. Hence we expect a favorable impact on net cost efficiency for the full year.
However, in Q2, this will be offset by production inefficiencies due to sharply lower volumes and disturbances as well as by operating 2 facilities in Anderson. We're also reassessing our longer term cost structure based on the anticipated new demand environment. The impact from the coronavirus situation not only shows in the organic contribution, but also indirectly through a significant currency headwind of approximately SEK1.7 billion for full year 2020 based on the currency rates as per 4th May. This mainly impacts our operations in Latin America, but also Asia Pacific and Europe. And finally, we have reprioritized capital expenditures by deferring and scaling back some investments.
Hence, we expect CapEx investments for the full year We continue to execute on our strategy to improve mix through innovation and stronger brands throughout the group. Even though currently very painful, and North America Refrigeration Manufacturing consolidation with great new products is setting us up for long term competitiveness. U. S. Food preparation and other transformation initiatives are progressing, but with even more focus going forward.
We will follow through on streamlining of the company through the separation of professional, which will continue to yield structural efficiencies and increased focus. So overall, we're already on a clear path to become even more cost competitive. As a team, we remain agile and flexible while accelerating our value creation strategy. A clear focus and strong liquidity makes our strategy resilient. And with that, I would like to open up for questions.
Yes. Thank you Jonas, Andreas. We will now open up for questions. To allow, as many of you are, cannot questions. We would like you to limit to one question.
And then, of course, you are most welcome to dial back in again and ask additional questions if time allows. So with that, I hand over to our moderator, please. Thank
Our first question is from Andreas Willie from JP Morgan. Please go ahead. Your line is open.
Yeah, good morning. Hope everybody as well. My question is on FX and mix and how that's playing out. So in Q1, you've had a massive FX headwind, what share of that were you able to offset already with price? And how do you look at the timing that going forward in terms of the offset.
You did very well on mix in Q1. It do you expect mix to continue to be positive despite the impacts from price increases on the consumer and and the demand impact, going forward.
Right. So good questions. I think Of course, a lot of the currency effects hit Latin America, but then also of course, significant impact in Australia as well as Russia and Eastern Europe in general. So those were quite sudden. So we had say limited ability to fully offset that in the quarter.
So that hit pretty hard in Q1. Gradually here, we are able to raise prices to offset that. But of course, with, in most situations with retailers, we have a certain lead time before between announcing price increases and getting them through. So we'll see a relatively limited impact in Q2. And then much more significant as we go through into Q3 and the rest of the year.
So that's kind of the pattern more or less. If we go to mix, I think we're our strategy really is focused on innovating in relative in relevant ways for consumers. We're not talking about gadgets. We're talking about very useful features that that consumers that give value to consumers and that they're willing to pay for. And I mentioned, for example, the laundry example.
So even in a quite challenging environment, we do expect, to continue to be able to drive mix. Now the overall market though, I think, is, of course, most likely shifting more towards a replacement driven demand as a total mix as opposed to, let's say, new construction and major refurbishment. And typically, the market mix is a little bit weaker in replacement than it is in new projects, let's say. So the market most likely based on history tends to drive a little bit negative on mix. Whereas our product innovation and product and strategy tends to increase our So we'll see how that plays out.
But of course, we remain super focused on driving positive mix. Welcome. Thank you.
And our next question is from James Moore from Redburn. Please go ahead. Your line is open.
Yes, good morning, everyone. Hope you can hear me. Hi Jonas. My question is, hi, is on the positive structural change potential after COVID-nineteen working from home, digital, etcetera. Could you remind us of the online share of revenue for the 4 businesses, I don't know, say last year versus how that's changing in the crisis and whether you see any evidence of structural change and are you still margin agnostic between the 2?
Yes. So, actually, to be to be honest, the data is a little bit inconsistent or incomplete here because much of the online sales is actually done by our traditional retail partners and we don't always get a per view on the mix between store sales and online sales. Having said that, we expect the, let's say, mix before Corona to be around 20% on average in mature markets. Europe and North America. Asia outside of China is substantially less than that.
Latin America, we have some markets with very high penetration like Brazil in particular where it can be higher than 20%. Where some other markets in Latin America are much lower. So it varies a lot historically. What we have seen though is in I would say on average, what we can see in markets, excluding North America, essentially a doubling of online sales. In the quarter or in sorry, in the period following the lockdowns, let's say, not in the quarter as a whole.
But, and into now into Q2. In North America, we don't see as much of a shift because there most stores are remain open and then people are able to go and pick up goods and so on. So, penetration, we don't have exact numbers, but say 40%, I think I'm not too far off in most markets. But again, it's not enough to offset the sharp decline in physical retail trade.
That's very helpful. I'm just trying to understand the human interactions in the entire chain. I guess you've got that in a retail store, but you've also got it when people connect in the clients in the home. I mean, what share of appliances that you sell require a human being to deliver and connect in appliance?
Yes. So The main sort of driver of whether that is required or not is, of course, the bulk of the appliance per se, how hard is it to move around? And then to what extent, it needs to be connected to the water mains. So, and this has been a factor because in different countries, different regulations have applied. In some places, it's been installation by let's say external parties has not been allowed whereas in others, it has been.
I would say in general, it has been allowed. And I think that indeed, one of the limitations in terms of online sales growth is sort of the physical distribution capability of, in the online flow, if you will, right? Warehousing and trucks and things like that. And the other part is indeed the number of people that they have access to that can actually install appliances. Whereas the traditional retailer have a much more sort of, well built out infrastructure for that type of installation.
So that is one of the limiting factors in terms of really accelerating the pure online. And that's also why a lot of our traditional retailers have are picking up most of that online sales growth. But yes, that has and is causing some complexity as we go through here. And of course, also people in general are more reluctant to allow people in their homes in this situation, of course.
Thank you. And
our next
question is from Eric Paulson from Pareto Securities. Please go ahead. Your line is open.
Yes. Hi, it's Eric at Pareto. So Can you elaborate a bit how you saw the Chinese sourcing situation during Q1, which obviously only resulting in a limited impact, as you write, And how can you use this sort of useful information, for instance, now in the Mexico situation here in Q2?
Yes, I think we've been on crisis footing here since the end of January and really The setup that we have with what we call a global sourcing organization inside of our global operations has been extremely helpful to us. So So we've been able to really globally coordinate and drive emergency, logistics in terms of air freight making sure that we're able to access inventories in China and get them out in an efficient way and to distribute available components between the most, let's say, most needy factories around the group. And so during the more acute lockdown in China, we were able to kind of manage through that type of process. And then And then, of course, suppliers started to ramp up and we were able to then replenish our inventories. And the other factor is, of course, that in normal times, we have these 6 weeks of components, let's say, on the boat, And then so that kept things going.
And then to replenish that, we then did much more air freight. So matching those 2, we were able to more or less, manage through with some higher costs, but with limited production impact. The challenge with Mexico is that there we have I'd say a little bit of a different approach in Mexico compared to in the U. S. When it comes to which suppliers are allowed to be open and and also manufacturers, which causes a very complex situation right now.
It's gradually starting to get resolved, but it's very, very difficult there. We have much shorter supply lines. So when the when a supplier shuts down or when one of our batteries shuts down, the impact is much more immediate. There's no, let's say, on the boats type of buffer there. So So there, we usually only have a week or 2 weeks or maximum 3 weeks worth of, of supply on hand.
So the impact is much more difficult to manage
And our next
question is from Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, it's Johan here. I hope you're all well. On the cash situation, you obviously had a negative cash flow during the quarter, but I also noticed that, your pension debt has increased a lot. Could you give some background to that and how you expect that to unfold over the year? Thank you.
Yes, it's mainly related actually to slightly lower discount rates or slightly higher discount rates during the during the quarter. We actually use the rates by the end of February when we do our balances by the end of March. And we see now by the end of March that this has essentially reversed. So I would say if we would do it by the end of April, we would be pretty be flat compared to what we saw last year. And I and I think to speculate on what will happen with rates going forward during the year at this point is quite difficult.
I mean, and overall, we have a quite high funding level right? So there's very limited funding need also in the foreseeable future. So this is from a liquidity, let's say, consumption perspective, we don't really have an issue with our pension liability?
No, no, for sure not.
And our next question is from Costa Mango from DNB Markets. Please go ahead. Your line is open.
Good morning. Christopher from DB. I have a question on the cost savings, regard, related to the reengineering and streamlining programs. You showed quite detailed pictures in Q4 where you said that you can have, well, SEK 3,500,000,000 of cost savings by SEK 24,000,000 and roughly SEK 1,500,000,000 by 2021. Given what you say today with lowering CapEx to SEK 5,000,000,000 and also delaying the factory structure in North America, can you, is it possible to update us on the planned cost savings for this program?
We will after Q2, but right now, we don't have enough, honestly, we haven't worked through it enough to be able to give you that yet. So we're actually in the middle of that process of figuring out what 2021 is going to look like and so on. So we'll do that when we come to Q2.
But is it fair to assume that the curve would be pushed out a bit?
Yes, I mean, the one thing we did announce is that month delay of Springfield and that will of course be a corresponding delay of those savings.
Just a very short follow-up the Mexico issue from a report on more ESC related actually. There was some news related to the protest Mexico, and that after the protests, that 20 workers were fired, because of them protesting for lack of health protection, Can you comment on that and also how you work with, well, health protection in the emerging markets?
Yes, absolutely. I mean, let me start by saying that that report, I think, was heavily misrepresenting facts, but I won't go into that in detail. I think the key point here is that we have extremely high safety standards and we started to work with this very, very early in the process, partially because we had the experience from China with our factories there, and how to make sure that we have appropriate protection, social distancing, working our adjustments and so on to make sure that the workplaces is completely safe. And then we very quickly rolled that out on a global basis. With face masks and We have installed flexi glass dividers between workstations.
We have, in the places where we transport our workers, we double the cap capacity on our buses so we can have distancing between our employees. So we've done very, very extensive measures in all factors globally. We have no sort of differentiation between different factories. And on the flip side from that reporting, I would point to a situation in Italy where we were allowed to start up manufacturing 1 to 2 weeks before. The country as a whole was opened up because we were able to reach agreements with our unions and local authorities that our factories were very safe workplaces.
So and again, we have no different standards in Italy than we have in Mexico or the rest of the world. So I'm actually extremely proud by the work done by our organization to really ensure that the workplace is much safer place to be than your home.
Our next question is from Johan Inasham from Danske Bank. Please go ahead. Your line is open.
Yes, hello. I have a question on NetCO's efficiency. You had quite negative number in Q1 and you're talking about the flattish and neutral development in Q2, but you're still revising your full year ambition from unfavorable to positive. Can you walk us through a little bit what kind of actions you are taking and if this if there's a material number that we should consider for the full year and how quickly can be I think the second half hit the P and L? Thank you.
Yes. So there's a number of different things here, right? So one of them is that in, in Q1 and also in Q2, we will have this significant sort of cost inefficiency from from Anderson, from our manufacturing consolidation there. And then as that goes into the second half, that becomes a much smaller issue. Right?
So that's one reason for the swing between, first half and second half. Then the other factor, which is complicating things for us is that with the sharp production reductions that we've seen towards the Q1 and also now in Q2, it's impossible for us to completely variabilize our variable cost, if you don't want to understand what I try to say. So typically, we consider direct labor and other variable cost to be variable. But then, of course, the ability to variablize those costs is limited when you have such sharp production decreases. We have things like like furlough programs in Italy and Germany and some other markets, but they don't cover all of the costs.
And in many markets, we don't have any government programs supporting the cost of labor of workers. And of course, we can't adjust our workforce to reflect these sharp drops. So you get these significant cost inefficiencies, in manufacturing that shows up in net cost efficiency. It's really a volume thing, but we show within cost efficiency because we have a kind of a standard view on what the volume drop through is. Does that make sense?
Yes, very much. And on the positive development in the second half, I mean, historically, you have been quite, you have been able to show quite significant improvement on this line when you're have been forced to, I mean, a couple of years ago, you basically doubled your initial guidance for the year on net cost efficiency. Are you seeing a material impact in the second half from actions that you are taking?
Yes. So we're actually currently evaluating exactly how much that will be to be fair with you. But I think it will be a it will definitely be a material number that we're in terms of cost that we're taking out. We also expect our, again, our manufacturing cost efficiency to be much more aligned in the second half of the year. So yes, we expect it to be substantially more cost productive in the second than the first half.
But the exact sort of magnitude of that will depend on what the new reality looks like as we come out of this of this crisis, how much is demand going to be down? And of course, we do want to continue and drive the transformation projects that we're driving, not just on the manufacturing side, but also digital transformation and building our online capability and so on. So there's a fine balance there that we're working through. And of course, it will depend on what the market looks like as we come out here.
Great. Thank you.
Welcome.
And our next question is from Martin Wilkie from Citi. Please go ahead. Your line is open.
Yes, thank you. Good morning. It's Martin from Citi. Just coming back to the question on online. You mentioned that percentage going up, which I guess is not so much of a surprise, but just your comment that the retailer often takes responsibility for that.
Obviously, the retail sector is going through his own significant disruption, a lot of companies seeing, that they will not reopen the same number of stores. I know there are some retailers where you effectively take responsibility for the delivery to the customer. Is that a possible change here that more of that is going to be taken in house? At Electrolux and would there be a cost implication if you effectively have to own much more of that piece where you get the appliance to the customer directly? Thanks.
Yes, I mean, we'll see. I think there are, some opportunities for, for, direct sales to consumers from our own, let's say, websites and so on. I don't think that's going to be a major factor in the foreseeable future, but certainly, I mean, for us, the key point is we want to be where our consumers want us to be, right? That's the number one guiding principle here. And So we need to make sure that our products are offered through the channels where our consumers want to interact with us.
And to your point, though, it's not so it's not necessarily so that we would be more cost efficient in supplying or executing the full dry chain than our retail partners are. So I think that's not a it's not a purpose on its own to sell direct But, in some markets and in some situations, I think that will be, that is something that we're we're executing and looking into, but I don't think it's going to be a major factor.
And our next question is from Harry Rinta from Handelsbanken. Please go ahead. Your line is open.
Yes, thank you. My question is about the very helpful April trends that you provided. And I guess the first part of the question is this 40% drop in Europe. So should we see it as a pretty much because I think you have earlier, commented that replacement market is roughly 60% of the overall market. So should we read that 40% drop as everything, but the bare bones necessities went away in April.
So basically, the only thing that was left was replacement and maybe you saw a significant shift towards refrigeration, people being worried about the they are sort of the more important appliances?
Yes, there is, of course, some of that. But But I think actually, when we look we don't know, first of all, what short term, what drives the purchase. So it's that part of speculation. But what we do see is that there's a very, very significant difference country to country. So Italy, Spain, France, UK were virtually stopped, right?
I mean, we're talking about negative 70%, 80% in many cases. Whereas other markets, some Eastern European markets, the Nordics, Switzerland, also Germany were much less affected. So I think it has more to do honestly with the extent of the shutdowns and the restrictions imposed by governments than consumer behavior per se. That's at least our assessment, then it's very difficult to validate that.
Okay. That I guess pretty much answers the second part of my question, which this difference between North America and Europe 40% versus 15%. So your best estimate is that that's also related to the degree of openness in the region? Yes.
So for example, if you look at the Nordics, we were actually fine, right, more in line with with what we see in North America. So I think that is just looking at some of those data points, you would draw that conclusion.
All right. Thank you.
Our next question is from Andreas Willey from JPMorgan. Please go ahead. Your line is open.
Yes, I wanted to follow-up on the earlier discussion on, kind of your customers, the retailers, what are you doing there in terms of kind of receivable management and concerns around their well-being and structural shifts there within the distribution of your appliances? Are you seeing some concerns and tightening basically terms with them as you kind of fear that some of them will not make it to the other side?
Well, I mean, clearly, cash management and our receivable management is an solute focus for us right now and making sure that we get paid for what we sell. I mean, that's a basic requirement. And so far, that's been going very well, I have to say. There are some some cases, of course, where we have some retailers here and there that are extremely stressed already before the crisis in there. We have to be very careful and work very closely with them to manage through.
But so far it's been going, almost, I would say, surprisingly well knock knock sort it. But, yes, so far so good.
And maybe just to follow-up on the CapEx which you reduced to CHF 5,000,000,000 for this year, is that a reduction of the overall program or just a shift also terms of kind of your view on future demand and therefore, need of capacity relative to just delaying the spending?
Yes. So there's a number of different factors here. 1, quite frankly, is physical, meaning that our, our suppliers of manufacturing equipment aren't able to to produce and they were not able to travel to the factories to install the new equipment. So there's just a natural sort of involuntary or automatic delay in a lot of these programs. So that's the first thing.
Then the second thing I think is that most of the of the capital that we're spending is not the capacity increase driven. It's new products and productivity mainly. In fact, we're taking out capacity in North America. With the closure of St. Cloud And Memphis.
Having said that, as we look at the new demand environment, of course, we have to make sure that we appropriately size the investment that we time them in a way that we're able to execute with quality because we don't want to do it halfway, so to speak. It's These are major transformations that we're doing. So it's better in some cases to sequence them a little bit more and make sure that we do them the right way given these new sort of constraints in terms of demand, in terms of cash management and so on. Do you want to add something to that?
And potentially the payback on automation in times when we have lower volume demand that another point that we are reviewing, both in the larger programs but also in general.
And our last question for today is from James Moore from Redburn. Please go ahead. Your line is open.
Hi. Yes, it's James. Thanks for taking the follow ups. I've got 3, if I could. On your volume price mix, outlook for the second quarter and the full year.
Can I ask what sort of organic sales growth they're talking about behind that? Would it be correct to assume that the second quarter will be better than the minus 30% in April as we see some re openings in May June? And actually, I'm really more asking about the cadence of how you're seeing the 3rd and the 4th quarter behind that organic sales guidance. Maybe go one at a time. That's the first one.
Yes. So yes, our let's say that the guidance that we gave is that indeed that we do expect sort of gradually from year on sales to improve as you say, as more actually outlets are opening up and more countries are opening up. So yes, that's true. The longer term question though is the tricky one, meaning what is the as we try to outline it, what is the impact on consumer confidence, what is the ultimate level of unemployment how effective are stimulus programs. Those things will be really, really important for the demand picture.
Starting in Q3, but really, as you go into Q4, very, very difficult to predict, right? We expect sales to be below prior year or demand to be below prior year also in the fourth quarter. We don't expect that to fully recover But, to put the number on that, I think, is just something we don't dare to try.
Thank you. And can we switch to Anderson and Could you talk a bit more about what's going on with new Anderson and old Anderson? And how it compares to the timing of what you expected 3 months ago? And And the reason I ask is I saw that market growth was minus was plus 45% in freezers in A ham in March. And I wondered if that's an indication of your old plant ramping back up a bit quicker than you hoped or whether it's just pre COVID stockpiling?
So during the quarter, we did ramp up than the old let's say, old facility in Anderson. So by now, if we hadn't had the coronavirus situation, I would say that we would have been quite aligned in terms of supply out of the combined new facility and old facility in Anderson. Unfortunately, we're not. And the reason for that is that we have these very strict social distancing measures, which which reduces the number of employees that can operate on the line at a given point in time and with more spacing, which reduces the output And also whenever we have a case, which fortunately we don't have too many, but whenever we've had a case, we, of course, stock production, we disinfect, we shut down and do all those things. So the actual output is quite heavily impacted by that, from late Q1 and onwards here.
And then finally, and this is the really tricky question is then what we we touched upon, which is component supply out of Mexico, where it's a very different picture state to state inside of Mexico in terms of whether suppliers are allowed to open up, whether they're considered essential or not. And this is the situation that we're managing through and our suppliers are managing through on a daily basis, but it does have an impact. On availability and production. So unfortunately, we will remain constrained. It seems like here throughout the second quarter also, despite the fact that we then ramped up the old facility.
So in terms of shipments, we sold everything we had, right? So, and then there was a lot of demand on the refrigeration side. And unfortunately, we were not able to take advantage of that the way normally we would have. So that was a big negative for us in the quarter and also in April.
Thank you. And then lastly, Brazil, if I could, the Continental brand.
Sorry, James. I think we need to end there and, Jonas would just give us the concluding remarks.
Give you a call afterwards. All right. Okay. So thanks everybody for very good questions. And of course, it's it's a situation unlike any that any of us have experienced.
So to provide appropriate description of what's going on and guidance is is a high priority for us, but there are significant limitations to the ability we have to see forward here. And I think that's true for all of us But I think the key point here and I think where I want to leave this is that we really are well positioned to create value going forward. We are not revising our financial targets. We do see a clear path to coming back over 6% operating margin and with good return on investment and growth after this very difficult period. And the core pillars of our strategy to drive sustainable consumer experience innovation, and in combination, increase efficiency through digitalization, automation, modernization, Those are the same drivers that will guide us as we come out of this crisis as well.
Of course, we have to focus, we have to prioritize, we have to to sequence in a way that takes into account the new reality, the new demand environment, new behaviors. But I think fundamentally we're super well aligned to that direction. And the fact that we have strong liquidity, strong access to funding gives us the ability to continue and push through with the transformation that we're in the middle of to really put us on a value creating journey. And that's our promise to you going forward as well. With that, I thank you all and wish you all a good health and good luck and look forward to talking to you soon.
Thank you.