Good morning, and welcome to Electrolux 4th quarter 2019 result presentation. With me today, I have our CFO, Race Friedbury and our Head of Investor Relations, Sophie Arnius. Before starting, I'd like to mention that this session is recorded and will be available on our website as an on demand version. Starting with the business overview and some clarifying comment on our new reporting structure. As you know, the Electrolux Board has decided to propose that an extraordinary general meeting is held to resolve on the distribution of Electrolux Professional.
The intention is to list Electrolux Professionals on NASDAQ's.com on March 23, 2020. And as a consequence, the Professional Business Area is listed as a discontinued operation. And the comments in this presentation will refer to the Consumer business meaning continuing operations, exclusive of Electrolux Professional unless otherwise stated. Starting with the full year 2019 for our continuing operation, We are in an intense period of transformation and innovation, which was visible both positively with strong performance from new products in Europe Latin America and APAC media and negatively with high transition costs in North America. In 2019, we strengthened our platform for future growth by launching in important new product ranges, initiating additional efficiency measures and investing in modularized products in automated manufacturing.
I'm very pleased that our 2 major launches under our Sharpen Electrolux brand in Europe and Australia were both well received and contributed to earnings and that we in 2019 continue to have a favorable sales and earnings impact from product mix improvements, supported by higher marketing investments. We also saw strong performance in the food preservation business in Brazil, supported by the curitiba factory reengineering. Our North American business was significantly impacted by consolidation of production to the new plant in Anderson. Resulting in capacity constraints, impacting sales volumes negatively as well as high manufacturing transition costs for running several facilities in parallel. In addition, lower private label sales continued to impact North America negatively.
Increased prices fully offset the significant headwinds of approximately 1 point Swedish krona from raw material costs, freight tariffs and currency. To sum up, operating margin, excluding nonrecurring items declined to 3.8% from 4.8% in 2019, and sales growth was minus 1.3%. The dividend proposal of SEK 2,400,000,000, Swedish kroner corresponds to a dividend per share of an unchanged SEK 850, or Turning to the Q4 highlights. Sales decreased by 2.8% in the quarter mainly driven by lower volumes in North America, while price and mix continued to contribute positively, and we saw some market growth in most regions. Our earnings, came in with 3 of our 4 consumer business areas improving.
Partially driven by price mix improvements. Unfortunately, that was not evident by looking at the group's operating margin of 3% as our North American business area was significantly impacted by consolidation of production to the new plant in Anderson. This resulted in capacity constraints impacting volumes negatively as well as high manufacturing transition costs for running several facilities in parallel as mentioned. Market demand in North America was also weaker in the quarter. Finally, higher marketing investments as well as costs related to the preparation of separation of professional products had a negative impact.
Turning to our Innovation segment. We have a very significant growth in demand for air purifiers that we're addressing in our well-being segment, most notably with the new A-nine air purifier, which is a smart connected air purifier that we've launched in several markets in the second half of twenty nineteen. This is also an interesting base for continued business from filters throughout the product's lifetime. We've also talked a number of times about our new, modernized and innovative front load laundry category, which have significantly improved profitability in the laundry category across most of our regions. Turning to Europe.
We saw sales increase in the quarter, driven by both higher volumes and mix improvements. We also saw slight price increases in the quarter which contributed to the higher sales. We saw good organic contribution to earnings in the quarter, gaining value market share in both premium laundry and built in kitchen, partly driven by the new launch. The new electronization range continued to gain share and very high consumer ratings across Europe. Currency continued to impact earnings favorably.
And as mentioned, we saw increased marketing investments for ongoing product launches that impacted earnings negatively. Turning to the market development, we saw that a total European market increased by 1%, where at least in Europe was up 2% and Western Europe, 1%. It's worth noting that this was a tough comparison period as Eastern Europe had a strong growth of 7% in the fourth quarter of 2018. Turning to North America. We saw a large decline in net sales due to lower volumes.
As mentioned, we have the manufacturing transition in Anderson, We also saw weak market demand, partly driven by destocking at a key U. S. Customer, and we also saw the negative effect of continued lower sales of private label products. We had a slight positive price contribution though from earlier increases. Operating income declined significantly year over year, This was mainly a result of the lower volumes, but also the increased costs related to the manufacturing consolidation and some accounting adjustments from prior years that also impacted operating income.
Turning to the U. S. Appliance market. We saw market demand decline for core appliances down 3% year over year, whereas market demand for all major appliances, including microwave ovens and home comfort products, declined by 6%. This decline in market was partially related to the retailer destocking as well as Black Friday timing.
We estimate that sell out to consumers were somewhat better than sell in, in fourth quarter. Turning to Latin America. We saw solid growth in the Brazilian market, driven by strong Black Friday and Christmas sales. In Argentina, the market recovered slightly from low levels last year, while the decline in demand in Chile accelerated in the quarter due to the unstable political situation. Overall, sales grew in the quarter with higher volumes and improved mix in Brazil, mainly related to fruit food preservation.
Price increases continue to contribute to sales growth, mainly in Brazil and Argentina, while sales declined in Chile and Northern Latin America, such as Ecuador and Peru due to the market decline. EBIT increased as a result of higher volume and mix as well as improved price primarily in Brazil. However, continued headwind from raw material and accelerated currency headwind impacted results. Operating income includes a positive impact related to operational taxes in Brazil. Turning to APAC, MENA and Africa.
The market demand in Australia continued to decline, whereas demand in Southeast Asia grew, but at a slower pace than before. Middle East and Africa are set to be slightly up in the quarter. Our sales declined, mainly driven by lower volumes in Australia, even though we had improved mix across categories. Southeast Asia was impacted by price pressure, and we saw some weakness in the Middle East, both from a market perspective and also significantly from a product supply perspective. We had a slight EBIT improvement that was driven mainly by improved cost efficiency, primarily in procurement and in manufacturing, which was partly offset by investments in major product launches.
We had a slight favorable currency impact with a positive translation effect offsetting a negative transaction effect. Before leaving the word to Theresa, I would like to say a few words about our discontinued operation, professional products. So as you know, during the year, we announced the intention to split the group into 2 listed companies. Elecora for household appliances and Electrolux Professional for Professional Appliances. As I mentioned in the beginning of this presentation, the Electrolux Board has decided to propose that an extraordinary general meeting is held on the 21st February to resolve on the distribution of Electrolux Professional.
The intended listing at NASDAQ.com is scaled for the end of March. And in the meantime, we have a number of important steps to take. Today, an information brochure has been published on our website that contains relevant information on Electrolux Professional and the process around the EGM. On 21st February, as mentioned, the Electro the extraordinary general meeting will be held, and the prospectus containing additional information is planned to be published on March 10. On 11th March, Electrolux Professional intends to hold its 1st Investor Day.
And then on 23rd March, the intended listing will take place on NASDAQ, of Electrolux Professional. Therese will tell you more a little about the capital structure later in the presentation before that, let's have a look at the fourth quarter. So overall, the demand for professional food service and laundry equipment is estimated to have shown growth year over year, but at a slower pace than the previous quarters. Professional products, including food service chains, Professional customers, including food service chains, have tended to prolong decision periods for new investments during last fall. We saw lower food and beverage volumes in the U.
S. Due to less chain rollouts. Although we will have some new chain rollouts in the first half of twenty twenty, we continue to meet the tough comparison from a very large rollout in beverage prior year. This will put some pressure on the overall growth rate in the first half of twenty twenty And also in particular, APAC in North America has been impacted by the heavy workload in combination with changes such as moving to new offices and the work related to the separation. Our EBIT was impacted by lower volumes and higher initial product costs related to new product launches in the last quarter of the year as well as higher initial costs for setting up new IT infrastructure and increased ongoing costs due to operating as a standalone company.
The efficiency activities announced in the third quarter of 2019 are under execution, and we're expected to compensate the increased ongoing costs related to separation with full impact in the second half of twenty twenty. Turning to Terez and the financial overview.
Thank you, Jonas. Looking at the financial overview for our continuing operations, organically, sales declined by 2.8% in the quarter. This was driven by lower volumes mainly relating to North America. Total sales was flat as the organic decline was compensated of goods sold was flat year over year. Operating income declined due to higher marketing investments, higher manufacturing transition costs and accounting adjustments in North America and additional costs related to the professional spin offs.
Now looking more closely at the drivers behind the year over year change. Organic sales decline had a negative impact on earnings. This is primarily relating to low volumes in North America, as a result of a weak market and our manufacturing consolidation. It is partly offset by mix improvements in Latin America and Europe as well as somewhat higher prices primarily in North And Latin America. Raw material and tariff impact was fairly flat in the quarter.
While currency had a negative impact on EBIT, primarily on our operations in Latin America. Net cost efficiency was as earlier indicated negative and the main reasons are. Manufacturing transition costs related to Anderson and an accounting adjustment related to previous years in North America. We also have increased marketing spend to support the major product launches as previously mentioned. We also incurred cost in preparation of the professional spinoff where approximately SEK 100,000,000 was included in group common cost in the quarter.
This was somewhat higher than earlier indicated since the final decision to propose spin off to the shareholders was taken by the board in December. If we then take a deeper look at the price and mix development, The EBIT margin accretion for the group from pricemix was 0.7 percentage points in the quarter. Price increases year over year were at somewhat lower level than what we realized in the third quarter as a result of continuous additional price increases during the second half of twenty eighteen. In Europe, we had favorable mix driven by growth of our high margin products in our premium brands and in built in kitchen and premium laundry. Which resulted in a gain in value market share.
Prices has also increased slightly compared to last year based on the price increases in the beginning of 2019. In North America, we continued to benefit from higher prices, which is mainly an effect from price increases implemented beginning of 2019. The year over year increase is sequentially decreasing as we increase prices additionally already during Q4 2018. Mix was impacted negatively by the aging we had good EBIT contribution mainly from price increases coupled with mix improvements mainly related to food preservation products. In APAC and EMEA, price pressure in Southeast Asia impacted negatively, while mix in total was fairly flat.
And now looking at the full year for the Consumer business. Organically sales declined, mainly due to lower volumes in North America related to lower private label sales and consolidation of production. This was partly offset by product mix improvements from a launch intensive year with well received new product ranges under a Sharpen Electrolux brand. Price was fully offsetting significant headwinds from raw material, tariffs and currency of approximately SEK1.5 billion. Net cost efficiency was negative with the main reasons being very much the same as for the 4th quarter.
It's the manufacturing transition costs related to Anderson. It's increased marketing spend to support the major product launches And we also incurred cost in preparation for the Professional spinoff. Approximately SEK200 1,000,000 was included in group common cost for the full year. We had a nonrecurring item of SEK1.3 billion in 2019 primarily related to restructuring charges for reengineering and streamlining teams. Excluding nonrecurring items, our EBIT declined by 1 percentage point.
For the full year, this corresponds to an EBIT margin of 3.8%. And now looking at operating cash flow. Operating cash flow after investment for the whole group, including Electrolux Professional was SEK3.4 billion for the full year, where of the consumer business accounted for SEK2.3 billion and the remaining came from Electrolux Professional. For the group, cash flow came in essentially in line with last year, both in the fourth quarter and for the full year. But compared to the previous year, the cash flow from working capital increased and this was partly related to higher positive timing effects around year end payments.
While the higher capital expenditure had a negative impact. And then looking at Q4 specifically, Electrolux Professional continued to have a solid cash flow by weak earnings and higher investment level in preparation for the separation. And then looking at the dividend, the dividend proposed by the board is SEK8.5 per share, which is corresponding to payout ratio of 97%. And just to clarify, Electrolux's continuing operation will pay the full 2019 dividend for the total group during 2020. And then to end the financial overview by showing what the potential capital structure would look like for Electrolux and Electrolux Professional, respectively.
If the separation had taken place as per 31st December, 2019. The billion intergroup financing that has been mentioned in the information brochure between Electrolux Professional and Electrolux has, in this overview, been regarded as an external loan. And as a consequence, the financial net debt of Electrolux is reduced. In addition, Electrolux Professionals Equity has been deducted from Electrolux equity since it would no longer be part of the group's balance sheet. Electrolux Professional will proportionally have low lease liabilities and low net provisions for post employment benefits and thereby low fluctuations and exposure.
And to reiterate, Electrolux will pay the 2019 dividend for the total group. After the separation adjustments, both companies show a solid balance sheet for 2019 and a net debt to EBITDA ratio below one time. And with that, I hand back to Jonas for the outlook.
Starting with the market outlook, the overall demand trend across most markets in 2019 is expected to continue in 2020. With an improvement in the Americas. We anticipate market demand for appliances in North America to be relatively flat with positive and negative demand drivers essentially offsetting each other. In Latin America, we estimate market demand to be positive, fully driven by Brazil. In Argentina, we look for a more stable situation.
While in Chile, we expect an overall market reduction as a consequence of the country's recent events. Geman in Europe is expected to be slightly positive, primarily driven by Eastern Europe. And finally, the Asia Pacific, Middle East and Africa region is expected to be slightly date on our reengineering and streamlining programs. We are on track to generate approximately SEK 3,500,000,000 of annual cost savings with full effect from 2024. These savings are net of expected ramp up costs and transition costs during the years 2020 to 2024.
As we already communicated in mid December 2019, the slower ramp up of the new Anderson facility means that the bulk of the expected cost savings from this investment will be realized from 2021 instead of in 2020. Looking specifically at 2020, we expect the capacity constraints in Anderson to be gradually resolved during the first half, but we will have transition costs also impacting the third quarter. Since December, we have worked through our plans for ramping up the new facility and running the 2 Anderson facilities until the third quarter. Unfortunately, this means that the net of our programs in 2020 will be flat compared to actual 2019 for the group as a whole. And with a net cost increase of SEK 300,000,000 from North America.
Given these higher costs, together with lower volumes from continued capacity constraints, We expect business area in North America to report a loss also in Q1 2020. We've applied our learnings from Anderson in our Springfield program, to derisk of phase and by gradually facing our production in Memphis during 2021, we ensure that we can continue to meet market demand. However, the cost savings from the Springfield investment are pushed 1 year later and will start to contribute meaningfully in 2022 with full impact in 2023. I'm confident that both our Anderson and Springfield investments will substantially contribute to improved competitiveness in North America. Our reengineering activities in Latin America and in Europe as well as our streamlining measures are progressing very well.
Turning to the business outlook. Looking ahead at Q1 and the full year 2020, let's start with a full year view. We expect a favorable organic contribution for the full year 2020, primarily driven by strengthened product portfolio, following the launch in terms of 2019. And we anticipate this to show primarily in mix, but also in terms of volume. The U.
S. Manufacturing consolidation into our new Anderson facility will negatively impact sales due to capacity constraints and the longer period with legacy products. We expect this to be gradually resolved during the first half of twenty twenty. In 2020, we expect positive year over year impact from raw materials, to more than offset the negative year over year impacts from tariffs in the U. S.
As well as indirect currency headwind. The letter relates primarily to Latin America, where the currency volatility impacts also the raw material cost as market prices are denominated in dollars, but we often buy them in local currencies. The raw material improvements are mainly due to favorable pricing for steel, but also chemicals and plastics. The net cost efficiency for the full year will be unfavorable despite continuous product cost efficiencies. This is to a large extent result of increased investments in marketing and innovation.
Europe has been successful in driving mix the last years, And with the newly launched Electrolux range, we have a great platform to continue on that route and get good return on the money invested. We want to strengthen our position in emerging markets and capture that growth opportunity. Hence, we will therefore invest in the Asia Pacific, Middle East and Africa region to drive mix and volume by having attractive products tailored for this region. And the U. S.
Manufacturing consolidation will result in transition costs until the 3rd Rash mentioned. Currently, we see currency headwinds of SEK 150,000,000 for the full year 2020, based on currency rates as for of the 22nd January, this mainly impacts our operations in Latin America, but also to some extent Asia Pacific. Our investment projects to strengthen our competitiveness through automation and modernization continues in 2020, and we expect CapEx investment for the full year to be approximately SEK 7,000,000,000. Looking at specifically at the first quarter of 2020, And given the U. S.
Manufacturing consolidation, lower volumes and higher cost, this will impact earnings for the first quarter 2020, resulting in a loss for the business area in North America. So the unfavorable organic contribution we expect for Q1 is to a large extent related to our U. S. Manufacturing consolidation. The main impact is on volume, but also on mix and price.
In addition, we expect private label sales to continue to decline. The expected unfavorable net cost efficiency in Q1 is also partly related to the U. S. Manufacturing consolidation but also to higher marketing investments in primarily Europe. We will also face transition costs in the first half of twenty twenty relating to outsourcing of parts of production in Hungary that we communicated about in September 2019.
The cost benefits of this outsourcing will start to contribute in the second of the year. And finally, you're all aware of the situation relating to the coronavirus and the related extension of the Chinese New Year holiday. Our first priority has, of course, been to secure the health and safety of our employees in China and also travel in the region. On the business side, We're sourcing significant volumes on finished products and components from China to all our business areas, including vacuum cleaners, small domestic appliances and air conditioners. Given the limited visibility and what will happen after the Chinese New Year, it's difficult at this point to assess the impact of potential further supply disruptions But if manufacturing at Chinese suppliers is further affected for an extended period, this could potentially have a material financial impact.
And we are now implementing contingency plans to mitigate a potential extended period of supply disruptions. With that, I'd like to summarize our fourth quarter with the fact that we 3 out of our 4 business areas are improving earnings We saw a significant impact as previously indicated from the consolidation of our U. S. Fridge and freezer production but that's going to end up in a very efficient facility with fantastic new products once we're up and running. The board proposed that the, an Electro Extra General Meeting is held to resolve on the distribution of Electrolux Professional, which would result in 2 streamline and highly efficient companies.
And we continue with solid cash flow, resulting in the dividend proposal of KRW8.50. With that, I leave the word to Sobi for the Q And A.
Yes. Thank you Jonas. We will now open up for questions operator. Please go ahead.
4, it's return to speak, you can dial 2 to cancel. So once again, that's 1 to ask a question. Our first question comes from the line of Andre Kitchen of Credit Suisse. Please go ahead. Your line is open.
Good morning. Thanks so much for taking my questions. I just start with a broader one on pricing? The comments you made clearly point to sequential stabilization and the increases in 20 'nineteen were mainly driven by early in the year or back end of 'eighteen increases. So what do you expect for 2020 in terms of fuel price effect?
Right. So as I've talked about before, the pure pricing changes are to a large extent driven by fluctuations in raw materials and tariffs and so on. And as those headwinds start to abate, of course, we expect to see less pure price And I think we did see some additional positive pricing in parts of Latin America and in Europe in the fourth quarter. And we expect to have, the opportunities to selectively raise prices in those regions also into 2020. But as I mentioned in the call, our main contributor is improved mix, where we're launching new innovative products at higher price point And that engine, so to speak, if you want to call it that, is working very well in 2019 and we expect that to be a significant contributor also in 2020.
Got it. Thank you. And on the reengineering update, the slide and the chart that you gave with a sort of small negative, which looks like about SEK 1000000 to SEK 200,000,000 negative for 2020. Is that the number that compares to the plus 200, that you gave in the December release, on the update on North America?
Yes. So year over year, it actually means that flat. If you see that we show a negative, let's call it, 200 in 2019 and also in 2020. So it's I would say it's, yes, $200,000,000 worse than, than what we then indicated in December. And that's a consequence of the fact that we're now work through the new ramp up scenario for Anderson and the timing of the consolidation into one facility.
Very good point on year on year. And then just finally on professional, obviously, Q4 performance was substantially below what we expected. And, you gave, one explanation is that the separation costs were 100. I think we had 20 originally. Was there anything else in in Professional in Q4 that is worth highlighting that weighed on performance And then just on separation costs, is there still a meaningful impact in Q1 2020 given the process is still ongoing?
Right? So the SEK 100,000,000 I mentioned was actually or Andreas mentioned was actually in our group common costs. So that number specifically was not in professional. However, on top of that, we saw some quite significant costs in professional, related to setting up new IT systems and general sort of high workload related. We haven't quantified But that was a negative, substantial negative impact for professional in the quarter.
The other piece that I think is significant is the amount of workload just in general across the markets in professional related to the separate again, new IT set up, new accounting set up. In many cases, separating offices and moving into new facilities, that was a very high workload in the quarter. And I think that it has to be taken into account when you look at the blip, if you will, in Q4 and in the second happening in general. We have mentioned and we are mentioning that this is a quite resilient business and we continue to very strongly believe that see this as more of a more of a temporary effect from the separation and from the effect of very low chain rollouts in the quarter and some, let's say, hesitation in terms of the decision time frames on some big projects that we have. So we expect all of those effects to be relatively temporary.
And going into the first quarter of 2020, most of the separation work is is done. So we expect substantially less impact from now on from the separation work.
Got it. Thank you, Jonas.
Appreciate it.
Sure. Thank
you. Our next question comes from the line of James Small at Redburn. Please go ahead. Your line is open.
Good morning. Thanks for taking the questions. I wondered if I could start with those topics that are quite hard to forecast from the outside, specifically thinking mix and net cost efficiency, which I thank you for the favorable and unfavorable, but as an analyst, it's almost impossible to put a numeric forecast against that. So I wonder if you could help us to scale these issues. And I guess the question is, will the volume price and mix positive being materially bigger positive than the net cost efficiency negative, or will they be broadly a wash when we consider them in the round?
Right. So as you know, we don't provide exact guidance on those parameters nor on the EBIT outlook. So So I won't be able to answer that precisely. But I think the fundamental reason, and we've talked about this why we don't provide a quantified outlook for neither for the organic contribution nor the net cost divisions is that they are somewhat communicating vessels where where depending on how, let's say, much traction we get in the market from our marketing investments, we would then tweak them up and down to drive mix and volume. So I think that's about as much guidance as we can give.
We expect substantial positive contribution from mix in particular in the coming year with the great product launches that we've that we've already done and that are in progress. But that is going to drive significant investment in, in marketing as well, as well as continuing increases in innovation spend, to further accelerate certain growth trajectory. So I think if you look at Europe and Latin America, You see that in particular, you see that we have quite favorable organic growth trends and we want to continue that and fuel that with additional, marketing and product investments. And in APAC and EMEA, we've had a good growth trajectory that slowed down a little bit in 2019 and we're going to invest behind accelerating that also into 2020. And we see plenty of opportunities there.
In North America, it's a little bit of a different picture. Of course, we're not necessarily increasing our investments in marketing or structure, but there we have the extra costs from the manufacturing transition program. Both Anderson, but also of course the fact that we are significantly ramping up our efforts in the springfield transformation program. So that will be a meaningful negative effect from the combination of those, despite the fact that we will have continued good productivity in product cost.
Thanks. And I wouldn't normally ask or expect an answer on this, but given the challenges that you're facing in North America, at the moment, given that there are a lot of internal issues that your owners can't. See and you can as a manager. Could you give your owners an indication as to where you see your internal budget for the North American margin landing for the full year 2020 and how the first half and the second half are really going to look. They're obviously going to look very different, but could you try to help people understand what you think the full year could look like?
Yes. I mean, as I've said before, we don't give that type of specific guidance. But what I can tell you is that, the first quarter will be a loss and then we will gradually improve from that perspective into Q2 and Q3 and then of course, a substantially better performance in Q4. Of course, where 2019 was negatively impacted by the by the ramp up and hopefully Q4, we should be in a more clean, clean state. So there will be a big swing between 1st and second half, of course.
Thanks a lot. Thank you. And lastly, thank you very much for your phasing of the new savings and the timing of the 1,000,000,000. That's very helpful. I just wondered if you could help us think about it looks like 1,300,000,000 in in 21,021,800,000,000 in 22.
Those are the 2 big years. How much of that's really North America versus the other actions that you've got in Brazil and Hungary, etcetera?
I would say a substantial majority of that those savings are in North America for those 2 years. And then we see the other program sort of kicking in towards the last couple of years.
Is there any springfield in 20 21 or is it just a small amount?
Well, there are some savings, but there are also some additional costs. So it's essentially a wash in 2021.
Okay. So 'twenty one is really the other stuff around the rest of the world and, and the coal facility.
Thank you. Thanks very much.
Our next question comes from the line of Johan Eliason of Kepler Cherro. Please go ahead. Your line is open.
Yes, good morning. On Professional, I have a question Obviously, we've seen now quite volatile organic growth here on the back of the rollout. You seem to have where there were some change. How is the pipeline looking for that type of projects in the Professional business?
It's looking relatively good. I would say the Q4 of 2018 and the first half of twenty nineteen were very, very strong with a big rollout. Actually, it has been mentioned now that that is with what was with Subway, a big beverage roll up with them. So that is hard to come, but we have a number of really interesting rollout in other smaller customers going into the first half of twenty twenty. So I'm pretty confident in our ability to to generate the steady stream of a chain roll out, but it is by nature quite lumpy given the scale of this roll out.
Good. And then you now announced the financial target setting for the Professional Business Organic Growth about 4 margin above 15%, which is all fine. But you don't have return target like you have for Electrolux group, like return on net assets, etcetera. How is the thinking about that for professional? What's the reason why you don't have specific return target?
Yes, I think 1st of all, the return on capital employed is extremely high in professional. But I think the issue with the return target there is that M and A significantly impacts the asset space. So you see a lot of volatility in the return, including the intangible assets from M And A. So that would say is the main reason why they've chosen to focus on the working capital metric as well as then driving profitable growth, to give a little bit sort of less volatility to numbers driven by, potential M and A.
Excellent. And looking at the net debt to EBITDA target, it looks like they have a firepower of around SEK2 billion to be at the high end of the net debt target easily. Do you have a pipeline of potential M and D, M and A deals to match that as well?
Yes. So first of all, I think it's important to note that they have a significant free cash flow generation as well, right? So So we were over CHF 1,000,000,000 in 2019 and we've been over CHF 1,000,000,000 for a number of years. So, and the fact that that, the sort of capital expenditures per se are not so high in professional, that means that a lot of that cash can be deployed to M and A also going forward. So beyond the strong balance sheet, they also generate a lot of free cash flow for M and A.
Then then on the pipeline, there is a, I would say, a quite significant long list of, of M And A opportunities. The challenge, of course, here is that pretty much all of those companies are privately owned. And, and as you know, M and A in that situation requires, of course, both sellers and buyers agree that it's a good idea. So it's very difficult to predict how quickly that will happen, but there is a good long list and there's plenty of 5 power.
Excellent. Thank you very much. Thank you.
Thank you. Our next question comes from the line of Andreas Citi at JPMorgan. Please go ahead. Your line is open.
Yeah. Good morning, everybody. Thanks for the time. I got a bigger picture question and then, follow-up on the professional margin. In terms of the 6% margin target, that you maintain also ex professional for the consumer business going forward.
If I look at the last decade or more, you kind of occasionally come close to it, but it's more like a 4% average. And it seems to always take a lot of effort to get towards the 6 sentiment savings are coming through when the markets are favorable. And then we drop away again. And then the next efforts comes towards get there. What is really the change that you see in the future versus the past that should allow you to basically consistently deliver around that 6% rather than occasionally, reach it.
And the follow-up question on, the professional business, with the effect of 15% EBITA margin target, So it was a bit difficult for us to assess the starting point given that 2019 had all the additional costs. Some of them will stay if new IT systems and so on, but maybe you could give us a normalized base, a rough number for where 2019 is for professional on the new structure in terms of having its own corporate cost, its own IT systems and so on that we see what the improvement potential is there. Thank you.
Right. So in terms of the margin target of 6%, I would take a slightly different perspective on that, which I think is a little bit more illustrative And that is our BA setup, right? So if you look at Europe, we've now had a since 2013, we've been on a steady improvement pace and are now sort of solidly over 7% operating margin. So I think and that is fundamentally driven by an improved quality of the product and the offering and the business in Europe. Similarly, if you look at them, Latin America, we have a steady improvement in the margins since 2016.
Where despite the fact that we have extremely volatile conditions in places like Argentina, Chile and also Brazil, We've continuously improved the profitability. We're not where we want to be yet, but we're continuously moving in the right direction. And I'm very high confident that we get to a place where Latin America is contributive to our 6% margin target. If you look at APAC and EMEA, Yes, that's a little bit a little bit volatile, as a result of, currency volatility and also just parts of the region being quite volatile. But solidly profitable over time.
We haven't seen a significant impacts on the margins there. They're contributing well. There's a big opportunity for profitable growth for us going forward. Then the challenge really comes down to, to North America, where where as you've said, we've seen a challenging development in particularly in the last 2 years. And that in turn is a consequence of, of a couple of major external events such as the trade tariffs such as the significant decline in our private label business.
And now most recently, the shorter term impact of our programs. I think though what the core strategy for North America is is to significantly strengthen our core product offering under the Frigidaire brand. Strong we have a strong position in the refrigeration. We're refreshing that with fantastic new products and very efficient manufacturing. We're doing the same with cooking.
It will take some time, but we're significantly strengthening the core profitability and core competitiveness of our of our North America offering. So this is the thing that has pulled down the margin in the last 2 years. And I think that's also where we see a lot of improvement opportunities going forward to them, to then reach our 6% margin target. So if you take that more geographic and, and let's say, time progression there, it's our strong conviction that we are on the right track to achieve that 6% margin target and profitable growth. Okay.
So then professional margin. So we also we show in the brochure that the average margin for the last A margin for the last couple of years is 13.1%. I think that's a good illustration of that profitability, core profitability of that business the way it's currently configured. We mentioned also earlier that the additional cost of running, professional as a standalone entity will be fully set by the efficiency program that we initiated in September. So I think you can look at this 13.1% assay as a clean number from, let's say, from also from a stand alone perspective.
We had a tough second half of twenty nineteen, as I mentioned, it was, of course, some delays in decision making from some of our key customers. But also I would say very significantly a function of the very, very high workload to separate the two businesses. And I think I think that will bounce back relatively quickly as we go forward. Then the further improvements towards the 15% That's, of course, the objective that the professional team have set for themselves. And I think they have high confidence that particularly the new product launches that they've, introduced in 2019 with a lot of extra costs, by the way, but fantastic new, well received products as well as additional focus on aftermarket growth and some other things that are mentioned in the in the brochure is what gives them the confidence to set the 15% EBITA margin targets.
I hope I answered all your Thank you very much. Thank
you. Our next question comes from the line of Gustav Sandstrom of RCB. Please go ahead. Your line is open.
Thank you, Taylor. And just one question if I may, regarding the destocking of where that large customer you mentioned going into this quarter. You please confirm whether or not this is not completed and perhaps also if you
can set
the probability
You're coming through very muffled. I'm not sure I'm capturing fully the question. Can you see if you can Sorry.
Yes.
Do you hear me better?
That's better. Yes. Thank you.
Yes. I blame my AirPods. No, regarding the destocking on the large customer, that you mentioned going into this quarter, whether or not that is fully completed? And also if you can assess the probability that we see similar initiatives this year from the same customer or other large customers?
Yes, I think it's largely completed. I think the the opportunity for additional inventory reduction, I don't think is very large, but of course, having said that, there is a larger trend, as more and more sales go online, that, the need to have a high availability of inventory for us as manufacturers is quite high. And we've seen I think we've made that adjustment over the last couple of years to a slightly higher run rate of inventories for us in North America. I think that's by and large done, but that has been, has been an impact.
Okay. So is it your internal assessment that we're going to see, sort of reverse a little bit trend with a bigger sell out and sell in in 2020 in the U. S?
Yes, I think so. Yeah. Thanks.
Our next question comes from the line of Martin O'Keefe of Citi. Please go ahead. Your line is open.
It's actually Martin Wilkie at Citi. Thanks for taking the question. The first one is just on the the assumptions behind your guidance on raw materials and tariffs, I think from memory, there was a sort of an annualized effect from the List 3 effects in tariffs, but just if you could tell us just to confirm that, but also what your assumptions are in what's embedded inside that guidance? And then the second question was just CapEx. I think a couple of years ago, there was an indication that CapEx should peak around 2019.
And just now that you've given the guidance for 2020, how we should think about the sort of pattern of CapEx over the next few years? Is it 2020 now the peak in CapEx and it should stay beyond that? Or just some sort of sense of how we should think of that? Thank you.
Right. So no, I, yes, on the CapEx side, I think we've said that it will remain at this sort of elevated levels for the next even couple of years, right? So 2020 2021 will be at the sort of elevated level. As part of this, the eight 1,000,000,000 additional investment program that we announced and which will then generate the $3,500,000,000 of extra savings. So that will go through 21 by and large.
And then sorry, I forgot your first question.
It was around tariffs.
No, on the tariffs, yes, sorry. The, we don't expect any changes other than the ones that have already been announced. However, and I think the I think you're aware that, the biggest carryover effect that we have is for, the air care category. Where we had tariffs implemented in, I think it was May of last year, which, didn't impact so much that season for Air Care because most of the purchases are done before May. And then so we'll have the full effect on the Air Care product tariffs this year.
That's the big year over year negative impact. And then of course, that's more than offset by by lower steel and chemical prices in particular?
Are the steel prices? Are those now locked in, or is there still some We'll be all locked in here.
Thank you. Our next question comes from the line of Eric Olson at Pareto. Please go ahead. Your line is open.
Yes. Hello there. It's Eric at Pareto. Given what we're seeing in China right now in the supply chain situation and the potential impact of could you please provide us with an update how your situation looks like that in terms of sourcing in China?
Right. So some finished goods categories are, let's say, fully sourced in China for the industry as a whole. So take categories like air condition portable air conditioners and air treatment units, microwave ovens, small domestic appliance, vacuum cleaners. Those categories are to a very large extent manufactured in China. And And of course, the supply disruptions already by the exemption of the Chinese New Year by for 1 week is is noticeable, although I think that can be that can of course be recovered.
The concern that we have is if we see a long period of of factory closures and supply chain closures in China. We're also sourcing a fair amount of, components in China. There, of course, we typically have, more source more of a dual source approach, but of course also here it depends on the length and magnitude of supply disruptions for components, what the impact is. But But, we don't really have any more information than you do in terms of what the impact of the spread of the virus is and so on, but we we felt it was important, of course, to, to give an update on the situation and to clarify the fact that we are sourcing significant volumes both of components and finished goods in China.
And in terms of geography there, I guess it's more towards the coastal regions or is it quite well spread? And also is it possible to quantify this in any way? How much you're sourcing, etcetera?
It is so the Hebei province, which is the one that's that's sort of the most impacted, we don't have significant supply from we have some suppliers, but we don't have any major impacts from that province. But beyond that, we're basically the supply base is basically spread across the eastern seaboard of China, south to north. With a relatively even distribution. I guess a focus around Guangzhou and Shanghai primarily. In terms of quantification, we don't give sort of detailed data on that from 4 specific countries, but for competitive reasons.
But again, as I mentioned for some of those product categories, it's very large. And then for our components, it varies a bit between category, but pretty much all our regions and all our product categories have component supply from from China as well.
Thank you. Our next question comes from the line of Olaf Sldeholm of ABG Sundal Collier. Please go ahead. Your line is open.
Hi, it's Rodolf with ABT. Just one on the air care specifically. You mentioned in your broader comments that sort of lower raw material cost means that it's difficult to raise pricing. But in this specific category, I guess the tariffs are so big that that you will have to raise prices and with the cost base being similar for everyone else, are you being able to offer set the tariffs prices in air care?
Yes, I mean, we already raised prices back in 2019 for that effect. So there's no further action, let's say, to be taken there.
Okay. So within the sort of price mix overall comment, there is a positive pricing there from
On a year on year basis for that category. Correct.
Okay, great. And one will obviously be very weak with North America being tough. But what's your confidence level now that Q1 will actually be sort of the trough or that we'll see a gradual improvement in Q2. Are there buffers built into this current view? Or
Yes. I mean, the conference level on that is high, and that's mainly because we are as I think we talked about before, we're ramping back up our legacy facility temporarily to make sure that we have enough products applied to the market. That will not be fully there in Q1. So that's why we have to see a more severe impact in Q1 than in to which and running at a decent pace for, for our legacy products as we then continue to ramp up the the new facility. We will have significant additional cost also in Q2, and we won't have availability like we want to, and that we're selling products that are phase out will have a negative impact as well, but But from a supply perspective, we have substantially more units in the market in Q2 and on.
Perfect. And lastly, do you see now after a bit of supply disruption in the U S? Do you see that you've do you have customer effects as well or customers, lowering listings and things that for you or do they understand the situation?
No, I think they understand the situation. And of course, this is not, not that unusual. Of course, our priority here is to make sure we supply our customers and our end consumers to the best of our ability and that's why we are ramping up the legacy facility here. But some effects are unavoidable and I think the main effect and we talked about this before as well is that in quite a number of cases, we don't just lose the sale of the of the fridge, we also lose sales of adjacent products that typically would have been bought from the same brands, so to speak. So we're we're working through those issues and as our supply of fridges goes up, then we will be able to get that attachment rate back up again.
So we're looking forward to that.
Thank you. And we'll now hand back to the speakers for the closing comments.
Okay. Thank you very much for those questions. And of course, It's been a mixed picture in the fourth quarter, but I think it's important to mention that 3 out of our 4 business areas are showing, improved profitability especially Europe is on a very positive trend that Latin America is continuing on. It's a good trend development. And unfortunately, we have impacts of the consolidation of our operations in Amazon, but that is temporary.
We're working through the issues. The new products are fantastic. Very well appreciated. So we expect to work through that as we go through the year. I think also very significantly, the separation of Electrolux and Electrolux Professional will give clarity and focus and strength to the 2 businesses.
We're really excited about the future for both part of the business and we're showing that confidence in, the continuation of a strong dividend yield of 850, proposed by the board for 2020. With that, I thank you very much and look forward to seeing you all soon again. Thank you.