Good morning. Welcome to the second quarter 2019 earnings discussion. With me today, I have Therese Friberg, our CFO, and Sophie Arnius, our Head of Investor Relations. Let's go into the business overview and start with the second quarter highlights. In the quarter, performance was solid with good price momentum and continued strong focus on innovation. Mix continued to be positive, driven by good traction of our innovative premium products in the market. Volumes declined mainly due to the private label business in North America. This resulted in a decline in our organic growth in this quarter. Earnings were fairly in line with last year, despite the headwinds from raw material, trade tariffs, currency, as well as the decline in volumes. A strong price momentum offset these headwinds. In the quarter, we increased investments in marketing for new product launches and innovation focus boost our earnings to improve mix.
We've started to incur some costs for the preparation of the Professional spin-off. Overall, I'm quite pleased with the quarter and particularly the price mix execution. Turning to the next page, as I mentioned, our innovations are really helping our earnings performance and driving positive mix. We choose to highlight two examples here. Really what it is about is the power of consumer experience innovation to drive sales of our more premium and more highly featured products. We focused on taste, care, and well-being innovation for the last several years and are now starting to see very tangible results in terms of mix contribution. Here we're highlighting two examples. The most recent example of this is a new product that we're launching in North America, which is a front-control freestanding range with air fry technology integrated.
Air fry is a more healthy way to fry French fries or chicken wings with less oil. A significant taste benefit with health benefits. That's something that consumers really look for. We are the first on the market to integrate this in an affordable product. That's just an example of how we look at taste experience as an innovation driver to provide attractive products. An example that's been around a little bit longer is our care innovation in Europe under the AEG brand, where the strong consumer insight that we have is that consumers are really concerned about how washing machines and tumble dryers might impact how their clothes look and how long they last. Our innovations in terms of care really help consumers get more confidence in what clothes they wash and dry.
This has resulted in over 30% EBIT improvement of our AEG premium laundry products. Really tangible results from deep consumer insights and solving real problems for consumers. This, I think, is very relevant as we're now doing a similar launch in Europe under the Electrolux brand. We started with the laundry products last year and are now coming with a full range of built-in kitchen products driven by taste innovation. Strong earnings impact from consumer insight-driven innovation. Returning to Europe, we had solid performance with positive organic growth, albeit at a slower pace than in the first quarter, where we had some pre-buys in the U.K., as well as the Easter effect on a year-over-year basis, shifting volumes a little bit between the first and the second quarter. We had positive price and continued strong product and brand mix development.
Earnings were solid. We saw strong performance in our focus areas of built-in kitchen and laundry, as I just described. We continue to invest in marketing, mainly for our large built-in kitchen range launch under the Electrolux brand, which is currently reaching the market and ramping up in the third quarter. This new range has been very well-received by retailers, and we have high hopes for the Electrolux brand in Europe. Overall, I am very happy with the performance in our European business. Turning to the market, the overall market remains supportive with a 1% year-over-year growth. This is entirely driven by Eastern Europe growing 4%, while Western Europe was relatively flat in the quarter. Turning to our North American business, we saw continued good price momentum and improved mix.
The mix was partly driven by our new global multi-door refrigeration range, as well as the front control freestanding cookers that I highlighted earlier. They are getting top consumer reviews. This partly offset the volume decline that we saw on an overall declining market where the core appliance market was stable, while air conditioners and microwaves declined substantially in the market. The negative volumes in the quarter were mainly caused by lower private label sales. Also an ERP system go live impacted volumes negatively. EBIT was fairly in line with the second quarter 2018, excluding the positive earn out release that we had last year of about SEK 100 million. The higher prices and mix improvements offset the higher cost from raw materials and trade tariffs, not fully than the decline in volumes.
Looking at the appliance market, industry shipments for core appliances in the U.S. was stable in the quarter compared to a very weak quarter last year. However, demand for microwave ovens and air conditioners was down 20%, and hence the total major appliance market was down by 8% in the quarter. We estimate sell-out to consumers to have been fairly in line with the sell-in of core appliances in particular. Turning to Latin America, we saw good execution in a continued volatile environment. Our largest market, Brazil, continued to show solid recovery, and demand is estimated to be quite strong in the quarter. The Argentinian market, however, continued to decline significantly, while Chile was only slightly down. We saw strong organic growth and margin increase driven by continued positive prices and mix improvements. Also on a year-over-year basis, driven by last year's truck driver strike that impacted results last year.
Mix was primarily driven by Brazil, where, for example, sales of high-capacity washers and multi-door refrigerators contributed positively. The cost-based price increases that we previously implemented fully offset currency and raw material headwinds. Turning to Asia-Pacific, Middle East, and Africa. We saw demand growth continue in Southeast Asia and Middle East, even though the Southeast Asian region was somewhat softer than previously. Demand in Australia remained weak due to the slower housing market and also the weaker AUD. Sales volumes in Australia declined as a result of the slower Australian market and the price increases we implemented to mitigate increased cost related to the currency headwinds. We did see positive mix also here, particularly the multi-door refrigeration platform that I mentioned previously, as well as the launch of what we call the E100 built-in range under the Electrolux brand, particularly in Australia, but throughout Asia.
We saw positive mix from our newly launched cordless vacuum cleaners, particularly the Pure F9. Earnings declined, however, versus last year, mainly due to the continued impact from strong currency headwinds, but also lower volumes in Australia had a negative impact. We continue to invest at elevated levels in marketing for the major product launches, such as the new built-in kitchen range in Australia, which of course impacted our cost structure negatively. Turning to Professional. We had solid performance with good organic growth on a slightly softer overall market. We saw strong growth in the beverage area, supported by a rollout for a chain customer in North America that we finalized in the second quarter. We continue to see slightly positive price realization, leading to a very strong margin at 16%.
This margin was heavily supported by the good contribution from the beverage rollout that finalized in the quarter, and we also had a positive earnings contribution from a pension plan settlement in Sweden related to the preparation for the Professional spinoff. We had higher investment in marketing and innovation as well as production ramp-up cost, especially for the new SkyLine cooking product and the new Line 6000 laundry product. These investments will continue during the remainder of the year to support these global launches. On a separate note, the board reconfirmed our plans to propose the spinoff of Professional Products, and we currently aim for a listing in the first quarter of 2020 or at the latest in the second quarter. Turning to the financial overview, Therese.
Thank you, Jonas. In the quarter, we saw an organic decline of 2.6%. This was a result of higher prices combined with mix improvements across the business areas, but this was not able to offset the volume decline, which was primarily driven by lower private label sales in North America. The total sales was up 1.1%, driven by positive translation currency impact of 3.8%. Gross profit improved on the basis of good contribution from price and mix. Operating income was fairly in line with last year, where the comparison period included a non-recurring item of 818 million SEK. Price increases was fully offsetting headwinds from higher raw materials, tariffs, and currency, as well as the lower volumes in the quarter. Mix contributed positively, while higher marketing and R&D investments and costs related to the planned separation of Professional impacted earnings negatively.
All- in- all, operating margin was 5.1% compared to 5.2% last year. Earnings per share was 3.94 SEK in the quarter. If we then take a look at the EBIT bridge. We saw continued positive organic contribution, which was primarily driven by higher prices that was especially good in North and Latin America, but also in Europe. We also see increased earnings through improved mix by selling more high-margin products. This was, from an EBIT perspective, more than offsetting the shortfall in the sales volumes, primarily relating to the decline in North America. We continue to have high headwinds from raw materials and tariffs, although on a lower level than what we saw in the first quarter. Currency had a slight negative impact on EBIT despite a positive effect from translation currency. Net cost efficiency, as earlier indicated, was negative in the quarter.
We have continued good traction from our underlying cost efficiencies, but this was offset by increased investments in innovation and marketing. In this quarter, we also started to incur costs in preparation of the Professional spinoff. The release of the acquisition earn out that we had last year was impacting the net cost efficiency negatively year over year. Let's take a deeper look into the organic contribution. EBIT margin accretion for the group from price and mix was very strong at 3.5% in the quarter. In Europe, we had favorable mix fueled by growth in high-margin products and premium brands, driven by the strong performance in our focus areas as built-in kitchen and premium laundry. Prices also improved versus last year. In North America, we have good price traction with prices sequentially improving.
This was a carryover effect from last year's price increases that are carried out through this year. It's also partly related to lower promotional spend, as last year's 100-year celebration campaign of the Frigidaire was not repeated this year. In Latin America, we had good EBIT contribution from previously implemented price increases, and this was coupled with mix improvements. In APAC and MEA, we had a positive effect from price actions previously taken in Australia, while price for the total business area was flat. Mix remained positive, driven by growth in refrigeration and kitchen products, as well as in cordless vacuum cleaners. For Professional Products, we continue to benefit from the positive price in the quarter. If we look at our cash flow, after investments but before acquisitions, it was SEK 384 million in the quarter, which was below the level of last year.
This was mainly due to negative contribution from working capital due to timing effects, which was predominantly related to an ERP system go live in North America, which impacted by approximately SEK 1 billion. This effect is temporary, and we expect it to be recovered in the third quarter. As we have announced, we also have a higher capital expenditure level due to the ongoing investment projects in re-engineering. This we also saw continuing in the second quarter. The average operating working capital in relation to rolling 12-month sales showed an increase to 4.6% versus last year's 4.0%. As highlighted, the working capital efficiency we have achieved over the last 10 years are expected to flatten out and remain at this healthy level.
First of two installments for 2018 dividend payment of SEK 8.5 per share was distributed to shareholders, and the cash flow was impacted by SEK 1.2 billion in the quarter. With that, I want to hand back to Jonas for the outlook and summary.
Thank you, Therese. Turning to the market outlook, we reconfirm our market view for the full year 2019, with the exception of Southeast Asia. Current industry trend indicators somewhat softer market demand for Southeast Asia, and hence we expect the region to be slightly positive compared to our previous positive outlook. We continue to expect market demand for appliances in Europe to be slightly positive in 2019, driven by Eastern Europe. In North America, trade tariffs have triggered price increases, resulting in uncertainty and somewhat weaker demand. We've also seen consumer sentiment moderate overall in a fundamentally solid demand environment. As a result, we continue to expect industry volumes to be slightly negative. In Australia, a slower property market and a weaker currency are impacting demand, and we continue to expect market volumes to be slightly negative.
In the LATAM market, the recovery in Brazil continues, and the region as a whole is expected to be slightly positive. Turning to the business outlook, we expect a favorable organic contribution for both the full year 2019 and Q3, driven mainly by the higher prices, especially in North America and in Latin America. Mix has contributed positively in the first half of the year, and we expect this to continue for the remainder of the year. In terms of volume, we expect private label sales in North America to continue to decline, as was the case in the first half of the year, while the impact from the ERP system go live that we had in Q2 should not impact volumes materially going forward.
We estimate the negative year-over-year impact from raw materials and trade tariffs to be approximately SEK 1.2 billion-SEK 1.4 billion in the full year, compared to the previous estimate of approximately SEK 1.4 billion-SEK 1.6 billion. The improvement is related to that we've locked in more steel and chemical volumes at favorable rates and now have improved visibility for the year. The outlook is based on the current tariff levels, so that means that Section 301 List 3 is included at the current 25% rate. However, for clarity, these higher 25% tariffs on List 3 did not have a significant impact on the 2019 outlook, since most of the seasonal purchases of air conditioner products took place before the tariff rate hike.
In the first half of 2019, price has fully offset this headwind, and we expect that to be the case also for the third quarter and 2019 as a whole. In terms of net cost efficiency, we keep our view that the full-year net cost efficiency will be negative. If we zoom in to Q3, we also expect net cost efficiency to be negative in the quarter and step up compared to the second quarter. This is due to three areas that we've communicated earlier about, and that should be well known. First, last year, we had positive one-offs in the third quarter of roughly SEK 250 million relating to a provision release in Latin America and a capital gain from a divestment in North America. Secondly, the manufacturing transition cost in North America that we've talked about before will start to kick in.
As we have said, we will start production in our new Anderson facility during the third quarter, meaning that we will have extra costs in terms of higher inventory and running these facilities in parallel to ensure a smooth transition, which means that we will run three facilities for a period of time before going down to one towards the end of the year. The third quarter is an important quarter for us in North America in terms of this manufacturing production ramp-up. The new Anderson facility will result in significant cost efficiencies, and we expect to start to see this from 2020 when we go from these now three facilities down to one at the end of this year. The final and third area is higher marketing spend, as I mentioned before, to support the major product launches that we have in the second half of the year.
Innovation is, for me, the key driver to improve margins in the long term. In the last quarter, we've proven that we are well capable of executing on innovative products and driving positive margin, and we'll continue to do that. In addition to these three areas, as indicated, given the board's confirmation on the intended Professional spin-off, this will result in cost of roughly SEK 100 million relating to preparation work during the second half of the year. Turning to currency, our indicated headwinds of SEK 200 million for 2019 has been positively impacted by favorable translation effects, and is based on currency rates as per the 11th of July. We continue to execute on our re-engineering program, and as I mentioned, we are about to start production in the new Anderson facility in the U.S., and hence we keep our full year capital expenditure outlook of SEK 7 billion.
Our path to profitable growth is continuing. We're continuing to be strongly focused on executing on our strategy, and I'm really pleased that our price execution is sticking, and we're continuing to fully offset the headwinds. Most of the business areas showed continued improvement, both price and mix, which I think is a significant contributor going forward. We're continuing to invest in innovation and marketing to support the new product launches and cater for further growth in the future. We're enabling this through a continued strong focus on our balance sheet and with a healthy overall balance sheet situation. With that, I'd like to turn over to Q&A.
Yes. Thank you, Jonas and Therese. We will now open up for questions. Moderator, please go ahead.
Thank you. Ladies and gentlemen, if you do have a question, please press zero one on your telephone keypad and you will enter a queue. We have a question from the line of Johan Eliason of Kepler Cheuvreux. Please go ahead. Your line is now open.
Yes, good morning. Thank you for taking my question. I was wondering about this net working capital impact on the cash flow in the quarter. You mentioned this ERP system change. You also said that the new plant in U.S. will start ramping in Q3, so there will be some inventory buildup also from that one. Does that imply that we shouldn't expect any release from this excessive inventory build from the ERP and the Anderson plant until maybe Q4 this year? Or how do you see that? Also on this ERP, is it part of this new plant development in the U.S.? Did it have any costs associated impacting the EBIT in North America in the quarter? Thank you.
It is two slightly different questions. The ERP system is not related to the manufacturing go-live, but is related to our financial processes. From a cash flow perspective, this was related to lower collection of receivables, the cash flow impact. This was a temporary thing, where some of the collection fell over into July instead of June. This will come back in the third quarter. When it comes to the inventory buildup for the plant, that has been going on for a little while. As we say, we will have two different factories. We don't see this as a major impact on our cash flow going forward. Essentially, you should see all the drop that we saw in the cash flow in the second quarter coming back in the third quarter already.
It didn't have any impact on the EBIT in the quarter?
No. As we have said, it didn't really have an impact on the group level at all. We saw slightly lower net sales in North America, but it didn't really have an impact on EBIT, neither for North America and the quarter or for the group.
Just on the raw material headwind guidance, obviously very positive that you reduce it despite having the tariffs, but which we got explained why the tariff is obviously hitting the air cons mainly. Does this imply that you will have a more significant headwind next year, on the back of these 25% tariffs on the air con?
Yeah. Assuming that they stay in place, yes, absolutely. Yeah.
Okay. Thank you.
Thank you.
Thank you. Our next question comes from the line of Andre Kukhnin of Credit Suisse. Please go ahead. Your line is now open.
Good morning. Thanks so much for taking my questions. Can we talk about pricing first? You talked about pricing impact coming from already implemented price increases. I thought there was a dynamic there where you raised or announced price increases at the beginning of the year, then were discounting against them as the tariffs were delayed, and then those discounts should have been eliminated as the tariffs in the end were put on. How should we think about the pricing impact on the bridge or on P&L for you for the second half? Does that run rate of what I think is about two and a half points in H1, does that tick up? And also taking account, obviously, we start comping the last year price increases.
I just wonder if you could help us with where the pricing level is sequentially and then year-on-year for second half.
Yeah. Your description is correct, of the impact on the tariff hikes and so on. Of course, because most of the air conditioners in the market, not just for us, but overall in the market, were purchased before the 25% rate, most of the volume sold this year will be at that lower price, most likely. Also going forward here, will be sold at that lower price, most likely. When it comes to the continued year-over-year, I think there's another year-over-year impact that we have to keep in mind, and that is that we had the significant promotional event in the second quarter last year related to the Frigidaire 100-year celebration that we didn't have this year. That year-over-year impact will not be there for the rest of the year because we didn't have a corresponding promotional event last year in the second half.
Of course, we started to raise prices both in North America and in Latin America in the second half of the year. When you net all of that out, we will see less headwind sequentially from raw material and currency and so on, but also less year-over-year pure price realization on a year-over-year comparison basis.
Got it. Thank you. That's very helpful. Just on the net cost efficiencies, if we look at the SEK 265 in Q2, and take out the SEK 100 for reversal, building that from SEK 165 underlying, we think about SEK 100 million for Professional spread across the two, and then the higher Anderson cost and marketing spend, which I guess is also actually comparably year-on-year because you're spending last year. I kind of see it stepping up but not another SEK 100 million from the Q2 run rate. The second half, I can't see you expanding more than SEK 500 million. Is that in the right ballpark or some of these items we're missing?
Yeah, you're missing a few things. First of all, we're not going to give you an exact number, of course. Yeah, you started out with two relevant points. Of course, as I mentioned last year in Q3, we had this approximately SEK 250 million positive one-offs that will reverse out in the third quarter. We are stepping up the investments in marketing and launch spend everywhere in the third quarter. We have big launches in Europe, big launches in Professional, big launches in North America, as indicated, and that will result in a fairly significant step-up in spend going into the third quarter. Yes, I think we are definitely seeing more headwinds than I think you are looking at there.
Got it. Thank you very much.
Particularly in the third quarter. For the full year, it's not a major let's say run rate increase for also the fourth quarter because we will see less of these sort of one-off year-over-year comparisons and so on. The third quarter will be a spike.
Right. Then it will come off in Q4. Got it. Thank you.
Sure.
Thank you. Our next question comes from the line of David MacGregor of Longbow Research. Please go ahead. Your line is open.
Yes. Good morning, everyone. Just a question, I guess. Very strong price mix performance across the model in the quarter, but we're watching lower metals prices starting to work their way into the marketplace, and I'm just wondering how confident you are in your ability to continue to hold pricing in the face of lower metals prices in the second half.
Yeah, I know. I think this is the same answer that I always have on those types of questions, and that is that the market prices of input materials tend to translate into market prices for appliances over time, going up or going down. There's always a little bit of lag, but it's a competitive market, and the input costs tend to get translated into product costs over time.
Do you feel like you've got a stronger price mix position in one region or another? It seemed like you were talking about strength across the entire global model in price mix. I'm just wondering how maybe North America versus Europe would-
Yeah, I think we do see strength across the board, and I think in particular, again, I highlighted that in Q1, and I want to do the same here in Q2, that we saw both positive pure price and positive mix. Meaning that despite the price increases, meaning that a product has a higher price than it did a year ago, we're still selling more of our more highly featured, highly priced products. That to me is a real sign of strength. It means that the innovations that we're bringing to market and the brands that we're carrying have strength in the market. I think that's a fairly consistent picture across the globe with exceptions in places like Argentina and so on, where the inflationary pressures are very high. To me, it's really a strong validation of our strategy.
To your point, and as I just said, the input cost that impact the industry sort of equally do tend to get translated into market pricing.
Just a follow-up question on that relating to your observation on mix. You talked about the strength in built-in in Europe. Do you feel like maybe that is a function of having gained share in built-in in Europe, or do you feel like the built-in category in general has just been growing very strongly?
Yeah, no, we're gaining share in built-in, and particularly under our premium brands. The focus for us, and you know that we've been focusing for the last six, seven years or so really on our built-in kitchen offering under Electrolux and AEG, as well as our premium laundry offering under Electrolux and AEG. That very strong single-minded focus is really working, and we've gained share consistently for several years in a row, and are continuing on that path. Now we're launching, as I mentioned, a complete new Electrolux-branded premium range in built-in kitchen that we have very high hopes for.
Great. Thanks very much.
Sure.
Good luck with the launch.
Thank you. Our next question comes from the line of James Moore of Redburn Partners. Please go ahead. Your line is open.
Yeah, good morning, Jonas, Therese. Maybe I'll go one at a time, if I can. The first one is on the professional division. Could you help us size the pension settlement gain in the division?
Yeah. It's big enough to be noticeable in the EBIT, but not big enough to be called out as a specific number. Basically, we can't quantify all these sort of minor items, because then it would be a very long list of little things hitting up and down. We don't do that. We call it out because it's noticeable in, specifically, the professional results.
Fair enough. Thank you. On the U.S. re-engineering costs kicking in the third quarter, I'm wondering if you can help us with whether the impact that you see coming from that is broadly in line with the plan or whether you see it pulling forward more into the third quarter than the fourth?
Yeah. It's broadly in line. There will be costs in both Q3 and Q4, but the Q3 aspect is, of course, as I kind of indicated, that we will, in fact, have three factories running, right? The St. Cloud factory, which we're closing towards the end of the year, and then sort of the old Anderson facility and ramping up the new one. We will have three factories going to one, ultimately. Of course, that results in cost. There's no way around that. The end result will be dramatically more efficient, and with massively better products, I think, very important to say. There are some fairly noticeable duplication costs and ramp-up costs associated with that.
Thanks. On the marketing and launch costs in the third quarter, you mentioned they're ramping up or stepping up. I think in the first quarter, you mentioned they will be stepping up in the second quarter.
Yeah.
What I'm trying to understand is the cadence of the marketing spend, if you like, as a proportion of revenue in the U.S.
Yeah.
or around the world. Broadly, if you look at an annual number, what is the marketing spend and how has that changed in the last few years? Are you seeing a particular spike against those normal running rates?
Yeah.
in the third quarter, just because it's often mentioned that we have launches and there's marketing costs.
Yeah. No.
I just want to understand the impact.
No, the reality is that, obviously, the big investments that we're making in new product, when we bring the products to market, then we will spend the commensurate money to launch them. That is a sort of an increasing trend, I would say, structurally over time. Our overall marketing spend is a little bit below 4% of net sales. That has been increasing in recent years, and we hope, honestly, to be able to increase that further as we go forward, because that to me indicates that we're successful in driving favorable mix and overall higher profitability. For me, this is good money. We're putting it in the same bucket as all the other efficiency work, because of course, we have the bridge to tie, but this is money that I want to spend.
Thanks. Lastly, just to clarify on Andre's question earlier on net cost efficiency against the SEK 265 million. You talked about the increase in the third quarter. If we stripped away the SEK 100 million gain reversal and the SEK 250 million gain reversal to get back to sort of an underlying, are you saying that it spikes up in the third quarter quite meaningfully against that SEK 165 million? Is it just a function of the reversal of the-
No.
250 million?
No, it's both. It's a combination of the two.
Thank you.
Sure.
Thank you. Our next question comes from the line of Martin Wilkie of Citi. Please go ahead. Your line is now open.
Yeah, good morning. It's Martin at Citi. Just a question on the raw material headwinds. You mentioned that you'd locked in some favorable rates on raw materials, and obviously we have seen steel pricing coming lower over the past few months. If you could just give us some sort of sense as to how much of that lower impact is locked in impact in 2019, because you obviously said that the headwind is slightly less than it was beforehand. Presumably some of that sort of falls over into 2020 as well because of hedging and forward purchasing and so forth. Just to get some sort of sense as to how much of that lock-in favorable rate is reflected in your 2019 guidance and how much of it is still to come in 2020, even just sort of directionally.
The second question was just on the ERP. You mentioned that the working capital effect reverses as you sort of get those payments in July. You also mentioned that the ERP hit volumes in the U.S. If you could just clarify why that happened, and is that effectively market share lost, or do we expect a reversal, if you like, of that volume impact from the ERP in Q3 as well? Thank you.
Sure. Starting with the steel, we have seen, as I think is visible to everybody, a quite substantial drop in the market prices for cold rolled steel. We have been able to secure good contracts as a result of that for the rest of the year. But of course, the first half of the year was mainly based on the prevailing market conditions late last year when we signed those contracts.
While our actual pricing does not correspond perfectly with market prices, because there are lots of other factors impacting that more locally and the variance in the grades and all those things, there is lots of factors here. For sure, we have seen a better pricing environment. What is going to happen going forward into 2020, I honestly do not know, and we have not started those negotiations with our suppliers. I am going to have to defer on that question.
When it comes to ERP, basically what we did, we went live with our sort of finance and commercial ERP system that we have been rolling out globally over the last several years in the quarter in North America. Of course, that is a very, very big market. Inevitably, there are some sort of slowdown in the go-live phase. That means that given that we have a very short order books, some orders were lost during that period. That is known and expected. That is a temporary effect, but we do not necessarily expect to get back those volumes. But that is a very manageable and minor effect.
Of course, there is the effect of, as you ramp up the new system, you have to match credit notes to invoices and things like that, and that takes a little while to get that all sorted out, and hence some payments to us, some collection got pushed over the quarter end. Again, these are all things that typically happen when you have an ERP go live. The only difference is that now we did it in basically in markets reflecting a third of our revenue. Of course, the working capital impact suddenly becomes quite measurable.
Okay. Thank you very much.
Thank you. Before we go to our next question, may I remind you that if you'd like to ask a question, please press zero one on your telephone keypads. Our next question comes from the line of Annabel Asquith of Morgan Stanley. Please go ahead. Your line is open.
Oh, hi. Good morning. This is actually Lizzie. I had actually two question. The first one was on the European market. I mean, the sequential deterioration or deceleration, I would say, is quite steep versus what we've seen in the first quarter. I appreciate the pre-buy effect from the U.K., I was wondering if you could comment maybe a little bit on the Scandinavian market specifically, as one of your fellow Swedish company yesterday was mentioning some slowdown on the residential side. If there is anything specific on any other European country that is maybe notable to kind of explain the drop. Then secondly, apologies if you already mentioned that, I had some issue with the line.
Can you quantify maybe the impact of the decline in private labels in the U.S. and whether this is accelerating, because the comp seemed to have been really easy in the second quarter of the year. I mean, AHAM 6 is flat in the second quarter, your organic decline seem quite more pronounced than what we've seen in previous quarters.
Yeah, if we start with Europe, I would say that the underlying trend is relatively stable and flat in Europe, I think that was honestly the underlying trend also in Q1. If you look at last year, it was basically flat in Western Europe as well. There are minor ups and downs market by market, the trend is very much flat in Western Europe. In Q1 versus Q2, we had the pre-buy in the U.K., where people were stocking up for an eventual hard Brexit on March 27th. That didn't happen, so that reversed out in Q2.
Of course, we had the Easter effect, where Easter this year occurred in April, and last year occurred in March, and that has a kind of a swing effect between the quarters, that if you sort of neutralize those effects, you basically see a flat quarter in West. Scandinavia, I honestly don't have anything significant to report. It's chugging along, I would say. Not exciting, but not terrifying either. Switching on to North America, we had, of course, Q2 last year. You'll recall, and it's well known that our private label business is mainly Sears. In the second quarter of last year, and also the third, we were selling at sort of full speed to Sears, and then they declared their Chapter 11 in the fourth quarter.
There was reorganization in the beginning of this year, but our sales volumes in private labels and mainly Sears are much, much lower now than they were in the prior year period. That's just the unfortunate reality. On the branded side, last year we had this big 100-year celebrations that pushed volume but at low margins, and this year we were more watching the margins and saw some slightly lower volumes. I would say that's not a trend effect. That's just a year-over-year promo versus no promo. Importantly, I did mention that the core appliances were flat. But if you dig into it, you see actually that kitchen appliances were negative by something like close to 4%, and we're mainly a kitchen appliance company in terms of core appliances in North America.
Air care and microwaves were down 20% in the quarter, and that's a relatively sizable business for us. When you look at all those factors, I would say it's not an unexpected volume development overall for us in the quarter. We're quite pleased, again, as I mentioned, with both the price and the mix realization that we had. We were able to really defend our bottom line almost completely on an underlying basis driven by that.
All right. Thank you very much.
Sure.
Thank you. Our next question comes from the line of James Moore of Redburn Partners. Please go ahead. Your line is open.
Yeah. Thanks for allowing a follow-up. I wanted to ask on the Latin American margin, which did pretty well, you mentioned the trucker strike impact dropping out. I was wondering proportionally how much of the increase year-over-year was trucker strike, and how much can we effectively carry over into the second half? I wonder if you could peel the onion a little bit of Latin American profitability, whether it's all Brazil and the other two countries are going the other way or what?
Yeah. In the sort of May, June timeframe last year, the market stood still for a while. The year-over-year effect, that impacted last year heavily, right? We lost money in the second quarter last year. Of course, the fact that we didn't have that, in fact, the market in Brazil is quite buoyant. If you look at the overall run rate, my assessment is that it's in the high single-digit overall growth rate on a run rate basis in the first half. That's of course quite positive for us. The very weak result last year was to a large extent explained by the trucker strike. Typically, if you look at the pattern in Latin America, Q3 is a relatively soft quarter, we have a strong fourth quarter. That's typically what the pattern is.
Going outside of Brazil, Argentina is very soft still, I think the year-over-year effect is starting to be less negative, it's not because the market is returning. It's still quite soft, we expect that to continue through the presidential elections that are upcoming this fall. We are able to offset or compensate for the inflationary pressure through price, which is very good. We're profitable, low volume. I think those are the headlines for Latin America.
Thanks, Jonas.
Sure.
Thank you.
Thank you. Our next question comes from the line of Andre Kukhnin of Credit Suisse. Please go ahead. Your line is now open.
Yes, hello again. Thanks very much for taking the follow-ups. One I wanted to double-check on was the tariffs versus pricing for 2020 implications. I understand that this, due to seasonality, kind of managed to blow over for 2019. Could you help us quantifying the full-year impact from tariffs with Section 301, List 3 at 25%? Just thinking about next year. Also, can you confirm that if pricing stays as it is, so hence with discounts removed, that covers that headwind?
Yeah. On your second question, yes. We actually are now removing those discounts to reflect the new tariff levels going forward. Again, the volumes from now on are very low for the rest of the year, usually. That will have a very marginal impact for this year. Next year, yes, we will see the headwinds from List 3 if it stays in place. The pricing is now from now on, already in place to cover that, we don't need to take any further action. I'm not going to go in and quantify the individual list effects. It just gets too messy to track.
Right.
It's covered in the overall guidance, yeah.
Right. If we use that reference in Q2, sorry, in Q1, when you changed your guidance for raw materials and tariffs by, I think from memory, SEK 3 million to SEK 500 million, and part of that was List 3 coming out of guidance, especially the bottom end. Is that still a useful reference point for that?
It was a noticeable, significant part of that, I'm not going to say exactly which is which, honestly.
Got it. I just wanted to check on the Electrolux brand revamp in Europe. If there are any early indications on how that is going and gearing up?
Yeah.
Well, maybe let's just start with that, I've got a little follow-up on that.
Right. We're really doing that. In terms of the market communication, it's really going to hit the market mainly with the new launch of the built-in range that we're now starting to ramp up heavily in the third quarter. We're extremely excited about it to basically present the Electrolux brand as a Swedish brand with leadership and sustainability, progressive, modern, and inclusive. We think that's a brand that is extremely well attuned to the trends in the market and what consumers are looking for. We're really excited about this revamp. Again, as we've indicated several times, when we did the same thing for the AEG brand with a very different platform. When you do a new brand platform in combination with new, well-designed and very innovative products, you get sort of a cumulative effect that's quite significant.
If you only do one of those three things, it's less significant, when you can have an attractive brand, beautiful products with fantastic consumer experience-driven innovation, that's when you can get a real pop. We're excited about it.
Great. That reference to AEG, I just wanted to follow up on that because, I remember from end of 2017, you presented a slide saying that the revamp of AEG resulted in, I think about 7% ASP increase for the brand overall. You relaunched the whole brand over three years.
Yeah.
Would you still maintain that the Electrolux revamp can have a sort of similar order of magnitude effect?
I would say so, yeah.
It's about two times the size of AEG in EMEA?
No, it's actually Electrolux is only marginally bigger than AEG. It's a relatively similar size.
Oh, okay. Yeah. Great. Thank you very much.
Sure. You're welcome.
Do we have a final question?
Final question from the line of Christer Magnergård of DNB Markets. Please go ahead. Your line is now open.
Well, I can start with just a follow-up question on the net cost efficiency. Where you said that you had a SEK 250 million one-off in Q3 last year. If I recall it, I had the SEK 170 million in my model. Just want to double-check that number.
One was the release we had in Latin America, and then the second one was the gain from the sale of our commercial vacuum cleaner business in North America.
Okay. Secondly, when it comes to the production changes you're planning for next year, will they be as significant as you do here in Q3, Q4 with double production and so on or will they be a smaller exercise?
well, the manufacturing investment per se is equally big. The product move is much smaller because we have The Memphis consolidation into Springfield is much lower volumes that we're moving. The extra cost will, at least the way I see it right now, will be lower.
the Frigidaire 100-year celebration last year
Yeah
in Q2, what kind of year-over-year impact did that have on pricing in Q2?
Yeah, we don't break it out in that level of detail, of course, we did have a really solid contribution from pricing year-over-year in North America in the quarter. Of course, the volume and the pricing to some extent, if you take the private label aside, which is not driven by pricing, then of course, there is an impact from the fact that we had kind of a, really a one-off event last year, driven by the 100-year celebration. If you then compare that year-over-year, that's a fairly significant pricing boost from that.
Did you also have a step-up in marketing last year? Related to that, or was it only on the pricing component?
There was some marketing, it was mainly, sort of 100-year anniversary discounts, let's say. Of course, supported by marketing.
Great. Well, thank you very much.
Sure. You're welcome.
Thank you. I'll now hand over to Johan for closing comments.
All right. Thank you. As I mentioned in our presentation, we're really on our path to profitable growth. We're continuing to focus on executing exciting new product launches, manufacturing revamp, automation, digitalization, leading the way in terms of driving profitable growth going forward. I'm really excited about the fact that we're already now able to show the benefits of that. Significant improved mix and price in the quarter, showing that we're able to execute that. We're really excited about what's coming in the second half of the year and into next year. Of course, supporting that with a strong balance sheet and continued strong cash generation. With that, I wish you all a great summer and look forward to seeing you all soon. Thank you.