Good morning. Thank you for joining the presentation and discussion of Electrolux second quarter results. With me today, I have our CFO, Anna Ohlsson-Leijon, and our Head of IR, Sophie Arnius. Before we start the presentation, I'd like to mention that this session is recorded and will be available on our website as an on-demand version. Let's kick off the presentation with our business overview, including the quarterly highlights. In the second quarter, we continued focusing on executing on our profitable growth strategy, and the group delivered good growth across most of the business areas. Our reported sales were up 1.3% to SEK 31.4 billion. Price increases and improved mix in core brands resulted in an organic growth of 0.4%. Adding acquisitions, sales growth was 0.7%.
I'm pleased that we, in the quarter, gained market shares in all key regions and continued to take market share in our core products and brands. Despite significantly higher raw material costs and currency headwinds, we delivered solid earnings, and the performance in the second quarter was in line with our overall expectations. Operating income was SEK 1.6 billion, excluding the provisions in EMEA of SEK 564 million related to the competition authority investigation and SEK 254 million to the unfavorable court ruling in France that we announced yesterday. Adjusted for these non-recurring items, the margin was 5.2% compared to 6.2% last year. We intensified our cost actions and reprioritized some activities to mitigate the increasing currency headwinds. In addition to cost efficiencies, higher prices and mix improvements also contributed positively to the earnings.
Looking at our business areas, EMEA and Asia Pacific continued to deliver growth and solid earnings. I'm very pleased over professional products achievements. They had a strong quarter, really showing the essence of delivering targeted growth, 14.7% operating margin and 6.7% sales growth. Home Care and SDA is in a transition phase and is investing for important product launches for the second half of this year. North America showed growth in core appliances on their own brands, while volumes, especially under air conditioners, but also private labels, declined. Latin America delivered strong organic growth. Earnings was impacted by cost inflation, currency, and the nationwide truck driver strike in Brazil. Turning to the very important innovation story that we're leveraging to drive mix improvements and profitable growth. We've talked a lot about the relaunch of the Frigidaire brand.
In the second quarter, we celebrated 100 years of innovation under the Frigidaire brand, and we're really leveraging the design innovation launches that we have made targeting the Frigidaire consumer. We've introduced the market first affordable induction ranges and a range of affordable black stainless products. This is resulting in, as I mentioned before, core branded market share increases in the first half of 2018. We're extremely pleased with the success of the new Frigidaire range. In Europe, we're continuing our journey of profitable growth in premium laundry and in built-in kitchen. We're focusing on clothes care and leveraging our innovations and introducing connectivity solutions in our laundry products. Also in built-in cooking, we launched a new range of ovens with integrated cameras for greater consumer taste experiences. In connection with that, we also launched a collaboration with the California-based food tech startup, Innit.
In Latin America, we're investing to strengthen our positions in our core market sweet spots through product and manufacturing re-engineering investment in primarily refrigeration and in food preparation. In Asia Pacific, we started the launch of an extremely important range of multi-door refrigeration products that are featuring market-leading innovations in taste and texture preservation, in particular for produce, meat, and fish. Turning to major appliances EMEA. If we turn to the business areas looking at our operations in Europe, the business area strong performance continued. Organic growth was 4.2%. Overall, European market demand was favorable during the period, driven by Eastern Europe. Electrolux sales volume show growth in built-in kitchen and laundry, and we continue to gain market share in our premium brands, thanks to innovative products. Product mix continued to be positive for the quarter.
Operating income increased 8% year-over-year despite increasing headwinds. The margin was solid at 5.9%, excluding the provisions relating to the competition authority investigation and the unfavorable court ruling in France we received yesterday that a reorganization procedure of a former subsidiary has been extended to our sales company for major appliances in France. We're surprised and disappointed and will now evaluate our options. We're working very hard to resolve this situation quickly, but in the second quarter, we took the one-time charge of SEK 254 million. Earnings was driven by good volume growth, mix contribution, and continued focus on cost efficiency, which more than offset the negative impact from increased raw material cost and currency. Let's move to the market development on the next slide. The European market showed a stable demand trend in the quarter with total unit shipments up 1%.
This was driven by the continued strong growth in Eastern Europe, where the demand grew by 8% in the second quarter, driven mainly by Russia. Markets in Western Europe remained at a high level, but declined somewhat as demand in the U.K., Italy, and France was slightly weaker. We expect the European market to remain favorable in 2018 and reconfirm our full-year growth outlook of 1%-2%. In North America, sales was mainly impacted by the lower volumes of air conditioners due to lost listings, which we previously called out, but also the continued decline in private labels and slower market demand. It's however encouraging to see that this is partially offset by a growing core branded appliance business. In the quarter, we continued to gain market share in our core branded products. The previously announced price increases is starting to generate a positive effect.
Our average sales price were roughly 2% higher compared to last year, but were partly offset by promotions related to the 100-year anniversary of Frigidaire. Operating income in the quarter declined mainly as a result of the significantly lower air con business. In addition, we also faced higher costs for raw materials, sourced products, and logistics. We're focused on mitigating these headwinds through price increases, but also through cost measures. Following the first round of pricing, we announced additional price increases that we aim to implement towards the end of the third quarter as a result of continued cost inflation, as well as the recently introduced Section 301 tariffs on certain components. Let's turn a slide to the market development in North America.
Market demand for core appliances in the U.S. is estimated to have declined by 5% in the second quarter, while demand for microwaves and home comfort products was up 5% year-over-year. The weak demand can partly be explained by good growth in the same period last year. In addition, we also saw a pre-buying impact from retailers before the price increases in the first quarter. We estimate that the retail sell-out to be unchanged in the quarter. The macro environment in the U.S. has in general been quite favorable. Consumer confidence index in the U.S. is high. The unemployment is at record low levels. In addition, growth in the housing sector remains positive, although we've seen growth slowing down somewhat.
Based on this and higher price increases in the market, in combination with ongoing uncertainty around trade actions, we now estimate U.S. industry shipments to grow by 0%-2% for the full year 2018. Now, let's turn to the next slide and talk about Latin America. The second quarter started with good consumer demand, similar to previous quarter. However, political and economical uncertainty increased towards the end of the quarter, especially in Argentina, while the market experienced a slowdown. Consumer demand in our largest market, Brazil, is estimated to have decreased in the quarter, and the country was heavily impacted by the nationwide truck driver strike, lasting for almost two weeks in the end of May. The FIFA World Cup event also had an adverse impact.
Based on the effects and political uncertainty and the resulting market price increases in Argentina and Brazil, we now expect a slightly weaker market demand for the full year of -2% to +1%. On a positive note, we continued to gain market shares in all three regions and achieved an organic growth of 21%. This was a result of improved volumes, mainly in Brazil, supported by higher prices. Operating income, however, declined in the second quarter year-on-year. Firstly, our earnings were negatively affected by higher raw material costs and increasing currency headwinds. Secondly, the truck driver strike in Brazil significantly impacted the in and outflows in operations. We expect profitability of our business to recover in the third quarter, and in July, we began implementing further price increases in Brazil and Argentina that should come into effect during the third quarter.
In the Asia-Pacific region, our operations continued to perform well and achieved an organic sales growth of 2.8%. Sales growth was supported by a favorable demand trend in East Asia. Towards the end of the quarter, however, we saw the Australian market slow down. We took market shares in all our key regions, Australia, New Zealand, and East Asia. As a result of the weaker housing and demand outlook, we have adjusted down the full-year market outlook for Australia to flat from previously 1%-2%. The higher sales was mainly driven by East Asia, and especially in laundry. Our operating income declined somewhat year-over-year, primarily due to the increased currency pressure, but also higher raw material cost. Higher volumes and mix improvements contributed positively while the ramp-up cost for the JV in China impacted earnings negatively.
Despite the headwinds, our margins remained at a solid level of 8.1% in the quarter. Let's continue with Home Care & SDA. Home Care & SDA continues to execute on its strategy and is in a transition phase preparing for upcoming launches. In the quarter, market demand shift towards the cordless category continued to accelerate, while demand for corded vacuum cleaners declined. The market shift in vacuums impacted the business area sales negatively, as important product launches in the cordless category are scheduled for H2 2018. The business area reported an operating income slightly lower than the second quarter in the previous year. Increasing spending in innovation and marketing related to the upcoming major product launches had an adverse impact on operations. Higher price and mix offset to some extent the lower volumes and currency effect. In the quarter, Anova had negative results impacted by investments and product launch delays.
This was more than offset by an earn-out adjustment of roughly 100 million SEK in the quarter. Let's turn to our professional business. Professional products had a strong quarter where the business area continued to deliver on the targeted growth strategy and posted a sales growth of 6.7% in the quarter. Sales increased across our segments, and the volumes growth was especially strong in laundry, also contributing to mix. Sales grew in most key markets and contributed positively to the top line. Earnings increased compared to the same period last year and benefited from a strong volume, price, and mix contribution. Operating margin was at a record level for a second quarter and improved to 14.7%. This was achieved despite ongoing investments for new product launches. With that, I'd like to hand over to Anna to go into the financials and the cash flow in the second quarter.
Thank you, Jonas. Let's look at the financial overview. As Jonas said, higher prices in combination with improved mix in our core branded products resulted in an organic sales growth of 0.4%. Four of our six business areas showed organic growth. EMEA, Latin America, Asia Pacific, and professional products. Sales growth, excluding currency, was up 0.7%. Gross operating income, defined as net sales minus cost of goods sold, declined year-over-year to 5.9 billion SEK, corresponding to a margin of 19%. The gross profit was impacted by increased cost for raw material, logistics, and sourced products, together with currency headwinds, which were only partially offset by cost productivity and price increases in the quarter. Operating income, excluding NRI, was slightly lower year-over-year, comparing with the strong quarter last year. We managed to partly mitigate higher cost inflation and unfavorable currency effects with price mix improvements and cost efficiency.
The EBIT margin, excluding non-recurring items, decreased one percentage point to 5.2%. Reported earnings per share decreased to 1.80 SEK versus 4.49 SEK last year. Earnings per share, excluding non-recurring items, was 4.35 SEK. Let's look more closely at the EBIT bridge on the next slide. Volume price mix combined had a positive impact on operating income in the quarter. Sales volumes were negative, mainly due to significantly lower volumes in air care in North America. Price in the quarter was slightly positive as the price increases, mainly in North and Latin America, have started to come into effect. Moreover, we had a good leverage from mix across our core categories that contributed positively to the organic development. The headwinds from raw materials was 434 million SEK in the quarter as forecasted.
In addition, the negative currency impact intensified during the quarter and was in total SEK 247 million, mainly related to currency headwinds in Latin America and EMEA. I will come back to this in more detail. During the quarter, we intensified our cost actions and reprioritized activities. We achieved a net cost efficiency of close to SEK 300 million, whereof earnout for Anova was approximately SEK 100 million. We continue to track well on our variable product cost activities, but face challenging cost inflation related to sourced products and logistics costs. We continue investments in R&D and have reduced spend in structural costs, mainly related to sales and admin. The acquisitions had no major effect on the group. Adjusted for non-recurring items of SEK 818 million, the operating income was SEK 1.645 billion, corresponding to a margin of 5.2%. In the quarter, we had SEK 265 million in negative currency effects year-over-year.
This is mainly a result of emerging market currencies in Latin America with weaker Argentinian peso and Brazilian real versus the strengthening U.S. dollar in combination with headwinds in Europe with U.S. dollar-denominated import and weaker Swiss franc and ruble versus the euro. The translation effect was positive SEK 18 million. At current rates, the negative transaction effects would continue to impact Latin America and EMEA negatively. All our business areas contributed to the 0.7 points EBIT margin accretion on a group level from price and mix. EMEA had a favorable mix fueled by market share gains in premium brands, particularly driven by built-in kitchen and premium laundry. The price erosion continued, but at a lower level. In North America, the positive contribution was driven by price improvement. In the quarter, we saw price increases taking effect and sequentially improving versus the first quarter. Total price increase in Q2 was approximately 2%.
This was partially offset by the planned promotional spend for the 100-year anniversary of Frigidaire. Mix contribution declined partly relating to shift in the product mix. In Latin America, the implemented price increases are also taking effect and had a positive contribution. We continue to go for price and announced in Q2 further price increases North and Latin America, as well as Australia, that should be implemented before the end of Q3. In Asia Pacific, the price mix contributed positively. Home Care & SDA benefited from both price and mix across most regions. Also professional showed positive price and mix in Q2 on the back of price increases being implemented. Cash flow after investments, but before acquisitions came in at SEK 1.8 billion and was at a lower level versus previous year.
The lower cash flow generation versus last year can be explained by lower EBITDA combined with lower contribution from working capital and a higher CapEx. The average net operating working capital in relation to rolling 12 months net sales remained unchanged at 4.3% versus last year. Overall, the focus of working capital throughout the group is continuing, and the working capital has now started to flatten out on good levels as predicted. Investments in the quarter was slightly higher versus last year due to ongoing investments in re-engineering, innovation, and automation, mainly North and Latin America. With that, I would like to hand over to you, Jonas, and to review our outlook and conclusions for the quarter.
Thank you, Anna. Let's move on to the outlook and start with the market view. We expect the positive demand for home appliances across our markets to remain supportive, although current industry trends indicate a slightly softer market demand outlook for North America, Latin America, and Australia. For the markets in Europe, we reconfirm our total market increase by 1% to 2% for full year 2018. This will be driven by Eastern Europe, which we expect as a whole to grow strongly. Demand in Western Europe is expected to decline slightly given the weak outlook for the U.K. and political uncertainty in countries such as Italy. We anticipate demand in North America to show positive growth, supported by continued good consumer confidence and macro environment.
Based on recent developments related to higher prices caused by higher input costs, however, we expect growth in the market to now be in the range of 0% to 2% for 2018. Markets in Latin America started the year with good consumer demand, but we saw a slowdown during Q2 and also a tendency that consumers mixed down into lower price categories. This was mainly related to increased political and economic uncertainties, combined with volatility in the currency markets. We therefore expect full year 2018 demand for the region, including Brazil, Argentina, and Chile, to be -2% to +1%. The overall demand outlook in East Asia remains positive. In Australia, we've seen a stabilization in the market after several quarters of good growth and therefore now expect the market to be flat for 2018.
Looking at our business outlook for third quarter and the whole year 2018, we expect a positive organic trend across our businesses. Average prices are expected to be higher in the third quarter and the full year. In North America and Latin America, we saw a positive impact in Q2, and we expect a positive impact throughout the rest of the year. We have, as already mentioned, announced further price increases in these regions that should be implemented towards the end of Q3. We have now more visibility on our raw material exposure and therefore revise our view to the upper end of the previously communicated range of SEK 1.6 billion-SEK 1.8 billion. For Q3, we expect raw material cost to increase year-over-year by approximately SEK 0.5 billion.
As Anna showed, the currency headwind for this year is roughly SEK 750 million based on currency rates as per the 13th of July. For the full year, we're determined to mitigate these raw material and currency headwinds with price increases and cost efficiency measures. We continue to focus on cost management, and we expect full year positive cost efficiencies, although we see higher input costs caused by Section 301 in the U.S. and also slightly higher or higher inflation in Latin America. We will mitigate this with higher prices, although with a lag. For Q3, we expect a neutral impact from net cost efficiency as we're increasing our brand investments and marketing for upcoming product launches. A stronger product portfolio and investments in consumer experience innovation are key elements to drive profitable growth.
Activities to strengthen our competitiveness through re-engineering projects are also ongoing, the CapEx outlook for SEK 6 billion remains unchanged for 2018. At the beginning of this year, we announced that we're moving towards the next stage of our journey on targeted growth on the journey to profitable growth. As I mentioned, we are extremely pleased with the success of our newly launched products and our focus on our key categories and brands, resulting in market share gains in all of our key regions. Our investments in brand and innovation and planned product launches in EMEA, in Home Care & SDA, and in Professional are ongoing. Based on the cost headwinds, we saw positive pricing in North America and in Latin America, and we will see further price increases going into the second half of the year.
We're continuing to drive positive product mix, driven by our own core brand of products and a great slate of new launches. Again, with the higher cost inflation that we're facing, both in raw materials, logistics, and driven by tariffs, as well as the strong currency headwinds, of course, we will remain strongly focused on cost efficiencies. Of course, we will continue to generate a solid cash flow. With that, I'd like to pass it to Sophie Arnius to explain the procedure for the Q&A.
Thank you, Jonas. We are now ready to take your questions. I see there are many that want to ask questions, please try to limit yourself to one question at a time. Please, operator, go ahead for the first question.
Thank you very much. Ladies and gentlemen, if you do have a question, please press 01 on your telephone keypad, and you'll enter the queue. Our first question comes from the line of Andreas Willi of JP Morgan. Please go ahead. Your line is open.
Good morning, everybody. I have a question on the trade impact. You mentioned it in the press release. Have you done any quantification, what it could mean for you in terms of cost impact? Both from some of the products where you have the tariff on imports, like vacuum cleaners or air conditioners. I guess for that, it's more next year given the season, also then in terms of general component cost impact and how you expect that to phase in as we go forward in the next few quarters.
To start with the Section 232 tariffs, which mainly impacted on steel and aluminum, that's captured in our raw material outlook for the year. The Section 301 tariffs that came into force here in the beginning of July will affect our net cost efficiency. For this year, what's currently in place is in the range of $10 million plus for the rest of this year. The most recent $200 billion list is not yet confirmed. It's not yet in place, it's a little bit difficult to accurately assess what the impact is. You may know this, we're talking about a potential of 10% tariffs on a wide range of components and products.
We expect the impact on this year, if it goes into effect, to be relatively limited, that's not fully included in our current outlook, I have to say, because we don't really know exactly what's going to happen yet. I don't know, do you have any?
No.
No?
That's correct.
Okay.
A follow-up question just on the growth in Europe. You mentioned U.K. and Italy, but it's still surprising Western Europe hasn't grown now for the market demand for pretty much six, seven, or eight quarters, despite the very good economy. What do you see in terms of how the market breaks down, the replacement market, new construction? Can it all be just explained by the U.K.? Or why is the Western European market not growing at a time of near record consumer confidence and good GDP growth, at least for Europe?
The U.K. was the main explanation up until the early part of this year. In Q1 as well as in Q2, we saw, let's say, softer demand or certainly not much growth in countries like, as I mentioned, France and Italy, but also Germany. I would say it's a little bit different stories in different places. Italy, of course, we see a little bit of an impact from the political uncertainty. Germany is a market that has been at a relatively high level for quite some time. France, I think, has been impacted by a few sort of short-term impacts such as, you're aware, train strikes, and we had some weather events. I think those are more temporary. I think it's a little bit different as you go country by country.
As you know, we don't expect a ton of growth coming out of Western Europe because it's mainly a replacement market in general.
Thank you.
Sure. Okay, next question.
Thank you. Our next question comes from the line of Lucie Carrier of Morgan Stanley. Please go ahead. Your line is now open.
Hi. Good morning. Thanks for taking my question. I will have two question. The first one is overall on your expectation for underlying profitability this year. I think I remember that earlier in the year, you were kind of saying you were expecting underlying profitability to remain stable year-on-year despite the headwind. Of course, we are seeing now a bit more FX headwind coming through, some increase in raw materials or impact from tariffs. I was wondering if you could comment a bit more holistically on how you think about the whole profitability complex for the year.
Right.
That's question number one.
Yeah. I think absolutely we are seeing more headwinds on cost inflation in general as well as currency, and we are raising prices to offset that. That's, I would say, working well in the market. Of course, the consequence of those price increases are slightly lower demand outlook as we've guided for here. Of course, there's also a time lag in the implementation of those price increases. Overall, we're very, let's say, committed and convinced in our ability to offset these cost headwinds and currency headwinds, there is a lag in the implementation of those. That, of course, poses some additional pressure on our total full-year numbers, even though the catch-up is coming as we go.
Just for me to kind of understand your point here, are you still expecting underlying margin to be stable year-over-year? Are you saying there might be actually a lag and you might not be able to achieve that despite your initiatives?
We're expecting margins to remain quite stable. We don't give exact guidance, of course, we're expecting stability in our margins.
Okay. The second question I had was around Latam. You've mentioned actually quite a lot of headwind markets slowing down, but if I look at the organic growth in Q2, this is actually quite impressive. I have to have a bit of a challenge to kind of reconcile the more cautious comments with the performance you posted.
Yeah, I can understand that, of course. It's important to note that Q2 last year was very soft.
Sure
Brazil in particular, actually also for internal reasons, because we implemented a new system in Brazil in Q2 last year. There's a comparison effect that's quite positive. We did execute quite well on the volume side. We have a lagging effect here as well on price increases. As we see towards the end of the quarter and coming into this quarter, price increases coming into effect, we see a market reaction to those price increases. Of course, we also see the general sort of turbulence both in Argentina and Brazil that causes us to be a bit cautious about the overall market outlook. You have to put those various points in balance there. I understand your point because we had a fantastic growth in the quarter.
Okay. Thank you.
Sure. You're welcome. Thank you.
Thank you. Our next question comes on the line of Andre Kukhnin of Credit Suisse. Please go ahead. Your line is now open.
Good morning. Thanks for taking my question. The question I have is more in detail on North America pricing. You said you saw 2% underlying in the quarter. That was partially offset by Frigidaire celebrations. How should we think about this into the rest of the year? Firstly, when will the Frigidaire promotions end, and whether there is scope for a further price increase in North America later in the year, given that the raw material prices have continued to ramp up? Just related to that, the Frigidaire 100-year celebrations related promotions, what is the end benefit of that in your view, and when will we see that?
Right. I guess a bunch of different things there. Starting with the price increases, the 2% that we've seen in the market, excluding then these particular promotions, we expect to stick going forward and to be net realized going forward. The further cost challenges in particular, of course, any effects from the Section 301 tariffs, we do intend to price for also going into the second half of the year. Yes, we have actually already announced further price increases following these additional cost inflation headwinds. When it comes to the Frigidaire 100-year anniversary, of course, we really want to lift up the Frigidaire brand further in terms of the brand attractiveness and desirability. This is, of course, an extremely strong heritage brand in North America, and we want to really lift that heritage of strong Middle American values, and we're doing that as part of the 100-year celebration.
We have a great new range, fantastic products targeted at the Frigidaire consumers. Mass price points, but great design, great features. We're really seeing that work. We talked about our market share gains that we saw already in the second quarter, and first quarter as well, in our core Frigidaire range. We expect, of course, and want to continue to drive that going forward. The promotions around the 100 year are over. They've been over for a month. We're continuing to see good traction in the market. We're extremely pleased with this new range of products.
That's great. 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.
Thank you. Good morning. It's Martin from Citi. Just a question on cash. During the first quarter, you had lower cash flow, and you pointed to some seasonality or some adverse impacts in Q1 you expected to reverse as the year progressed, and that's not happened in Q2, so you've not seen a catch-up effect, if you like, during the second quarter. I know you pointed to some of the ratios on working capital are about stable. Should we expect that undershooting Q1 to catch up later in the year? Just a comment on cash conversion would be helpful. Thank you.
Yes. As we have guided before on working capital, we are seeing this trend now flattening out. As you might see, we're slightly lower on the inventory levels year-over-year. This is mainly related to the business model in North America. We will see this come down, but however, the contribution from working capital will flatten out year-over-year. That will be at a lower level. What's also worth pointing out here is that we have guided for SEK 6 billion in CapEx, and there's a seasonal effect in that as well. We will have more CapEx spend in Q3 and Q4 here of that SEK 6 billion. Yeah. I'll stop there, I think.
Yeah, the big point I think here is that last year, certainly in the first half, we had massive positive contribution from working capital, and this year we don't. That's the big swing. Of course, that we don't expect to reverse out per se, because we're talking about flat working capital. I think that's the key point. Okay.
Thank you. If I could just have a follow-up to that. Obviously, over the last decade or so, some of these working capital ratios have obviously seen phenomenal improvement, and it's been a big support to your free cash flow. Have you got to the point where with suppliers and so forth, the risk that payable terms and so forth begin to creep back against you and towards the suppliers? I realize you're saying that these things flatten out.
Is it possible that could become an adverse impact over the next few years?
Yeah. No, we have a very strong program on working capital across the group, and we don't see that as a risk at this point. It's a lot of focus on it, but we don't see that risk.
Okay. Thank you.
Thank you. Our next question comes from the line of Johan Eliason of Kepler Cheuvreux. Please go ahead. Your line is now open.
Yes. Hello, this is Johan of Kepler Cheuvreux. Just a question about this announcement last night, where you took a charge because of this bankruptcy of your previous subsidiary. Now, I understand that the French court has declared your sales organization in France in bankruptcy as well. This, I think it's relating to turnover more than SEK 4 billion per annum in France. Is that at risk now, or how should I understand that situation?
No. This is a technical effect because this former subsidiary was declared bankrupt some time ago. The court ruling basically says that this company should really be viewed as part of Electrolux France SAS, our major appliance subsidiary there. As a result, technically, that insolvency of that subsidiary gets extended to the major appliance business unit. This is just an administrative matter. The company is solvent. We are continuing to operate the business as more or less on a normal basis with some administrative work, which is painful, but it is not impacting our business per se, and we expect to get out of this situation quite quickly.
Okay, good. Just on North America, I think you mentioned a slight negative mix over there. Is that any way related to the private label and the cooking products still going down and the volumes that you are growing is more in the cold product areas, or was it just air con that is behind this comment?
It is mainly air con, which is of course in the peak season, typically very profitable. Right? That over the year, that is a lower effect. In these sort of peak quarters, it is an effect.
Okay. Private label, how much is that now?
Yeah. It's continuing down. We're talking about around, yeah, 12% of net sales.
Okay. Thank you.
You're welcome.
Thank you. Our next question comes from the line of Björn Enarson of Danske Bank. Please go ahead. Your line is now open. Bear with me a moment. We're having a brief technical issue. Okay, Björn, you may now go ahead and ask your question.
Yes. Can you hear me?
Yep. Hey, Björn.
Hey. Yeah, I have a question on the net cost efficiency and where you are. We have had a couple of good years behind us and exceptionally strong last year. Now you have talked about 2018 as a little bit of a transition year. If you look ahead, what are your normal level of support from savings on net cost efficiency when it normals out past this year?
Yeah, I wouldn't say that we are in a transition year actually on cost efficiency. We're continuing full speed ahead, Anna showed this in quite some detail at the Capital Markets Day, and we're not really deviating from that at all. I think what is a little bit particular this year is that we are seeing some significant sort of, how should I say, out of the ordinary cost inflation driven by particularly logistics, where we see fuel price increases and driver shortages. Also, the Section 301 tariffs that get baked into our net cost efficiency the way we display it. Thirdly, and also quite importantly, with this big currency effect that we see in Latin America, also drag with them cost of inflations outside of the CRM currency. In that sense, we are getting more pressure on that reported line, let's say.
The underlying cost efficiencies are continuing more or less on the same path that they were last year in terms of product cost efficiency and so on.
Quantifying that is roughly?
We showed it is around SEK 2 billion per year.
Yeah
in that sort of underlying productivity. Yeah.
The previous review that you were talking about on North American production, et cetera, has that changed anything or you're still with your SEK 6 billion CapEx outlook?
Yeah. For sure. The discussion about Springfield and so on does not impact this year's CapEx at all. This is anyway further out in terms of timing.
What could potentially be the outcome?
Well, we're still trying to optimize these investments based on these tariff regimes and what we see as the requirements for the market. We have time. That's the key point, right? This is an announcement that were made in the beginning of the year for a product that we'll be launching in two, three years' time. We have time to optimize these investments to make sure we're competitive in the market.
Okay. Thank you.
Based on tariffs and all the things that are going on.
Thank you.
Sure.
Thank you. Our next question comes from the line of Christer Magnergård of DNB. Please go ahead. Your line is open.
Good morning. Just some more questions on pricing and the comments you made earlier about stable profitability. To start with on pricing, what kind of price increase are you implementing here in late Q3 in Latin America and North America to start with?
In Latin America, it's very significant price increases, particularly notably in Brazil and in Argentina. We're talking about high single digits to low double digits in several cases. That's also, of course, the reason why we're calling down a bit because it's not just us, it's the market, right? The cost pressure is there. We're calling down the market outlook a bit. In North America, it's more about getting these 2% that we've raised to stick and some, at this point at least, more marginal further increases on top of that. We're not talking about massive additional price increases at this point. We'll see what happens with Section 301 tariffs and so on going forward. We are retaining flexibility to address that depending on the outcomes.
You previously talked about earnings growth in the second half, now you're talking about the stable profitability for the full year, which basically means that you should see earnings growth in the second half. Is that still valid, given your comments about cost inflation and lagging price increases?
Obviously, we don't give exact earnings guidance on a quarter-by-quarter basis. My comments are around stable profitability levels. That's what we're seeing going forward.
Finally, just a quick question on, you have launched a couple of partnerships here over the last quarter with Innit, and SideChef, for instance. Is this a new strategy or what should we expect here?
Yeah. I think this is partially a new strategy. Of course, as we see, particularly in the cooking area, these new networks coming into place where people integrate their overall shopping, preparation, cooking, and sharing experiences. We see lots and lots of opportunity around that in really helping consumers to make more innovative, better-tasting, healthier food. We're super excited to work with great partners to develop that further and make that into a number of platforms for food and taste enjoyment that we play a very important role in. We see a lot of value creation opportunities there.
Great.
Sure. Thank you.
Thank you. Our next question comes from the line of James Moore of Redburn. Please go ahead. Your line is now open.
Yes. Good morning, Jonas, Anna, Sophie. My line was cut off for a couple of minutes earlier, so apologies if I'm repeating. Without putting hard numbers on it, which I guess you won't want to do, can you say if the revenue drop and the EBIT drop in North American air conditioning were of a similar magnitude to that that you saw in the first quarter, or were they worse or a bit better than that?
Similar.
Okay. Thanks. On the promotional expense, I guess I could maybe try and calculate back from the 2% to a more modest price, but are you able to quantify the promotional expense that you took in the 100-year anniversary promotion, and how much, if any, will carry on into the third quarter or the second half?
I would say we probably, in the order of magnitude of half of that price increase, were kind of offset by the 100-year celebrations. Going forward into the second half of the year, those are over. We're talking about realizing that full price increase benefit.
That's clear. Thanks. Lastly, your SEK 86 million central line, if I'm correct, seems quite low.
Yeah.
Are there any exceptional positives in there? What sort of quarterly run rate should we think about going into the second half or next year? Is that a new normal or is it an exceptional number?
There are no particular one-off events in there, but there are some timing differences. This is for sure lower than what we expect the run rate to be, but we do see our full-year group common cost to be lower than, or in the low end of the range that we communicated of SEK 600 million to SEK 700 million for the full year.
Very helpful.
Sure.
Thanks.
Thank you.
Thank you. Our next question comes from the line of Johan Eliason of Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Thank you for my follow-up here. I was just wondering, I didn't quite understand the Anova accounting. You said there was a loss in the quarter, but that was compensated by an earn-out. Was that sort of
Yeah
provision that was released from the balance sheet from previously assumed price for Anova, or how should I understand it?
That's correct. Basically, as we then continuously assess the likelihood of that additional purchase consideration being paid out or not, we have to then make an evaluation of that. If that changes, then you have to take that through earnings. Of course, we had a weak quarter, we had to release some of that. That's the
That was SEK 100 million positive then from the balance sheet?
That's correct. Yeah.
Okay. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Andreas Willi of JP Morgan. Please go ahead. Your line is open.
Yeah. Thanks for allowing a follow-up question. I just wanted to ask about private label in the U.S. into next year. Maybe you could give us an update where we stand. I think you have a contract that may or may not expire next year, and the business is currently, or Sears is currently in discussions about their future. Maybe you could just provide some information on how you think about the business as we go into next year and the risks and opportunities from all these changes.
Yeah. No, I of course, can't comment on our plans and negotiations with individual customers. I think you have to rely on the public information available. Sorry.
Is the contract running out next year, the existing contract, is that correct?
Well, the old contract that we had, yes, is running out, that's, of course, we have ongoing discussions with all our customers about contracts. We don't in general have indefinite contracts with our customers. Those are continuously renegotiated.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Jack O'Brien of Goldman Sachs. Please go ahead. Your line is open.
Hi. Good morning. Just following up on U.S. Top-line growth. First quarter, we saw organic sales growth -5%, second quarter, -10%. I appreciate there's some private label in there. Top percent sales maybe going back 20% or 30%. That's like a two, three percentage point drag. Obviously, air con was weak. How should we be thinking about the competitive environment? I hear anecdotes of higher stepping up pressure. Obviously, Samsung and LG have reshored. What should we be thinking, I guess, about your second half organic sales growth for that region? Thank you.
Yeah. First of all, if you look at the AHAM numbers, they were +5% in Q1 and then -5% in Q2. That, I would say, accounts for that difference, let's say, in the growth rates between the first and the second quarter. There's nothing extraordinary that's happened in market shares between the two quarters. Quite the contrary, we're continuing to execute, as I mentioned, very well, I would say, on the new range of Frigidaire products in the core range, and we're gaining market share there. I would say there's nothing new or extraordinary to note in the competitive environment.
Okay. Thank you.
Sure.
Thank you. Our next question comes from the line of Kari Rinta of SEB. Please go ahead. Your line is now open.
Karri from Handelsbanken. Just a quick follow-up on the CapEx number, because after the first half, you are now at SEK 1.8 billion spent so far. You have mentioned a few times that you still stick to the SEK 6 billion guidance. Can you give us some specifics on where exactly you expect to spend those remaining SEK 4 billion in CapEx during 2018? That would be helpful.
Where? In what regions or?
Yeah, regions and any specifics that you can give.
Yeah. I think we have ongoing program in Latin America. We also have an ongoing program in North America. I think in terms of the higher CapEx run rate for this year, those are the two regions that we've called out.
Yeah.
A follow-up also on the input costs. Now we are in July, and you revised your input cost guidance slightly for this year. Besides the third potential tariffs that you mentioned that is not fully incorporated in your input cost guidance, is there any outstanding risk in any other, maybe some metals and so forth for this year? Are you pretty much fully set now for this year?
I think metals in particular steel, but metals in general is quite tied. Whereas, plastics, some of the chemicals you basically can't hedge for. In some cases, there's month-to-month pricing on those, so there's still some exposure there.
Okay, thanks. The small technical related to Home Care & SDA, you mentioned that in the second quarter you had some losses related to upcoming launches in Anova, which were offset by this earn-out adjustment. Now when you don't have this earn-out adjustment in the third quarter, are you confident that you get those launches out of the door and the underlying profitability will improve?
Yeah. We have some really exciting launches in Home Care & SDA overall in the second half of the year. We'll talk about them after Q3 because some of this is not publicly launched yet. We have some fantastic new cordless products. As I mentioned, the market is shifting very rapidly. We expected to shift, but it's happening more rapidly than we had expected to cordless battery-powered products. We're a little bit behind the curve here in these launches. We will catch up on that in the second half. Also in Anova, actually we have started shipment of a new product there. We expect that to start to kick in Q3. These types of products, the Anova products are very Christmas season driven, so fourth quarter is really the peak for those products.
All right. Thank you.
Okay. We thank you for your questions and start to wrap up this call. Thanks a lot for the interest, and of course, the main story today is that we're delivering on track despite the increasing headwinds that we're facing. We're continuing on our strategy of moving towards profitable growth. I made some of the highlights just a few moments ago, but we're really confident in the strength of our product offering. We've launched great new products. They're gaining market share in the marketplace. We are acting from a position of strength as we're facing these cost headwinds and currency headwinds, which are driving us to raise prices. Again, we're doing that out of a strong position in the marketplace, and against an overall quite positive economic backdrop. We are redoubling our efforts on cost efficiency, and we'll continue to drive that throughout the year.
Overall, we're coming from a position of strength as we enter the second half of the year. With that, I thank you very much and wish you all a great summer and look forward to seeing you soon again.
This now concludes our call. Thank you for attending. Participants, you may disconnect your lines.