Good morning. Thanks for joining the presentation and discussion of Electrolux first quarter results 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. We started the year with a solid performance across most of our business areas, supported by continued favorable demand trends across regions. Our focus on profitable growth continued in Q1, delivering a sales growth of 3.3%, of which organic growth was 1.8%. I'm pleased that we gained share in our core products and brands in key markets. During the quarter, we implemented previously communicated price increases. The impact started to become visible in our net price in March.
As previously announced, we took the restructuring charge of SEK 596 million relating to the consolidation of our North American operations. Excluding this charge, operating income was in line with last year and amounted to SEK 1.4 billion, corresponding to a margin of 4.9%. Our consistent focus on strategic portfolio management and cost efficiency paid off in offsetting accelerating cost for raw material and also unfavorable currency effect. Looking at our business areas, I'm pleased that EMEA and Asia Pacific continued to deliver strong organic growth and earnings improvement, reaching an operating margin of 6.2% respectively. North America showed growth in core appliances under own brands, while volumes under private labels and air conditioners declined. Our operations in Latin America delivered growth in the quarter, supported by the market recovery.
Earnings was down as we could not fully compensate for the headwind from raw material and currency with positive price effects coming late in the quarter. Home Care and SDA showed stable performance compared to last year, and professional products started the year with solid numbers. All in all, good growth and solid earnings. Let's turn to market highlights. During the quarter, Electrolux continued to launch innovative products, showing our ambition to invest in connected appliances that enhance the consumer's experience and create new business opportunities. In March, we launched a new connected steam oven with an integrated camera, the CombiSteam Pro Smart. The oven provides a live feed from the oven to a mobile device, and consumers can now send recipes directly from their mobile device to the oven. Sweden and Norway are the first market where the product is made available to consumers.
In the quarter, we also announced a strategic partnership with Innit, an American tech startup that will deliver personalized cooking journeys to our consumers in the kitchen. I'm also excited to mention our most recent launch in the U.S., where just a few weeks ago, we announced the launch of the Pure i9 robotic vacuum cleaner. Together with the Anova team, we're leveraging their digital expertise and consumer-focused approach. The innovation hub in San Francisco is in charge of marketing and selling the product to U.S. consumers. The Pure i9 was launched in Europe last year and recently won the prestigious iF Design Award, and has earned best-in-class ratings from leading tech publications around the world. I would also like to highlight the official launch of the AEG brand in China through a joint venture.
We're leveraging the brand's heritage of German craftsmanship and innovation, and the first products will reach stores in June, and launches will continue throughout the year. Finally, I'd like to mention that our strategic focus on best-in-class consumers experience was visible at Eurocucina in Milan, one of the world's most influential kitchen trade shows. This year, we showed an impressive array of the innovative products that are helping our consumers create great-tasting food. Major appliances EMEA showed strong organic growth of 7.6% in the quarter. Together with growth from acquisition, sales growth was 10%. Market demand was favorable, driven by Eastern Europe, and our volumes increased, particularly in built-in kitchen and laundry. We continued to gain market share in premium brands, and the mix continued to be positive for EMEA in the quarter.
Earnings increased 27% year-over-year, and the EBIT margin increased to 6.2% from 5.6% in Q1 last year. This was driven by good volume growth, mix contribution, and cost efficiency, which in total offset the negative impact from increased raw material cost and currency headwinds. Looking at the market development on next slide, the European market continued to show favorable demand trend in the quarter, with total unit shipments up 1.2%. Markets in Western Europe were stable, and we noted strong growth in the Nordics and the Benelux, while demand in the U.K. continued to decline. Demand in Europe was particularly driven by the strong growth in Eastern Europe, including Russia. Demand in the region accelerated and grew by 6%. We expect the European market to remain favorable in 2018 and reconfirm our full-year growth outlook of 1%-2%.
In North America, our sales continued to decline on private labels. We were also impacted by significantly lower sales volumes of air conditioners, driven partly by an overall lower demand due to cold weather and by lower sales to one customer due to listing changes. However, I'm very pleased with the strong growth in our branded core appliance business, and we gained market share on the back of our recent product launches under the Frigidaire brand. In mid-March, the previously communicated price increase took effect. However, the U.S. appliance market remains competitive with ongoing promotional activities, especially around the holidays. Starting in Q2, we are also celebrating our 100-year anniversary of the Frigidaire brand. As previously communicated, we initiated in the quarter the consolidation of the freezer production to our Anderson facility and took a restructuring charge of SEK 596 million.
Excluding this charge, operating income declined mainly as a result of lower volumes and increased cost for raw materials and logistics, as we have seen freight cost go up during the quarter. The corresponding margin for the quarter was 5.0%, supported by increased cost efficiency and improved mix. Let's turn to next slide and talk about the market development in North America. Market demand for core appliances in the U.S. started the year strong and grew 6% in the first quarter. Market demand for microwaves and home comfort products was, however, down 10% year-over-year. With five consecutive years of positive growth, we still believe the market for appliances remains favorable, supported by a healthy macro environment. For the full year 2018, we confirm the outlook for the North American market growing in the range of 2%-3%. Let's move to Latin America.
Demand for appliances in our Latin American region continued to show recovery in the first quarter. The industry shipments to retailers, however, was lower than the consumer demand as we saw some retailers destocking appliances preparing for the upcoming football World Cup. On the back of this, Electrolux delivered an organic growth of 6.4%, supported by the improved sales volumes, mainly in Brazil and Chile. The increase of volumes was particularly in the lower margin segments, while the mix continued to have a slightly negative contribution. Electrolux took market share in Brazil during the quarter. During the quarter, we began the implementation of price increases, and we continue to carry out these in the coming quarters. This is to offset the significantly higher inflation and cost for raw materials, as well as currency. All in all, operating income decreased versus a strong quarter the prior year.
This was a result of higher raw material cost, higher cost inflation, and currency headwinds. In the Asia-Pacific region, our operations continued to perform well and achieved an organic sales growth of 7.6%, supported by overall favorable market demand trend. Sales increased, particularly in Australia, New Zealand, and East Asia, across most categories, and we gained market shares. EBIT in Asia-Pacific improved versus last year, and the margin increased to 6.2% in the quarter and 8.7% in the last 12 months. The strong volume development was the main contributor. Better cost efficiency also contributed to earnings while ramp-up cost for the joint venture in China impacted earnings negatively. Let's continue with Home Care and SDA. The Home Care and SDA business continued to execute according to the profit recovery plan.
Our sales in the quarter declined due to lower volumes of vacuum cleaners, particularly in Latin America and in Europe, partly due to a product transition for new energy requirements in Europe. The previously communicated supply constraints within cordless vacuum cleaners has been resolved over the course of the quarter. Mix improvements contributed to sales. Our operations showed a slight improvement in earnings, and the EBIT margin increased to 3.8% from 3.4% in the previous year. Strong mix improvements and currency contributed to earnings, while the lower sales volumes and increase in innovation investment had an adverse impact. We remain focused on executing our plan to restore profitability through new innovations and by repositioning our business to the most profitable categories.
The acquired smart kitchen appliance company Anova had a positive impact of 2.8% on sales in the quarter, and the new high-end robot vacuum cleaner is continuing to sell well. Let's turn to our professional business. Professional products continued to deliver solid performance in Q1. Organic sales grew by 1%, and the acquisition of Grindmaster-Cecilware had an 8% positive impact on sales. Earnings remained at a high and stable level versus last year and benefited from the positive organic contribution in spite of pressures from higher raw material cost and currency. Operating margin for the quarter was 12.4% and was negatively impacted by dilution effects from the acquisition of Grindmaster-Cecilware, as well as from increased investments for new product launches. During the quarter, the acquisition of the laundry solution supplier Schneidereit was completed. The acquisition enabled us to develop our offering within laundry rental solutions and grow new revenue streams.
With that, I'd like to hand over to Anna and go into the financials and the cash flow of the first quarter.
Thank you, Jonas. Okay, let's start with the financial overview. Organic sales growth was up 1.8%, mainly driven by EMEA, Latin America, and Asia-Pacific. More than offsetting the organic decline in North America and Home Care and SDA. The acquisitions had a positive impact of 1.5%, and currency translation impact was negative 4.4%. In total, sales adjusted for currency was up 3.3%. Gross operating income, defined as net sales minus cost of goods sold, was lower than in Q1 last year, SEK 4.9 billion versus SEK 5.9 billion, and translated into gross margin of 17.5%. This included a restructuring charge of SEK 0.6 billion, and adjusting for this non-recurring item, the gross margin came in at 19.7% compared to 21% last year.
This was mainly due to increased cost for raw material, logistics cost, and cost for source product not being fully offset by other variable cost productivity, in combination with price increases taking effect late in the quarter. Operating income, excluding non-recurring items, remained at a stable level, although slightly lower year-over-year. We managed to a high degree mitigate accelerating input cost pressures and unfavorable currency effects with product mix improvements and higher cost efficiency. The margin in the quarter, excluding non-recurring items, decreased slightly by 0.2 percentage points to 4.9%. Reported earnings per share decreased in the quarter and came in at SEK 1.92, versus SEK 3.52 in the same quarter last year. Earnings per share excluding the non-recurring item was SEK 3.43. Looking more closely at EBIT on the next page. Volume price mix had a slightly positive impact on operating income in the quarter.
Sales volumes were negative, impacted by the continued decline of private labels, the larger impact came from the significantly lower volumes of air conditioners in North America. Price in the quarters was slightly negative as the price increases, mainly North and Latin America, were coming into effect late in the quarter. In contrast, I'm pleased that we had positive mix improvement across most business areas to more than offset the negative impact from volume and price. The headwind from raw material was SEK 392 million, was offset by improvements in net cost efficiency of SEK 432 million. This was related to efficiency actions throughout the group and mainly in EMEA, North America, and Asia-Pacific. The net negative impact from currency was mainly related to currency headwinds in Europe, due to the weaker CHF and RUB, and Latin America due to the weaker ARS and BRL.
The acquisitions had a slightly dilutive effect on the group. Adjusting for the restructuring charge of SEK 596 million, the operating income was SEK 1,360 million. Looking at the earnings contribution from price mix, I'm pleased that most of our business areas contributed to the 0.6 percentage points positive EBIT margin accretion on the group level. EMEA had a strong mix, fueling market share gains in premium brands, mainly built-in kitchen, but also in premium laundry. The price erosion continued, but at a lower pace. In North America, the positive contribution was mainly driven by mix improvements, and in mid-March, the price increases took effect. As Jonas mentioned, the U.S. appliance market is still competitive in terms of promotional activities, especially around the holidays. Also in Latin America, we implemented price increases, which more than offset the slightly negative mix. In Asia-Pacific, price mix was negative due to lower price.
As you've seen on the previous slides, this was more than offset by the strong volume contribution, which was the main reason for the business area's higher EBIT margin. Home Care and SDA benefited from strong mix across regions and on all product groups, and also Professional showed positive price mix in the first quarter. Cash flow after investments, but before acquisitions, came in at a negative SEK 2.7 billion and was at a lower level versus previous year. The deterioration in cash flow compared to the corresponding quarter in the previous year can to a large extent be explained by timing effects related to accounts payable. Cash flow for the first quarter is normally low since there is a seasonal buildup of inventories. The cash flow from working capital in the first quarter of 2018 also reflect this trend.
Overall, the strong focus on working capital throughout the group is continuing to pay off. The average net operating working capital in relation to rolling 12 months net sales came down to 4.2%, an improvement from 4.4% last year. Investments in the quarter were slightly higher versus last year due to the ongoing investments in re-engineering, innovation, and automation, mainly related to North America. With that, I would like to hand over to you, Jonas, to review our outlook and conclusions for the first quarter.
Thank you, Anna. Let's move on to our outlook and start with our market view. We expect the positive demand for home appliances across most market to continue and reconfirm our full year market outlook for 2018 versus last year. For the markets in Europe, we expect demand in Western Europe to remain slightly positive despite the weak outlook for the U.K., while in Eastern Europe, we expect the region as a whole to grow strongly. All in all, we expect demand in Europe to increase by 1%-2%. We anticipate demand in North America to show continued growth by 2%-3%, supported by the healthy macro environment and consumer sentiment. Markets in Latin America continue to show recovery, and we expect demand in that region to improve with a growth rate of 3%-5%.
The overall demand outlook in East Asia remains positive, we continue to expect demand in the Australian market to grow by 1%-2% in 2018. Looking at our group business outlook for Q2 and the whole year 2018. We continue to expect the positive organic trend from volume, price, and mix to be a key driver in the next quarter and for the full year. We accelerate our focus on targeted growth. Investment in new products and portfolio management should result in mix improvements, as well as increasing contribution from price increases in our key markets taking effect. As earlier mentioned, we're planning for promotional activities in North America during the second quarter. As we enter the second quarter, we have seen pressures building up in raw material costs, both direct and indirect raw materials.
The prices have come up in the market since our last outlook, partly due to the announcement of trade barriers for steel in the U.S., but also in other commodities like oil. This is affecting our cost for carbon steel, plastics, chemicals, and transportation. We currently estimate the negative year-on-year impact from raw material costs to increase by approximately SEK 400 million for Q2, and by SEK 1.6 billion-SEK 1.8 billion for the full year. There's still some uncertainty here related to the ongoing trade discussions in the market. For the full year 2018, we continue to plan to offset these raw material headwinds with our cost efficiency measures in combination with price increases. The full effect of these price increases will be more skewed towards the second half of the year. Our overall performance outlook for 2018 is unchanged.
In Q2, investments in innovation and marketing impacts net cost efficiency negatively. This is to strengthen our competitive position and to support our ongoing launches and planned product innovations. Headwind from currencies is expected to be negative in Q2, mainly due to a stronger EUR in EMEA and weaker currencies in Asia-Pacific. For the full year, we expect a negative currency impact of SEK 400 million. As we pointed out, our focus this year will be to take the next steps in our journey towards targeted profitable growth, investing in product innovations and automation to strengthen our competitiveness. Our CapEx outlook of SEK 6 billion remains unchanged. With that, I'd like to pass it to Sophie Arnius to explain the procedure for the Q&A.
Thank you. Before we begin with the Q&A, let me remind you that as we conduct the session, please keep your questions one at a time so that those who are waiting in line will also have a chance to ask a question. If you wish, you can then come back to the line for follow-ups. With that, operator, please go ahead and take the first question.
Thank you. Ladies and gentlemen, just as a reminder, if you do have a question, please press zero one on your telephone keypad to enter the queue. Our first question comes from the line of Andreas Willi from J.P. Morgan. Please go ahead, Andreas, your line is open.
Yeah, good morning. Thanks for your time. My question relates to the outlook comment you just made that you say that basically the message on the full year hasn't changed. Given that you have about SEK 800 million more headwinds from FX and raw materials than you expected a few months ago, maybe you could elaborate a little bit why that doesn't change the full-year outlook, and how much incremental cost savings you are planning to get, and what that cost savings number now is for the full year compared to before. Given you expect promotional activity in the U.S. in Q2, where does the confidence come from on the pricing that by the second half of the year can offset these headwinds? I'm just a bit surprised if you can have an SEK 800 million increase in headwinds, that you can just offset that easily for the full year.
Thank you.
Right. The offset of these higher headwinds is the combination of price mix and cost efficiencies. We are implementing price increases. As we speak, we had actually positive net price performance in the month of March, also in North America. We are seeing and we do expect to continue to see positive net price contribution in most major markets, particularly Latin America and North America. However, the full effect of those price increases is more skewed to the second half of the year because of these planned promotional activities that we're driving in Q2, specifically in relation to that Frigidaire 100-year anniversary, which is something that of course we want to celebrate and drive. We are very, very pleased with the new introduction of the Frigidaire core range, and we're getting great traction, great distribution of those products, and we want to continue to fuel that.
We're very, very optimistic about our market traction in the U.S. and our ability to continue to drive positive net price as we have done in March. We are focusing on more cost efficiency delivery, as we also showed in the first quarter, quite strong performance. In the second quarter, we're reinvesting a little bit of that in product launches and marketing activities, again, partially around that 100-year celebration, as I mentioned. That's out of confidence rather than anything else. We feel very good about, again, our new Frigidaire range that's actually growing by double digits in the Frigidaire core branded. Frigidaire is growing by double digits in the first quarter of 2018. Overall, yes, we are getting the price increases in place in Q1.
We will see continued traction of that in Q2 and even more in the second half as we continue to ramp up. Our cost efficiency measures are working, as we showed in the first quarter. We'll continue to drive that. We will selectively choose to reinvest some of those savings in driving further growth and also getting the positive pricing to stick. Overall, we see more cost efficiency opportunities for the full year than we did at the beginning of the year. Price mix and cost together offset these SEK 800 million.
Just to follow up on the U.S. pricing, if we look at the data we get on our Bloomberg terminals, if you look at the major appliance pricing, the CPI, the consumer index, it keeps going down, but the PPI measured at the manufacturers is going up. How do you explain that? Or is that just not comparable?
No.
Somehow the price increases in the market doesn't seem to show up in the statistics.
I think there's obviously a lag. As we mentioned, our pricing only really kicked in March in the U.S., and I don't expect that would have had any impact on retail prices in the first quarter. I think there's a lag there. Yeah.
Thank you.
Sure.
Thank you. Our next question comes from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah. Hi, this is Johan. Just keeping on the price discussion. I was a bit surprised to see that you talk about negative pricing in Asia Pacific. What's driving that? Is there any new competitors, or is it simply so that one of the key markets have been more promotional there as well? In general, where do you think it will be most difficult to get your price hikes to stick in terms of geography? Thank you.
Right. If we start with Asia Pacific, this is mainly, or this is exclusively Australia, where we did a tactical, I would say, repositioning of some of our tactical brands in Australia, actually last year, which has a year-over-year impact in this year. That's actually showing great traction. We're growing profitably in Australia and we're further strengthening our position there. That's a little bit of a special case where we saw an opportunity to strengthen our position further in an already strong position that we have. In terms of pricing, we are getting positive price increases actually in most markets. I would say the one part of the world where we're playing more with sort of combination of price and mixes is Europe, where we have, as you know, we've introduced a new range of AEG products. We're refreshing the Electrolux lineup.
We have really good traction in those products and growing profitably and mixing up. There's less of a need to raise list prices, let's say, in some of the European markets, even though we are doing it in several European markets like the U.K., like Russia, like Switzerland. But that's where it's a little bit of more of a sort of a combination of driving mix and volume and price. In North America and Latin America, there we have straight price increases that are, as I mentioned, kicking in the month of March with positive net price realization.
Just on the cash flow, obviously Q1 tends to be negative. This was even worse. How do you see the cash flow for the year considering that you have these inventory builds you talked about at the Capital Markets Day from more online, et cetera? Do you think you will be able to meet last year's level?
No, we did not guide that we would meet last year's level in 2018. We are exactly where we plan to be for the full year. There's always these quarterly fluctuations, some point-to-point fluctuations on working capital. We also had some outflows related to customer bonuses and so on in the first quarter, it doesn't change our overall outlook. What I think we did guide for in the Capital Markets Day was more sort of flat development for working capital and an increase in capital expenditures.
Okay, excellent. Thank you.
This is more timing effects. We're internally not changing our view of the full year, even though we don't give an external outlook in more detail. Our work on working capital is continuing in a very good way.
Good.
Thank you. Our next question comes from the line of Andrey Kuklin from Credit Suisse. Please go ahead, Andrey. Your line is open.
Yes, good morning. Thanks very much for taking my question. It was really on Latin America evolution there and in particular, that gap that you saw of raw materials and FX, negative impact versus pricing not yet kicking in. Can you just help us quantifying that and whether you have confidence on closing that in the subsequent quarters from what you see from your price realization already? Related, I guess, to that, the retailer destock effect that you saw in the quarter. Again, could you give us some idea on the size of that and whether it's ended?
On the price versus cost, obviously, as you indicated, we didn't fully offset the cost increases through price in the quarter. However, in March, we saw good net price realization and more or less offsetting the cost pressure at that time. Since then, and that's reflected in our current outlook, the BRL in particular has weakened further. We are going to announce further raised prices in, particularly in Brazil, but also in Argentina going forward. I think the cost headwinds, particularly driven by currency, are increasing and our prices will continue to be increased to face that as we go through the year. The overall underlying demand, as I mentioned, is quite solid. We see the trends that we had pointed out before, unemployment, interest rates, consumer confidence continuing to improve.
We're not concerned about the overall demand outlook in our key markets for the year, and we are confident that we'll be able to offset these cost pressures through pricing. Excuse me. When it comes to the retailer destocking, from a consumer perspective, we did see mid-single-digit growth in retail demand in the quarter, but relatively flat, let's say, wholesale demand growth, particularly in Brazil and also in Argentina. We do expect that slight pressure, let's say, from retailer inventory mix away from appliances into TV in particular, to continue through the second quarter, as usual. That always happens when there's a soccer World Cup. The promotional activity, the stock, and so on, is focused more on TVs than on appliances around the World Cup. We expect that to subside and level out in the second half of the year.
Thank you very much. Can I just follow up on cash quickly? The payables build-up you mentioned, is this the timing of the weekend of Easter falling on the end of the quarter, or was there anything else in there that impacted that?
Yeah. Those are effects that can play into the AP balance, but this is also a year-over-year effect, so it can also have the timing on other kind of payables and the timing of those versus last year in general. Accounts payable is one area that we focus a lot on in our net operating working capital program as well. As the benefits of those initiatives kick in, you can have a bit of a year-over-year volatility, if you call it that. The underlying is very good, and we feel confident about our working capital.
Got it. Thank you very much, both.
Thank you.
Thank you.
Thank you. Our next question comes from the line of Christer Magnerg ård from DNB. Please go ahead. Your line is now open.
Good morning. The first question is a follow-up question to what you said earlier about price mix and the cost savings. Did I understand it correct that you said that those effects will offset the FX headwinds and raw material costs for the full year, but that Q2 will be a bit tougher?
That's correct. Yes.
Yeah. The potential earnings growth then should come from the volumes, I guess. Are you seeing a net positive effect from price mix?
No. For the full year, we see volume growth, absolutely. Yeah. I think it's worth to maybe point out, nobody has asked the question yet, but on the impact that we're seeing from air care here in the first quarter, honestly, we do expect that weakness to continue into the second quarter. As many of you know, this is a very highly seasonal trade. We see those negative effects in the first half, they're washed out in the second half. Just continuing on our current sales trend, we will see a significant positive volume contribution in the second half of the year, just mathematically. Just to be clear on that.
Great minds think alike, because that was my second question.
Okay. Right.
on air care. The final one, on price mix. In Q1, you said that you had a price mix effect of 0.6%, looking at operational leverage, you talked about that very quickly in the EBIT bridge for Q1. Operational leverage on organic growth was almost nothing. Why was that?
That was because of the air care.
Okay.
Yeah.
Okay. Thanks.
Sure.
Thank you. Our next question comes from the line of Jack O'Brien from Goldman Sachs. Please go ahead, Jack. Your line is open.
Hi. Good morning, everyone. I've just got a question on how you're seeing the competitive backdrop at the moment in EMEA. Obviously, strong growth above market. Are you taking share there? Secondly, in the U.S., related to the lower air care volumes, I'd heard that perhaps Haier was becoming a bit more aggressive in that segment. Do you think that's also a cause for the challenging volumes you saw? Thank you.
Right. We are indeed very pleased with our traction in EMEA, both around the AEG and the Electrolux brand, and in particular, as mentioned, in built-in kitchen as well as in premium laundry. We're really executing on our strategy there, and we're gaining quite significant share in Europe. Continuously, not just in the first quarter, but we've done that for a while. In North America, as I indicated, our Frigidaire core products grew double digits in the quarter. We have fantastic traction with our new product. The Frigidaire brand is really refreshed from a lot of perspectives. We see that continuing with great traction, and we're continuing to fuel that, as I indicated. The air care situation is driven by two things. It is a very cold start to the year, and continuing. Actually, we're continuing to see a very cold weather in Northeast U.S.
Indeed, we have lost certain listings to competition on window wall air conditioners. Of course, we don't talk about individual competitors, but that is a reality, yes.
Perhaps just a point of clarification, if I may. When you mentioned that cost efficiencies will be able to offset the higher raw material costs, can I just understand where those additional cost efficiencies will be coming from? Can you just clarify that, please?
Right. We're not saying that net cost efficiency will offset all of that raw material cost increase. There will be a combination of more price and more cost efficiency. On the cost efficiency, I think we have great traction on a number of items. Of course, the underlying just sort of variable cost productivity is continuing to be very strong. We're accelerating that further. We have great traction on our warranty cost performance. Our quality is improving, and that's resulting in lower warranty costs. We're accelerating our continuous improvement program for our structural cost, so higher overhead SG&A cost productivity. We're really pushing on all the levers there and continuing, again, as we saw in the first quarter, very good traction on our cost efficiency performance. What we balance with, of course, is then how much of that productivity we reinvest in driving profitable growth.
There we have a certain amount of flexibility as we also kind of showed here, again, in the first quarter that because of, for example, in the U.S., that lower traction on air care, we were able to pull back a little bit on some of our discretionary spending. We're continuing to balance and reinvesting where we see the opportunity to drive profitable growth.
Perfect. Thank you, Jonas.
Sure.
Thank you. Our next question comes from the line of James Moore from Redburn. Please go ahead, James, your line is open.
Good morning, Jonas. Can I clarify when you say the message on the full year has not changed, what you mean there? I think at the Capital Markets Day, you indicated the core target to improve EBIT 7% per annum, including 2018. Can I just clarify that you expect that from a SEK 7.4 billion base? Within that, can you talk about how you expect full-year margins to develop year-on-year in North America and Latin America against last year? Because they seem to be some of the issues today.
During the Capital Markets Day, we indicated that we expect earnings to improve in 2018. We didn't say the number 7% there, and we're not changing the fundamental outlook for our EBIT performance for 2018. You look at the various components of that, we did indicate also at the Capital Markets Day that of our sectors, the one where we're going to have a little bit of a tougher ride is North America, as a result of the fact that we are currently reinvesting and re-engineering our product offering there, and that these 2018, 2019 will be a little bit sort of less positive earnings traction. That's what we're seeing here in the first quarter as well. However, we do expect to improve versus the current run rate in the second half of the year as we come out of this air care effect that we've highlighted.
Latin America, we continue to feel very positive about. We are seeing higher cost headwinds that did have an impact on us in the first quarter, that's accelerating further, will have an impact also in the second quarter. We are raising prices, and we're continuing to see good traction of our sales. We will be able to offset that and feel very confident that we'll continue positive earnings development overall for the year and also in Latin America.
Just a quick follow-up, thanks. On the net cost efficiency, I think you mentioned around SEK 1 billion too. You haven't been that explicit today. Is that number broadly unchanged, or can it lift a bit with the discretionary aspect?
We didn't really give a precise indication in our outlook, we are further accelerating a bit on that. I would say the main further improvement versus our original guidance is on price and mix. That's where we're really seeing good traction for the rest of the year.
Thank you very much.
Sure.
Thank you. Our next question comes from the line of Björn Enarson from Danske Bank. Please go ahead. Your line is open.
Yes, hi. Thank you. Could you talk a little bit about your re-engineering or reinvesting in North America? You have had some messages a little bit back and forth there, you're sticking to your CapEx guidance, of course. Where are you in your plans, and how will it look like going forward?
Yeah, of course, the trading, let's say, or tariff outlook for North America remains a bit uncertain. We are, of course, continuing to reevaluate specifically what investments and how we're going to execute those for the coming years. As we don't yet have transparency on that, we're continuing to monitor our options.
There is a need in any way, I guess, to do some reinvestment in those plants in North America.
Yeah.
It's more of the structure or more detail?
First of all, when it comes to our refrigeration re-engineering, that's continuing exactly as planned.
Yeah.
On the cooking project, focused on Springfield, that's the one that we're taking a deeper look at to fully understand the impact of any potential sort of trade consequences on our cost structure and what we need to do about that. That is still, I guess as you know, a little bit unclear exactly what that will be.
Yeah, at least for me. Would you say that this is delaying your progress or?
No, not at this point, because we're not at the stage where we would have spent major capital anyway, and we're continuing the engineering work, but we're not spending major capital at this point until we understand better what the outlook is.
Do you like to tell us when you need to take that decision to not to get delayed from your initial plans?
No, I think we're not in a spot right now.
Cool. Thanks.
Thank you. Our next question comes from the line of David MacGregor from Longbow Research. Please go ahead, David. Your line is open.
Yes. Good morning, everyone. Jonas, I just wanted to ask about European pricing. It sounds like you're pursuing pricing more aggressively in the American market, in the Latin American market, the Asian market. You talked about going after selective increases in Russia, Switzerland, and U.K. I'm guessing that raw material inflation is an issue in the European market, as it is everywhere else. Would it not make sense to be more aggressive on pricing in the European market and take some of the benefits of those new products to the bottom line rather than use those to offset raw material inflation?
Right. As usual, we're looking at a combination of volume price and mix to drive the maximum gross margin contribution. We will selectively raise prices also in other markets, but I think it's because we have the opportunity to drive mix, and we have introduced new products at higher price points that we want to sell more of, that it's a more sort of combined picture in Europe where we can drive profitable growth through a combination of activities. Price will be a significant element of that, so don't get me wrong. Whereas if we look at North America and LATAM, it's more substantial and more across the board price increases that we have already executed and that we will do more of.
Is it fair to say that the bulk of that SEK 400 million incremental guidance on raw materials is North America?
No, it's actually quite evenly spread among the big sectors.
Okay. Just to follow up, can you just talk about the professional products business? You're seeing limited organic growth there. You talk about order patterns from food service segment looking better. What are the prospects there for the balance of the year? Are we approaching an inflection point where you would expect to see, based on what you're seeing in your order book, sort of a better growth prospect?
Yes. We're very optimistic about the outlook for professional. We had a tough year-on-year comp, then we had, let's say, an order pattern that slightly negatively impacted the first quarter deliveries and will come back in Q2. We're very confident in our traction in professional.
Okay. Thank you.
Sure.
Thank you. Our next question comes from the line of Erik Palsson from Pareto Securities. Please go ahead. Your line is open.
Yes. Hello. Thank you for taking my question. Regarding logistic costs, you talk about that has increased further in the quarter, and I think this is the first time since at least a while back that you talk about those costs that are increasing. It is only concerning North America, or do you actually see this in Europe as well? Can you please give us a magnitude of this cost?
Yeah. What is happening is a combination of two things. One is, of course, that oil prices are impacting fuel costs. Secondly, in some places in both North America and in Europe, we see driver shortages driving up costs for transportation, for drivers. It's a noticeable impact. It's not to the magnitude of the raw material and currency effect that we discussed, but it is a clear impact for us, for the industry.
It's basically around the truck pricing and freight rates then?
Yeah, and also ocean freight, actually. Again, same things happening, higher oil prices and also a little bit of more squeeze in the availability of ships.
Okay. Thank you very much.
Sure.
Thank you. I'll remind you that if you do want to ask a question, you'll have to press zero one on your telephone keypad. The next question comes from the line of Andreas Willi from J.P. Morgan. Please go ahead. Your line is open again.
Yeah, thanks for the time. I just have a follow-up question on the discretionary cost cuts. Could you maybe clarify exactly what you can pull the levers on and to what degree this impacts the ability to grow or market share top-line growth, either now or longer term? Because you've been going after discretionary cost cuts very successfully for some time now and offset a lot of headwinds, but what's the risk of damage to the business from doing that?
Yeah. As I mentioned, we're very clear in selecting where we spend and where we cut based on how we can drive profitable growth. That's indeed why we are planning to reinvest some of that efficiency in the second quarter. Overall cost efficiency is by and large and mainly driven by real efficiency gains, not by cutting programs or anything like that. This is the fact that we're driving lower purchasing costs, higher manufacturing efficiency, higher overhead cost efficiency. Then actually our discretionary investments are increasing this year and projected to continue to increase throughout the year versus last year.
Thank you.
Sure.
Thank you. Our next question is a follow-up question from the line of James Moore from Redburn. Please go ahead. Your line is now open.
Thanks for taking the follow-up. Jonas, I wonder if you could help quantify, I know that's difficult, but quantify how much the list price hikes in North America, Latin America fed through into price realization in the back end of March. I understand promotional activity will intensify, but I'm just trying to get a feeling for retention and how much that could move numerically.
Yeah, I don't want to give exact numbers, but it's clear that we had good positive net price in both North America and Latin America in the month of March. Net of promotional activity and everything, we realized positive pricing in both North America and in Latin America in March.
Do you think that might step back with the promotional activity before stepping forward again?
No, not necessarily, but the full effect of the price increases will only come through in the second half of the year, but it's not a step back, no.
Thanks. On air conditioning, can we assume that that is in an EBIT loss in the current period, which might continue in the second quarter but then sort of normalize as we go into the second half?
Yeah, we don't give the profitability of individual product categories or customers as usual, but of course the air care business in general is all first half, if you will, in terms of the profit realization. To the extent that that is impacted by lower volumes, that impact is all in the first half of the year.
Thanks. Lastly, could I just ask on mix, I mean, you talked about being quite confident on a mix development this year in EMEA, a number of times. In terms of the quantum without going into it, do you still feel whatever the quantum was, you're happy that you can continue to develop that?
Absolutely. Yeah. We're continuing to really be favorably impressed, I have to say, with the traction that we're getting with our new and innovative premium products and again, in built-in and in premium laundry. It's going very well.
Thank you very much.
Thank you.
Thank you. Our next question comes from the line of David MacGregor from Longbow Research. David, go ahead. David, your line is now open. Your line is muted locally. Could you unmute it?
Yeah, thank you. Thanks for taking the follow-up questions. A couple of cleanup questions. Latin America, could you just talk about the Continental acquisition, you talked about negative mix down there. Continental is going to give you a little more representation at the lower price points. Is that what's going on or is there something else? Then secondly, if you could just talk about the M&A outlook at this point and kind of your appetite, what you're seeing in the funnel. Thanks.
We're not selling any Continental products in the first half of this year, at all. That has no impact.
Okay.
We will start to launch those products, later in the year and really full impact more in 2019 and beyond. As I mentioned, actually a few times before, we have been a little bit uncompetitive in the mass price points in Brazil in particular. We worked hard to become more cost competitive and also gain back some of the share we lost in those mass price points. That's partially what's happening here in the quarter. We still have a lot of work to do on our cost efficiency though. With product re-engineering and manufacturing re-engineering in Brazil. We're continuing to do that, and we expect to continue to improve our competitiveness in Brazil as we go forward.
On the M&A?
On the M&A, no change. We're continuing to work on the priority focus areas that we've outlined, and of course exactly when something happens is impossible to guide on, but no change in our direction.
Thank you.
Thank you.
Thank you. If we do not have any more questions registered, I hand back to you speakers.
Thank you very much, operator. Let us summarize the Q1. We delivered a consecutive quarter with organic growth, managing to grow our business in a profitable way. The underlying EBIT was at a solid level, and we grew profitably in EMEA, Asia Pacific and Professional. Similar to the trend we saw in the previous quarter last year, we are executing on portfolio management, taking share in core brands, and driving mix and cost efficiencies. North America delivered another quarter with good growth in its core branded business, although offset by lower sales of air conditioners and decline in private label. In Latin America, market growth continued, sales were higher in the lower margin segments. At the same time, costs for raw materials increased together with headwinds from currency.
All in all, our performance was good, and earnings were solid despite lower volumes in North America and increased raw material costs and currency headwinds. We have focused on mitigating these by implementing the previously announced price increases, focus on cost efficiency, and improved mix in the quarter. We will continue to more than offset these headwinds for 2018. With that, I would like to thank you all for listening to this presentation.