Good morning, and thanks for joining presentation and discussion of Electrolux First Quarter Results. Leon 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. Now 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 the impact started to become visible in our net price in March. As previously announced, we took the restructuring charge of SEK 596,000,000 relating to the consolidation of our corresponding to a margin of and offsetting accelerating costs 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.
However, earnings for Stounds 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. So all in all, good growth and solid earnings. Now 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 combi steam Pro Smart. The oven provides a live feed from the oven to a mobile device, and consumers can now send recipes directly from the 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 within 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. Were just a few weeks ago, we announced the launch of the 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 EuroCochina in Milan, one of the world's most influential kitchen trade shows. This year, we showed an impressive array of the innovative product 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, 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. The 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 costs 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 UK 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 of 1% to 2%. In North America, our sales continued to decline on private labels, 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, And starting in Q2, we are also celebrating our 100 year anniversary the consolidation of the freezer production to our Anderson facility and took a restructuring charge of SEK 596,000,000. Excluding this charge, operating income declined, mainly as a result of lower volumes and increased costs for raw materials and logistics, as we have seen freight costs 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 5 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 confirmed the outlook for the North American market growing in the range of 2% to 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, Electrops delivered an organic growth of 6.4 percent, 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. Electrics took market share in Brazil during the quarter. During the quarter, we began the implementation of price increases, and we'll 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 strong quarter in the prior year.
This was a result of higher raw material costs, 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 FDA 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 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 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 Cessilware 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 costs and currency. Operating margin for the quarter was 12.4% and was negatively impacted by dilution effects from the acquisition of Grahamass Assessivewear as well as from increased investments for new product launches. During the quarter, the acquisition of the laundry solution supplier, Schneider Wright 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, 4.9000000000versus5.9 and translated into gross margin of 17.5%. This included a restructuring charge of EUR 600,000,000 and adjusting for this nonrecurring item The gross margin came in at logistics cost and cost per 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 nonrecurring items, remained at a stable level, although slightly lower year on 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 nonrecurring 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 the last year. Earnings per share, excluding the nonrecurring item, was SEK 3.43.
Looking more closely at EBIT on the next page. Volumes pricemix had a slightly positive impact on operating income in the quarter. Sales volumes were negative impacted by the continued decline Price in the quarters was slightly negative as the price increases mainly in 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 SEK392 1,000,000, was offset by improvements in net cost efficiency of SEK432 1,000,000.
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 Swiss franc and ruble and Latin America due to the weaker Argentinean peso and Brazilian real. The acquisitions had a slightly dilutive effect on the group. Adjusting for the restructuring charge of SEK 596,000,000, the operating income was SEK 1,360,100,000. Looking at the earnings contribution from pricemix, I'm pleased that most of our business areas contributed to the 0.6 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 better 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. But 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, pricemix was negative due to lower price. However, as you've seen on the previous slides, This was more than offset Home Care And SDA benefited from strong mix across regions and on all product groups and also professional showed positive pricemix.
In the first quarter. Cash flow after investments before acquisitions came in at a negative SEK 2,700,000,000 and was at a lower level versus previous year. 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 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 reengineering, 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 MarketView. 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 to man Western Europe to remain slightly positive despite the weak outlook for the UK, 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% to 2%.
We anticipate demand in North America to show continued growth by 2% to 3%, supported by the healthy macro environment and consumer sentiment. Markets in Latin America continued to show recovery, and we expect demand in that region to improve with a growth rate of 3% to 5%. The overall demand outlook in East Asia remains positive, and we continue to expect demand in the Australian market grow by 1% to 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. Investments in new products and portfolio management should result in mix improvements as well as increasing contribution from price increases in our 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. 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 costs 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 400,000,000 for Q2 and by SEK 1,600,000,000 to SEK 1,800,000,000 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 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.
Hence, our overall performance outlook for 2018 is unchanged. However, 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 euro in EMEA and weaker currencies in Asia Pacific. For the full year, we expect a negative currency impact Our focus this year would be to take the next steps in our journey towards targeted profitable growth, investing in product innovations and automation to strengthen our competitiveness.
Hence, our CapEx outlook of SEK 6,000,000,000 remains unchanged. With that, I'd like to pass it to Sophie Arnius to explain the procedure for the Q And A.
Thank you. Before we begin with the Q and
questions.
You.
Thank And our first question comes from the line of Andreas Willy from JP Morgan. Please go ahead, Andreas. Your line is open.
Yes, good morning. Thanks for your time. My question relates to the outlook comments you just made that you say that the basically the message on the full year hasn't changed. Given that you have about 800,000,000 more headwinds from FX and raw materials, then you expected a few months ago, maybe 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 kind of what that cost savings number now is for the full year compared to before. And given you expect promotional activity in the U.
S. In Q2, where does the confidence come from on the pricing that that by the second half of the year can offset these headwinds? I'm just a bit surprised you can have an SEK 800,000,000 increase in headwinds that you can kind of just offset that easily for the full year? Thank you.
So the offset of these higher headwinds is a combination of pricemix and cost efficiencies. So we are implementing price increases. As we speak, we had actually positive net price performance in the month of March, also in North America. So we do expect and 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. And 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. But we're very, 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 will get we are focusing on on more cost efficiency delivery, as we also showed in the first quarter, quite strong performance. In the second quarter, we're a little we're reinvesting a little bit of that in product launches and marketing activities. Again, partially around that 100 year celebration, as I mentioned. But that's out of confidence rather than anything else.
We feel very, very, very good about our, 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. So we see great traction there. So 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. But overall, we see more cost efficiency opportunities for the full year than we did at the beginning of the year. So price mix and costs together offset these 800,000,000.
Just to follow-up on the U. S. Pricing, if you look at kind of the data we get on our Bloomberg terminals, if you look at the major appliance pricing kind of 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 from how the price increases in the 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 in March. In the U. S. And I don't expect that that would have had any impact on retail prices in the first quarter.
So I
think there's a lag there. Sure.
Thank you. And 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 or is it simply so that one of the key markets have been more promotional there as well? And 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. So 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 in Australia actually last year, which has a year over year impact in this year. And that's actually showing great traction So we're growing profitably in Australia and we have a yes, we're further strengthening our position there. So that's a little bit of 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 in most markets.
I would say we're, 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. So we have really good traction in those products and growing profitably and mixing up. So 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 UK, 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 in the month of March with positive net price realization.
And then just on the cash flow, obviously, Q1 tends to be negative. This was even worse How do you see the cash flow the market stay from more online, etcetera, etcetera. Do you think you will be able to meet last year's level?
Well, no, and we did not guide that we would meet last year's level in 2018. So 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, but it doesn't change our overall outlook. So So 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, more timing effects than we're internal not changing our view of the full year, even though we don't give an external outlook in more detail. And our work on working capital is continuing in very, very good way.
And our next question comes from the line of Andre Kukhnin from Credit Suisse. Please go ahead, Andre. 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, gap that you saw of raw materials and FX negative impact versus pricing that you're kicking in. Could you just help us quantifying that and whether you have confidence on, on closing that in the subsequent quarters from what you see from your price realization already.
And related, I guess, to that, the retailers destock effect that you saw in the quarter, again, could you give some idea on the size of that and whether it's ended?
Yes. So on the price versus cost obviously, as you indicated, we didn't fully offset the cost increases through price in the quarter Again, however, in March, we saw a good net price realization and more or less offsetting the cost pressure at that time. However, since then and that's reflected in our current outlook, the Brazilian real has weakened further. So we are going to have to we are going to announce further raised prices in particularly in Brazil, but also in Argentina. Going forward.
So 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. So 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, yeah, from a consumer perspective, we did see a sort of 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. And we do expect that sort of slight pressure, let's say, from re tailor inventory mix away from appliances into TV in particular, to continue through the second quarter as usual. I mean, that always happens when there's a when there's a soccer room. The promotional activity, the stock and so on is focused more on more on TVs than on appliances around the world cup. And 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 Easter falling on the weekend of Easter falling on the end of the quarter or was there anything else in there that impacted that?
Yes. I mean, those are effects that can play into the AP balance, but this is also a year over year effect. So So it can also have the timing on other kind of payables and the timing of those in versus last year in general. And accounts payable is one area that we focus a lot on in our net operating working capital program as well. So as the benefits of those initiatives kick in, you can have a bit of a year over year volatility, if you call it that.
But the underlying is very good and we feel confident about our working capital.
Thank you. And our next question comes from the line of Krista Magna Gaut from DNB. Please go ahead. Your line is now open.
Good morning. The first question is a follow-up question, 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.
Potentially earnings growth actually come from them volumes, I guess, because or are you seeing a net positive effect from pricemix?
No, no, for the full year, we see volume growth, absolutely. Yes. I think we have and I think it's worth to maybe point out nobody has asked the question yet, but on on the impact that we're seeing from air care here in the first quarter. And honestly, we do expect that weakness to continue into the second quarter. But, but as many of you know, these this is a very highly seasonal trade.
So we see those negative effects in the first half. And they're then sort of not that they're washed out in the second half. So just continuing on our current sales trend, we will see a significant positive volume contribution in the second half of the year, just mathematically. So just to be clear on that.
Great. Think like because that was my second question on Aker. But then the final one, on pricemix, for Q1 sorry, Q1, you said that you had a price mix effect of 0.6%. But looking at operational leverage, you talked about very quickly in the EBIT bridge Q1. Operational leverage on organic growth was almost nothing.
Why was that?
That was because of the air care. It was okay. Sure.
Thank you. And 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. So I've just got a question on how you're seeing the competitive backdrop at the moment. EMEA, obviously strong growth above market. Are you taking share there? And then secondly, in the U.
S. Related to the lower air care volumes. I'd heard that perhaps higher was becoming a bit more aggressive in that segment. Do you think that's also a sort of a cause for the challenging volumes you saw? Thank you.
Right. So we are indeed very pleased with our traction in EMEA, both around the AG and the Electrolux brand and in particular, as mentioned in built in kitchen as well as in premium laundry. So 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, I mean, as I indicated, we are Frigidaire core products grew double digits in the quarter.
So So we have fantastic traction with our new product. The Frigidaire brand is really refreshed from a lot of perspective. And we see that continuing with great traction. And we're continuing to fuel that as I indicated. The air care situation is driven by 2 things.
It is a very, very cold start to the year and continuing. Actually, we're continuing to see a very cold there in Northeast U. S. And indeed, we have lost certain listings to competition on window wall air conditioners. And of course, we don't talk about individual competitors, but that is a reality, yes.
And perhaps just a point to application, if I may. When you mentioned that cost efficiencies will be able to sort of offset some higher raw mats costs Can I just understand, where those additional cost efficiencies will be coming from? Can you just clarify that, please?
Right. So 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. But 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 sort of overhead SG and A cost productivity So 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. So and then what we balance with, of course, is then how much of that productivity will reinvest in driving profitable growth And there, we have a certain amount of flexibility as we also indicated, as we also kind of showed here, again, in the first quarter, that that, you know, because of, for example, in the U S, that lower traction on, on, air care, we were able to pull back a little bit on some of our discretionary spending. So we're continuing to balance and reinvesting where we see the opportunity to drive profitable growth. Sure.
Thank you. And our next question comes from the line of James Moore from Redburn. Please go ahead James. Your line is open.
Good morning Jonas. Ana, can I clarify when you say the message on the full year has not changed, you mean there? I think at the Capital Markets Day, you indicated the core target to improve EBIT 7% per annum, including 2018. And can I just clarify that you expect that from a SEK 7,400,000,000 base? And 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 there seem to be some of the issues today.
We didn't yes, we said 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, for our EBIT performance for 2018. If you then look at the various components of that, we did indicate also at the Capital Markets Day that in the of of our sectors, the one where we're going to have a little bit of a, a tougher ride is North America. And as a result of the fact that we are currently reinvesting and reengineering our product offering there and that these 2018, 2019 will be a little bit sort of less positive earnings traction.
And 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 1st quarter and that's accelerating further. We'll have an impact also in the 2nd quarter But, we have, we are raising prices and we're continuing to see good traction of our sales. So 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.
And just a quick follow-up.
Thanks. On the net cost efficiency,
I think you mentioned around 1,000,000,000. You haven't been that explicit today? Is that number broadly unchanged or can it lift a bit with the discretionary aspects?
Yes, we didn't really give a precise indication in in our outlook, but we are further accelerating a bit on that. And, but that's I mean, 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.
Thank you. Our next question comes from the line of Johan Eliason from Danske Bank. Please go ahead. Your line is open.
Could you talk a little bit about your reengineering or thing in North America. You have some messages a little bit back and forth there, but you're sticking to your CapEx guidance of of course. But where are in your plans and how would it look like going forward?
Yes. Of course, the trading, let's say, or tariff outlook for North America remains a bit uncertain. So we are, of course, continuing to reevaluate specifically what investments and how we're going to do, execute those for the coming years. But as we don't yet have transparency on that, we're continuing to monitor our options.
But there is a need in any way, I guess, to do some reinvestment in those plants in North America, but it's more of the structure or Well,
so 1st of all, when it comes to our refrigeration reengineering, that's continuing exactly as planned. Then 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. But that is still as you I guess, as you know, a little bit unclear exactly what that will be.
Yes, at least for me. Is this 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 to the sort of the engineering work, but we're not spending major capital at this point until we understand better what the outlook is.
And
do you like to tell us when you need to take that decision to not to get it delayed from your initial plans?
No, I think we're, yeah, we're not in that spot right now.
And 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 markets, in the Latin American market, the Asian market, you talked about going after selective increases in Russia, Switzerland and U. K, but I'm guessing that raw material inflation is an issue in the European market as it is everywhere else. And 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 raw material inflation.
Right. I mean, as usual, we're looking at a combination of volume price and mix to drive the maximum gross margin contribution. And we're we will selectively raise prices also in other markets but I think it's less of a 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 $400,000,000 incremental SEK guidance on raw materials is North America?
No, it's actually quite evenly spread among the big sectors.
Okay. Just as a follow-up, can you just talk about the professional products business you're seeing limited organic growth there. You talked about order, patterns from Foodservice segment looking better. What are the prospects there for the balance of the year? And 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 we had a tough year on year comp, and and then we had a, let's say, an an order pattern that that slightly negatively impacted the first quarter deliveries and will come back in Q2. So we're very confident in our traction in professional.
Okay. Thank you.
Sure.
Thank you. And our next question comes from the line of Eric Palfson from Pareto Securities. Please go ahead. Your line is open.
Yes, hello. Thank you for taking my question. Regarding logistic costs, you talked about that 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? And can you please give us a magnitude of this costs?
Yes. So what is happening is a combination of 2 things. 1 is of course that oil prices are impacting fuel costs. And then secondly, in some places in both in both North America and in Europe, we see a driver shortages driving up costs for, for for transportation, for drivers. And, it's it's a, yeah, it's a 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.
So it's basically around the truck pricing and freight rates then.
Yeah. And also ocean freight, actually. Again, same, same things happening higher, oil prices and also a little bit of, squeeze in more squeeze in the availability of ships.
Okay.
And the next question comes from the line of Andreas Willey from JP Morgan. Please go ahead. Your line is open again.
Yes, 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, kind of, the ability to grow or market share top line grows either now or longer term because we have you've been going after discretionary cost cuts very successfully for some time now and offset a lot of headwinds. But what's kind of the risk of damage to the business from doing that?
Yes. So we're, we're, as I mentioned, we're, we're very clear in selecting where we spend and where we where we cut based on how we can drive a profitable growth. So that's indeed why we are planning to reinvest some of that efficiency in the second quarter. Overall, I think we're the overall cost efficiency is by and large and and mainly driven by real efficiency gains, not by not by cutting programs or anything like that. This is just this is the fact that we're, driving lower purchasing costs, higher manufacturing efficiency, higher overhead cost efficiency.
And then actually our discretionary investments are increasing this year and to continue to increase throughout the year versus last year.
And our next question is a follow-up question from the line of James Moore from Redburn.
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 and Latin America fed through enterprise 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?
Yes, I don't want to give exact numbers, but it's clear that we had, good positive net net price in both North America and North America in the month of March. So net of promotional activity and everything, we realized positive, pricing in both North America and Latin America in March.
You think that might step back with the promotional activity before stepping forward again?
No, not necessarily, but the full effect of price increase will only come through in the second half of the year, but it's not a step back.
And 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.
Yes, we don't give the profitability of individual product categories or customers as usual, but But of course, the air care business in general is all first half, if you will. In terms of the profit realization. So to the extent that that is impacted by lower volumes, that impact is all in the first half of the year.
Thanks. And so 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, yes. Yeah. We feel, 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 getting built in and premium laundry. It's going very well.
Thank you very much.
Thank you.
Thank you. And our next question comes from the line of David MacRager from Longbow Research. David go ahead. Your line is open. David, your line is now open.
Your line is muted locally. Could you unmute it?
Yes, thank you. Thanks for taking the follow-up questions. A couple of cleanup questions. Latin America, could you just talk about the Continental acquisition? And 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? And then secondly, if you could just talk about the M and A outlook at this point and kind of your appetite, what you're seeing in the funnel? Thanks.
We don't we're not selling any Continental product in the first half of this year, at all. So that has no impact. But we'll continue we'll start to launch those products later in the year and really full impact more in 2019 and beyond. No, but I think we have As I mentioned, actually a few times before, we have been a little bit uncompetitive in the mass price points in Brazil in particular, and we worked hard to become more cost competitive and also gain back some of the share we lost in those mass price points. And that's partially what's happening here in the quarter.
We still have a lot of work to do on our cost efficiency though. And with product reengineering and manufacturing reengineering in Brazil. So we're continuing to do that and we expect to continue to improve our competitiveness. In Brazil as we go forward.
And on the M and A?
On the M and A, no change. We're continuing to work on the priority focus areas that we've outlined. And of course, that's exactly when something happens impossible to guide on but no change in our direction.
Thank you. And as we do not have any more questions registered, I hand back to you
summarized the Q1, we delivered a consecutive quarter with organic growth, managing to grow our business in a profitable way. 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, but 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, focused on cost efficiency and improved mix in the quarter. And 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.