Good morning, welcome to this short update on the North American operations. With me today is Sophie Arnius, Head of Investor Relations. I would also like to mention that this session is recorded and will be available on our website as an on-demand version. I will do a short summary and then open up for questions. Yesterday, we provided an update on issues expected to impact operating income for our business area in North America in the fourth quarter. This is primarily about the consolidation of the U.S. refrigerator and freezer manufacturing and related transitions to new platforms. We're also impacted in the quarter by de-stocking at a key U.S. customer and accounting adjustments from prior years. These together will have a negative impact year-over-year on operating income of $70 million. Let me walk you through what has happened.
As you're all aware, we are currently investing approximately $250 million in a new facility in Anderson. This will replace manufacturing in St. Cloud, which was closed in Q4, as well as manufacturing at a next-door facility in Anderson. This is part of our strategic investment program in automation, digitalization, and product platforms, which will significantly strengthen our competitiveness in North America and elsewhere. As we've emphasized before, it's a complex process to set up brand-new, highly automated, and large-scale production flows with top quality as well as high output capacity. As a result of this complexity, the ramp-up of the new Anderson facility has required more fine-tuning than anticipated. Therefore, our planning to supply the market using the old Anderson facility was not enough to fully meet market demand during the quarter.
This has created a situation where the transition to the new facility impacted deliveries in the fourth quarter. We expect the lower volumes as well as increased costs to have a larger impact on operating income in the fourth quarter than the approximately negative $25 million that we had communicated previously. Looking ahead, we expect the capacity constraints in Anderson to be gradually resolved during the first half of 2020. These developments will also impact how our savings from this investment will play out. In order to meet market demand for our products with a continuously high quality level, we've decided to extend the transition period and run the two Anderson facilities in parallel into the second half of 2020. As you know, we previously communicated savings in 2020 from re-engineering and streamlining to be approximately SEK 800 million.
With today's announcement, this is more likely to be roughly SEK 200 million. The added costs for keeping two facilities operational mean that the bulk of the expected cost savings from the investment in Anderson will be realized in 2021 instead of in 2020. This is a temporary setback, and I'm confident that the measures we're taking to strengthen our competitiveness in North America are the right ones, both making us more efficient and providing consumers with great new products. I also want to emphasize that as we state in the press release, we're on track to generate approximately SEK three and a half billion of annual cost savings with full effect from 2024. With that, let's open up for questions. I would like to emphasize that we will limit the discussion to clarifications about yesterday's update in Q&A.
Thank you. Ladies and gentlemen, if you do wish to ask a question, then please press 01 on your telephone keypad now. Our first question comes to the line of Erik Paulsson from Pareto Securities. Please go ahead. Your line is now open.
Yes. Hi, it's Erik at Pareto. You talk about volume effects here. Is this coming from the capacity constraints, or is it in your own manufacturing, or is it cost from customers or actually both?
Well, we have capacity constraints during the transition as we've shifted over people from the old facility in Anderson to the new facility. Our production capacity in the old facility has gone down, and the new facility has not ramped up as quickly as we had planned. Also in the quarter, we have closed the St. Cloud facility. That has resulted in an overall capacity constraint on the upright freezers and top mount refrigerators. On top of that, but as a completely separate event, one of our top customers in North America has initiated an inventory reduction program during the fourth quarter, which has impacted our sales to that customer in the quarter. It's those two effects.
All right. Thank you. My second and final question is regarding those accounting adjustments from prior periods. Can you comment on this. What does it concern?
It relates to inventory reconciliations from prior years that we have cleared out now in the fourth quarter, and then also relating to warranty accruals related also to prior periods that we needed to true up and update in the quarter.
Okay. Thank you very much.
You're welcome.
Thank you. Our next question comes to the line of Johan Eliasson from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yeah. Hi, it's Johan here. Just a short question first on this major retailer, destocking, and then you say you have capacity constraints. Wouldn't they work hand in hand sort of instead of against each other?
Yeah, both result in lower volumes, right? The capacity constraints relate to top mount refrigerators as we call them, and then upright freezers, and then the de-stocking is across category.
Okay. This is one of the big programs you're running on the cold side. How about the cooking facility? Should we be worried about that one already?
That project in Springfield is running well. Of course, it is a complex program, that one as well, and there will be a transition period for that where our efficiency gains gradually come into place as we ramp up the new facility. That's normal in such a big transformation. We have no specific issues there.
How is that timing-wise versus Anderson? Is it ahead, or was it this one that was started later? I can't remember exactly.
Yeah. The Springfield one, we're really starting to ramp up in the first part of 2021.
Okay. Excellent. Thank you very much.
Thank you.
Thank you. Our next question comes from the line of Gustav Hageus from SEB. Please go ahead. Your line is now open.
Thank you, operator. Good morning, guys. Just a few questions, if I may.
Good morning.
Could you please give us a little bit of clarity on the size of these different items that bucket into the [same thing] and looking at the de-stocking and also the accounting for how big is that of the total number we discussed yesterday?
Yeah. We're not breaking it down in detail, but I can tell you that more than half of the impact is related to the Anderson ramp-up, and the two other effects are less than half combined. Of course, specifically the accounting and de-stocking effect, we expect them to be confined to the fourth quarter, and then the Anderson ramp-up issues will gradually be resolved as we go through the first half of next year.
Okay. Could you let us in a little bit on sort of what has gone wrong or what has not panned out as you foresaw with the ramp-up and also your transparency or your clarity there, and that is actually going to be resolved during the first half of next year. What is the magnitude component of this, actually it's just a delay or not something else?
Right. The benefit in this case is we actually have the old Anderson facility available to ramp up again to meet market demand. Now, as we transition from the old factory to the new, we of course transition both people and suppliers from the old factory to the new one, which resulted in a ramp down of the old one while we're working to ramp up the new one. Since the new one is then ramping up a bit slower than what we had planned, we are now sort of ramping the old factory back up again and transferring some people back and switching over suppliers then partially to the old components, let's say. That takes some time to get that sorted out, of course, with long lead time components and so on. That's why we're seeing a constraint here in Q4 and also into Q1.
Fundamentally, we are able to, and we are now working to ramp the old factory up again so that we can have a little bit of a smoother transition, let's say, to the new factory. Slower than what we had previously planned, but sort of inside of our control to manage that transition. That's sort of the good news and the bad news here, that we are able to and will be able to supply our major customers, or all our customers into next year. Of course, there is a temporary capacity constraint here in Q4 and into Q1 in particular.
Great. Just the visibility on sort of the ramp-up profile now with the new facility, do you feel confident, and why is that so that you're actually on track to deliver these SEK 800 million or SEK 600 million in cost savings by 2021? What is it that has not panned as you were expecting and why can you feel confident?
It's timing, right? The product, we are producing in the new factory. The products are fantastic. The material cost, the manufacturing costs are all sort of fundamentally according to plan. The one issue that we're struggling with is the pace of the ramp-up. We are of course suffering from additional costs related to that, also running 2 facilities instead of 1, and that will continue into the second half of next year. Of course, the savings are coming from the fact that we will then operate 1 high capacity, very highly automated factory, as opposed to 2 non-automated factories previously. Those savings are still fully expected to occur. It's just that the timeline has changed because of the pace of the ramp-up of the new facility and the fact that we have to keep the old one open for longer than planned.
Why is the new facility delayed?
It's a number of, let's say, equipment tuning issues and sort of run at rate issues where, of course, we have to make sure that we safeguard the high quality of the product as we ramp up. We want to make sure that these new products are sold with top quality. The products are extremely well-received in the market. It's just that we want to really make sure that we are able to provide it with the best possible quality. We are. It's just that it's taking longer than what we had planned. You have to remember, this is a huge facility.
This is a 3 million unit capacity. The largest facility we have anywhere in the group, and with a very high level of automation, which means that there's a lot of equipment and machinery that needs to be tuned to working with high efficiency in combination. That is unfortunately, and that's of course not something we're happy about, but that's taking longer than what we had planned.
Okay. Thank you.
Sure.
Thank you. Our next question comes to the line of James Moore from Redburn. Please go ahead. Your line is now open.
Yes, Morning, everyone. Morning, Jonas.
Good morning.
Thanks for the color. I wonder if I can just get back to the last topic. It's a very big facility, 2 million units. I think you talked about it being four production lines when it's fully up and running. Can you say how many of the production lines are running? Is it that one is running today, and you got stuck on the second, or you've got stuck-
No
on the second, on the third, and the fourth?
We're currently ramping up the third line. It's progressing. To provide a little bit of extra color, we're focusing on ramping up the freezer production since, of course, we closed down the St. Cloud facility in the fourth quarter. The freezers are the top priority right now. We'll continue to provide the top mount refrigerators, mainly from the old facility, for a period of time and then switch over to more fully to the new facility throughout the first half of the year.
Have the challenges come more in freezer or in fridge?
No. We have, let's say, ramp-up delays in both freezers and Top Mounts. Yeah. We're working through those. Fundamentally, the freezer is a less complex product to manufacture than Top Mount Refrigerators, so the challenges should be less to ramp that up.
You helpfully, back in 2017, 2019, provided the savings on the re-engineering savings, the phasing of them for the original SEK 3 billion plan, which you've added half a billion.
Yeah
in Eastern Europe since. You've told us SEK 200 million of that comes in 2020. Can you give us a rough flavor as to how the balance of the SEK 3.3 billion savings, if not for all of the years 2021, 2022, 2023, 2024, but certainly at the beginning? I'm trying to understand whether we get a very big year in 2021 because we start to get the cooking savings with the delayed cold savings.
Yeah. Of course, we will then get the full effect from Anderson in 2021, and then we'll gradually start to see the impact from Springfield. Of course, there will be startup and transition costs there as well. We will come back actually at the Q4 earnings release with an updated outlook on the longer-term trajectory, yeah.
And I take-
We're working through that.
Okay, thanks. The re-engineering savings are part of wider savings, aren't they? You have ongoing continuous cost improvement savings, which make up total savings. Are you able to flex discretionary levers to lift total savings with continuous in 2020? Can you give us a flavor for what type of savings to get there?
No, not yet. We will do that at the Q4 release. As we've mentioned, the overall SEK three and a half billion savings from our re-engineering program as well as our global streamlining initiatives, they are absolutely coming through with the data we mentioned yesterday. We have no doubts or issues about the overall delivery of that SEK three and a half billion. As I said, we are continuing, of course, to use our scale and leverage to drive efficient sourcing of products. We're driving manufacturing efficiency as we go on, and that we are pushing as hard as ever. Of course, we are also, and this is important, I think, launching lots of new and exciting product that we of course want to support with great marketing and so on.
There's always that balance between how much of the efficiency savings that we're bringing, that we actually bring to the bottom line directly and how much we invest in growing the sales of our new launch product. That's why it's difficult for us to give you exact guidance of that for very long periods in the future, because we're managing that as we go along to optimize the bottom line overall.
That's helpful. Finally, very quickly, if I could, which quarter do you expect to be fully ramped up in Anderson now?
It would be into the second half of the year, Q3, most likely.
That's really helpful. Thank you, Jonas. Thanks.
Sure.
Thank you. Our next question comes to the line of David MacGregor from Longbow Research.
Good morning.
Morning, David.
I guess a couple questions. First of all, it sounds like this is an automation or a calibration issue in terms of just trying to get your technology into a supportive mode. Are there any technology vendor reimbursements expected here?
I don't want to comment specifically on that, but no, nothing of any magnitude to discuss, no.
Okay. In other words, when you contracted with your engineering people to ramp these plants, it wasn't a turnkey project. You weren't agreeing to pay for an operating plant. This was something you're engineering yourself internally.
Yeah. No, it's something we're engineering ourselves with our global engineering team. Yeah. Yeah. No manufacturing engineering team. Yeah.
Can you just talk about the impact this has had in terms of your retail relationships? Have you lost, even if temporarily, any listings in any retailers as a consequence of the disruption to supply?
No, we haven't lost any significant listings, no.
Okay. Finally, on the destock, your expectation was that this would conclude by the end of the quarter, that there wouldn't be any spillover into the first quarter. Did I hear that correctly?
Yeah. That's our assessment. Of course, we're not in control of our retailers' inventory management, but that's our current visibility, yeah.
Right. Have they provided you with any kind of a schedule on that?
No, nothing specific other than the fact that this is a Q4 event.
Oh, okay. Thanks very much.
Sure. You're welcome.
Thank you. Our next question comes to the line of Martin Wilkie from Citi. Please go ahead. Your line is now open.
Thank you. Yes, it's Martin from Citi. Just one question coming back to the de-stocking. Obviously, it's not something that's under your control, did you get a sense as to whether that was done because the retailer has a lower demand outlook for 2020, or were they undergoing some program of warehouse consolidation or something like that could cause them to destock that's unrelated to demand? Just to sort of get a sense as to if there's any signal there about the market outlook for 2020.
No. Yeah, my understanding is that it's not related to demand. This is more of a sort of operating model, let's say, improvement, where they want to run at lower inventories.
Okay. Thank you very much.
Sure.
Thank you. Our next question comes to the line of Olaf Sverre Holm from ABG Sundal Collier. Please go ahead. Your line is now open.
Hi. It's Olaf with ABG. Just one question, really. If we look on a quarterly basis now, you're taking bigger cost than expected this quarter. There'll be higher costs per quarter going forward. Is Q4 the trough here, and will there be a sequential improvement in both Q1 and Q2, so we can see that things are progressing in the right direction, do you think?
Yeah. Of course, we're not providing detailed earnings guidance for the quarter. Yes, in terms of these impacts, the $70 million, that's for sure the biggest impact that we have any reason to predict.
Okay. Thank you.
Sure.
Thank you. Our next question comes to the line of Kari Riipinen from Handelsbanken. Please go ahead. Your line is now open.
Yes. Thank you. Maybe one last question related to de-stocking. Is there any way to believe that this would have this customer-specific de-stocking or any other similar measures? Would they be any way related to expectations that import tariffs might be lowered at some point in the future? Have you started to hear any such chatter from your customers at this point?
Yeah, no. I would say this is not related to that. I think this is more a sort of a company operating model improvement that's across all categories, let's say, not just appliances. Of course, there might be some people that speculate on tariff changes, but that would be a pretty dangerous speculation, I would say, because of course, they can go both up and down.
Sure. These accounting adjustments related to inventory and warranties, do you feel comfortable that you have now gone to the bottom of the accounting issues in North America? Is there any risk that this would sort of pop up somewhere outside North America in some other geography?
Oh, no. These issues are completely confined to North America. It's pretty clear that this is mainly related to a detailed review of our balance sheet that follows the implementation of our new ERP system in North America that we implemented earlier this year.
All right. Thanks. Finally, maybe a follow-up on Olaf's question on the sequential development. Initially, you expected these extra costs to be roughly $25 million for Q4. Is that sort of an okay ballpark estimate for Q1 and Q2 for related?
Yeah, no. I'm not going to give a detailed outlook per quarter going forward, I guess the guidance I would give is that we said a little bit more than half of the $70 million is related to Anderson. The other effects we don't expect to recur, and then the effects from Anderson, we expect to gradually be phased out in the first half of next year.
Perfect. Thank you very much.
Thank you. Our next question comes to the line of Andrei Kouline from Credit Suisse. Please go ahead. Your line is now open.
Yeah, good morning, Jonas. Thanks very much for taking my questions. I just wanted to firstly make sure the numbers are right in terms of the level. You said just now that $70 million, over half of that is Anderson. Let me interpret that as $40. You talked about $25 before, the Anderson extra cost is $15. Is that kind of right interpretation?
I mean, ballpark-wise, yeah.
Okay. Excuse me. If we're running at this 40 into H1 2020, again, not inviting guidance, but just purely the mechanics of it, that 40 you expect to gradually phase in H1, and then it should phase completely by the end of H2? Is that kind of how you're saying things?
Yeah. Broadly, yes.
As we get to the end of 2020 in Q4, we actually will be in the positive on the bridge, right? Because we'll be comparing to the full run rate already.
Yes. Absolutely.
Okay. Just wanted to make sure.
Sure.
Just back to the individual lines question. You said you're ramping up line 3. Can I ask if lines 1 and 2 are fully ramped up and delivering to what your expectations were? Do we have a proof point there that this is working?
No, we're not yet fully ramped on this either. That's going forward, but step by step.
Got it. Thank you. Just last one, the SEK 200 million of savings that you expect to generate in 2020, this is a gross number, right? This is not net of any of these costs.
No, that's a net number.
Net of the Anderson ramp-up costs?
Right. On a year-over-year basis, yeah. I mean, we of course have costs this year as well. The net savings that we expected from Anderson are eaten up by these additional costs, and then gradually as we go into the second half of the year, we'll start to see the benefits. Net year-on-year is basically a break even on Anderson.
Got it. Okay. I take all that math that I started with quarter by quarter, and we should be SEK 200 million above that, basically, whatever the numbers are.
The SEK 200 million is not related to Anderson. That's related to the similar programs we're implementing mainly, and right now we're seeing the benefits mainly from Latin America, which we're starting to see already this year, and then into next year. Also the first impact of the global streamlining initiatives that we announced in September.
Got it. Thanks very much.
In North America, we're basically not seeing any benefits next year. Yeah.
Okay, the savings across the programs elsewhere outweigh the Anderson cost. As you said, Anderson breaks even overall for the year 2020.
Correct.
Great. Thank you so much.
Yeah. Sure. You're welcome.
Thank you. Our next question comes to the line of Robert Riches from Berenberg . Please go ahead. Your line is now open.
Yes. Thank you. Good morning, Jonas. Thank you for taking the question. I have two.
Good morning.
First one is, I'm curious, how is the working relationship with union in South Carolina, and is this a factor at all in this upcoming situation?
No, it's not a factor at all. I would say it's a very vibrant labor market, the one challenge we have is to quickly ramp up the old facility again, just as a consequence of the just availability of staff. No, we have no labor relation issues.
Okay. My second question is simply, earlier last week we learned about Jonas Samuelson is leaving the company. How is that related to the situation in Anderson?
Yeah, no. I mean, Jonas had planned to retire next year for quite some time. We had actually jointly started to plan for the succession and had an extensive search process that went through this fall. The relatively fast changeover time is partially related to the challenges that we have in North America because, of course, we wanted to have a clear leadership in place and not a very long transition period. In that sense, it's partially related. The transition plan and the retirement plan was completely unrelated to this.
Okay. Thank you very much.
Sure. Welcome.
Thank you. Our next question comes to the line of Adam Rolfsen from DNB. Please go ahead. Your line is now open.
Thank you very much. Thank you for taking my questions, Jonas. I just have two questions. First of all, who is the customer regarding the destocking issue?
Yeah, I understand why you ask that, but we don't typically comment on individual customers. That's of course, we need to maintain confidentiality with our customers.
Okay. Got it. What can you shed some light on the relative size of the customer in relation to the U.S. business?
Customer.
Sorry, could you repeat that?
It's a very large customer. Yeah.
Very large. Okay.
Very large.
All right. That's all my questions. Thank you very much.
Sure. Thank you.
Thank you. Our next question comes to the line of Lucie Carrier from Morgan Stanley. Please go ahead. Your line is now open.
Oh, hi. Good morning, gentlemen. Thanks for taking my question.
Hi, Lucie.
My first question is around the de-stocking effect. Is that something that you're taking, what I would say below the line as exceptional, or is that something that can impact actual adjusted profits considering.
No, all of these effects will be taken in current income. We will not call them out as one-off items.
Okay, thank you very much. Then secondly, I was just curious about how much capability do you really have on the ramp-ups of these facilities, and how much nurturing can you do there? Because you recorded a business quarter not too long ago, literally about two months ago, and the cost was SEK 25 million, and now that cost is almost double, apparently. How much capability do you really have on that? The reason I'm asking is because we still have the Anderson facility to be fully ramped up, but we also have Springfield coming. How is the requirement working there?
Yeah. The impact here in Anderson, the cost is not necessarily that much higher. The issue is the capacity constraint, which then impacts sales volume. The higher effect here in the quarter is mainly related to the volume impact. Of course, what we're doing now is we're ramping back up the old facility in Anderson so that we can meet consumer demand and retailer demands in the first half of next year. We're excuse me, a little bit more insulated, let's say, from the pace of the ramp-up as we go into next year. That's why we can be reasonably confident that we will manage through this without any long-term damage.
Thank you, Jonas. I appreciate it's more the volume constraint which is being problematic, I guess my question is how we have escalated so quickly for these extra costs in two months' time. What was the situation in terms of the ramp-up two months ago that we now have come to a point where we're in a situation to have all of these extra costs in terms of the capacity constraint?
It's clear, of course, that the ramp-up hasn't gone as quickly as we thought at the time. Of course, we don't have as high volumes to sell because we had ramped down the old facility, and also the suppliers. I think that's the key point here, that as we ramp down the old facility, of course, you have to pre-plan that because we have long lead suppliers. We don't want to end up with a lot of obsolete components, right? We planned in advance the ramp down of the old facility and then the ramp-up of the new. Since the new facility has taken a longer time to ramp up, we didn't have as much availability, either of the new products or of the old ones, and that's causing this impact, this capacity constraint.
As I mentioned, we're ramping the old facility back up again, but with a lead time, because we need to switch suppliers back to the components for the old platform. That takes a little bit of time. We are doing that, and that's providing us that, let's say, insurance for next year. In the meantime, we're working through the remaining issues in the new facility. Of course, as I mentioned, we're talking more about tuning in new equipment. It's not that we have to redesign a product or anything like that. This is just purely equipment, people training, working with our equipment suppliers to make sure that they operate at full capacity. Again, it's a major facility. It's a 3 million-unit plant, so even seemingly small technical flags have a very large impact in the facility.
Okay, thank you very much.
Sure. Welcome.
Thank you. We will now take our final question for today, and that will be from Christer Magnergård from DNB Markets. Please go ahead. Your line is now open.
Good morning. Sorry, just a follow-up on the actual cost savings so that we get everything right here. The SEK 200 million program, is that the gross cost savings number you talk about, or is that what you normally refer to as net cost savings for 2023?
Yeah. It's a net cost saving, but only for this program, the SEK 3.5 billion program, right?
Okay.
We work on other ongoing efficiencies on the one hand, and also, of course, other investments to support, again, new product launches and new capabilities, for example, in growing our aftermarket business and so on. We're continuously investing in that, and we're continuously driving efficiency in ongoing operations.
Perfect. Secondly, on the CapEx that you're budgeting for the coming years, has that changed somewhat on the back of this, or should we still continue to have the same general profile?
No, it's largely the same profile.
Thank you very much.
Thank you. Thanks, everybody. Looking forward to talking to you again following our Q4 results. As I mentioned, of course, we are very confident that the measures that we're taking in North America to strengthen our competitiveness are the right ones, making us more efficient and most importantly, providing our consumers with great new innovative and good-looking products. This is a temporary setback, and we're looking forward to update you on the progress as we go forward. Thank you very much, and happy holidays.