Good morning, and welcome to the short update on the North American operations. With me today are Suty Arnaud, 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. Will do a short summary and then open up for questions. Yesterday, we provided an update on issues expected to impact operating income for are in North America in the fourth quarter.
This is primarily about the consolidation of the U. S. Refrigerator of presum manufacturing and related transitions to new platforms. We also impacted in the quarter by destocking at our key U. S.
Customer and accounting adjustments from prior years. These together will have a negative impact year over year on operating income of US70 million dollars. Let me walk you through what has happened. As you're all aware, we are currently investing approximately $250,000,000 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 emphasized before, it's a complex process to set up a brand new, highly automated and large scale production flows with 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 US25 million dollars that we had communicated previously.
Looking ahead, we expect the capacity constraints in Anderson to be gradually resolved during the first half of twenty twenty. And, 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 2 Anderson facilities in parallel into the second half of 2020. As you know, we previously communicated savings in 2020 from reengineering and streamlining be approximately CHF800 million. And with today's announcement, this is more likely to be roughly CHF 200,000,000.
The added costs for Qiw2 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 white ones, both making us more efficient and providing consumers with great new products. I also want to emphasize that we, as we state in the press release, we're on track to generate approximately CHF3.5 billion of annual cost savings with full effect on 2024. And with that, let's open up for questions. And I want we'd like to emphasize that we will limit the to clarifications about the incident yesterday's update in Q And A.
Thank you. A lady you. Our first question comes from the line of Eric Paulson from Pareto Securities. Please go ahead. Your line is now open.
Yes. Hi, it's Eric. It's Perretto. You've talked about volume effects here. It's just coming from the capacity constraints, or is it your own, in your own manufacturing, or is it cost from customers or actually both?
Well, that we have capacity constraints during the transition as we've, shifted over, people from the old facility in 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. And also in the quarter, we have close to 50% count facility. So that has resulted in an overall capacity constraint on the operator refrigerators and top of my upgrade freezers nonrefrigerators. Then on top of that, but as a completely separate event, our 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. With those 2 effects.
All right. Thank you. My second and final question is regarding those accounting adjustments from prior periods. You comment on this and what does it concern?
It relates to inventory reconciliations from prior years that we appeared out now in the, in the fourth quarter and then also relating to, warranty accruals related also to prior periods that were that we needed to, to true up and, an update in the quarter.
Our next question comes from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is now open.
Yes, 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. I mean, both resulting in lower volumes, right? The the the capacity constraints, relate to refrigerated top mount refrigerators, as we call them, and then upright freezers. And then the destocking is, cross category.
Okay. And then just, I mean, this is one of the big programs you're running on the code side. How about the cooking facility, should we worry about that one already?
Yes, I mean, the last project in Springfield is running well. Of course, it is a complex program that, that one as well. And, and there will be, you know, a transition period for that where, where our efficiency gains or, you know, gradually come into place as we went up in a facility, and that's, that's normal, in, in such a big information, but we have no specific issues there.
And how is that timing wise versus, Anderson? Is it the head or it was this one that was started later, I can't remember exactly.
Yes, the Springfield 1, we're really starting to ramp up in the 1st part of 2021.
Our next question comes from the line of Christopher Sandstrom from SEB. Please go ahead. Your line is now open.
Could you please give us a little bit of, of, clarity on the size of these different items that, that, opportunity doesn't And, looking at the the dispatch, you know, actually the the accounting part of the total number we discussed yesterday.
Yeah. We're not breaking it down in, in detail, but I can tell you that, more than half of the impact is related to the, to the Amazon ramp up, and the 2 other effects are less than half combined. And of course, specifically the accounting and destocking effect, we expect them to be combined to the 4th quarter And then the Anderson ramp up issues, will gradually be resolved as we go through the first half of next year.
Could you let us in a little bit on, sort of what has gone wrong or what has not planned out as you could solve with the ramp up and also your, your transparency
or your, your clarity and that is actually gonna be resolved during the first half of next year?
What is it that makes you confident that this actually is just a delay or not something else?
Right. So so the benefit in, in this case is we actually have, the old Amazon facility, available to, to, to grant up again to meet market demand. Now as we transition from the old factory to the new, we transition, both people and suppliers from the old factory to the new one, which resulted in a ramp down the old one while we're working to ramp up the new one. And since the new one is then ramping up a bit slower than what we have planned, we are now sort of ramping the back the the old factory back up again and transferring some people back and, and switching over, suppliers then partially to the old components, let's say, and 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.
But fundamentally, we are able to, and we are now working to ramp up the old factory up again so that we can have a little bit of a, of a smoother transition, let's say, to the new impact is slower than what we had previously planned, but sort of inside of our control to manage that transition. So that's sort of the good news and the bad news here that we are we will, we are able to and we'll be able to supply our major customers, or all our customers into next year. Of course, there is a temporary capacity constraint here in, in, in Q4 and into Q1 in particular.
Great. And just the disability on sort of the ramp up close eye now with the new facility, do you feel confident and why is that so that you're actually on track to deliver these 800,000,000 or 600,000,000 in net income savings by 2021. What is it that has not Pam as as as you would expect them and and why
it's it's timing. Right? So the the product, we are actually, you know, we are producing the new factory. The products are fantastic, the the material costs, the manufacturing costs are all sort of fundamentally according to plan, that the one issue that we're we're struggling with is the pace of the ramp up. So we are, of course, suffering from additional cost related to that, also running two facilities into L1 and that will continue into the 2nd half of next year.
And 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 factors previously. So that those savings, are are still fully expected to 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. But but why is the new facility delayed?
Yeah. Yeah. It's it's a number of of, let's say, equipment cleaning tissues and, and, and, sort of, run its rate issues where, well, of course, we have to, make sure that we safeguard high quality of the, of the product as we ramp up. We want to make sure that these these new products are are sold with, you know, top quality. And, and the products are extremely well received in the market.
It's just that we want to really make sure that we, we are able to provide it with the best possible quality. And we are. It's just that it takes, it's taking longer than what plan. And I mean, you have to remember, this is a huge facility. This is a 3,000,000 unit capacity, the largest facility where anywhere in the group and with very high, very high effects in, in level of automation, which means that, there's a lot of equipment and machinery that needs to be tuned to work with high efficiency, in combination.
So that takes that's unfortunately, and, and that's, of course, not something we're happy about, but that's taken longer than what we had planned.
Our next question comes from the line of James Moore from Redburn. Please go ahead. Your line is now open.
Yes. Morning everyone. Morning Enerstrom
for the the color. I'm I
wonder if I could just get back to the last topic. It's a very big facility. 2,000,000 units. I think you talked about it being for production line. One fully up and running.
Can you say how many of the production lines are running? Is it that one is running today and you've got up on the second, or you've got No. We're
we're we're currently ramping up the 3rd line. So so it's it's it's progressing. We're focusing now on to provide a little bit of extra color. We're focusing on ramping up the freezer production since, of course, we we, closed down the St. Cloud facility in, in the fourth quarter.
So the frees are out of the top priority right now. And then we'll, we'll continue to provide the top non refrigerators mainly from the old facility, for a period of time and, and then switch over to, more fully through the new facility, throughout the of the year.
And have the challenges come more in freezer or in fridge?
No, I mean, we have let's say, ramp up delays in both, in both recess and top mounts. Yeah. So, but we're working through those fundamentally, the freezer is, a, a, a less complex product to manufacture than the top market refrigerator. So the challenges should be less, to, to ramp that up.
And and you, hopefully, back in 2017, 2019 provided the savings, the the re engineering re engineering savings for phasing of them for the for the original 3,000,000,000 plan in which you've added half a 1,000,000,000 in Europe since. And you've told us 200,000,000 of that comes in 2020. Can you give us a rough flavor, as to how the balance of the 3,300,000,000 total not for all of the years, 21, 2, 3, 4, but certainly at the beginning, because I'm trying to understand whether we get a a very big year in 2021 because we start to get the cooking savings with the delayed cold savings.
Yes. So of course, we would then get the full effect from Anderson in 2021. And then we'll gradually start to see the impact from Springfield. But of course, there will be, start up and transition costs there as well. So we will come back actually in, in, at the, at the 2, 4 earnings release with an updated outlook on the longer term trajectory.
Okay. Thanks. The the reengineering savings are a part of why the savings on there because you will have ongoing continuous cost improvement savings, which make up total savings. Are are you able to reflect discretionary levers, to lift total savings of continuous in 2020. Can you give us a flavor for what type of savings did that
No, not yet. We will do that in, at
the Q4 release, but, but, I mean, as we mentioned, that the overall 3,500,000,000 savings from our reengineering program as well as our global streamlining initiatives, they are absolutely coming through, with the day that we mentioned yesterday, but we have no doubt or issues about the overall delivery of that, of that 3,500,000,000. As I said, we are continuing, of course, to, to use our scale and leverage to, to drive efficient sourcing of products. We're driving manufacturing efficiency as we go on, and that we are pushing as hard as ever. Then of course, we are also, and this is important, I think, launching lots of new, an exciting product that we, of course, want to support with great marketing and So there's always that balance between, how much of the efficiency savings do we we're bringing that we actually bring to the bottom line directly and and how much we're investing growing, growing in the sales of our new newly launched products. So that's why it's difficult for you for us to give you exact guidance about 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. And finally, they put you in a table. Which quarter do you expect to be fully ramped up? Amanderson now?
It would be into the second half of the year, Q3, most likely.
That's really helpful. Thank you. Sure.
Thank you. Our next question comes from the line of David MacGregor from Longbow Research. Good
morning. Good morning, David.
I guess a couple of questions. First of all, it sounds like this is an automation or 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, nothing of any of an magnitude of his customer.
Okay. So in other words, when when you contracted with your engineering, people to to ramp these plants, it wasn't a turn project, you didn't you weren't agreeing to pay for a non operating plan. Is there something you're engineering yourself in turn Yeah. Yeah.
Yeah. No. No. It's something we're engineering ourselves with our global engineering team. Yeah.
Yeah. Yeah. Manufacturing engineers. So yeah.
And then can you just talk about the impact this has had in terms of your retail relationships? Have you lost even if temporarily any listings and any retailers as a consequence of the, the the the disruption to the supply?
No. We haven't lost anything with things.
Okay. And 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 1st quarter to hear that correctly?
Yeah. That that's our assessment.
Of course, we we're not in control of our of our retailers in internal management, but that's our that's our current disability. Yeah.
Right. Have they provided you with any kind of schedule on that?
No, nothing specific other than the fact that this is a Q4 event. Our
next comes from the line of Martin Wilke from Citi. Please go ahead. Your line is now open.
Thank you. Yes, it's Martin from Citi. I just one question coming back to the to the destocking, obviously it's not something that's under your control. But did you get a sense as to whether that was, done because the retailer has a lower demand for 2020 or were they undergoing some program of warehouse consolidation or something like that that could cause them to destock us unrelated to demand, just to sort of get a sense as to And if there's any signal there about the mark, how is it called for 2017?
Yes, my understanding is that it's not related to demand. This is more of an sort of operating model, this improvement where they want to run at lower inventories.
Okay. Thank you very much.
Sure.
Thank you. Our next question comes from the line of Olaf Sederholm from ABG Sundal Collier. Please go ahead. Your line is now open.
Hi. Hi. It's Olga with ABT. Just one question really. If we look on a quarterly basis now you're taking bigger costs than expected this quarter, there'll be higher costs by quarter going forward.
But is Q4 the the trough here? And should 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?
Yes. I mean, of course, we're not providing detailed learnings the quarter. But, yes, in terms of these impacts, the $70,000,000, that's for sure the biggest impact, that we have any reason to predict.
Okay. Thank you.
Thank you. Our next question comes from the line of Charlie Rinta from Handels Please go ahead. Your line is now open.
Yes, thank you. Maybe one last question related to destocking. Is there any way to believe that this would have this customer specific destocking or any other similar measures, would there be any way related to expectations that imported tariffs might be lower at some point in the future. Have you started to hear any such chatter from your customers this quarter?
Yes. No, I would say this is not related to that. I think this is more a sort of a company operating model, improvement, that that's that's across all categories, let's say, not just appliances, and, and, you know, of course, there might be some people that speculate on, on, territory that would be a pretty dangerous speculation, I would say, because, of course, they can go low to up and down.
Sure. And then this accounting adjustments related to inventory and warranties, I guess, do you feel comfortable that you have now gone to the bottom of the accounting issues in North America And is there any risk that this would sort of pop up somewhere outside North America in some other geography
Oh, no.
I mean, these issues are completely confined to North America and, and I think it's pretty clear that this is mainly related to, to a detailed review of our, of our balance sheet that follows the implementation of 1 of your ADR pieces I mean, in what market we implemented earlier this year.
All right. Thanks. And then finally, maybe a follow-up on ULoft's question on the On the sequential development, initially you expected these extra costs to be roughly $25,000,000 for Q4. Is that sort of an okay ballpark estimate for Q1 and Q2 related?
Yeah. No. No. I'm not going to give a detailed outlook per quarter going forward, but it will be, I mean, I mean, I guess my my the guidance I would give that, we said a little bit more than half of what we of the CHF 70,000,000 is related to Anderson. The other effect We don't expect to recur and then the effects from Anderson, we expect to gradually, be phased out in 1st half of next year.
Thank you. Our next question comes from the line of Andre Gutling from Credit Suisse.
I just wanted to, firstly, make sure the numbers are right in terms of the level. So if you said, just now that 70,000,000 over half that's Anderson. So let me interpret that as 40, and, you talked about 5 before. So the Anderson extra cost is 15. Is that kind of right interpretation?
I mean, both part wise. Yeah. Yeah.
Okay. And then since if we're running at this, okay, into H1 2020, again, not inviting guidance, but just purely the mechanics of it. That 40 you expect to gradually saved in H1. And then it should say completely about end of H2. Is that kind of what you're saying?
Yes, broadly. Yes.
So as we get
to the end of 2020 in Q4, we actually will be the positive on the bridge, right? Because we'll be comparing to the full run rate already.
Yes. Yes. Yeah. Yeah. Yeah.
Absolutely.
Okay. Okay. Just wanted to make sure. Back to the individual lines question. You said you're ramping up line 3.
Can I ask if lines 1 and 2 are kind of fully ramped up and delivering to what your expectations were? So do we have a proof point there that, this is working?
No. We're not yet, we're not yet fully ramped on on this either. So that's going, it's going forward, but, but, let's step by step.
Got it. Thank you. And just last one, the 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, I would no, that's a net number.
Net of the Anderson ramp up?
Right. So, I mean, on a year over year basis. Yeah. So I mean, we, of course, have cost this year as well. So, the savings, net savings that we expected from from Emerson 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 benefit but net year on year, it's basically a breakeven on Anderson.
Got it. Got it. Okay. So I'll take all that math I started with quarter by quarter, and, we should be 200,000,000 above that, basically, whatever the number
Well, the $200,000,000 is not the $200,000,000 is not related to Anderson. That's related to the similar programs we're implementing mainly in right now seeing the benefits mainly from, from Latin America, which we're seeing already this starting to see already this year and then into next year. And also the first impact of the global streamlining initiatives that we announced in September. Got it. Thanks very much, Markey.
We're basically not seeing any benefits next year.
Okay. But the savings across the program, elsewhere, outweighed answering costs. So, as you said, Anderson breaks even overall, for the year. Right.
Thank you.
Thank
you. Our next question comes from the line of Robert Treaches from Dragons Industry. Please go ahead. Your line is now open. Yes.
Thank you. Good morning, Jonas. Thank you for taking my questions.
I have 2 Good morning.
First one first one is, I'm curious about how it's working relationship with union in South Carolina? And, Is this a factory at all in this, outcome situation?
No, no, it's not a factor at all. It's, I would say it's a very, vibrant labor market. So the one challenge we have is to to quickly ramp up the, the old facility, again, just as a consequence of the, just availability of staff. But, but no, we had no labor relations issues.
Okay. Now second question is simply earlier last week, we were under about Alan Shaw is leading the company. So how is that related to the situation in Anderson?
Yeah. No. I mean, he Alan, had planned to retire next year, for for for quite some time. We had, actually, jointly started to to plan for the succession and and had a an extensive search process that went through, this fall and And and the, the relatively fast changeover time is, of course, related to the 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, but the transition plan and the retirement plan was completely unrelated
comes from the line of Adam Walsall from Milir Brondovich. Please go ahead. Your line is now open.
Thank you very much. Thank you for taking my questions Jonas. I just have two questions. So first of all, who is the customer regarding the digital connection?
Yeah. I understand why you asked that, but we don't typically comment on individual customers, that's, of course, you know, we need to maintain confidentiality with our customers. Okay. Good. So can
you shed some light on, the relative size of the customer relation to the US business? Sorry. Could you repeat that earlier?
It's it's a very large customer. Yeah. Very large. Okay. Alright.
That's my question. Thank you very much.
Thank you. Our next question comes from the line of Lucy Karriou from Morgan Stanley. Please go ahead. Your line is now open.
Taking my question. Actually, my first question is around the destocking effect. Is that something you want to take in whatever you said below the is that something that can impact actual adjusted?
No, all of these be taken in current income. We will not call them out as one of our teams.
Okay. Thank you very much. And then I was just curious about how much do you really have on the ramp ups of this receivable season and how much will you be there did you if you recall for video calls and not too long ago, it should be about 2 months ago, and the cost was 25,000,000 and down that content almost double apparently. So how much visibility do you really have on that? And the reason I'm asking is because you still have the end of the community to be fully ramped up on what you have to consider is coming.
So how is the requirements working there?
Yeah. So the impact here in, Anderson is to, I mean, the cost is not necessarily that much higher. The issue is the capacity constraint, which then impacts sales volume. So the higher effect here, in the quarter is mainly related to, to, the volume impact. And, and, of course, what we're doing now is we're ramping sort of back up the, the, legacy, the old facility in Anderson so that we can meet consumer demand.
So and retail demands in the first half of next year. So 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. So that's why we can, we can be, reasonably confident that we will manage through this without any long term damage.
Thank thank you, Ynez. I I appreciate this more of a bullying contract, which is being quite an asset, but I guess my question is, you know, how we have escalated so quickly for these extra costs in 2 months' time I mean, how was, you know, what was the situation in terms of the ramp up 2 months ago that we now have come to a point where, you know, we made the situation to have all of these recovery, which is best to contract?
Yes. I mean, it's clear,
of course, that the ramp up hasn't gone as quickly as we thought at the time. And then, of course, we don't have as high volumes to sell because we have ramped down the old facility and also the suppliers. And I think that's the key point here that, that as we ramp down the old facility, of course, you have to preplan that because we have long, long lead, supplier. So we don't also don't want to end up with, a lot of obsolete, components, right? So we planned in advance, the ramp down of the old facility and then the ramp up of the new.
And since the the new facility has taken longer time to, to ramp we didn't have as much availability either of the new products or of the of the old ones, and that's causing this, this impact, this capacity constraint. But then, as as I mentioned, we're ramping the old facility back up again, but with the lead time because we need to to switch suppliers back to, to the components for, for, for the old, platform. And that, that takes a little bit of time, but, but we are doing that and that and that's providing us that, let's say, insurance for next year. And then in the meantime, we're working through, the remaining in the new in the new facility. And of course, this is a, as I mentioned, we're talking more about trimming 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 supply, equipment suppliers to make sure that they're they operate at full capacity. And again, it's, it's a major facility. It's a a 3,000,000 unit, time. So so so even even small, seemingly small, technical snacks have a very large impact.
Sure. Welcome.
Thank you. And we will now take our final question for today that will be from Mcchristin Marnikode from DNB Market. Please go ahead. Your line is now open.
Good morning. And sorry, just to follow-up on the actual cost savings, so that we get everything right here. The 200,000,000 progress, that the gross cost savings number you talk about? Or is that what you normally refers to as of net cost savings for 2020?
Yes. So it's a net cost saving,
but only for this program, the 3,500,000,000 program, right? So, and then, and then we work on other other ongoing efficiencies on the one hand and also, of course, other investments to support, again, new product launches and new capabilities. Example, in growing our our aftermarket business and so on. So we're continuously investing in that and we're continuously driving efficiency in, in ongoing operations. Perfect.
And then secondly, on the CapEx, is that your budgeting for the coming years? Has changed somewhat on the back of this? Or should it still continue to have the same kind of profile?
No, it's largely the same profile. Thank you. Thank you. Thanks, everybody. And, looking forward to, to talking to you again following our our Q4 results, And, as I mentioned, of course, we are very confident that the measures that we're taking in North America to strengthen our competitiveness is are the right ones.
Making us more efficient and, and most importantly, providing our consumers with a greatly innovative and good looking product. So, this is a temporary setback and we're, looking forward to updating you on the progress as we go forward. Thank you very much and, happy holidays.