Welcome everyone to the presentation and discussion of the fourth quarter and full year 2016 results. With me here today, I have our CFO, Anna Ohlsson-Leijon, and our Head of IR, Catarina Ihre. Let's begin and turn to our presentation. We'll start with a summary of the full year. In 2016, Electrolux achieved total sales of SEK 121 billion. We had positive sales in our operations in Europe, Asia-Pacific, and professional products, driven by good performance. Sales in North America was impacted by the private label business, and Latin America by the declining demand. During the year, however, we continued to drive and improve mix and raise prices in selected markets. The group's EBIT increased versus last year, and the margin was 5.2% versus 3.9% in the previous year, excluding the impact from GE.
EMEA, accounting for 31% of group sales, showed strong improvement. Focus on premium branded products and cost efficiency contributed significantly to the results. Our North American operations, representing 36% of net sales, drove strong focus on profitability, improved efficiency, and also benefited from raw materials. In Latin America, we continued to experience significant challenges due to the deterioration in the market and the sharp decline in consumer confidence. Price increases and cost measures have partly mitigated those challenges. We concluded the year with a strong cash flow of SEK 9.1 billion , and are entering the new year with a strong financial position. Thus, the board proposes an increase of the ordinary dividend to SEK 7.50 per share. This reflects Electrolux's commitment to deliver continued shareholder value in the short and long-term perspective.
As of 2017, Electrolux will pay the annual dividend split in two installments in the year. The first payment will be made following the AGM and the second during the fall. The proposed payment periods will facilitate a more efficient cash management. Turning to Q4, performance improved across our businesses in the fourth quarter, supported by continued focus on active portfolio management, driving sales of higher-margin products and cost efficiency gains. Our group operating income increased versus last year to SEK 1.6 billion, and four of our business areas achieved an operating margin above 6% in the quarter and in the last 12 months. For the group, the operating margin was 5.0%. In EMEA, our sales were in line with previous year and continued to gain market share within premium brands. The overall market environment in Europe was positive.
In North America, improved product cost and operational efficiency, combined with positive contribution from raw materials continued, which offset the price pressure and private label volume declines. Our operations in Asia-Pacific posted positive organic growth in the quarter, with a significant improvement in operating income. In Latin America, the Brazilian and Argentinian markets continued to decline and affected both our top line and earnings negatively, and we ended the last quarter also with a strong cash flow. Let's go through some key market highlights during the quarter. In December, Electrolux announced the agreement to acquire the leading water heater company in South Africa. The acquisition will provide a step change for Electrolux in Southern Africa through the complementary product offering, access to important customer segments, and by adding a strong distribution and service network in the region, relevant for our other product categories.
This acquisition fits perfectly with our strategy to drive profitable growth. Moving to North America, Electrolux recently took home the Good Design Award for two of its best-in-class products, the Frigidaire Gallery Cool Connected Air Conditioner, and the Electrolux Perfect Steam Washer. Both received the prestigious award that recognizes product design, which exemplify top-notch quality, state-of-the-art functionality, and cutting-edge aesthetics. We are pleased to announce these two products have won the 2016 Good Design Awards. As mentioned before, the launch of the new AEG premium product in Europe is underway and has been perceived very well by customers. During the quarter, we started the launch in the German market, and the plan is to gradually roll out in new markets in 2017. Major appliances in EMEA showed stable trend, sales trend in the quarter, and this was mainly driven by better product mix.
Demand for appliances was positive in most Western European countries, except for the U.K., and demand in Eastern Europe showed strong growth in the quarter. However, market demand weakened in Middle East and Africa. Electrolux sales volumes were in line with previous year, with positive growth in several key European markets. However, growth slowed down, mainly due to the U.K. and Middle East and Africa. Overall, Electrolux gained share in its premium branded pro business. Product mix improved in the quarter, and selective price increases were made to some extent, offsetting the continued price pressure in the market. Operating income increased versus previous year, and our EBIT margin reached 7.2%, surpassing 6.7% in the past rolling 12-month period. This is an all-time high. Strong mix and benefits from cost efficiency contributed to the earnings development.
The depreciation of the Egyptian pound had a significant one-off impact on earnings in the quarter. Price increases were implemented in Egypt to offset the currency headwind. Let's turn the page and talk about the market development in Europe. The European market continued to be positive in the fourth quarter. Total unit shipments increased by 3%. Demand in Western Europe was up 2%, with volumes lower in the U.K. and Switzerland. Growth was strong in the Nordics, Iberia, and positive in Italy and France. Following the depreciation of the British pound, price increases have been made. However, the outlook for demand in the U.K. still remains uncertain, in particular, since higher prices are now in effect in the market. Demand in Eastern Europe was up by 5.4%. Most markets in the region showed growth.
We expect the European market to continue to be healthy in 2017, and forecast around 1% growth for the full year, based on our outlook from December. This reflects a stable demand trend, but also the weakness in the U.K. In the fourth quarter, our operations in North America continued to focus on profitability and showed earnings improvement. The North American market grew strongly in Q4, driven by Black Friday and increased promotional activities. Our branded business performed well, and sales volumes were higher versus last year. Total sales, however, declined, mainly related to lower sales under private labels, but also due to continued promotional price pressure. We benefited relatively less from the market growth since it was skewed to laundry, which is relatively less predominant for us.
Earnings in North America increased versus last year, achieving an operating margin of 5.6% in the quarter and 6.2% for the year. The improved profitability was a result of our focus on product cost and efficiency, and raw materials also contributed positively. Let's turn to the next slide and talk about the market development in North America. Market demand for core appliances in North America picked up strongly and was 12% in the last quarter of the year. For the full year, 2016, market growth was 6%. With four consecutive years of strong growth, we believe the market for appliances in North America will remain positive, and we expect to see economic fundamentals supporting growth in the industry. For the full year 2017, we expect the North American market to grow by 2%-3%.
Let's move to Latin America. Demand for appliances in the region deteriorated again, and the macroeconomic situation remained weak. Market volumes in Brazil and Argentina declined, while demand in Chile was slightly positive. Additionally, Electrolux volumes were negatively impacted by retailer de-stocking in Brazil. The challenging market conditions continued to affect our operations negatively in the fourth quarter. The reduction in retail inventories also affected our performance. In the quarter, Electrolux volumes and mix declined, while prices were somewhat higher versus last year. To compensate for the weak markets, our team has taken actions for additional structural measures, which has required some cost in Q4. This was to adapt our operation to lower market volumes and to mitigate the under absorption of fixed cost in production and overhead.
I'm pleased to announce that Ricardo Cons, who has been acting Business Area President since October, was today announced as permanent in the position. Let's turn aside and talk about our operations in Asia Pacific. Market demand in all three sub-regions in Asia Pacific is estimated to have been positive in the fourth quarter. Our organic sales growth was driven by strong volumes in Southeast Asia. New launches and better product mix across all regions also contributed. Earnings in Asia Pacific increased, and margins reached 7.1% in the quarter and 6.7% for the last rolling 12 months. Both Australia and Southeast Asia contributed positively, mainly due to favorable mix development and increased cost efficiency. Going forward, we will continue to focus sales on new products and roll out premium brands, such as AEG, to drive profitable growth in the region.
Let's continue with Small appliances. During the quarter, the Small appliances business continued to execute active portfolio management activities, primarily focused on North America and Latin America. Our volumes in Europe continued to grow profitably, while sales volumes for segments in North America and Latin America continued to decline. During the quarter, the Eureka brand in the U.S. was divested to Midea Group. In total, our organic sales declined by 4%. Operating income increased compared to Q4 previous year, which was impacted by SEK 190 million in charges related to measures to restore profitability. During this quarter, we intensified our efforts within the cost reduction program. The positive gain from the divestment of Eureka has been offset by costs related to this program. For the year, the business area delivered an EBIT margin of 2.9%.
As of 2017, Small appliances changes its name to Home Care and Small Domestic Appliances. Let's flip page and cover more of these highlights. As just highlighted, from 2017 and onwards, the business area Small appliances will change its name to Home Care and Small Domestic Appliances. With this change, we will further develop our offering. This underpins our strategic priority to develop the Electrolux offering around healthy well-being within the home and grow our presence in Floor-care, Air Care, and Watercare. We aim to further spur the growth through a holistic approach to best-in-class consumer experience. We're looking forward to create a unique well-being ecosystem driven by connectivity, simplified consumer interaction, and enhanced user benefits to our end customers. The financial reporting will remain unchanged for the business area. Now, let's turn to our professional business.
Professional products showed a strong performance in Q4 and posted an organic growth above 7%. Sales growth was driven by Western Europe, North America, and Japan. As mentioned previously, we have increased investments to support profitable growth in key markets and new businesses. Our professional business achieved a strong EBIT margin, above 15% in the quarter, driven by higher sales volumes and good execution. The business achieved an EBIT margin of 13.9% for the year, a strong record performance. Now, I would like Anna to go into the numbers and go through our financials and cash flow in the fourth quarter. Please, Anna.
Thank you, Jonas. Let's start with the financial overview. Organic sales were down 3% in the quarter, mainly due to decline of the volumes in Latin America, decline in the private label volumes in North America, and the active program of exiting less profitable products in Small appliances. Pricing in several markets was under pressure in the quarter. The currency translation impact was positive 3.9%, and acquisitions contributed with 0.2%. This resulted in reported sales growth of 1.1%. Total gross operating income, which is defined as net sales minus cost of goods sold, increased slightly versus Q4 last year, and translated into a gross margin of 20.4%. For the full year, the gross margin improved from 19.1% to 20.9%.
Earnings were up compared to last year, driven by continued good performance and cost improvement across most of our business areas. Last year's EBIT of a negative SEK 202 million was impacted by costs related to GE. Excluding that impact, EBIT increased by 11% versus Q4 last year. The EBIT margin increased to 5% compared to 4.6%, excluding GE costs for the quarter, and to 5.2% for the full year from 3.9%, again, excluding GE, an increase of 1.3 percentage points. The financial net was impacted by the depreciation of the Egyptian pound of approximately SEK 170 million in the quarter. In the same quarter, previous year, our finance net had a funding cost impact of SEK 187 million for the not completed GE deal.
Cash flow was strong in the quarter, with contribution from earnings improvement and favorable development of operating assets and liabilities. The effective tax rate was impacted by a positive revaluation of the deferred tax assets at the end of the year, and was 19.5% for the full year. Earnings per share increased in the quarter and was at SEK 4.43. The full year EPS showed a strong increase from SEK 5.45- SEK 15.64. Let's move to the sales and earnings bridge on the next slide. Let's start with the organic growth. Volume price mix resulted in a negative impact of SEK 408 million on operating income in the fourth quarter. Price was the key negative driver due to price pressure in North America and Europe, which was partly offset by price increases in Latin America.
Volumes were negatively impacted by the decline in Latin America, decline in private label volumes in North America, and the portfolio management activities across business areas. These effects were partly offset by positive contribution from mix. The impact from raw materials in the quarter was positive of SEK 160 million. Moving to the net cost efficiency, this shows an improvement of SEK 556 million, comprised by the positive impact of productivity work and efficiencies throughout the group. To summarize, we had a margin dilution of 1.3 percentage points from the organic part, which was offset by a + 1.7 points in contribution from net cost efficiencies. In addition, we had a + 0.5 percentage points contribution from raw materials. The significant negative currency impact came mainly from the Egyptian pound and the British pound.
The SEK 1,849,000,000 in the other column mainly relates to the positive delta for GE costs and charges for Small appliances in the fourth quarter, EBIT last year. Let's go to the sales and earnings bridge for the full year. Volume price mix resulted in a positive impact of SEK 311 million on operating income for the full year. Volume was a key negative driver due to sales being impacted by the decline in Latin America, decline in private label volumes in North America, and the portfolio management activities. These effects were fully offset by positive contribution from price mix. The impact from raw materials in the full year was approximately SEK 900 million. The net cost efficiency showed an improvement of SEK 1,670,000,000 r elated to positive impact from productivity work and efficiencies.
The main drivers were purchasing and engineering savings, lower sourcing costs and savings in variable SG&A, partly offset by investments in innovation. We had a margin accretion of 0.3 percentage points from the organic part, 0.7 percentage points contribution from raw materials, and a 1.4 percentage point in positive contribution from net cost efficiencies. The significant negative currency effect came mainly from the Egyptian pound, the British pound, and the Brazilian real. The SEK 2,307,000,000 in the other column mainly represent the positive delta from GE costs, restructuring costs in Small appliances, and the inventory write-down in Asia in the EBIT last year. Let's go to cash flow and move side. Cash flow in the fourth quarter increased versus the same quarter last year and amounted to SEK 2.6 billion.
For the full year, cash flow was SEK 9.1 billion, which is an improvement of SEK 2.4 billion, with the improvement in earnings mainly contributing. Cash flow in the fourth quarter and the full year 2015, was negatively impacted by GE fees and costs. Our net operating working capital, measured as inventories, trade receivables, and accounts payable, continued to improve. The average net operating working capital in relation to average net sales for the year came down to 5.1%, an improvement from 6.4% last year. The quarter was also impacted by contribution of approximately SEK 600 to the German Pension fund. Finally, let's take a longer perspective on the cash flow. Similar to the historic trend, Q4 was a good quarter in the year, but not the best.
For the reasons explained before, the current quarter has been strong in terms of cash flow. The strong cash conversion rate in 2015 and 2016 has given us a very strong balance sheet and means we have the funds and firepower to continue with our investments as well as additional strategic acquisitions. I would also like to mention that in December 2016, Electrolux investment grade rating from S&P was upgraded from BBB+ with a stable outlook to A - with a stable outlook. With that, I would like to hand back to you, Jonas, for summary and conclusion.
Thanks, Anna. Let's move on and summarize this presentation with the outlook for Q1 and full year 2017. Looking ahead into the first quarter and the full year, we expect consumer demand to continue to drive growth in the appliance industry. We expect the positive demand trend in Western Europe to continue in most markets. The outlook for the U.K. remains uncertain. In Eastern Europe, we expect the region as a whole to show growth. We anticipate demand in North America to remain positive for 2017, driven by a solid development in new housing starts and favorable consumer confidence. Although growth is expected to remain positive, it's likely to be at a lower level than we've seen in the past three years.
Latin America continues to be weak. We expect demand in both Brazil and Argentina to be slightly negative, but with some signs of market stabilization in the region. Demand in East Asia shows a mixed pattern with an overall positive outlook. Australia has continued to show positive growth for several quarters, but we estimate the market to remain flat to slightly negative in 2017. Now to our business outlook. In terms of overall sales volumes, we foresee a slight decline, mainly related to the private label business in North America. For EMEA, there are uncertainties in demand related mainly to the U.K. and Middle East and Africa, and we expect Asia-Pacific and professional to continue a positive momentum in the next quarter. In Latin America, we expect to see a slight year-over-year volume decline.
In terms of price mix, we expect price pressure to continue in EMEA and North America, driven by continued high promotional activities in the latter, although offset by improving product mix. In Latin America, we expect the competitive price pressure in Brazil to continue. We expect to continue our focus to increase net cost efficiency. This will strengthen and benefit our operations going forward. We expect raw materials to have a negative net impact starting from the first quarter and about SEK 900 million for the full year of 2017, as previously communicated. There are some risks there. With continued fluctuations in the currency markets and with the strengthening of the Brazilian real, we see less impact from currencies in Latin America. The depreciation of the British pound and the Egyptian pound, however, has increased the headwinds for the year.
Our intention is to mitigate this through price increases. At current rates, we expect a positive transactional effect of SEK 40-50 million for Q1 and a negative SEK 150 million for the full year. Translation effects for Q1 and the full year are expected to be slightly positive. Our CapEx outlook remains in the range of SEK 4 billion . I would like to pass it on to Catarina to open up for Q&A.
Right. Good morning, everyone. With this, I would like to open up for a Q&A session. Operator, could you please take the first question?
Thank you. Our first question comes from Lucie Carrier of Morgan Stanley. Please go ahead. Your line is open.
Hi, good morning, Jonas. Good morning, Anna and Catarina. Thanks for taking my questions. I will start with one on shareholder returns and how you think about the cash in the balance sheet. You ending the year pretty much net cash. Why didn't you make the choice to, you know, go further in terms of in terms of shareholder returns? Is it also, you know, linked to your strategy in Small appliances, a bit more focused on well-being and health?
I think, first of all, I think the board is showing a lot of confidence in our performance by a significant increase in the ordinary dividend. Then, of course, the question is, with the very strong balance sheet we have, what is the most effective use of that capital? We do indeed see a lot of opportunities for value creating M&A. And of course, there is a rapid opportunity for transition with new business model opportunities, you know, coming our way, and we want to retain the flexibility and the firepower to act on those. That's the rationale from the board. Of course, we will not waste any money.
We will invest only in value-creating, M&A opportunities, and if they don't show up, then, of course, excess cash will be returned to shareholders.
Thank you. I'll have a second question regarding your exposure in Mexico and also in China. I was wondering if you could give us some color on your manufacturing capabilities in Mexico and China, and specifically also how much of what you manufacture in these countries is being then imported into the U.S. This is, of course, in relation with, you know, the election of President Trump.
Right. Approximately, if you take the core white appliances in North America, about 20% is manufactured in Mexico and close to 80% in North America, in the U.S. We have a pretty good profile of in terms of manufacturing footprint compared to competition there. Some categories like Microwave Ovens and Air-conditioners and some other smaller categories are, let's say, almost exclusively sourced in Asia, both for us and for competition. In terms of the profile, I think we are well positioned, you know, with a strong American brand in Frigidaire, and predominantly manufactured in North America.
Of course, we have a lot of flows, back and forth, both of components and finished goods.
Are you able to give an indication of, you know, how much flows really are going from Mexico, Asia into the U.S.?
Yeah, not in total, but again, the, you know, because it's a combination of in and out and components and finished goods. But again, 80% of the core white is manufactured in North America, with the combination of components from all over the world, but also, of course, a lot of it in the U.S. You know, of course, we can give more detail on that, but, you know, I don't think our profile will vary much from the other domestic manufacturers in North America. Of course, we're much more heavily local than some of the international manufacturers.
Thank you. And maybe my last question actually is going to be on Latin America. Of course, I mean, the market is particularly difficult there, and that has been the case for two years. I know for two years, you have implemented different type of measure to try to kind of mitigate the headwinds. How much more can you reasonably do right now in LatAm? I mean, which type of additional initiative can you take, also thinking that at some point, that market should rebound?
Yeah, I think that's a fair question. The actions that we've taken now in Q3 and Q4, I think are now the right ones to start to turn around the business. I feel we have much better control of our structural cost, our product cost, and very importantly, the mix that we offer the market. I think the hits that we have taken are, of course, predominantly just from the impact of the market declines. But there's also a significant mix component in this, where the demand has shifted down, and we haven't really had the right, let's say, content and then costed offering there.
It's a combination of structural cost adjustments that we're making and the product offering, you know, with the right cost and right price points that we're making right now. I have a, you know, high confidence that we will turn around the business here already, you know, in the short term. Of course, the continued weak demand in the market will sort of cap the potential there, I think we're doing the right thing.
Just maybe as a follow-up, you said that you.
I think we're now on question four, right? I think
Okay.
I think we have to move on.
All right. Thank you.
Yeah. Thanks.
Sorry, Lucy. Could I just ask you to have one question at a time, so as many from the audience as possible have the opportunity to ask questions?
You'll be able to come back.
Absolutely, you'll be able to come back, but, I think that's fair.
Okay. Next question.
All right. Should we move on?
Thank you. Our next question comes from Andre Kukhnin of Credit Suisse. Please go ahead. Your line is open.
Is Andre around?
Andre Kukhnin, if your line is on mute, please, unmute your phone.
All right.
Okay.
If not, I think we can move on to the next question, and we have Andre coming back.
Okay. Our next question comes from, Johan Eliason of, Kepler Cheuvreux. Please go ahead. Your line is open.
Yeah. Hi, this is Johan. Just two small questions. You said the Small appliances becoming Home Care and Small appliances. Are you moving in some Air Care business into that one from the other divisions? I think you did say that there were no reporting changes here, but I just want to confirm that. The secondly, why do you expect CapEx to increase, and what sort of CapEx are we talking about here? Thanks.
Okay. I will take the first one, and Anna will take the second. On the first, we will not. The Air Care and Small and Watercare categories are today kind of sold by both the previous Small appliance sector and major. We will not move the responsibility for the sales, and hence, the financials stay the same. What we're moving is the, what we call the product line responsibility. In terms of generating the offer, generating the marketing communication, and making sure that we again develop this ecosystem of products that in combination provide a, you know, a healthy well-being offer. In that sense, we're moving responsibility for the, let's say, the product creation, but not the commercial execution.
Hence, we're keeping the reporting assets for that. I'll move the CapEx question to Anna.
Yeah. When it comes to CapEx, we invested slightly lower this year than we had guided. This is mainly related to timing of projects. For next year, that number will be then, you know, slightly higher, and this is mainly process CapEx related to the gaining cost efficiencies into next year and in the future, but also investments in new product offerings.
Okay, excellent. Just a minor question. You did end the full year on a 1.6 cost out on net cost efficiency, which I think was a bit higher than you indicated previously. Any reason there? Thanks.
Well, I'm not sure if it was higher than we guided, but the point is that this is a huge, huge focus for us, of course, and will remain so for the coming year. We do have, you know, untapped or underexplored opportunities, mainly in North America and in Latin America, that will continue to drive.
Excellent. Thank you very much.
Thank you.
Thank you. Could we move on then to our next question, please?
Of course. Our next question comes from David MacGregor of Longbow Research. Please go ahead. Your line is open.
Good morning, guys. One question then, from me on the apparent losses of market share in the U.S. I mean, the volumes there were very, very large for the market this quarter, yet organic growth there disappointed again. That's something we've seen over the past couple of quarters, but not in this dimension. Could you just help us bridge what, you know, what is happening there again, so we know what we can expect for the future? Thanks.
Sure. We saw a total market growth of 12% in volumes in the quarter. Of course, pricing was negative, and that's affecting net sales, but not volume. You kind of have to deduct that from the market growth as well. That's for the 1st thing. Secondly, the growth was much larger in laundry than in our, let's say, strongest categories, which are refrigeration and cooking. From, let's say, a market mix perspective, we had, let's say, an unfavorable mix in the 4th quarter. Thirdly, private labels, right?
We have a relatively high proportion of sales in private labels, and that has been on a negative trend, significant negative trend in the third and the fourth quarter, which offsets volume gains in our branded business. Our branded business was up, and if you do the correct market mix, let's say, versus our sales mix, we were only just below the growth rate of the market in that, let's say, in that way of looking at it. Of course, that in turn was the course of profit management, right? We were focusing on profitable sales and making sure our margin continues to improve, or our overall profit continues to improve.
Thank you so much. That's very clear.
Sure.
Thank you. Can we have the next question then, please?
Our next question comes from Jack O'Brien of Goldman Sachs. Please go ahead. Your line is open.
Good morning, guys. Thanks for taking the question. raw materials, is, I guess, a focus a lot of people have. I noticed your guidance for 2017 is unchanged. Can you just perhaps talk me through the risk factors? I mean, I guess since that guidance was set at the start of December, steel prices have been moving a bit higher, so have plastic. Would just be interested to understand the contingencies you have, sort of incorporated in that number and how we should think about that if raw mats continue to move higher.
Yeah. Yeah, I think it is fair to say, and as I mentioned, there is some risk to that SEK 900 million, but of course, the markets are volatile, right?
Mm-hmm.
I do agree that in the short term, both steel and chemicals, and specifically in Europe, have bounced up a bit more. Some of the input costs have, at the same time, gone down. If you look at coking coal, scrap metal, and a few things that tend to impact the price of the finished good over time, those have been moving down. That's why we are not changing our guidance at this point, because we see, you know, various factors sort of offsetting each other in the market. Of course, there is indeed risk to the number.
Okay. Just one more, if I may, on the sort of slightly changed messaging around the M&A. It seems slightly more of a focus than perhaps previous. I would just be interested to understand to what extent you'd be happy to take sort of group leverage, you know, given your unleveraged position at the moment. How should we read that?
What we've communicated and still think is right is a net debt to EBITDA around 2 x is kind of the long-term sustainable level for us. That means that we have a lot of capacity, both for M&A and strong cash returns to shareholders. I do think that, you know, let's say, following the GE focus that we had, right, it's taken a little while to refocus our M&A strategy, and we have done that, and it's clear that there are plenty of interesting opportunities in professional, as we've talked about before, in emerging markets, and also, I think, in new interesting opportunities to accelerate our business transformation in the direction of connectivity, digitalization, and so on.
There are, quite a number of interesting opportunities that we're acting on right now.
Great. Thank you.
Sure.
Thanks so much, Jack. Shall we move on to the next question then, please?
Thank you. The next question comes from Andreas Willi of J.P. Morgan. Please go ahead. Your line is open.
Yeah, good morning, everybody. My first question is on the profitability in Europe. If you strip out the Egypt revaluation, that was very, very strong, is this kind of a new level you think you'll be able to maintain, or was there anything unusually impacting on the positive side, excluding Egypt in Q4, in terms of mix, for example, in the European margin performance?
Yeah, I would say that the trend, underlying trend in EMEA, is continuing on a good level. I wouldn't say that it's necessarily accelerating, and some, yeah, heavy lifting was done on the cost side to offset this significant impact on the currency. I don't think that we can sort of straight line out that those, let's say, short-term actions on discretionary spending and so on. Yes, the underlying performance in EMEA remains very solid. But I think straight lining the you're just taking out the pound effect and then saying this is the new level is a bit too high, too aggressive.
My follow-up question is on the private label business in the U.S., which you mentioned. Maybe you could give us an indication where we are as a percent of the total large appliance sales now, what's the risk related to Sears? We have seen Sears selling some of their other brand, Craftsman, to one of their kind of suppliers. Do you expect any movement on the Kenmore brand? Kind of just how you frame those risks over the next 12, 18 months as Sears restructures.
Right. private label is a bit below 20% in total in North America, and we don't break out the individual accounts there, the total is around, you know, around 20%. That has indeed been declining quite significantly during the year, and we do expect that to continue. I won't comment on, of course, specific actions by our customers, I will note that we have a long-term contract in the case of Sears, that we're sticking to, and that they're sticking to as well.
Thank you very much.
Sure.
Thank you very much. Operator, could we please have the next question?
The next question is from Matthew McEachran of Royal Bank of Canada. Please go ahead. Your line is open.
Morning, everyone. Just digging a little bit more into the U.S. and the outlook. One question was on you put price pressure still continuing. I think you said last time that perhaps as raw materials rise, you might see a change in behavior and promotional activity moderating. Do you think that's still the case, from today?
I think what I said is that yes, That typically comes with, like, a six-to-nine-month lag, right? Because, it, you know, because just of the behaviors in the market and price lists and all kinds of different things, the say market behavior tends to be impacted by swings in raw material, but with a lag.
Okay. The other thing I noticed on the output, one competitor had, well, a reasonably significantly higher. They were looking for 4%-6% volume growth in North America. You're looking for sort of 2%-3%. You probably won't comment on what a competitor said, but any sort of reason why you're sort of significantly lower?
Well, I mean, I, if you look at last year, it was quite volatile quarter to quarter, right? If we look at the underlying, let's say, drivers, we've now had four years of very significant growth, and, we do expect a moderation. We called it at 2%-3%. You know, we'll see what happens. There are many, many different factors driving demand, potentially upwards and downwards going forward. We think it's better to be a little bit prudent, see where things are going, and if necessary, we'll of course adjust our outlook as the year goes along.
Great. Thanks very much.
Sure.
Thank you. I think we have a few other questions on the line, please go ahead.
Thank you. The next question comes from James Moore of Redburn. Please go ahead. Your line is open.
Yes. Good morning, everyone, Jonas and Cat. Can I ask a question on productivity and saving? The SEK 1.6 billion you guided to before Christmas, I guess it's before inflation, a bigger number, and if I assume SEK 1 billion-SEK 1.2 billion of inflation, that's a SEK 2.6 billion-SEK 2.8 billion number, or two and a bit percent of revenue, which seems to me quite a bit higher than what I think we've seen in the past, excluding things like DOE and Memphis. I wonder if the ratio was, say, 2.25% of sales for that gross number, could you say how that ratio differs by division and what degree of visibility and confidence you have on it, and how much is kind of modularization 2.0 versus other specific headcount actions?
Right. I won't break it down in detail, but of course, we have, as I indicated, untapped potential in both North American and Latin American. We have a very strong focus on cost efficiency there, as everywhere else, but more, more concrete opportunities in the short term there. That's where we're putting our focus. I think that the savings that we're projecting are very much in line with what we're doing this year. The geographic mix will shift a little bit, and some of the sources will shift a bit as well.
What we're doing is really taking a holistic cost perspective of material cost, conversion cost, logistics and warranty cost, as well as the more structural cost elements of, let's say, factory overhead and operational structural cost. We do see both an opportunity and very much a need to have a strong program of continuous improvement and continuous cost excellence. In all aspects of our cost structure. You know, if there's a change, it may be that we're really focusing on continuous improvement and efficiency in all of our cost drivers.
That's very helpful. Could I maybe follow up on a related issue? I suppose the other side of the savings are the challenges and price versus raw material seems to me a big one. You talked about a bit of risk on 2017 raw material impact. I don't know if you can concise that, and I'm more thinking about the year after, full year 2018. If we were to stay at current metal prices, would there be another SEK 500 million or SEK 1 billion to drop in 2018 due to the timing of contract lag, et cetera? Are you concerned about the acceleration in U.S. promotional intensity trading down, coming at the same time with the raw material? Can you help us think a little bit about that?
Yeah, sure. I think on the raw material side, it's, you know, difficult to impossible to speculate about 2018 at this point. We do see a fair amount of volatility, both in steel and in chemicals. We see a little bit of a, in the short term here, divergent pattern in terms of steel prices versus input cost for steel. That's why we're saying, yes, there's risk, but there's also, let's say, opportunities in terms of the market price for the finished material. I don't, you know, I don't want to blow this up.
We're not talking about major risks to the, to the indication, of course, the market is moving and a little bit in different directions. We do have a fair amount locked in, but I would say less than we typically have just because of these diverging market factors. We have a little bit more open this year than we would typically have.
Thanks, Jonas.
Sure.
Thank you. Thank you, James. All right, should we move on to the next question, please?
Thank you. The next question comes from Björn Enarson of Danske Bank. Please go ahead, your line is open.
Thank you. Yes, looking at your European outlook and the uncertainty, surrounding Brexit, how much have you, or what's your view on the U.K. looking for 2017, and how much is that putting pressure on your, full year outlook? Also, if you can put the European outlook, towards your own addressable market, if you would grow less or more than, the market.
Yeah. First the U.K. then. We do it's a little bit interesting because the market has actually been more resilient than we would have assumed originally, given Brexit and given the currency hit. What's happening right now is that us and others have raised prices, and not just in appliances, I think other industries as well. The question then is what happens to inflation and demand in the U.K.? I fear that we, or we fear that we haven't seen the full impact of that in the U.K. yet, and that's why we're a bit conservative in terms of our outlook for the U.K.
We're not publishing a specific number, we are expecting that market to be down for the year, that's an important market, of course, for us.
Part of the 1%.
When it comes to the rest of Europe, you know, as indicated by a 1% guidance, we do see growth, but we also see a lot of, let's say, political volatility and risks in the market. We don't want to call that too high at this stage. You know, we have elections in many big countries in Europe, and that usually creates a little bit of volatility. That's why we're, let's say, a positive but tempered in our outlook for Europe. Sorry, your second question, I dropped it.
No, if you could, if you take your addressable market in Europe, if that's similar, if that's reflected by the market outlook, or I guess you have a little bit of a less exposure to the U.K. than what they stand for in the total Europe.
Yeah, a little bit less. Yeah, that's true. Yeah, no, I think we're on a positive trend in Europe, right? We're gaining market share in our premium business. We're launching the new AEG range that will roll out over the course of the year. We're definitely optimistic and positive in terms of our ability to continue to gain profitable share in Europe. Yeah, we're positive on that.
If I just shortly can come back to private label, you talked about, 20% or a little bit less than 20% exposure in North America. What was it a year ago?
I don't have the exact number, but it was, but it's going down. It's going down.
Yep. Thank you.
Sure.
Thank you. We have room for two more questions before it's time to summarize the quarter. Please go ahead.
Thank you. The next question is from Karri Rinta of SHB. Please go ahead, your line is open.
Yes, thank you. I would like to start by going back to the net cost efficiencies, because you're, for this year, you're guiding roughly the same net cost efficiencies that you achieved last year. If I look at the last year, 2016, that was probably helped to a large extent by the difficulties that you had in the U.S. in the first half of 2015. I guess, you have discussed North America and Latin America as a source for further cost savings, but maybe, where does that incremental potential now come from that will be equal in size than that sort of North American improvement was in 2016?
Do you see any, maybe more broadly, how do you see the first half of 2017 versus the second half of 2017 when you bake in the input costs, your savings, and any price pressures that you see? Thank you.
Yeah, I think I tried to answer that one already, so I'll give Anna a try and see if she can do a better job.
What we see is a potential two pointer in North America and Latin America, and this is both in purchasing savings and in operational structural costs. We tend to see that the cost savings are a little bit backloaded, so we probably see a bit more savings coming the second half of 2017 versus the first half.
All right. Thanks. Then a very quick follow-up. If I would try to estimate how much tax you pay in the U.S., would I be in the right ballpark if I just look at the share of EBIT as a share of overall group EBIT? Is there something that I would need to take into account?
Yeah, no...
Yeah, no. This is not something we comment specifically on.
All right. Thanks.
Thanks.
Thank you.
All right, could we have our final question, and I think Andre is back online now, before we hand back to Jonas. So please.
That's right, Andre, from Credit Suisse, your line is now open.
Hi, can you hear me? Hello, can you hear me?
Yes, we hear you. Go ahead.
Yes, we hear you.
Oh, great. Sorry about earlier. Yes, could I just come back to Brazil and what you said there on destocking by distributors? Could you quantify that? Also, could you please quantify the size of the charge or kind of the restructuring costs that you took through the operating line in there, please? Thank you.
Yeah, I'll try and do that. Obviously, as you noticed, we had a quite significant decline in the region, in the fourth quarter, and that was a bigger decline than the total market. Actually, we had a stable to slightly positive retail market share. Actually, I would say the entire decline over and above the market was because of retail inventory reductions. That was, again, mainly in Brazil and really concentrated in our biggest customer in Brazil, which had a very tight inventory management in the quarter.
We think that is behind us now, or we know that that's behind us, and we expect to be in line or better than the market going forward.
Great. And the size of the charge for restructuring?
Yes. Yeah, It's around SEK 100 million.
Great. Thank you. Can I just ask a more broader question, I think in follow-up to the North American pricing? Obviously, Q4 last year got very promotional, very competitive. From what you see in the market now and how sort of the post-promotional period, would you say it's normalizing? Is the market kind of back to normal pricing dynamics, or is there a kind of an imprint now left that we should be aware of for 2017 from that particular strong promotional period at the end of 2016?
Yeah, no, Well, first of all, I think that of course, the fourth quarter in general is always more promotional than the other quarters. Yes, there's not a straight line sort of from that into the first quarter. I would say that, for sure, will be less promotional. We'll see, right? It's early days, and I do expect continued promotional pressure, but for sure, not in the magnitude of the fourth quarter.
Very clear. Thank you. If I could just abuse a little bit, your hospitality. Can I ask on the Egypt impact in EMEA?
Sure.
Thank you. Am I right to think that the SEK 170 million revaluation went through the finance line? Then in the operating profit line of EMEA, there is an impact that's more related to actually the sourcing of that business, i.e., the kind of dollar or other hard currency sourcing versus the Egyptian pound sales?
A little bit more complicated than that, so I, and I'll leave it to Anna.
Yeah.
It's right that we had an impact in the finance net, of around SEK 170 million. We also had the impact in the operating income of a total of SEK 270 million. Approximately SEK 200 million or slightly above SEK 200 million of that is revaluation of operating liability, so basically AP, and the other is more of the kind of underlying flow impact.
Right. On the running basis, that SEK 200 should be a one-off, and then SEK 70 is recurring. Is that roughly the right way to think about it?
I think that's the right way to look at it.
Yeah, that's the right way to look at it, specifically for Egypt. Again, as I cautioned before, it's a little bit too aggressive to pull a straight line from that and say that that's the new operating performance, because we took some aggressive action on discretionary spending in the quarter to help partially offset that one-off.
Got it. Got it. That's very helpful. Thank you very much.
You're welcome.
Thank you, Martin. With that, I would like to hand back to Jonas.
Mm-hmm.
To summarize the quarter and the full year.
Thanks, Catarina. Let us summarize the highlights from Q4. The group showed positive operational performance, driven by all business areas except for Latin America. This resulted in four out of six business areas achieving an EBIT margin above 6%. We focused on active product portfolio management and continued to drive cost efficiencies and saw some benefits from raw materials. Our European operations showed strong performance with solid earnings, despite significant currency headwinds. Profitability in North America increased, mainly driven by productivity and cost efficiency. The favorable trend in Asia Pacific continued, with both positive growth and increased margins. Latin America continued to be negatively affected by weak markets. We're taking further actions to reduce structural costs in the business area. Actions to restore profitability in Small appliances is ongoing and making progress. In summary, Electrolux ended the year with a strong financial performance.
Thank you very much for attending, and looking forward to see you all soon again. Thank you, and have a good day.