Good morning, thank you for joining the presentation and discussion of the second quarter of 2017. With me today, I have our CFO, Anna Ohlsson-Leijon, and Mårten Kaplan from Investor Relations. Let's begin the presentation. In the second quarter, Electrolux delivered good mix and strong earnings improvement in most of our business areas, supported by product portfolio management and cost efficiency gains. Our reported sales were up 5.1% to SEK 31.5 billion. Organic growth was unchanged, while there was positive contribution from acquisition. Operating income increased versus last year to SEK 1.9 billion, most business areas achieved an earnings improvement. The group achieved an operating margin of 6.2%, for the last 12 months, the margin was 5.6%. EMEA sales grew organically in Q2, with strong contribution from product mix.
In North America, our sales improved, while volumes on the private labels declined. Increased operational efficiency more than offset price pressure and raw material costs. This was a significant profit contributor in the quarter. The operations in Latin America faced another quarter with tough market conditions, although there were signs of recovery. In Asia Pacific, home care and SDA and professional products all showed strong improvements in earnings compared to the second quarter, 2016. This was very encouraging to see. Let's go through some key market highlights during the quarter. As you may know, on July fourth, we announced the agreement to acquire Best, a European manufacturer of innovative kitchen hoods. The acquisition will enable us to develop a complete offering of built-in cooking solutions and further drive long-term profitable growth in the EMEA region.
The deal is expected to close within the next quarter and will then be our fourth this year, highlighting our ambition to broaden Electrolux product offering and expand in new profitable markets and segments. Related to the quarter, I also want to highlight the positive news of winning the prestigious Red Dot Design Award for three AEG branded products. The AEG ComfortLift dishwasher, the AEG Mastery Range of kitchen appliances, and the AEG window cleaner. This award recognizes our commitment to delivering remarkable consumer experiences with products that offer sustainable solutions, are intuitive to use, and are aesthetically pleasing. Finally, I want to mention the new Frigidaire Black Stainless Steel collection of cooking products, which was launched in North America during the quarter. This is a very exciting line with a new modern finish and look that we believe will be successful with those customers.
The collection is available to consumers as of May this year. Major appliances EMEA, net sales grew organically in the quarter. This was driven by strong mix development. Electrolux volumes declined somewhat due to the weak markets in the UK and Middle East, Africa, but we continued to gain share in premium brands and built-in kitchen and improved our product mix. Operating income was in line with the previous year, and EBIT margin was 6.2%, reaching 6.8% in the past rolling 12-month period. This was in spite of negative impact from inventory adjustments of SEK 23 million related to the Kwikot acquisition. Excluding this, the EBIT margin was 6.4%. Let's turn page and talk about the market development in Europe. The European market improved slightly in the second quarter, and total unit shipments were up 1%.
Demand improved in most markets in Western Europe, while demand in the UK continued to decline. This resulted in a decline of 1% in Western Europe. Demand in Eastern Europe, however, was up by 5%, and most markets in the region show growth. We expect the European market to remain favorable for the rest of the year and confirm our out-outlook of about 1% growth for the full year. This reflects a stable demand trend, but also some weakness in the UK. In our operations in North America, we continue to see good operational performance, improving the mix by driving higher sales of our most competitive products and increasing efficiency. Our total sales, however, was impacted by declining volumes under private labels and continued price pressure.
Earnings in North America increased versus last year, achieving an operating margin of 8.4% in the quarter, an improvement of 1.9 points. The 12-month rolling operating margin is now at 6.9%. The improvement was a result of positive product mix, lower SG&A, and net cost efficiencies, which more than offset higher raw material costs. Last year, Q2 was also impacted by some non-recurring costs. Let's turn to the next slide and talk about the market development in North America. Demand for core appliances in North America continued to be positive and grew 5% in the second quarter. With a year-to-date growth rate of 4%, the market for appliances in North America remains solid, and we continue to see a favorable macro environment supporting a positive appliance demand.
For the full year 2017, we therefore raise our outlook for the North American market and now expect the market to grow by 3%-4%. Let's move to Latin America. Demand for appliances in the region recovered somewhat in the second quarter. Market volumes in Brazil, Argentina, and Chile improved slightly. The macro and political uncertainty in Brazil remains. Electrolux sales volumes also improved in several markets. Organic growth was negatively impacted by continued pressures on price mix. In the quarter, earnings in Latin America declined year-over-year, mainly as a result of the weakening price. Negative impact from currency related to the deterioration of the Brazilian real also had a negative effect on earnings. Actions to improve the profitability of our business are progressing according to plan.
In terms of the market outlook, there remains an uncertainty around the Brazilian economy. We expect a slow recovery in that market. For the region as a whole, we expect stabilization in the second half of 2017. Let's turn slide and talk about our operations in Asia Pacific. Market demand for appliances in all sub-regions, Australia, East Asia, and China, were up in the quarter. Our organic sales was good and grew 6.6%, driven by strong volume development in China and Southeast Asia. The acquisition of Vintec also had a positive impact of 1.2% on sales. EBIT in Asia Pacific improved significantly versus last year, and margins reached 7.7% in the quarter, and 7.1% for the last rolling 12 months. Strong sales volumes, better factory absorption, and cost efficiency contributed to earnings.
Let's continue with Home Care and SDA. During the quarter, Home Care and SDA business continued to execute on the product portfolio management. Our sales in cordless categories continued to grow in the quarter, but was not enough to mitigate the shortfall in other parts of the business, impacted by portfolio management and exit of unprofitable products. Operating income continued to improve year-over-year, and the margin increased to 4.1% from 0.3% the previous year. We remain focused on executing on the cost reduction program and the plan to restore profitability. The acquired smart kitchen appliance company, Anova, had a positive impact of 4.6% on sales in the quarter, but impacted the earnings negatively with the acquisition-related inventory value adjustment of 8 million SEK. Excluding this effect, the operating margin was 4.5%. Let's turn to our professional business.
Professional products continued to show good performance in Q2, with growth in most key markets. Organic sales grew by 5.8%, volume price mix all contributed positively. In terms of earnings, the business developed well with an operating margin of 12.9%. This was driven by good organic drop-through in spite of increased investments. Operating income in the quarter was negatively impacted by acquisition-related inventory value adjustments of SEK 9 million, excluding this effect, the margin was 13.4%. I would like Anna to go through the numbers and go through our financials and cash flow in the second quarter. Please, Anna.
Thank you, Jonas. Let's start with the financial overview. In the quarter, organic growth remained flat. This was a result of factors such as continued price pressure in several markets and lower volumes under private labels in North America. In combination with the ongoing efforts of exiting less profitable products across business areas, partly offset by positive mix. The acquisitions and divestments combined had a positive impact of 1.2%, currency translation impact was positive 3.9%. This resulted in reported sales growth of 5.1%. Gross Operating Income, which is defined as net sales minus cost of goods sold, increased versus Q2 last year and translated into a gross margin of 21.5%. Earnings were up compared to last year, driven by continued mixed performance and cost improvements across our business areas.
EBIT increased by 24% versus last year, and the margin in the quarter increased by one percentage point to 6.2%. Cash flow remained at a high level in the second quarter. Earnings per share showed an increase from SEK 3.75 to SEK 4.55 for the quarter. Let's move to the sales and earnings bridge on the next slide. Let's start with the organic growth. The net of volume price mix had no impact on operating income in the second quarter. Price was a key negative driver due to the continued pressure in several markets. Sales volumes were negatively impacted by the decline on private label volumes in North America and the product portfolio activities across the group. These effects were, to a large extent, offset by strong contribution from mix.
The impact from raw materials was SEK 317 million negative. Moving to the net cost efficiency, this shows an improvement of SEK 775 million, an accretion of 2.6 percentage points. This was related to efficiency actions in product structure and cost throughout the group. In total, we had a margin dilution of 1.1 percentage points from raw materials, which was more than offset by the contribution from net cost efficiencies. The acquisitions and investments contributed a net total of SEK 60 million to EBIT. This net contribution included a total negative impact of SEK 40 million from the acquisitions-related adjustments to inventory. The net negative impact from currency was mainly from the Egyptian and the British pound, in combination with the Brazilian real. Let's look into the drivers of the net cost efficiency on the next slide.
As you have seen in the EBIT bridge, we achieved a significant contribution from the net cost efficiency of SEK 775 million in the quarter. This was mainly driven by improvement actions in North America and Latin America. About SEK 600 million was achieved in variable cost improvements, comprising of purchasing savings, production efficiencies of labor and overhead, and contribution from logistics and warranty. Efficiencies linked to structure cost amounted to a net of about SEK 180 million. This was mainly related to operational improvements within fixed factory overhead, warehousing, and sales and admin areas. This improvement is shown net of any investments in marketing and R&D. We are progressing well on our cost efficiency targets, and have, since the start of the year, put focus on early delivery. Year to date, we have now delivered close to SEK 1.6 billion in net cost efficiency.
Let's go to the cash flow. Cash flow after investments, but before acquisitions, came in at SEK 3.5 billion in the quarter and was at the seasonally high level. The main contributor was the strong improvement in earnings, while change in operating assets and liabilities had a somewhat lower contribution compared to the same period last year. Investments in the quarter were also slightly higher.
Our net operating working capital, measured as inventories, trade receivables, and accounts payable, continued to improve despite the impact of the acquisitions. The average net operating working capital in relation to rolling 12-month net sales came down to 4.5%, an improvement from 5.5% last year. With that, I would like to hand back to you, Jonas, for a summary and conclusion of the quarter.
Let's move on and summarize this presentation with the outlook for Q3 and the full year. Looking ahead into the third quarter of 2017, we expect consumer demand to continue to drive slight growth in the appliance industry. We expect demand in Western Europe to be stable, although the outlook for the UK remains uncertain. In Eastern Europe, we expect the region as a whole to show good growth. We anticipate demand in North America to be positive for 2017, supported by the favorable macro environment and good consumer confidence. Given the good demand trend during the first half of the year, we're raising our full year growth rate to about 3%-4%. Latin America is showing a slow recovery, but the uncertainty around the Brazilian economy remains. We expect stabilization in the second half of the year.
Demand in East Asia shows an overall positive outlook. The demand in the Australian market has continued to show growth for several quarters. We estimate the market to be slightly positive. Now to the business outlook. Going forward, we expect the organic development for the group to be slightly positive, driven by this supportive market environment, strong mix performance, and successful product launches, offsetting continued price pressure. Price developments in the commodity market have been neutral and balanced. We confirm our negative impact on raw material cost at 1.4 billion SEK for the full year. We furthermore continue our efforts to drive cost efficiency and now expect to deliver a net cost efficiency of 2.3 billion SEK, an increase of 100 million SEK for the full year of 2017.
In spite of the recent volatility of the Brazilian real, we see a slightly net positive impact for the full year from currencies in Latin America. In EMEA, however, the depreciation of the British pound and Egyptian pound will continue to impact us negatively. At current rates, we expect a net negative currency effect of SEK 140 million for the full year. Our CapEx is expected to be in the range of SEK 4 billion. With that, I'd like to pass it on to Merton to open up for Q&A.
Thank you. Okay, before we begin, let me remind you that as we conduct the Q&A, please try to have one question at a time so everyone in the line will have a chance to ask a question. If you wish, you can then come back to the line for follow-up questions. With that, operator, please go ahead and take the first question.
Thank you. As a reminder, ladies and gentlemen, if you wish to ask a question, please dial zero one on your telephone keypad now. Our first question comes from Andres Sevi of JP Morgan. Please go ahead. Your line is open.
Yeah, good morning, everybody. I've, my question is on the cost savings performance, which was very strong again in Q2. Out of the SEK 2.3 billion for the year you expect, how would you break that down in some of the discretionary cuts you alluded to at the beginning of the year, at Q1, and more structural savings that you expect to carry forward? In terms of the realized savings of SEK 1.6 billion in the first half, in February, you expected that for the full year. What allowed you to so quickly, basically within a few months, get the full year target in the first half of the year? Why shouldn't we expect more in the second half, given the run rate you're already at? Thank you.
Yeah. Obviously, we're very pleased with the cost performance in the first half of the year. As you mentioned, it's a combination of, let's say, ongoing cost efficiency programs that will continue to deliver in the second half of the year, and then in combination with more sort of discretionary spending changes. As indicated, we have been more conservative on the discretionary spending in the first half of the year than we had originally planned. We have a number of product launches and other activities that we're going to support more actively in the second half of the year. We see a little bit higher spending on that sort of, on the discretionary side for the second half of the year.
We're continuing with good underlying cost efficiency performance, but the swing is mainly driven by that sort of discretionary element on sales and marketing and a few other items.
Basically, we should see a swing in terms of contribution more towards, basically better market share, but lower cost savings if we look relative to the first half of the year?
Yeah, a little bit less on the discretionary and marketing type cost and more contribution from volume and mix in particular, yes.
Thank you very much.
Sure.
Thank you. Our next question comes from David Voss of Barclays. Please go ahead, your line is open.
Thanks very much for taking my question. I was just wondering if you could help us understand the U.S. earnings bridge a little bit better. It almost occurs to me that it's actually a mixed positive having lower private label sales in there, i.e., you know, were those private label sales coming at a loss-making position previously? Is that why you're seeing such a, you know, sharp improvement in EBIT in that business? That's the question. Thank you.
First of all, of course, we don't communicate on profitability of individual product segments and channels. What I would say, though, is that we did have positive mix in the quarter. It's also our key quarter for Air Care, and we had a good quarter in Air Care, and we had very good mix inside of Air Care as well. Moving from dehumidifiers to room air conditioners. That there was a good mixed element in Air Care, plus the fact that it's the key quarter for Air Care. On top of that, we did have very good cost performance. Some of that, or a big chunk of that, was that we were conservative on our discretionary spending, so that had a positive effect.
We also had some unfavorable costs, one-off type costs in the prior year period. Nothing very significant, but when you add all these things up, you get that significant sort of year, positive year-over-year effect. Yes, we're very pleased with the performance in North America, but I would say this sort of year-over-year is a bit above the run rate you can expect going forward, or quite a bit above the run rate you can expect going forward.
Perfect. That answers the question. Thank you very much.
Sure.
Thank you. Our next question comes from Johan Eliasson of Kepler Cheuvreux. Please go ahead, your line is open.
Yes, thank you. Coming back to these cost savings, SEK 2.3 billion is a very high historic number. And part of this is discretionary spending, you indicate. How should we think about this going forward? Is this SEK 2 billion-plus annual year-over-year improvements in the years to come as well? Or are you taking a lot of actions this year, basically, to rectify the situation in North America as we speak?
It's, it's a, it's a mixed bag, of course. you know, some of it is Some of the, let's call it discretionary spending, is a result of the, of the business focus that we're driving, focusing on fewer of our brands in terms of spending, focusing more on specific product categories and less on others. There is discretionary spending that sort of comes, reduction that comes out of this business focus. That is relatively one time in nature, of course, in that, you know, once we've done that focus, we get less of that discretionary cost reduction from that part.
I would say the pace in 2017, certainly in North America, but I would say also globally, is higher than what we can expect going forward, because you kind of do this business focus sort of mainly once and over, or over a limited period of time, let's say. What we are doing is we're putting a lot of effort into continued efficiency improvements, both on the product cost side and on the structural cost side, in terms of product reengineering, working more closely with our suppliers to gain efficiencies, and continuous improvement initiatives inside our, let's say, our white collar environment.
We do see that we have stepped up our ongoing cost efficiencies, but I think to pencil in a rate of over SEK 2 billion per year going forward is a little bit too aggressive.
Mm-hmm. How should we think about the profitability in the North American market? Keith once indicated, you know, you should probably be 200 basis points below Whirlpool because of structural differences, and Whirlpool is around 11%-12%. You just reported 8.4%. Is there further upside to this 8.4% in your view?
Well, I mean, first of all, when you look at the 8.4%, you have to remember that, again, this is the peak quarter for Air Care. I think you can't draw a line from that 8.4%. We have a seasonally weaker Q3 and Q4 than Q2. I think that's important to keep in mind. Now, of course, we are seeing structural improvements in our profitability in North America, again, from driving a more focused business, focused on the Frigidaire brand family, from driving a high focus on cost efficiency. I do expect that we will continue over the coming years to continue to drive even more cost efficiency.
That's, of course, happening in a very competitive market with a lot of price pressure. It's required to continue with very good cost efficiency to and mixed performance to offset the price pressure. you know, from a run rate perspective, do we have further opportunities to improve? I would say yes, but I wouldn't compare that to the 8.4%. I would compare that more to the run rate that we've had. In terms of the relationship with Whirlpool, I think it's difficult to put a number on that. Of course, they have a higher market share. They're approximately double our size in North America, and several of their brands are positioned more highly than we are in the market.
Yes, it's, I think it's fair to say that they have certainly an opportunity to run at a higher margin level than we do in North America.
Okay. Finally, just on the bankruptcies we've been seeing over in North America, there was specialty, appliance retailer in Q1, and then I think it was now Sears Canada. Has that impacted you in any way in terms of your EBIT or your working capital?
Yeah, I mean, look, we've been well protected, or we are well protected for credit risks in North America, so we're not talking about significant impacts. But of course, there is a significant sort of reshaping of the North America retail landscape, and that requires us to focus a lot on the right channels and building the right capabilities in distribution. That's something we're spending a lot of effort on.
Okay. Thank you very much.
Sure, you're welcome.
Thank you. Our next question comes from Andre Kukhnin of Credit Suisse. Please go ahead, your line is open.
Yes, good morning. Thanks so much for taking my question. Could you just talk us through where we are on the North America private label size, and where are we sort of down year to date? Just trying to assess sort of how much further we've got to go. Thank you.
Yeah. The, yeah, private labels were down about 25% in the quarter. That's more or less the run rate for the year to date. I don't have the exact number in front of me, but it's more or less the run rate for the year to date period as well. Yeah, private labels is now down to 13%, 14% of net sales in North America.
Great. Thank you. If I may, just a quick one on the, on the PPA, or the step-up values, amortization, that was SEK 40 million.
Yeah
Q2. What should we think of for the second half? I guess there should be a little bit into Q1 2018 as well. Thank you.
Yeah. The step-up values or impact, let's say, of the inventory is more or less done. Because as we cycle through the inventory of the acquired businesses, that sort of, that value washes out. Of course, we'll have continued sort of, well, PPA, purchase price allocation impacts for the coming five years or so, impacting the EBIT negatively as we write off other intangibles. That SEK 40 million is a one-off, and that's not gonna recur in the second half of the year. I don't know, Anna, do you want to mention anything?
No, I think that's correct. The inventory adjustment is, yeah, for the material part is in the Q2.
Thank you. How much is the recurring PPA at the moment?
It's, yeah, we don't have that exact number yet, because that's, as you know, that's something that you calculate based on the assessments for. Actually, you have a 12-month period after the acquisition to do the detailed calculation on that. We don't have that fully firmed up yet.
Right.
We'll come back on that.
Great. Thank you very much. Appreciate your time.
Sure.
Thank you. Our next question comes from Jack O'Brien of Goldman Sachs. Please go ahead, your line is open.
Good morning, Jonas. You touched briefly on distribution channels earlier, and I was just interested to know where you're seeing the threat from online emerge most quickly, and how you envisage sort of dealing with that as a business, as we move from traditional retail to online, and the challenges you may face.
Yeah, we don't see it as a threat, just to state that. We see it as an opportunity. I think the days where online was a danger to us in terms of how we distribute our products, I think are over. In fact, there are many online retailers that are very good at representing our products and provide a good service to consumers. If consumers want to shop there, we want to be there as well. This is not a threat from a, let's say, channel and consumer perspective. The issue is that, of course, we need to build new capabilities to be effective in those channels. It has to do with mainly two things.
One is the, how we do marketing and how we present ourselves, going much more to digital-type marketing. The actual sort of physical distribution of the goods, because several of these retailers don't carry as much own inventory and rely on their partners to do a lot of the fulfillment. Here we have to build out our capability, and that's we're in the middle of doing that in North America and Europe, and in all parts of the world.
Okay, great. Just one follow-up, if I may, on market share development. I think I heard that, you know, you've been taking share in Europe in built-in appliances and laundry. Perhaps, can you just give a few comments on market share developments by region?
Sure. I think. Well, first of all, we didn't mention laundry in Europe. It's built-in that's really driving the share gain in AEG and Electrolux, those two brands. We're actually giving up a little bit of share in our values, value part of the market in EMEA. In balance, we're relatively flat on market share in EMEA, but we're gaining what we want to gain, which is in the premium side and built-in. If you go to North America, we lost a little bit of share in our branded business, not very much, and actually a lot of that was through portfolio management.
As I mentioned, we're reducing our sales in some categories, in particular in the humidifiers for profitability reasons, and we're focusing more on our more profitable parts of the business for the branded side. Of course, with the decline in private label, net-net, we lost share in the quarter in North America. In Latin America, we're relatively flat in share. You know, we're relatively stable in a relatively flat market.
Okay, great. Thank you.
Mm-hmm.
Thank you. Our next question comes from Christer Magnergård of DNB. Please go ahead, your line is open.
Good morning. I missed one or two questions, unfortunately, so if you have answered these, I'm sorry. The first one is related to the cost for the recent M&A. You said SEK 40 million for inventory writedowns, and then or revaluation, and then SEK 6 million for transaction costs. Was that correct?
It might be, yeah, SEK 6 million. Yeah, that sounds about right, yeah. Yeah.
Okay. The second thing was.
... related to FX. When the Egyptian pound and UK pound, when that kind of falls out of the picture in terms of year-over-year effect, will we see a positive effect from the weak dollar, looking at 2018?
Yeah. Yeah, so in the, in Q3, given that we still, you know, we had some hedges and so on for the British pound in Q3 of last year, so still the year-over-year effect from both the British pound and the Egyptian pound will be negative in Q3. We do expect to see positive impact from the US dollar in Q3. Of course, in Q4, we're kind of cycled out of the British pound effect. We also, as you may recall, had a quite substantial negative asset revaluation effect from the Egyptian pound in Q4 of last year, and that's gonna flip to a positive, of course, on a year-over-year comparison, unless something unforeseen happens.
2018, that looks quite positive?
18? That's a little bit...
Ah.
I think the currencies will change quite a bit between now and 2018, unfortunately, judging by history, yeah.
Just a final question on the cost savings versus mix. You said that you're planning for lower cost savings in Q3, Q4 because of that, you will have these product launches and an increased-
Right.
marketing spending.
Right.
Do you think the mix effect will offset the increased spending, so to speak?
Yeah.
The net effect will actually be flat or positive?
That's a little bit what we're indicating, yeah. You know, if you read it, we raised basically our indication for volume price mix contribution to EBIT from flat to slightly positive for the full year. In fact, we did a little bit better than we had expected in Q2 as well, on the mix side. Yeah, we see good support from mix in particular, and a little bit of volume also. If you recall, we had a very soft second half in Latin America last year. We took a number of adjustments there on the inventory side.
Even though we don't expect a lot of growth in Latin America, the year-over-year effect should still be a little bit positive on, also on the volume side there.
Excellent. Thank you.
Mm-hmm.
Thank you. Our next question comes from Martin Wilkie of Citi. Please go ahead. Your line is open.
Thank you. Good morning, it's Martin from Citi. Just a question on raw materials. You've kept your guidance for the headwind there unchanged. I mean, if you hedge for the year, during Q1, you probably locked in steel prices or pretty close to the high. I was wondering, you know, given recent steel volatility, if that strategy of hedging for the year is still one that you're happy with? As a follow-on, given, you know, as we look forward to 2018, you know, given where plastics prices are going and so forth, is it too early to start thinking that raw materials could actually be a net benefit to you in 2018? Thank you.
Actually, this year, we hedged a lot less on the steel side than we typically do. You know, gradually have locked in more for the year. Actually, what's happening, if you look at it, is in EMEA, we see actually some decently positive impact on steel prices. In North America, it's actually not positive. Certainly with the timing of the contracts, we expect a little bit more headwind in the second half of the year than in the first half. A lot of that has to do with all the tariff discussions and so on, that are ongoing in North America. We don't see a lot of support there.
On the plastic side, I know that some of the indicators are positive. We are not, unfortunately, seeing that come through in the grades and in the formulations that we're buying. That's why on average, let's say, if you add everything up, it's more or less neutral in terms of our expectations. I would say, though, that to your point, the outlook for next year, probably if you just look, draw a straight line from market prices, this, you know, where they are now versus where they were in the beginning of the year, looks better for 18 if it stays at these levels, yeah.
Okay. All right. Thank you very much.
Sure.
Thank you. Our next question comes from James Moore of Redburn. Please go ahead, your line is open.
Yes, good morning, everyone. Yeah, that's Anna. On your, on your volume price mix, you mentioned that it got a little better in the outlook and helped by a strong mix in the second quarter. If I think about the mix for the first half as a whole, as the impact on EBIT, I guess collectively, that was quite a nice number. Last quarter, you talked about seeing a better second half for volume price mix. I'm just thinking, if we zoom in specifically on mix, do you think you can see a similar positive mix effect in the second half, Bridge, as we've seen in the first, you know, even when you include that good second quarter?
Absolutely. Yeah. Yeah, for sure. That's what we're driving to, yeah.
Is it divisionally in the same sort of areas, or does that move around?
The mix is, I would say, more or less moving in the same sectors and same direction in the second half as in the first half. The one thing that's different, I think, is gonna be volume, which again, in Latin America, we had a very. You know, again, we took some pretty significant adjustments in the second half of last year, so we expect positive volume in Latin America. Also, some volume contribution in as usual, in professional, in EMEA and so on.
Very helpful. If I could just follow up, you mentioned LATAM, and LATAM and Home Care have been two divisions where the margins faced some challenges in the last couple of years.
Yeah.
As you go forward to 2018 or 2019, what sort of margins do you think, do you still think they can get to the same sort of margins that you thought more recently? Is that assuming a flat or a growing market?
Yeah. Home Care and SDA, you know, historically have been, if you go back a number of years, in the high single digits area. Also if you look at competition, let's say, in small appliances, they're usually on, in that sort of, yeah, around double digits, let's say. I honestly don't see any reason why we shouldn't get back to that level. Exactly how quickly is something we're working on, but our ambition is definitely to get back to high single digits or double digits on Home Care and SDA, driven by our floor care business. That will take a little bit of time. It will take a few years to get there, I think. Latin America is a little bit different.
Historically, we've been running around the 6% level or so, and of course, the market has adjusted down quite a bit from the good years in a number of years ago. To get back to that, we are having to take some very significant overall structural and variable cost adjustments. We're in the process of working through that, and that's also gonna take a bit of time, but certainly the ambition is to get back up to that, let's call it around 6% level that we had historically. With a different sort of, different demand picture and different cost picture than what we had historically.
Brilliant. Thanks, Jonas.
Sure.
Thank you. Our next question comes from Matthew Spurr of RBC. Please go ahead. Your line is open.
Hi there. Morning. I had a question follow-up on market share in North America. You are giving up some market share, stepping away from some categories. If, when I listen to the Whirlpool capital markets, then obviously that's from their perspective, but how important do you think market share is for long-term profitability? I'm thinking of things like the command of sort of floor space with retailers, sort of brand awareness and things like that. How do you see that giving up market share impacts your potential profitability longer term?
Yeah. On the branded side, which is, I think what we need to talk about here, the private label is a different sort of dynamic, of course, in terms of that. I would say that our ambition is for sure not to give up market share there. At the same time, I think you have to look at it category by category and retailer by retailer. We're in that phase right now, like in a few years ago in EMEA, where we're sort of refocusing our approach on our more co- competitive categories and the channels where we can be competitive.
The fact that there is a little bit of, let's say, adjustment to our market share in the short term as a result of that, is not something that concerns us. That's actually very deliberate. I don't see any concerns around that sort of, call it, clout, let's say, in the marketplace from market share. That's not really changing to any significant degree based on what we're doing.
Okay. Can I ask one quick follow-up on?
Sure
acquisition in EMEA? I understand that is, that's loss-making, the Best range hoods. One, is that about sort of 20 basis points impact we should think about for the margin? Also, how do you plan to improve that, given it's sort of, it's got a, looks it's got a quite high cost base in Italy? Thanks.
Yeah. The reason why we're acquiring Best is to increase our in-house capability around hoods. Of course, we're today sourcing a lot of hoods externally, and Best is undersaturated from a capacity standpoint. We of course, expect to saturate that manufacturing footprint much better going forward. That, of course, will result in if we execute well in significant profitability improvement. In terms of the manufacturing footprint, I think it's well balanced today. There's some in Italy and a significant facility in Poland as well.
I think it's important to remember that in terms of hoods capability, sort of the world capital for more premium kitchen hoods is Italy. The main players in, or most of the main players in the industry are headquartered in Italy and have capability in Italy, and so this is not different than competition.
Okay, thanks.
Sure.
Just a reminder, operator, we have a few more questions, and, I would also remind that, please ask one question at a time so we can make this more efficient. Thank you.
Thank you. Our next question comes from Karri Rinta of SHB. Please go ahead. Your line is open.
Yes. Thank you. Good morning. Going back to cost savings, I wanted to actually focus on one of the elements, which is the warranty and logistics that you mentioned, and especially the warranty part. Does that mean that you have changed your assumptions in terms of warranties and therefore provisions, or is that also a function of the mix shift away from sort of low end and more towards high end? Or what is driving the warranty-related-
maybe what's the rough magnitude of this? Thank you.
Okay. Yeah, no, the warranty costs are going down because our quality is improving. It's as simple as that. We've actually seen over 20% reduction in our service call rates over the last year or so, and that has an impact on our warranty costs. That's what's driving that.
How much is that, roughly, in terms of savings that you have achieved?
Oh, let's see here. I think it's, a bit over 100 million SEK in the first half of the year. Yeah, in that range.
All right. Thanks.
Mm-hmm.
Thank you. We have a follow-up question from Johan Eliason of Kepler Cheuvreux. Please go ahead, your line is open.
Yeah, hi. Thank you for taking just a follow-up. I was just curious a little bit about the North America and the retail space. I mean, we read the dreadful numbers for the big box retailers, and still, the appliance market is growing quite nicely. Could you shed some light on where, what channels are sort of growing in your industry in North America? Is it the Amazons of the world? Is it the builder channel through distributors, or how does this look like?
Sure. Amazon is not actively in major appliances at this point. That's not the driver. They're not in the sort of bulky goods and appliances. The growth is driven to a fairly substantial extent from new construction, as well as remodels, let's say, of existing homes. Where If you look at the data, we see more people moving houses, not necessarily constructing a new one, but moving houses. And very often when that happens, then people take the opportunity to remodel their kitchen or their laundry room. So those are significant drivers.
As a consequence, the home improvement centers are developing quite well, so the Lowe's and the Home Depots and the likes. Yeah, I guess those are the big trends beyond, of course, the again, the contract manufacturing channel.
The contract manufacturing channel, you talked about that and also Home Depot a few years ago, that you needed to expand your distribution capacities.
Yes
... putting up more regional distribution centers. Is that something you are still spending on, or do you have the network you want to have now in?
No. No, that's ongoing. We're continuing to build out there. We're making very good progress, but there's more work to do to really get to the full, sort of, fine web coverage of North American households that we're looking for. That's work ongoing.
Can you give any number on where you are right now? How big proportion of the, of the population is now within reach for your direct distribution, for example, or anything?
I'll be honest with you, I don't have that number off the top of my head. Well, let's put it this way, we can reach most households, or I would let's say, let's say 90% of the households in the U.S. The bigger question is not can we reach them, the question is, can we reach them cost efficiently?
Mm.
To reach them cost efficiently, you need, you know, optimal driving routes. That's, you know, as we grow our sales through these channels that require, let's say, either home delivery or specific site delivery, then we can then afford to build a more, sort of, fine web of distribution points, which in turn reduces the cost. That's kind of the equation that we have to drive.
Okay. Thank you very much.
Mm-hmm.
Thank you. The next question comes from Lucie Carrier of Morgan Stanley. Please go ahead, your line is open.
Hi, good morning, Anna, good morning, Jonas. Thanks, thanks for taking my question. That was actually on Europe. We spoke a lot about, you know, the amount of cost savings, you know, notably benefiting North America. When I look at the European margin, even though considering, you know, some of your costs around acquisition, it looks like the momentum we had seen in terms of margin expansion is kind of coming a little bit to a halt at the moment, even though, as you said, you have gained share in built-in appliances.
I wanted to have your view on how you think about the profitability in Europe, whether you feel you have reached now kind of full potential or close to that, or whether you see much more opportunities in terms of pushing it further?
Right. I think, of course, running at around 7%, EBIT is a good performance level. I still see opportunities to improve that, but of course, the rate of improvement going from, what was it, 1% in 2013 to 7%, now on a, or close to 7% on a run rate basis, of course, that pace is bound to reduce significantly. Specifically, though, what, for the first half of this year, I think, and we've been, I think, clear about that a big chunk of the raw material cost headwind, as well as all of the currency headwind, or more than 100% of the currency headwind is happening in EMEA.
They have some very significant headwinds that they had to offset, and I'm actually very proud and pleased of the, their performance in being able to offset these significant headwinds. The market is not necessarily growing.
Thank you. If I can just have a follow-up question on your point around, online retailers.
Mm-hmm.
the fact you see them as an opportunity. I understand it from a sales channel standpoint, but can you describe maybe the dynamics around, you know, the pricing and, you know, the rebate requirement versus kind of more regular distributors? Of course, those online retailers, they also need to gain market share versus the, you know, the guys who are already in the market, and might try to do so also from a price standpoint.
I mean, it's a tough and competitive market. I don't think that's changing, and price pressure will continue to be a reality. I don't see it. From this point, I don't see it materially changing. I think the one thing that if you go back five years or seven years ago, of course, what the online sales channels contributed to was perfect price transparency. Of course, that in turn led to more intense price competition between different channels. That effect is. I mean, the price transparency, you can't go above 100%, right? It's there. I think that effect is behind us now in almost all markets in the world, I think.
Then the question is, of course, which distribution channels can meet consumers' needs and requirements at the lowest cost? That, you know, those are the channels that are winning. It's becoming less about who can drive the lowest cost, and it's becoming more about who can because, again, with price transparency at 100%, it becomes more of who can deliver the better experience.
Thank you.
Sure.
Thank you. We have a follow-up question from Andres Sevi of JP Morgan. Please go ahead, your line is open.
Yeah, thanks for giving another chance for a question. On, on Europe, maybe you could give us some more detail. You talk about the UK being weaker. Overall, Europe doesn't seem to grow much for the appliance market, even though we have the best GDP growth since 2007, very high consumer confidence. Similar to the U.S., we should have a good replacement market, given appliances sold in the past, peak in 2006, 2007. Which countries in Europe are kind of pulling it down a bit so that overall Western Europe is not growing in the appliance market despite the very good GDP growth?
Yeah, it's the UK that's pulling it down to largely, right? We saw what is it now? The market was around, I'm trying to look it up, around 5% negative in the first half of the year and in the quarter in the U.K. We see, I mean, it's not a big market, but it's an important market for us, is Switzerland, which is also marginally down. Pretty much all other markets are flat to slightly positive. The one market that has been a good engine for actually throughout the financial crisis and also over the last several years, has been Germany.
There we didn't see the big, neither the big bubble nor the big drop, but it's more of a, sort of a continued replacement demand. We're not seeing a significant net positive contribution from Germany in the first half of this year. Again, most other markets are growing at a steady but slow pace.
Thank you very much.
Mm-hmm. Maybe we have the final question later. Thank you.
Thank you. The final question comes from David Macgregor of Longbow Research. Please go ahead, your line is open.
Yes, good morning, Jonas, congratulations on a very good quarter and all the progress. Wanted to ask you about Latin America, and you mentioned in your preliminary remarks that you're seeing signs of recovery, and I just wonder if maybe you could elaborate a little bit further. In addition, you also talked about pricing was negative-
Mm.
in the Latin American market. I guess, you know, you kind of got this duopolistic competitive model down there, and it just, it strikes with the history of price increases over the past few years. I'm just wondering, is there kind of an acceleration of promotional activity going on there that's fairly temporary? Or?
Yeah.
if you just talk a little bit about that, it'd be helpful. Thank you.
Sure. On the first question, on the market, we saw just a little bit of growth, actually, in most of the markets in Latin America in the quarter. The key ones for us, Brazil, Argentina and Chile, had just a, you know, overall, just a little bit of growth. The price effect is mainly a year-over-year impact, where as you recall, the Brazilian real strengthened quite a bit in the second quarter of last year, or, and around that time. We kept our pricing quite high, in, you know, because we'd raised prices a number of times and kept pricing quite high in the second half, the second quarter of last year.
Because we were in a situation where our sell-out was slowing down in the third quarter, and of course, with the stronger currency, we had to drop prices quite significantly in the second half of last year. This is more of a year-over-year effect of that we're seeing in the second quarter. I don't see sequentially, in the second quarter versus 1st quarter, a significant step up in the pricing environment. I think on the good news side, our channel stock and our replacement demand situation is much healthier now than it was a year ago.
That's why we have some confidence that in the second half of the year, we'll see a better development than we did last year.
Great. Thank you very much.
Sure. Okay.
Thank you.
I think that was it. Thanks, everybody, for good questions. Let's go to the last page and summarize our highlights from Q2. The group achieved a strong operational improvement driven by most business areas, this resulted in an increase of our EBIT of almost 25% and a margin of 6.2%. As mentioned previously, we're focusing on product portfolio management, further improving our mix and driving cost efficiencies, which is mitigating the increased cost from raw materials. North America delivered good profitability in the quarter, our European operations showed stable development. In Latin America, markets are showing signs of slow recovery, we're progressing according to plan on the cost savings program. Actions to restore profitability in Home Care and SDA are also making progress.
Electrolux continued to execute on the path to profitable growth in our business with a solid financial performance and cash flow generation. With that, I thank you and wish you all a great summer. Bye-bye.