Welcome everyone to the presentation and discussion of the first quarter of 2017. With me here today, I have our CFO, Anna Ohlsson-Leijon, and Merton Kaplan from Investor Relations. Let's begin the presentation. We started the year with good earnings performance across our business areas, supported by continued focus on active portfolio management, driving sales of higher margin products and strong efficiency gain. The operating income increased versus last year to SEK 1.5 billion, and all business areas achieved earnings improvement. The operating margin for the group landed at 5.3% for the quarter, and was 5.4% for the last 12 months rolling. EMEA had good contribution from product mix in the quarter. Sales declined somewhat compared to the strong previous year. We continued to gain market share within our strategic premium brands.
In North America, good operational efficiency offset the competitive price pressure, continued private label volume declines, and higher raw material costs. The professional business showed strong performance, with 8% net sales growth and operating margin expansion. Our Asia Pacific business had an organic growth of 8% and maintained a good profitability level. Our operations in Latin America achieved volume growth, combined with strong recovery in earnings. This development was supported by growth in Argentina and Chile, and the restructuring of the business in Brazil. Similarly, operations in Home Care and SDA showed very good earnings recovery. Let's go through some of the key market highlights during the quarter. In December, Electrolux announced the agreement to acquire the leading water heater company, Kwikot Group, in South Africa. As of March 1, this acquisition has been completed.
We look forward to strengthening our position in Africa and to drive profitable growth in the home comfort area. Moving to the U.S., we recently announced the agreement to acquire the leading manufacturers of beverage equipment, Grindmaster-Cecilware. The deal has been completed as of February 28th and will broaden Electrolux offering in the professional food service business in the U.S. During the quarter, we also announced the deal to acquire San Francisco-based Anova, a smart kitchen appliance company with a direct consumer business model. Their innovative, connected sous vide Precision Cooker provides a strong contribution to our Home Care and SDA business. The acquisition was completed on April fourth. A few words about a product launch in the professional business. We introduced the first connected high-speed grill, SpeeDelight, during the quarter.
We're very excited about this product, which offers high quality preparation of paninis, pizzas, and sandwiches in seconds. SpeeDelight will strengthen our chain business and will be commercially launched in the U.S., Europe, and other selected markets in the first half of 2017. This was mainly driven by lower volumes in Middle East Africa and some European markets, and price pressure, partly offset by strong mix development. Demand for appliances was slightly negative in Western Europe, mainly driven by the U.K. Demand in Eastern Europe increased somewhat in the quarter. Markets in Middle East and Africa, however, remained weak. Electrolux sales volumes were lower in some European markets due to active focus on the most profitable products and brands.
Overall, Electrolux gained share in premium brands and improved the product mix in the quarter. Operating income was in line with previous year, while our EBIT margin increased to 6.3%, reaching 6.9% in the past 12 months period. This is an all-time high. Strong mix and benefits on cost efficiency contributed to the development and more than offset the negative impact from currency and raw materials in the quarter. As mentioned earlier, the acquisition of Kwikot has now been completed and consolidated into statements as of March. Let's turn the page and talk about the market development in Europe. European market was stable with total unit shipments flat in the quarter. Demand in Western Europe was down 0.8%, with volumes being lower in the U.K., Italy, and Germany.
The outlook for demand in the U.K. still remains uncertain, in particular, since higher prices are in effect in the market. Demand in Eastern Europe was up by 3.2%, and most markets in the region grew. We expect the European market to continue to be healthy in 2017 and remain with our forecast for about a 1% growth for the full year. This reflects a stable demand trend, but also some weakness in the U.K. In the first quarter, our operations in North America continued to grow to show operational improvement. The North American market showed positive growth during the quarter. However, we benefited relatively less from the market growth due to strategic priorities to focus on more profitable products and segments. Our sales continued to be impacted by lower volumes on the private labels and the competitive price pressure.
Earnings in North America increased versus last year, achieving an operating margin of 6.1% in the quarter, an improvement of 1.1. The 12-month rolling operating margin is now at 6.4%. The improvement in the quarter was a result of our strong focus on portfolio management and product cost improvements, combined with structural cost efficiencies, which more than offset the higher raw material costs, lower volumes, and the price pressure. Let's turn to the next slide and talk about the market development in North America. Market demand for core appliances in North America started the year healthy and grew 2.5% in the first quarter of 2017. With four consecutive quarters of strong growth, we believe the market for appliances in North America will remain positive. We expect to see economic fundamentals supporting growth in the industry.
For the full year 2017, we confirm the outlook of the North American market growing in the range of 2%-3%. Let's move to Latin America. Demand for appliances in the region started a slow recovery in the quarter. Market volumes in Argentina and Chile improved, while demand in Brazil continued to decline due to the weak macro environment, but at a substantially lower price base. Electrolux volumes improved in several markets and had a positive contribution to the top line. Organic growth was negatively impacted by price pressure, which is closely related to the favorable currency trend in the market. In the quarter, our operations in Latin America showed strong earnings recovery, due mainly to continued cost-saving initiatives, but also due to the ongoing business repositioning. We expect the important Brazilian market to recover slowly during 2017.
Let's turn side and talk about our operations in Asia Pacific. Market demand for appliances in Australia and China increased in the quarter, while demand in East Asia showed a mixed pattern. Our organic sales growth of 8% was driven by strong volume growth in China and Southeast Asia. New products rollouts and better mix in strategic markets also contributed. Moreover, the acquisition of Vintec had a positive impact of 1.3% on sales. All in all, EBIT in Asia Pacific increased somewhat, and margins remained stable at 4.7% in the quarter, and 6.7% for the last rolling 12 months. Strong contributions from sales volumes, favorable mix development, and increased cost efficiency contributed to earnings. After the quarter closed, we signed an agreement to establish a joint venture with Midea to promote and distribute the AEG brand in China.
We're combining our premium products and brand expertise with a strong distribution network of Midea. This will, in the long term, enable us to drive profitable growth in the premium segment of the Chinese market. Let's continue with Home Care and SDA. During the quarter, the Home Care and SDA business continued to execute on active portfolio management. Our volumes in Europe and Asia continued to grow, and the Eureka brand in the U.S. has now been divested. In total, our organic sales declined by 3.3%. Our operation showed a recovery in profitability in Q1, and the EBIT margin increased to 3.9% from 2.3% the previous year. We continued to execute on the cost reduction program and the repositioning of our business to profitable categories through active portfolio management.
As of April, the acquisition of the U.S.-based smart kitchen appliance company, Anova, was completed. Now, let's turn to our professional business. Professional products continued to show good performance in Q1 and benefited from strong, profitable growth in its strategic market. Sales growth was positive in Western Europe, North America, and Japan, while the trend in emerging markets was stabilizing. Our professional business grew by 8% in the quarter. All regions contributed positively. The two product lines, food service and laundry equipment, both showed growth in the quarter. All in all, our professional business achieved an EBIT margin of above 14% in the quarter, driven by higher sales volumes and improved price mix. The investments continue in innovative products and new channels to further support the profitable growth agenda.
Now, I would like Anna to go into the numbers and go through our financials and cash flow in the first quarter. Please, Anna.
Thank you, Jonas. Let's start with the financial overview. Organic sales growth was down 2.8% in the quarter. This was due to continued price pressure in several markets and lower volumes in EMEA and private label in North America, in combination with the ongoing efforts of exiting less profitable products in Home Care and SDA. The currency translation impact was positive 5.9%, while acquisitions and divestments combined had a negative impact of 0.4%. This resulted in reported sales growth of 2.7%. Total gross operating income, which is defined as net sales minus cost of goods sold, increased versus Q1 last year and translated into a gross margin of 20.8%. Earnings were up compared to last year, driven by continued good performance and cost improvement across our business areas.
EBIT increased by 21% versus last year, and the margin in the quarter increased to 5.3%, compared to 4.5% last year, an increase of 0.8 points. Cash flow was slightly lower than in the first quarter of last year, despite the earnings improvement. This was mainly related to the negative change in operating assets and liabilities year-over-year. Earnings per share showed an increase from SEK 3.04 to SEK 3.77 for the quarter. Let's move to the sales and earnings bridge on the next slide. Let's start with organic growth. Volume price mix resulted in a negative impact of SEK 359 million in operating income in the first quarter. Price was a key negative driver due to continued pressure in North America, Europe, and Latin America.
Volumes were negatively impacted by Europe, decline in private label volumes in North America, and the portfolio management activities throughout the group. These effects were partly offset by positive contribution from mix in EMEA. The impact from raw materials was SEK 200 million negative. Moving to the net cost efficiency, this shows an improvement of slightly more than SEK 800 million. This was related to positive impact of efficiencies related to product cost and structural cost throughout the group. In total, we had a margin dilution of 1.2 points from the organic part and a 0.7 point dilution from raw materials, which was offset by 2.9 points in positive contribution from net cost efficiencies. In addition, we had a slight positive contribution from the net of acquisitions and divestments. The negative effect from transactional currency came mainly from the Egyptian pound and the British pound.
The translation effect in the quarter was positive. Let's look into the drivers of the net cost efficiency on the next slide. As you've seen in the EBIT bridge, we achieved a significant contribution from net cost efficiency of SEK 800 million in the quarter. This was mainly driven by improvement actions in North America and Latin America. The key drivers in the cost efficiency can be broken up into two parts, the variable and the structural cost. About SEK 550 million was achieved in variable cost improvements, comprising of purchasing savings, improved production of efficiencies in terms of labor and overhead, and contributions from logistics and warranty. Efficiencies linked to structural cost takeout amounted to a net of about SEK 250 million. This was mainly related to operational improvements within fixed factory overhead, warehousing, and sales and admin areas.
This improvement is showed net of any investments in marketing and R&D. To summarize this, we are well on track related to delivering on our cost efficiency targets. In fact, with the uncertainties in the beginning of the quarter around the total negative impact of raw materials, increased focus was put on early delivery of cost efficiency activities, and discretionary spending was under very tight control. This resulted in a high net cost efficiency contribution already in the first quarter. Let's go to next slide and the cash flow. Cash flow after investments, but before acquisitions, ended at a negative SEK 958 million. Q1 is normally low and reflects a seasonal pattern with buildup of inventories. As we have seen, the improvement in earnings contributed positively, while changes in operating assets and liability had a negative impact.
This is mainly explained by a year-over-year change in the other operating items, such as provisions. Our net operating working capital, measured as inventories, trade receivables, and accounts payable, continued to improve despite the impact of the acquisitions of Kwikot and Grindmaster-Cecilware. The average net operating working capital in relation to average net sales for the quarter came down to 4.9%, an improvement from 5.9% last year. Acquisitions in the quarter impacted the group's cash flow with SEK 2.4 billion. Let's take a longer perspective on the cash flow. Similar to historical trends, Q1 is the weak quarter in the year. For the reasons explained before, the current quarter reflected the seasonal pattern in terms of cash flow.
The strong cash conversion rate we've had in the past two years has given us a strong balance sheet and means that we're financially well positioned to continue to invest in our business and our strategic growth areas. With that, I would like to hand back to you, Jonas, for summary and conclusions.
Let's move on and summarize this presentation with the outlook for Q2 and the full year. Looking ahead into the second quarter of 2017, we expect consumer demand to continue to drive growth in the appliance industry. We expect a stable market trend in Western Europe to continue in most markets. The outlook for U.K., combined with the political environment in some markets, remain uncertain. In Eastern Europe, we expect the region as a whole to show growth. We anticipate demand in North America to be positive for 2017, driven by good 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 have seen in the past years.
Latin America is showing a slow recovery, and we expect demand in Brazil to remain slightly negative, but with signs of market stabilization in the region in the second half of the year. Demand in East Asia shows a mixed pattern with an overall positive outlook. The Australian market has continued to show positive growth for several quarters, and we estimate the market to be slightly positive, supported by stronger than expected commodity markets. Now to our business outlook. In terms of overall sales volumes, we foresee a decline mainly related to private label business in North America. For EMEA, uncertainties in demand related mainly to the U.K. and Middle East Africa remains. We expect Asia Pacific and professional to continue the positive momentum in Q2, and in Latin America, we expect to see slight year-over-year volume improvement.
In terms of price mix, we expect price pressure to continue in several of our regions, driven by intense promotional activities, although to some extent offset by improved mix. We're seeing higher negative impact from raw material costs for the rest of the year, and therefore adjust the net impact of previously communicated SEK 900 million to SEK 1.4 billion for the full year 2017. This is mostly related to increased prices for steel. We have accelerated our cost efficiency efforts and now expect to deliver net cost efficiency of SEK 2.2 billion for the full year 2017. With the strengthening of the Brazilian real, we see less impact from other currencies in Latin America. In EMEA, the depreciation of the British pound and the Egyptian pound, however, still remains a headwind for the year.
Our intention is to mitigate this through price increase. At current rates, we expect a net negative currency effect of 15 million for Q2 and net positive of SEK 125 million for the year. With that, I'd like to pass it to Merton to open up for Q&A.
Thank you very much, and good morning, everyone. We're now ready to open up the Q&A session. Before we do that, I would like to highlight or remind you to everyone on the line, to ask one question at a time so we can have this session smooth and efficient. With that, I leave the word to the operator to moderate. May we take the first question, please?
Thank you, ladies and gentlemen. If you have a question, please press zero one on your telephone keypad and you'll enter a queue. The first question comes from Andreas Willi from JP Morgan. Please go ahead. Your line is now open.
It's Andreas from J.P. Morgan here. My question is on the cost savings that you upgraded. If you could help us to understand a bit better, you also mentioned you've cut back on discretionary spending early in the quarter. Maybe the SEK 2.2 billion, how does that break down into, in that sense, good cost savings that don't have an impact on the commercial activity or market success, and some of the more discretionary spending you have taken that could impact market, not market demand for your products and promotional activity? If you look at the cost savings that you are getting, historically, you always needed to take restructuring charges.
It took some time, and so before you recovered, an impact from raw material or weaker demand, now you seem to be able to be much more flexible, much quicker in getting savings up when something goes against you, like raw materials. What has changed? Is it just regions? Because this is more U.S. and Latin America versus Europe, where it's more expensive. And maybe you can also give a bit of a flavor, what's different to the past in terms of where you get these cost savings without having to invest in restructuring as much as in the past?
Very good. I'll start and see if Anna has something to add. I think, yeah, first of all, I think I'll combine sort of the answer to both questions. Yeah, first of all, you're right. More of the savings, much more of the savings are now coming from North America and Latin America. To your point, the cost of executing those savings are substantially lower in those regions than they are in Europe and require shorter lead time, right? That's one thing. You know, as we indicated during last year, we see a lot of continued potential in those two main regions, where maybe we haven't put as much focus on cost efficiency historically as we have in the EMEA region.
We do see more, let's say, I would say, a bigger impact in general of our cost focus, because I think we have a broader and more structured and approach, both, let's say, short term and long-term continuous improvement activities and so on. I think. You know, if you compare, let's say, restructuring savings versus what we're doing now, previously, more of our savings came from consolidating our manufacturing footprint, moving to lower cost sources. Whereas now, it's more driven by modernization, automation, cost efficiency in our existing footprint, which inherently costs less in terms of restructuring.
If we then look at the outlook for the year and the split between structural savings, structural cost savings, SG&A savings, and variable cost, I think we will see more or less the same split. We are accelerating our, let's say, our continuous improvement program, focused on our operational structural costs. We, the mix will actually further increase a little bit from the structural piece versus the variable piece. That's not, you know, driven by reducing marketing or anything like that, and it's more driven by continuous improvement activity.
Finally, my final point on discretionary spending and marketing and so on, those reductions have also mainly been in North America and Latin America, which is connected to our portfolio management focus, where we're focusing our efforts on our most profitable product categories, and hence, getting efficiencies in, also in our go-to-market spend. I don't know if there's too much to add to that, Anna. Okay, I think we'll go to the next question.
Thank you. Our next question comes from Christer Magnergård from DNB. Please go ahead. Your line is now open.
Good morning. Well, I can have a follow-up question on the cost savings program then. You have quite big savings in Q1, SEK 800 million, and the coming quarters, according to your guidance, it's about SEK 450 million or so, by quarter. When I listen to you, it seems like this what you do next quarters will be of any other type than what you're doing now in Q1. Why the lower saving rate next quarters? Also, maybe if you can comment on what kind of rate we should expect for the 2018, 2019, not like a number, but more a gut feeling, what you, what we should expect.
Right. In terms of the pace, there's two effects. One is that year-over-year, Last year, we kind of accelerated our cost reduction activities over the course of the year, so you get a little bit more of a year-over-year effect here in Q1. That's one factor. We expect to use less of that tool going forward as we manage our portfolio mix and price going forward. We see, let's say, a more balanced approach for the rest of the year.
In terms of longer-term guidance, I think that we see a lot of continued opportunities to drive continuous improvement, both in our product costs, driven by modernization, automation and continued structural cost continuous improvement program, basically lean management of our structural costs. I'm not ready at this point to give guidance for 2018 and beyond, but we have good confidence that we'll continue to be able to drive good costs in the coming years.
That's great. Just a very short up, follow-up. The SEK 40 million transaction costs you mentioned, is that in Q1? If so, in which division?
Yep. Yeah, this is in Q1, and it is in EMEA and Professional.
Thank you.
Thank you. The next question comes from James Moore from Redburn. Please go ahead. Your line is now open.
Morning, everyone, Jonas, Anna, Merton. I wonder if I could ask a little bit about the selectivity program. We've asked about the savings. It feels like mix is the other story going on here. Selectivity was mentioned a few years ago in Europe. You've continued to mention it for the U.S., Europe, small appliance, more than the other areas. How far are we through the journey? Is there any way you can help us quantify that we had 15% of sales in these regions that we thought we needed to get out of? We're now halfway through that, 80% of the way through that. Where are we in the journey of selectivity, please?
I guess we use the word portfolio management, yeah, fine. I think it's a good question. Basically, what we have done for all our business areas is that we have done a, you know, traditional, not revolutionary, kind of Boston matrix, saying, all right, what subcategories do we have in fixed or exit mode? Where do we milk? Where do we grow profitably? Where do we accelerate growth? We've done that in a, as you know, in a structured way in EMEA for several years, we've done the same now for all our business areas. I would say we made good progress in 2016. We expect to continue to make good progress in 2017. Look, there's...
I don't think there's an end to that type of work. There's always going to be categories where we make more money, that we can invest more in, and categories where we make less money, where we need to change our approach and potentially invest less money or invest a lot of money to make it more profitable. I think that's just a management approach that we will continue to drive.
You know, in terms of the pace of change, I think that we're kind of at an accelerated pace of change right now in, certainly in Home Care and SDA, and in Latin America, where, you know, that's a, kind of at a high pace now, and that would probably moderate over time, whereas in North America, we have a lot more to do on that, on that.
If I could just follow up quickly on raw materials. A U.S. peer mentioned resin, you mentioned steel. Just interested in the difference there as to what you're seeing?
Yeah. I think it's fair to say that we have seen a lot of volatility and market disruption in resins, and we are seeing headwinds there as well. That was, to some extent, already, you know, a big part of the forecast that we had in the, in the SEK 900 million that we.
Mm.
Released in December, and we see that moving up as well. In krona terms, versus our SEK 1.4 billion guidance versus our SEK 900, a good chunk of that is steel.
Thank you very much.
Also, you know, a relatively high part of that is EMEA, both steel and resin.
Okay, thanks.
Thank you. Our next question comes from Martin Wilkie, from Citi. Please go ahead. Your line is now open.
Yeah, thank you. Good morning, it's Martin from Citi. Just coming back to the North American business, and obviously you saw some very impressive margin expansion there, despite the organic growth. I wonder if you could go into a bit more detail on the private label in terms of how you're adjusting for essentially fixed costs and volumes, given the, well, the apparent level of decline inside that part of the business. As that business presumably continues to get smaller, if it's very easy for you to reset lower the fixed costs for that lower level of volume.
A related question to it, is if you could just talk about whether there's a big mix differential, on white label versus the rest of, your own branding in North America in terms of the average margin for those two categories of products. Thank you.
Right. Internally, what we really drive here, the program, if you will, is Frigidaire first. We're really focusing our efforts on driving the Frigidaire brand family, both short term and long term. That's already today, well over 70% of our sales, and we're growing that. That allows us to reduce costs on everything else, if you will, so, you know, in private labels and other activities. This is a big vehicle for cost efficiency for us.
Of course, in terms of, you know, adjusting our fixed cost structure to then potentially lower private label sales, I think it's a combination, of course, of being very focused and determined to increase cost efficiency across the board and at the same time investing to grow our distribution capabilities in alternative channels. It's about managing that balance very carefully. I think it's obvious we've been able to show, and we have more to come, that there are real benefits from this portfolio and brand focus that we're driving now in North America. That allows us to take out a lot of costs, and we will continue to do so.
Okay, thank you.
Thank you. The next question comes from Andreas Koski from Credit Suisse. Please go ahead, your line is now open.
Yes, good morning, everyone. Thanks so much for taking my question. Can we talk about M&A? Clearly, there's been a step up in activity, could you help us firstly with just how much you've acquired in terms of sales for 2017 and 2018 already? More interestingly, how should we treat that going forward? Is this the sort of the pace that you've set, or is this a new trend that should accelerate from here with increased M&A activity? Thank you.
I think I'll pass that to Anna, and then I can fill in. Yeah.
Yep. In terms of net sales for the year here, we expect a contribution of around SEK 1.9 billion in net sales. Of course, in terms of the activity, we have not an M&A strategy, but we have a growth strategy, so we're constantly, of course, evaluating potential acquisitions that fit our strategy. The timing of that is difficult to say, but we have a focus, high focus, I would say, on M&A.
Exactly. You know, you know it, right? It's impossible to give guidance on a quarter by quarter or even year by year basis on the pace of M&A. However, I think it's fair to say that, you know, we have a clear strategy of where we want to grow, where we want to strengthen our position, and we see opportunities in those spaces. We expect to continue that. Giving guidance on the when and how and how much, that's much harder.
I wasn't so much about guidance and certainly not by quarter. Of course, I understand. It's just more of, you've acquired close to 2% of sales, and can we think about Electrolux now as a continuous acquirer of sort of a certain amount of small deals, yielding something like that or thereabout? Has there just been sort of, you know, a refocus on growth and within that M&A, and that's resulted into kind of a spurt of deals, and from here it's quite highly uncertain? I guess, how full is the funnel?
I would say it's more towards your first point, right? That, yeah, we can expect a continued sort of flow of small to medium-sized deals, but with obviously very, very hard-
Mm.
...To predict the timing and exact one. Yeah.
Great. Thank you.
Sure.
Thank you. The next question comes from Olof Cederholm from ABG. Please go ahead. Your line is now open.
Yes. Hi, good morning. It's Olof from ABG. I have a question about the Asia Pacific division and especially maybe the Midea JV. Could you talk a little bit more about that, what the time plan is, and what you think can be done through that JV? Thanks.
As we've talked about many times, the Chinese market is extremely competitive with very strong local players in that. It's been difficult for us, as you're aware, to grow profitably in China. We have had a very sort of deep review of our strategy in China, and we see a dual path going forward. One is that we continue to drive our Electrolux brand in-house with a more premium focus on the construction business and seeing the opportunity to drive that profitably. We have this opportunity with our premium Germanic AEG brand.
It's previously not really existing in China, but we do expect that it has a very good fit with premium Chinese consumers. There we can leverage together with Midea, their enormous distribution scale in China and build. This is something that they need as well, you know, to establish more of a premium position, and it fits our needs for high scale and capability and distribution. We will start at a modest pace, I would say, because, I mean, this is really a premium launch. We're gonna start mainly with European-sourced AEG products, and then over time, we will develop a broader portfolio with Chinese-sourced, Midea-sourced, premium AEG products for the Chinese market locally. This is a China-only strategic initiative.
It's important to mention. We think this is a good mix for us going forward and will allow us to participate in the huge Chinese market in a profitable way and with a manageable level of investment.
Perfect. Thank you very much.
Thank you. The next question comes from Mattias Sparre from Royal Bank of Canada. Please go ahead. Your line is now open.
Morning, everyone. I had a question on the North America sort of retail environment. Just in terms of we've seen sort of retail footfall traffic declines, you can sort of read that U.S. malls are sort of one of the headlines favorites, so big shorts at the moment. How do you think this will affect the appliance industry, going forward, particularly prices, if there's a channel shift involved? Second part of that was, in terms of the overall Sears exposure, can you remind us again what the private label percentage is and what your own brand exposure is to Sears as well? Thanks.
Right. Yeah, the private label to exposure to Sears is a little bit more than 7%-15%, and then we have a little bit of our own label as well, but that's a smaller part. Yeah, the shift in retail patterns that's happening globally, I think is, it, When it happens, it causes a bit of course, of disruption for everybody involved, but it doesn't fundamentally change the possibility to be profitable in the market. I can take the example of the U.K., where something like 45% of the major appliance sales are online today, through pure players and through click-and-mortar.
We see no real difference in margins and profitability in the U.K. versus, let's say, the rest of continental Europe, where the online mix is substantially lower. I think this requires a lot of focus and attention from us and our retail partners to really meet consumers where they want to shop and how they want to shop. It's a big effort, but it's not necessarily, if well managed, a significant impact on our ability to act profitably in the market. I'm not sure if that's answered your question.
Yeah, that's. Where do you think we are in sort of the change in channel shift in North America? Is it sort of, it's still very early stages, for the appliance industry then, or has it been going on for sort of some time and we're at sort of a steady pace?
I think we're still in the early stages. I think around 12%-13% of the U.S. market is online, either, you know. Very little of that is pure play, and most of it is what we call click-and-mortar. Whereas in Europe, it's more like 20% now, and again, the U.K. is the extreme of around 40%-45%. I think it will continue, however, that doesn't necessarily mean that we're selling through new partners. You know, that's one of the things that we're seeing in Europe, is that our traditional retail partners are massively increasing their investment in online, and of course, they have strong brands that consumers trust.
It is a revolution in terms of how consumers shop, but it's not necessarily an a revolution in terms of who we sell to, if you know what I mean.
Okay, thanks for that.
Thank you. Our next question comes from David MacGregor from Longbow Research. Please go ahead, your line is now open.
Yes, good morning, and thanks for taking the questions. Congratulations on the progress on the cost side. My question was more with regard to North America and the private label business. If you think about the some of the share loss at Sears with their Kenmore brand, I'm just wondering how you're positioning the Frigidaire brand to try and pick up some of that volume, and how much volume you think you can pick up with your branded product that maybe you're losing on the private label?
Right. It's a little bit of a category by category perspective, right? Whereas I think you're aware that in cooking, we have a very high share of the Kenmore business, and then it's, relatively speaking, more difficult to pick up an equal share of that in Frigidaire. Whereas in our other categories, it's more of a sell and more even spread. We have a good opportunity to pick that up in other channels. That's something we are really paying a lot of focus and attention to, growing our how should I say, our distribution network, and our retail partners outside of Sears throughout the U.S. It's a high focus area for us now.
Overall, I feel relatively confident in our ability. The biggest challenge is in cooking.
Okay. Thank you very much.
Thank you. Our next question comes from Jack O'Dwyer-Henry from Goldman Sachs. Please go ahead, your line is now open.
Morning, everyone, thanks for taking the questions. We haven't touched very much on Latin America yet, so just interested in your thoughts about where margins could get to this year in light of cost savings in a, in a slightly negative market. The second question was just on the structural cost savings you're hoping to take out of the business. How should we be thinking about your footprint? Obviously, over the last decade or so, your footprint has changed quite materially, you know, the push to low-cost countries, but where can now that get to from here? Thank you.
Right. Sure. Latin America, I think we're Look, as we've always said, we have a very, very strong operation, primarily in Brazil, but also in Argentina and Chile. With a little bit more stability in the market, a little bit more stability in the currency, the very aggressive actions we're taking, both on a cost on the cost side and on portfolio management right now, I think it's really on track to bring us back to our historical profitability levels, right? Historically, we've been around 6%. I think it's too far a stretch to get close to that this year. Obviously, this takes a bit of time to really adjust our entire operation to this new sort of market demand reality.
We expect to continue to improve during the year and over the coming years to come back to our historical profitability level. I lost your second question.
Just on the sort of structural cost savings, I was wondering about the footprint changes.
Yeah, exactly. The footprint is. As we said, the big transformation in our manufacturing and sourcing footprint is done. From here on, it's more around scale and efficiency and modularization automation. I mean, that's what we're really focusing on. I'm not saying that will eliminate any footprint changes going forward. I think we're always looking at our, an optimal manufacturing footprint, but the big program, for sure, is over. Then the question is more: all right, when we talk about modularized product in highly automated digital factories, if you will, you know, what is the optimal scale of that? How do you kind of organize your manufacturing to take advantage of that of that scale?
That's where our focus is going forward. You know, high scale, highly automated factories, assembling modularized products. We're making good progress on that journey, but I have to say that there's a lot left, a lot of opportunities left on that for the coming five years. Okay, thanks, Jonas. Bye-bye.
Thank you. Our next question comes from Olof Larshammar from SEB. Please go ahead. Your line is now open.
Thank you for taking my question, and good morning, everyone. One question regarding pricing. Given that, you know, we are seeing that raw material prices are increasing quite significantly, what do you see in terms of pricing onwards and in general, but also it would be interesting to hear your thoughts on, you know, the U.S. market, where we have seen, you know, quite intense price competition during the latter part of 2016 and also beginning of 2017.
Yeah. Well, I think we're projecting a bit of a moderation-
Yeah
... of our, of the price pressure in our key markets going forward. I don't think we'll turn to, let's say, price positive. For sure not. There's always an underlying, let's say, price down, mix up pressure.
Yeah.
In our Western markets, both Europe and North America. We expect that to continue.
Yeah.
As we continue to introduce new innovative products at higher price points, the older products then go down in price. That's structural, and we expect that to continue for the foreseeable future. If you think more about the promotionally driven price pressures that really accelerated, specifically in North America, in the second quarter of last year-over-year, we expect that to moderate a bit. It's not looking like it's going to accelerate further from where it is right now. A little bit more of a moderate pace, but continued underlying, let's say, price pressure and mix up. That's kind of the story going forward.
Do you see potential, you know, given high raw material cost, that, you know, you or competitors are trying to, you know, offset a part of that by raising prices? Or, you know,
Yeah. Raising prices, but, you know, only sort of moderates the negative pricing environment.
Yeah.
... As opposed to turning it into a positive. You know, the way we. Price, and I guess the industry practice is that.
Maybe, um, uh-
You know, maybe just to say that the what we see as, what we call price, is the product that's been in the market for at least one year. What was the price of that product a year ago? What's the price of that product this year?
Exactly.
Everything else, sort of newly introduced products.
Yeah.
... and new innovations, we put under mix. That kind of means that there is this natural, ongoing price pressure in the market, which we then have to offset and hopefully more than offset...
Yeah
... by introducing new and innovative products.
Yeah.
At more, that are more desirable at higher price points. That's what we've been, I would say, very successful in doing in the EMEA over the last several years. We're accelerating that effort in North America right now with a more focused portfolio.
Yep. many thanks. Have a nice weekend.
Thank you. Our next question comes from Karri Rinta from SHB. Please go ahead. Your line is now open.
Yes, thank you, Karri Rinta, Handelsbanken. A quick follow-up on that topic in terms of pricing and more broadly on volume price and mix. You guide for continued negative volume price and mix in the second quarter, but yet, for the full year, you guide for flat. I'm curious in which levers do you intend to pull in the second half to get to the flat volume price and mix, especially since given, based on your guidance, it would seem that the input cost headwinds are intensifying, and therefore, the volume lever can be a bit tricky one? That's my first, not a real question, but a follow-up to the previous question. Thank you.
If you think about sort of the year-over-year effect, we had stronger volumes in the first half of last year versus the second half, there's a year-over-year effect that is a positive impact in the second half versus the first half. The second part, I think, is that if you think about EMEA, from the start, we expected the first half of this year to be a little bit impacted by a lot of the, you know, political headlines in a lot of important markets. As that settled down, we see continued growth in Europe, in Western Europe. Similarly for Middle East Africa, a lot of turbulence right now.
You know, Egypt, we've talked about, and then, we see a moderation of that going forward. Third fact is Latin America. We expect a continued overall negative net net volume effect from market demand effect in the first half of the year, turning to a positive in the second half, as these positive macro factors that are prevailing in the market now start to translate into consumer demand in the second half. If you put all that together, then you get a slight negative in the first half and a slight positive in the second, or a flat total.
Okay, and just to clarify, it's mostly volume that you are seeing turning?
Volume and a little bit less year-over-year net price. Good mix from the product launches that we're driving, mainly AEG in Europe, that is ramping up over the course of the year. New launches on the Frigidaire in North America as well, happening starting here in the second quarter.
Perfect. Very quickly on FX, positive 6% impact on sales and hardly any impact on EBIT. You used to provide a sort of a EBITDA or FX bridge on earnings in your conference call slides. You don't do that anymore, maybe a few comments on why the translation impact on EBIT was essentially zero.
Yeah, it's positive. Yeah, maybe I don't know, Anna, if you have the detail on that?
I think it's, this is, mainly related to the, to the different, what do you say? Currency comparison, how they affect kind of the bottom line versus the top line.
Right. We see a very strong improvement in the Brazilian real.
Mm.
There, of course, our margin, actual margin is not very high, right?
It's the mix that really creates this little bit unusual pattern in the quarter.
That's. It's mainly, I would say, the Real. I haven't dug into it, but it makes sense to me.
Yeah, it's real and the pound.
Yeah, the flip of those.
Exactly. Then the effect on, of course, the, yeah, the total translation effect in relation to that.
Yeah. If you think about the Brazilian real, significant strengthening at low margins, whereas the British pound, significant weakening at higher margins, so you get that.
All right. That's very helpful. Thank you.
Thank you. Our next question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is now open.
Hello, this is Johan at Kepler Cheuvreux. I just had a quick question a bit related to your cash flow. You once again managed to improve sort of your net working capital ratio to sales, I understand, in the quarter. I think you sort of alluded to that this is expected to sort of flatten out going forward, and improved cash flow should mainly come from improved profitability. Can you say anything about the trend for the net working capital going forward?
You're on the right path, but yeah, and I'll, yeah.
Yeah. No, I think that is correct, that we have seen for quite many years now, a very good development in our net operating working capital. We continue to drive very strong focus on these programs across all sectors. What you see in the quarter is that we have added the acquisitions of Kwikot and Grindmaster-Cecilware on the working capital, but not on the net sales here in the measurement. That's a little bit of a temporary effect there that you see mainly in inventory. We plan to continue to focus on working capital, but the improvement going forward will not be at these levels that we have seen historically. It will more flatten out.
Okay. Thank you very much.
Operator, we have room to take three more questions. Then we have to close down the... Please go ahead.
Thank you. The next question comes from Agnieszka Iwaszkiewicz from Carnegie. Please go ahead. Your line is now open.
Hi, thank you. I have just a follow-up question on the effect from raw materials and net cost efficiency savings. If I sum them up for Q1, I can see that you achieved a net positive effect of SEK 600 million. Looking at your guidance, means that these two effects will average then some SEK 70 million positive per quarter. Could you just help us out and tell us about the profile quarter by quarter for both the savings and the raw material impact? Thank you.
Yeah. It's relatively evenly spread.
Okay.
There's no major deviation. Maybe, you know, we're still very focused in Q2 here, but overall, it's relatively evenly spread and yeah.
Thank you.
Mm.
Thank you. The next question comes from Lucie Carrier from Morgan Stanley. Please go ahead. Your line is now open.
Hi, good morning, gentlemen, Jonas and Anna. Just a follow-up question on the U.S. operation, please. I was just wondering how you are, you know, how you are managing or wanted to understand the dynamics between, on one hand, you know, strong decline in your private label and your choice also to kind of favor, you know, higher margin businesses or your choice around selectivity and the capacity utilization of your plans. Here, specifically, I'm thinking about Memphis and, you know, maybe you're concerned that at some point there could be a tipping point where, you know, that selectivity, the decline at the private label, could also impact, you know, the absorption of costs. Just wanted to understand the dynamics here, please.
As I said, the biggest impact we have from decline in private labels is on. Indeed, that is the pressure, and we're working very aggressively to address that. However, what I would say is that our, I mean, the vast majority of our cooking business comes from our Springfield facility, and actually, that facility has been running three shifts with on Saturdays. Actually, as the volume comes down a bit there, that's not necessarily such a huge pressure on us. The Memphis operation is more specialty project products, lower volumes and higher values. We're less impacted in Memphis than in Springfield.
Thank you.
Thank you. The final question comes from Erik Gunnarsson from UBS. Please go ahead. Your line is now open.
Thank you for letting me finish off the Q&A then. Well, I just have one question to Anna, and that is related to the Brazilian USD relation again. How much are we seeing in Q1 of the, you know, sharp decrease? How much are we expected to see sequentially in Q2?
Yeah, we can say that in Q1, it's around SEK 100 million. In Q2, we expect around SEK 40, you can say.
All right. Thank you very much.
Very good. Thank you very much for those, very good questions. Let us then summarize the highlights from Q1. The group achieved good operational performance, driven by all business areas, and this resulted in an increase in our EBIT margin to 5.3%. As mentioned, we're focused on active portfolio management and to drive cost efficiencies, as well as mitigating increased costs from raw materials. We're doing this very successfully. Professional delivered good profitable growth in the quarter, and our Latin American operations showed a recovery with improved earnings despite weak macroeconomy in the region. Actions to restore profitability in Home Care and SDA is continuing to make progress, and in the quarter, we also closed three acquisitions within strategic areas for future growth for the Electrolux Group.
To summarize, Electrolux continued to execute on the path to create sustainable profitability in our business with a strong financial performance in Q1. With that, I'd also like to highlight that we have announced the save the date for our Capital Markets Day that will be held in Stockholm on November 16th. I hope to see you there, and thank you for listening to the presentation. Thank you very much, and have a good weekend.