Welcome everyone, to the presentation and discussion of the first quarter of 2016. With me here today, I have our new CFO, Anna Ohlsson-Leijon. Welcome, Anna, and our Head of Investor Relations, Catarina Ihre. Let's begin and turn to our presentation. We started the first quarter with positive organic growth, driven by continued volume growth in our two largest markets, EMEA and North America, but also good performance in our professional business. Improved price and mix also contributed to our sales growth. The market trend in all key Western European countries and North America continue to be positive. In Latin America, the Brazilian market continued to decline significantly. Our operating income more than doubled to SEK 1,268 million in the quarter, corresponding, amounting to a margin of 4.5%.
Earnings improved in all business areas versus last year, except for Latin America, and achieved higher margins as a result of improved price and mix and cost efficiency. Currencies continued to have a negative impact on earnings, however, but this was mitigated by price and mix. Overall, Electrolux had a good start to the year 2016, driven both by relatively favorable external conditions and solid performance. On this next page, I would like to mention some market highlights and Electrolux activities during the quarter, which illustrate how we are moving in the right direction in our strategy execution and in terms of market initiatives. Electrolux has a unique position to leverage our leading expertise in serving the world's most demanding customers in our professional division.
We have, during the past five years, introduced innovative solutions, leveraging professional techniques to help consumers make great-tasting food in their own kitchens. During Q1, we completed the range by unveiling the Electrolux Blast Chiller, presented at the EuroCucina Fair in Milan in April. In connection with the fair in Milan, we also profiled the Electrolux Connected Oven with a camera and other innovative products. One additional example of new products was a dishwasher with a lower basket that reaches up to meet you, massively improving ergonomy. This is the first in its class. Also in the quarter, Electrolux presented the For the Better initiative. This initiative highlights how sustainability now becomes an even more integrated part of doing business at Electrolux. We have set the For the Better agenda in place in three dimensions for 2020: better solutions, better operations, and better society.
I will talk more about this in the coming quarters. In the fourth chart, we see the sales development for the group in local currencies. In the first quarter, we continued to have a positive sales trend, driven by 1.8% of organic growth, mainly from volume and price. There was a slight contribution from acquired growth in the quarter. Let us now go through the business areas and start with covering the development in EMEA. Major appliances, EMEA continued to show positive sales growth, achieving strong organic growth of 7.1% in Q1. This was driven by higher volumes and improved mix. Demand for appliances in all key Western European countries increased, while demand in Eastern Europe was flat, as Russia appears to have stabilized in the quarter.
Electrolux saw volumes, sales volumes grew in several key European markets, and we continued to gain share in specific markets. Product mix improved due to the ongoing strategic focus on higher-margin, premium branded products in built-in kitchen and laundry. Prices continued to be under pressure in Europe, however, but during the period, we compensated for this by better mix and higher efficiency. Our operating income doubled versus previous year, and our EBIT margin reached 6.1% in the quarter, also surpassing 6% for the past twelve-month period. This was the result of higher sales volumes, improved mix, and benefits from product cost and efficiency gains. Let's turn page and talk about the market developments in Europe. The total European market was positive in the first quarter and was up by 2.5%, including Russia and Ukraine.
The Russian market appears to have stabilized following the significant downturn from late 2014 into the full year of 2015. Demand in Western Europe increased by 3% and has now increased for nine consecutive quarters. Growth was particularly strong in the UK, Germany, Italy, and parts of the Nordics. Demand in Eastern Europe was slightly up. Most markets in the region showed positive growth in the first quarter. We expect the Western European market to continue to be healthy in 2016 and grow by 2%-3% for the full year. We forecast the market in Eastern Europe to grow by about 2%. Turning to North America, our operations in North America continued to grow, to show good progress and improved year-over-year. Both organic sales growth and earnings increased substantially.
Our organic growth was positive in all core categories. Higher sales in home comfort also contributed positively in the quarter. Profitability and refrigeration of freezers has been restored, and the work to stabilize and further increase our efficiency measures in the cooking plant in Memphis is making progress. We estimate that this work will continue into the second half of 2016. To sum up, earnings in North America improved significantly versus last year, and we achieved an operating margin of 5%, which was a sequential and year-over-year improvement. The recovery in profitability was a result of higher volumes, positive mix, product cost, and efficiency gains. Towards the end of the quarter, we experienced some price pressure in the market, but we continued to be disciplined in our price management. Let's turn to the next slide and talk about the market development in North America.
Market demand for core appliances in North America has been good for three consecutive years and increased by 8% in the first quarter of 2016. With a good start of the year, the underlying market for appliances in North America is healthy, and we continue to see consumer confidence and the macro environment to be positive for the appliance industry. We believe the underlying market growth in North America will remain solid in 2016, and expect the full year market growth to be in the range of 4%-5%. Market demand for appliances in Brazil deteriorated significantly in the quarter, and the macroeconomic outlook in the region remains weak. Challenging market conditions continue to affect our volumes negatively in Q1. Market volumes in Brazil and Argentina dropped by more than 20%, while demand in other Latin American countries was more stable.
To compensate for the weak markets, our team has taken significant actions to reduce cost. In the quarter, we have implemented price increases to compensate for currency headwinds and inflation. These measures, in combination with improved mix, have almost compensated the negative currency development. We expect the important Brazilian market to remain weak in 2016. Let's turn slide and talk about our operations in Asia Pacific. Market demand in the three sub-regions in Asia Pacific showed a mixed pattern in the first quarter. Our sales in Australia and New Zealand and Southeast Asia continued to show growth. New product launches and price increases contributed positively. Sales in China declined in the quarter as a result of proactively reduced business activity. Earnings in Asia Pacific increased year-over-year, and margins improved to 4.7%.
Both Australia and Southeast Asia performed well and had a positive impact on earnings. Over the past quarters, we have actively downsized our operations in China, and that work continues in the first quarter and expected to continue during 2016. As of April 11, the relocation of the refrigeration production from Orange, Australia, to the factory in Rayong, in Thailand, is now completed. Let's continue with small appliances. Sales growth in Western Europe showed strong performance. Premium products within floor care also improved the mix. Total sales, however, was negatively impacted by lower volumes in the U.S. and Latin America in the first quarter. The small appliance business continued to be exposed to currency headwinds in the quarter, which impacted the EBIT negatively. In these market conditions, we've taken price actions to offset parts of the negative impact.
As previously communicated, a cost reduction program was initiated end of last year with the aim of restoring profitability. The program is in progress and has started to contribute positively. In addition to this, we are putting significant emphasis on refocusing our business on profitable categories through active product portfolio management. Let's turn to our professional business. Professional products continued to show a strong performance in Q1 and benefited from profitable growth in the strategic markets. Sales growth was positive in Western Europe, in North America, and in Japan, while the trend in emerging markets was soft. All in all, our professional operations achieved an EBIT margin of 13%, as earnings increased by roughly 20% versus last year. This was driven by volume growth and operational efficiency.
I'd like Anna to dive into the numbers and go through our financials and our cash flow in the first quarter of 2016. Please, Anna.
Thank you, Jonas. Let's start with the financial overview. Organic sales was up 1.8% in the quarter, driven both by positive price mix and volumes. Acquired growth was 0.1% due to contribution from the Veetsan acquisition last year. The currency impact was a negative 5.2%, and this, excuse me, this resulted in reported sales -3.3%. Total gross profit, which is defined as net sales minus cost of goods sold, in Q1, was up 12% versus last year, which translated into an improved gross margin by almost three percentage points, up from 17.6% last year to 21.5% in Q1. Reported earnings were significantly up compared to last year, driven by strong performance in our two largest business areas, EMEA and North America, as well as in professional.
Earnings also increased within small appliances in Asia Pacific. Overall, the group benefited from positive volume price mix and product cost improvements. As a result, our EBIT margin increased to 4.5%. Cash flow remained flat year-over-year at -580 million SEK. Cash flow for the first quarter is normally low and reflects a seasonal pattern with buildup of inventories. Reported earnings per share were 3.04 SEK for the quarter. Let's move to the sales and earnings bridge on the next slide. Let us start with the first column in the bridge, which comprises of price, mix, and volume, i.e., the organic growth, that contributed positively with SEK 754 million to operating earnings in the quarter.
Price mix together was the main part. If you compare this with a negative total currency effect of -SEK 720 million, you can see that we largely compensated for the currency this quarter, even though it varied in the different regions and markets. In Latin America, improved price mix have almost compensated the negative currency development. The net cost efficiency shows the net impact from product cost improvements, including cost savings from raw materials, the impact of other productivity work, as well as structural cost efficiency throughout the group in the quarter. In total, we had a margin increase of 2.5% from the organic part, which mitigated the dilution from currency. We have also had 2.2% in contribution from cost efficiencies.
In the column other, the SEK 63 million reflects a positive delta from the GE cost taken in EBIT in Q1 2015. Let's go to cash flow and move side. Cash flow ended minus SEK 580 million and was at the same level as previous year. Q1 is normally low, and this reflects a seasonal pattern with buildup of inventories. As we have seen, our EBIT number is up strong year-over-year. However, the cash flow is more or less unchanged compared to last year due to a higher negative impact from working capital in the period. The net change in operating assets and liabilities year-over-year is driven mainly by North America as a result of higher AR in inventories linked to the growth and changes in other operating working capital across the group.
The CapEx run rate is not decreasing, this is just a quarterly timing issue, and the cap on CapEx will continue to be around SEK 4 billion . The strong cash conversion rate in 2014 and 2015 has given us a strong balance sheet, which means that we have the funds and the firepower to continue our investments, as well as look at further acquisitions. Finally, let us take a longer perspective on the cash flow. Here you see that the Q1 is always the weakest quarter in the year, and this is followed by the strongest quarter in the year. With this, I would like to hand over to Jonas for summary and conclusions.
Thank you, Anna. Let's move and summarize this presentation with the outlook for Q2 and the full year, 2016. Looking ahead into the second quarter of 2016 and the full year, we believe that growth will continue for the appliance industry. We expect the healthy growth trend in Western Europe to continue in most markets. In Eastern Europe, we expect Russia to be stabilizing and expect the region as a whole to show growth. We anticipate demand in North America to remain positive in 2016, supported by a solid macro environment, better consumer confidence, and continued improving housing market. Latin America continues to be weak with very low visibility. We expect demand in Brazil and Argentina to further deteriorate before it stabilizes. The year-on-year comparables do become easier in the second half of the year.
Demand in East Asia shows a mixed pattern with a stable outlook. Australia has shown positive growth for several quarters, the market is now estimated to remain flat to slightly negative. In terms of price and mix, we expect a slightly positive net impact in EMEA, in Latin America, and in Asia Pacific in the second quarter. In North America, we do see signs of price pressure building up. We continue to work to increase efficiency and reduce structural costs. We expect to further benefit from these initiatives throughout the year. We expect raw material costs to have positive net impact in the second quarter and for the full year, primarily driven by steel and plastics. Although both markets have shown continued volatility in recent months, but that will have a limited impact on 2016.
Due to the recent fluctuations in the currency market, with the weakening of the US dollar, we currently see a less negative impact on currencies in 2016 than we communicated in connection with the Capital Markets Day in February. At the current rate, we expect the transactional currency effect of SEK -425 million for Q2, and SEK 1.3 billion for the full year. Our CapEx outlooks remain stable in the range of SEK 4 billion. With that, I would like to pass it to Catarina to open up for Q&A.
Yes, good morning, everyone. By this and the conclusions from Jonas, we open up for a Q&A session. Please, operator, could we have the first question?
Yes, of course. First question is from Andreas Willi at JPMorgan . Please go ahead. Your line is open.
Yeah, good morning. Thanks for taking my questions. The first one relates to your comment on increased price pressure in North America or the US. Maybe you could elaborate a bit on that. I mean, we've had another very good quarter on volume and raw materials are no longer falling. Why do you think is price pressure increasing at this point in time? The second question is, if I look at the Q1 profitability of 4.5% margin at normal seasonality, would almost get you towards the 6% margin target for the year. Is that kind of what you, what you're aiming towards for the year, or was something specific in Q1 that we should fade a little bit compared to normal seasonality? Thank you.
Yeah, thank you, Andreas. Good question. In North America, We did see some increased price pressures, as mentioned in towards the end of the quarter. I don't want to exaggerate that. I think it's natural, given the lower raw material prices, that there is some pressure. However, as you said, there is a lot of volatility in the raw material market. It's hard to give you sort of a clear trend or direction on price pressure driven by the volatility in raw materials. I wouldn't put too much emphasis on that, but it's clear that we did see some pressure.
On your second question on the Q1 run rate, I think it's probably a bit too optimistic to say 6% for the year. However, we are, you know, obviously happy about the good result, and we see a continued positive trend for the year. I think that's a little bit too optimistic to say. Thank you very much. Thank you.
Thank you. Could we have our next question, please?
Yes, we go to the line of Johan Eliasson at Kepler Cheuvreux. Please go ahead. Your line is open.
Hi. Just a question about your currency guidance, so I understand it correctly. You previously talked about the transactional headwind for the full year of SEK 2 billion, and now you talk about SEK 1.3 billion, which is a quite significant change here. However, is this really for the full year, or is this SEK 1.3 billion for the remaining three quarters? Should we add the SEK 700 million that we saw already in Q1, so we basically get to around SEK 2 billion still, or how should I understand it?
No, it is for the full year, the $1.3 billion. And the, you know, we've seen basically a broad base of strengthening of currencies against the dollar, right? The biggest-
Mm-hmm.
Single impact right now is the Brazilian real, which has strengthened quite significantly versus the dollar, but also Canadian dollar, Aussie dollar, and euro have strengthened against the US dollar, and that all those are favorable to us. That's why you see a quite significant swing.
Okay. Thank you very much.
Thank you, Johan. By that, could we hand over to our next question, please?
Yes, of course. That's Nathalie Ahlström at Carnegie. Please go ahead. Your line is open.
Thank you. Congratulations on the good report, congratulations, Anna, for your first quarter. I have just a couple of questions. You performed a great margin in EMEA, and you are expanding your market share in built-in kitchens, as you mentioned. Just a question on the market share: Do you have approximately similar market share through the majority of European markets, or do you have much stronger in some countries and much, you know, weak in other countries? I just want to assign the potential for continued market share gains in Europe for that particular high-end segment.
Right. Built-in kitchen in general is the category where we have the strongest shares in most European markets. We're particularly strong in, of course, in the Nordics, in Italy, in Switzerland, in Benelux, and a little bit lower share in Germany, in Spain, and UK. We're gaining share really in all markets and see a positive trend there.
Okay. Just a question on North America, if I may again. Was any specific categories where you believe that the price pressure building up? Also a question in connection to that Whirlpool is currently having their anti-dumping case against Korean laundry appliances made in China. Is it connected to that? Do you think if they win in, I don't know, three quarters, that would change the dynamics of the market?
Yeah, obviously, we have to be careful talking about price, so I have to be very general here. I would say that it's not, for us, specifically tied to a category or a specific competitor. I think it's more a question of retailer pressure. Again, I don't want to overemphasize this point.
Thank you very much.
Sure.
Thank you, Nathalie. Could we have our next question, please?
Yes, of course. We're over to the line of Christer Magnergård at DNB. Please go ahead.
Hello there. Good morning. Question on, first, the FX guidance. Previously, you have basically always tried to compensate for the FX headwind by raising prices. Now, when you see lower FX headwind going into the second half of the year, especially then, do you expect that you need to give some of that back to the retailers, i.e., cutting prices a bit? Or do you think that you'll be able to keep the price level today, as you have today?
I mean, all of these comparisons are, you know, year-over-year, and they're quite volatile, so it's hard to give, let's say, very precise guidance on that. Of course, it's a reality that when currencies get weaker, we, as well as our competitors, need to compensate for that by raising prices. Conversely, the margin to compete is higher if you have more favorable currency development. Those, that's a, that's just the market dynamics. However, it's not that we've seen any of the currencies get back to, let's say, the historical levels against the dollar.
We're still seeing a relatively weak, say, historically speaking, currency picture, particularly in Latin America, but also in some of the other major currency pairs that we have.
Okay. Just to follow up on FX, how can you talk about that since you have quite high margins in North America, where, you know, U.S. dollar has weakened, obviously, that will probably have a negative effect on translation?
Year-over-year translation is negative for us by about SEK 60 million or so in the quarter. At current rates, it will be SEK a couple hundred million for the full year.
You also talked about net cost efficiency, of SEK 655 million in the quarter, year-over-year? Is that the net number of cost inflation and the cost that you are taking out of the business?
That's correct. It's including raw material, inflationary pressure, and efficiencies.
Okay. Is that the top run rate we should expect going forward for this year, or is it abnormally high in Q1?
... I would say, in general, it's an achievable run rate, with one exception, that is that we had a very tough start to the year in North America last year. The year-over-year impact is a bit higher there than I would say the run rate is for the full year. In most of the other sectors, I think it's a relatively achievable run rate.
Mm-hmm. Then there's a final one on small appliances. If you can talk a bit more about what you have done there to achieve this, well, maybe too early to call turnaround, but you're at least showing a positive trend.
Yeah. Yeah, it is nice to see. It is too early to call it a turnaround. you know, we have big profitability differences between our regions in small appliances, and Europe is a profitable region. Here we saw nice growth. Then, of course, we proactively reduced sales in some of our more loss-making categories in other parts of the world, so that's why you saw that impact in combination with continued cost reductions and positive raw materials. It is indeed too early to call it a turnaround yet. lots of headwinds still to face.
Okay. Thank you very much.
Thank you.
Thank you, Christer. Could we have then our next question, please?
Yes, of course, that is David MacGregor at Longbow Research. Please do go ahead.
Yes, good morning. Can you hear me okay?
Hi, David.
Good morning, Jonas. Nice to see the progress in North America with the refrigeration. You talked about improving efficiencies also maybe at Memphis. Can you just talk about the % drag on North American margins that manufacturing might still represent at this point? In other words, you know, where can you get these North American margins under today's business conditions, competitive conditions, if your manufacturing was working as you would like to get it?
Yeah, it's a good question. Look, we're still not where we want to be in terms of manufacturing efficiency. I'm hesitating to give you an exact number there because that's gonna develop over time. But for sure, there's further upside on manufacturing efficiency. On the flip side, of course, we had very good raw material cost development in the first quarter, and of course, that, given current raw material prices, that positive headwind will not continue into next year.
Right. With regard to the observations you made on pricing in the North American market, and you referenced retail as being the source of pressure. Can you, without obviously mentioning retailers, but can you say whether it's one retailer in particular or whether it's broad across the community of retail?
Yeah. I would say it's broad-based, and of course, it's, I would call it mainly, raw material-driven at this stage.
I see. You mentioned that it wasn't necessarily confined to a category, but would there be a concentration around the room air conditioners rather than majors?
No, I wouldn't say so.
Okay. Thank you very much.
Thank you.
Thank you, David. operator, could we have our next question, please?
Yes, of course, that is Lucie Carrier at Morgan Stanley. Please go ahead.
Hi, good morning, Jonas, Anna, and Catarina. Congrats on the great results. I just have a few questions left. The first one actually is on cash flow, and you signal, you know, higher in buildup of inventory in North America. Maybe I'm gonna play a bit devil's advocate here, but we have seen a bit of weakening data on the housing starts or housing data in North America. What is giving you the confidence that the market is gonna continue at this strength? That's question number 1, and maybe after you answer, I will come back with a few more questions.
Okay. Yeah, for sure, the rapid growth that we've seen really over three years now, we're not predicting that to continue at that pace. However, you know, we call the year at, you know, as we said, 4%-5%, and of course, with the 1st quarter at 8%, we do expect a slower run rate for the remainder of the, of the year. We are positive on, the consumer confidence. We're positive on, lower unemployment, and low interest rates. Those sort of, those strong fundamentals remain in place. However, to your point, the, the housing sort of recovery is probably reaching, more of a natural run rate, let's say.
Okay. Thank you very much. My second question was on Latam. You've been, you know, facing a very difficult market, obviously, in Brazil, taking a lot of cost out. My question is, obviously, we don't have full visibility on your cost structure there, but how much more cost down can you take? How long... You know, if the situation we're going to last even much longer, what is your flexibility still to kind of mitigate the headwinds?
Yeah, we do expect the situation to continue. For sure, we're taking additional actions both on cost and on price as we speak. There is more opportunity. I think it's important to note that we have a high market share in Brazil, a strong position. You know, while it does take some time to adjust both cost and price to the new market conditions, we have full confidence that we will be able and to continue on that trajectory and to do that.
Just maybe a follow-up on that. Could it be that at some point, hopefully, Brazil improve that, you know, your cost base would be massively optimized? I mean, Brazil or LatAm used to be a, you know, fairly good market for you. When you think about it long term and with all the initiatives that you've taken, what is your view for kind of your long-term potential in Brazil or LatAm?
We're optimistic. We don't expect the market to come back to where it was in the last few years, anytime soon, but it doesn't have to. You know, we have a strong position in the southern part of Latin America, with efficient manufacturing, great leadership, great innovation in our products. For sure, we will, and we are adjusting to the new market environment and expect to get back to the solid profitability there in the not too distant future.
Thank you very much.
You're very welcome.
Thank you, Lucie Carrier. could we have our next question, please?
Yes, of course. If anyone else wants to ask questions, it's 0 and then one, by the way. It's over to James Moore at Redburn Partners. Please go ahead. Your line is open.
Yeah, good morning, Jonas and everyone. I have a few quick ones, please. I'm just trying to understand the North American EBIT a bit better. Could you perhaps help us understand how air con in the U.S., EBIT moved year-on-year, up, down, flat, and how much this improvement is just core white versus that? Secondly, on the U.S., could you talk a little bit about loading in Memphis, and how did the first quarter volume units annualize? Was it 200-300, 300-400? Really, was it better or worse than you expected? I'm thinking about product take-up, and whether the share loss that you lost in U.S. cooking is lost forever or coming back better than you thought. Maybe come back on a couple of others.
Air conditioning was strong in the first quarter. Solid contribution on the EBIT level as well as the top line. Of course, it's not by any means our biggest category, so that was not the majority of the recovery. I think we saw good profitability recovery, really, in all categories in the quarter. When it comes to Memphis and demand for our products there, we are running at the, let's say, close to current demand levels or more or less at current demand levels, so we don't really have significant manufacturing constraints right now. As you pointed out, that is slightly lower in terms of market share than we used to be, and we do expect to recover that over time.
Okay, thanks. On Europe, the profitability improvement, I get the impression you had some challenges in dishwasher and freezer. Does that specifically reflect improvements in the problem areas, or is it a more general, through the board improvements in profitability?
It's actually very, very wide, widespread and broad. We did see improvements both in dish and refrigeration, but also equally in the categories where we have been doing well in laundry and in built-in kitchen.
Okay. On the net efficiency, that new number, the 655, there's lots of things in there. Specifically, I'm just thinking about the savings number, and I guess that was a very good number relative to where we've been. I suppose, if you can help us more on that would be great. Whatever the good savings number is or whatever the good number is inside that 655, do you see it continuing at that level throughout the balance of this year, or do you think the first quarter is artificially high and unsustainably high?
Right. first of all, the raw material piece of that is a bit over SEK 200 million. The rest is true efficiency. However, I The one caution I would mention is that North America, we had a very tough start to the year last year, right?
Yeah.
Year-over-year, that efficiency number becomes significant there. Again, in the other sectors, it's more on a, let's say, a sustainable run rate, I would say.
That's very helpful. Thanks. Finally, just on the currency, just to be clear, the SEK 1.3, that includes the SEK 200 of translation, so it's SEK 1.1 billion transaction and hedging and not SEK 1.5?
I'm sorry, can you restate that as?
Yeah, just on the currency guidance, the SEK 1.3 billion, Does that include translation, transaction and hedging?
It includes hedging, but not translation.
It's 1.5 versus the old 2.2.
Yeah. Yeah, yeah, correct.
Okay, thanks.
Sure.
You're welcome.
Thanks very much.
Thank you, James. I think we have some more questions. Please go ahead, operator.
The next question is Martin Wilkie at Citi. Please go ahead. Your line is open.
Good morning. It's Martin Wilkie at Citi. Just coming back to the China commentary, you mentioned this repositioning and, of course, some reduced sales activity. Should we see this as a sort of permanent reset of your footprint in China, or is this sort of scaling back as you consider what your strategy is going to be in China? You've obviously had a couple of false starts there over the years in terms of how you're going to succeed in China. Just interested in your thoughts as to whether this is a temporary repositioning or if it's sort of a new normal for your footprint there. Thank you.
I would say that in many ways, you can consider it the new normal, in that the channels and the product categories that we were pushing before, we're scaling back permanently. Over time, we are building up a more premium position in different channels. That will take some time, but we do expect that to contribute over the years. It's a different model, and it's more kind of a premium business model that we're building in China.
That'd be a gradual thing rather than a sort of, a big, you know, big push or big launch in any one quarter. That's just a more general, gradual push.
That's correct, yes.
Okay, thank you.
Sure. You're welcome. Thank you.
Thank you, Martin. Please, could we have our next question?
Yes, Björn Enarson at Danske Bank, you're up.
Thank you, Björn Enarson, Danske Bank. Can you talk a little bit about the sell-in activity versus the sell-through activity in Europe and North America? I'm trying to get at where, what your view are on the retail inventories are, moving.
Yeah, I don't see anything extraordinary there. It's relatively, let's say, sell-in versus sell out is relatively flat. I mean, you always have a bit of an inventory buildup in the first quarter, being a seasonally low kind of sell-out quarter and retailers building up for a stronger Q2, particularly in some categories like Air Care. nothing unusual.
Okay, perfect. Coming back again on Memphis and, you've been talking about, you see further efficiency improvements, and you previously talked about that you should get some kind of a normalization by the middle of this year. Is that still valid, or is this more of a gradual improvement from here?
Yeah, we try to kind of split it in two parts. One is the, can we produce to demand at a steady pace? That we have achieved here in the first quarter. In terms of, let's say, raising from manufacturing efficiency to the level that we want to see in the factory, that's going to be more of an ongoing effort. We do see some nice gains in the first quarter and second, and continuing in the second quarter, but that will be more of a gradual recovery over the course of the year.
Perfect. Thank you.
You're very welcome. Thank you.
Thank you, Björn. Could we have our next question then, please?
Yes, we're over to the line of Anders Trapp at SEB. Please go ahead.
Hi there. I have two questions. basically, I'm trying to sort of figure out if there's any kind of common denominator behind this very strong improvement. I mean, you had a 150, almost % improvement, EBIT, you beat the street estimates by 25%. More importantly, you beat it on every single line, which is actually quite rare. I'm trying to figure out if there's a common denominator here across the board or different business areas. I would lean to mix actually, but I'm not sure. If you could say something about that.
us setup. I won't talk about new management in this. But, no, look, jokes aside, I think that obviously we have a good contribution from raw materials. We have a very good trend in EMEA, in professional that's continuing. We had a weak start to last year in North America as well as Asia Pacific. Now you see a little bit more of a, say, normalized performance in those markets. Then, of course, Latin America is hard to be very precise on the prediction. It's difficult for us and difficult for you, given the massive currency swings and demand swings.
There, we did see a slightly better currency environment towards the end of the quarter. So, you know, I wish I could say new management, but I think it is a little bit of a different story in the different sectors.
Could you also shed some light on the fact that you actually had an operating leverage of 153% on the organic growth? That is sort of quite rare. The only thing I can think of is actually that you have a very good mix development.
Yeah, we have good mix and good price. Basically, if you think about it, we had solid growth in EMEA, right? 7%. We had solid growth in North America, close to 6%. Then we had declines, well, and nice growth in professional as well.
Yeah.
Then we saw negative Latin America, but there, the volume was you know, to a significant extent, offset by price and cost. Then in Asia Pacific and in small appliances, the sales decrease there was entirely driven by sales that we took out, that were very low margin revenue. The fact that we kind of lost volume there actually improved our EBIT.
Yeah.
that's when you put all that together.
Yeah
that's when you get that effect.
Yeah. Okay, one final also. Latam, I mean, that market, you've been doing extremely well over the, in this period of the difficulty. What do you think it takes for you to, you know, come back to sort of like some kind of normal, whatever normal is, profitability there, like 5%+ or so? Is it just enough with the stabilization of the market, or would you need a recovery as well?
I would say stable, stabilized market and currency are for sure needed, it we're not specifically looking for a recovery, and we don't expect a recovery. It's more about we still have price that we need to get, and we still need to see the full impact of the cost reduction efforts that we've already taken and are taking right now. No, that's it, let's say.
Yeah, yeah. All right. Thank you.
Sure.
Well, guys, thank you so much. I think we have room for some more questions, please go ahead.
Yes, we are now over to the line of Mikael Busch at Swedbank. Please go ahead, Mikael.
Good morning, again, like everybody else has said, congratulations on some excellent results.
Thank you very much.
I just had a question on, I'd like to dive in a little bit deeper into the working capital to, get a feel for. I know the first quarter is, you know, it builds up quarters, so, you know, it shouldn't take too much into that. If we're looking at the working capital, there is, there is still, quite a significant change to about, tune of about SEK 1 billion, in operating liabilities. Can you perhaps shed a little bit more light on that, please?
Anna, you want to take that one?
Yeah. Yes, the main drivers here are the AR and the inventory. We have a buildup of inventory both in North America and in EMEA, our largest business areas. This is, of course, seasonally the impact, also for North America, also looking ahead for product launches. AR is also then, of course, on the back of the growth here in Q4, higher versus last year. Those are the two main drivers of the working capital change versus last quarter.
I would just add that also last year was particularly strong in terms of working capital development, so you have a negative sort of year-over-year effect there as well.
Okay. That's fine. Thank you very much.
Sure. Thank you.
Thank you so much. Shall we move on to the next question, please?
We're back to the line of Andreas Willi at JPMorgan . Please go ahead. Your line is open again.
I just had a follow-up question on Latin America, Brazil specifically. Given the, that the currency has strengthened so much recently, how long do you think you can so obviously, you're still increasing, prices. Your raw material costs are now coming down in local currency. How long do you expect that kind of period to last, where you can harvest this in terms of the profit level before you would expect, prices in the market to follow again, the currency development? Like, if you look back in history, how long can you hold on to that spread?
Yeah, I think we're far away from that type of situation. I mean, a few years ago, the dollar-real was at around two, right? Now it's around 3.50. It peaked at around four. We're still in sort of very unfavorable territory despite the strengthening, and we have not yet recovered, let's say, from that negative development. I think we for sure need and will take more price even in the current currency environment.
You haven't seen anybody starting to drop prices towards the end of the quarter?
No, no, no. I mean, I think, yeah, I think what I just mentioned holds true for everybody.
Yeah. Thank you.
Thank you, Andreas. Please, operator, shall we move on?
Yes, we now have Timothy Lee at Barclays. Please go ahead, David.
Hi, good morning, Jonas. Good morning, Anna. Just two questions from my side, please. First, if you could comment a little bit on how we think about the quarter, the second quarter in the U.S. Last year, we clearly had this quite unusual quarter with the air conditioning volumes very high. I was just wondering how we think about that, both in terms of organic growth and in terms of the margin that we should be thinking about in Q2 in the U.S. Secondly, your point on taking out loss-making revenue is well made. I was wondering if you could perhaps quantify that effect across the group, and also, perhaps say for how many more quarters you see that really contributing to the bottom line. Thank you.
Right. Excuse me, starting with outlook for the second quarter in North America, we do expect another good season for air conditioning in the second quarter of this year. I don't expect that to be a drag. However, if you look at the sort of Q1 year-over-year versus Q2 year-over-year, it's important to note that Q1 of last year was particularly weak, and Q2 was already a bit stronger in North America. I don't expect the same level of year-over-year performance improvement overall in North America. Then on the, let's say, the mix improvement from exiting low margin business, that's mainly in small appliances and in Asia Pacific.
If you, if you look at the, at the margin improvement there, really a large portion of the improvement in both sectors comes from that sort of mix improvement. You, obviously, you see negative net sales in both business areas and a positive EBIT improvement. A lot of that swing is from that factor. You see less of that in the other category, in the other business areas.
Thank you. That's to continue for how many quarters longer, please?
I think that's a journey that's only started in small appliances. In Asia Pacific, it's mainly that China effect, there you will see maybe some further improvement, but you've seen much of the effect already.
Thank you very much. No, another quarter for me. Yeah. Thank you.
Should we have our next question, please?
Okay. Hai Huynh at UBS, you're up. Please go ahead.
Good morning, guys. I have two questions for you. First of all, these new product launches that you mentioned on page 3 in the presentation, how would you quantify that in the first quarter? Going forward, how will that, you know, affect the operating margin?
Right? Yes. Maybe I'll take that one first.
Yeah, yeah.
These product launches are really just how should I say, completing the range in EMEA, and in themselves are not major volume or profit drivers. What I would say, though, is that we have launched now over the last several years, a range of...
Come on, Martin, get off my line.
Very, very innovative and good products in built-in kitchen and in laundry in EMEA that have had very good receptions among consumers, and that's what's really driving the mix improvement that we've seen over the last years. For sure, we don't expect that journey to be at the end. No, we will continue to drive that trend. It's not so, let's say, specifically related to individual product. It's more of an overall range of product to help consumers make great-tasting food and take great care of their clothes. That's what we're really driving.
Thank you. Just the follow-up question on that was basically, how do you see, now when we move ahead a little bit in time from the Capital Markets Day, do you have any more concrete plans of the aftermarket possibilities? Also, now, you know, when you launch these new products, of course, the connectivity comes into the picture even more. Could you concretize aftermarket possibilities more?
We actually saw good development in aftermarkets in the first quarter here. As we mentioned in the Capital Markets Day, traditionally, aftermarket revenue has mainly been around repair and services around that. With connectivity, we have the opportunity, and also before connectivity, we have the opportunity to connect more directly with our end consumers and sell more, both services, accessories, consumables, and parts directly to end consumers. This is something we're focusing a lot on. It's not something that will radically change the result from one quarter to the next, but over the coming five years, I do expect that to be a significant contribution to our profitability.
Do you have a target of percentage of sales that will be up to market in, let's say, five years?
We're not at the point where we can mention that at this stage, so.
Question? As much as we could.
Yes, of course. We're over to Henrik Christiansson at Carnegie. Please go ahead. Your line is open.
Thank you very much for taking my question. to Jonas, I'm listening to you. You're saying that good Q1 was good due to volumes, mix, good savings pace, and going forward, all that will remain. You also have lower FX. My question is, theoretically, what do you think is holding you back from achieving 6% margin already this year?
Yeah, as I mentioned, I think that's way too early to call that. I think it's. First of all, it's clear that the swing in North America is, to a large extent, well, it's good performance, but we had a very weak start to last year. When you look at it, you have to see that effect over the course of the year, where we see less of a positive impact over in the remaining quarters. We also have a long way to go in small appliances. I don't want to call that a turnaround.
That's gonna be, I'm sure, volatile for the rest of the year as we continue to reposition that and to refocus, where I think over time, we have significant margin expansion opportunity in small appliances. What I'm not, I'm not seeing that fully this year yet. Of course, we have continued very challenging market situation in Latin America. I think those for us to reach or achieve the 6% target, I think we will have to get more progress on those in those business areas. I don't expect that to deliver fully already in this year.
Thank you so much. It's very helpful. Just one last follow-up question on small appliances. You had good Europe, and your North America don't seem to be improving much. How do you see on that? Do you see that bottoming out this year to some type of normalized levels, or do you think we should expect it first next year for North America, specifically?
Yeah. North America will be a longer journey, indeed. Indeed. Not, no turnaround this year.
Thank you.
A lot of hard work and progress, but no real turnaround, I think.
Thank you.
Sure.
Thank you. I think we have room for two more questions, before we have to close. Please, operator?
Okay. Well, in that case, the penultimate question is back to the line of Johan Eliasson at Kepler Cheuvreux. Please go ahead, Johan, your line is open.
Yes, thank you for the follow-up here. I was just wondering about pricing in Europe. I understand it has been trending towards the negative 2% range again after for some time being closer to 1% negative, sort of on a year-on-year basis. Are you seeing anything in the European market that really makes you sort of think that pricing should become better or worse going forward, or is this just a temporary development because of less price hikes in Russia?
I think that's exactly it. The underlying trend in Western Europe has been relatively constant around that 2%. With the big currency drop in Russia and Ukraine last year, we raised prices there, and that sort of lifted the average for Europe, and you don't see that impact anymore. I think this is the proper run rate, let's say, or let's say, the long-term run rate.
What is needed to get this into a better situation? A significant consolidation, or is this just what you have to live with in Europe?
Yeah, it's very difficult to say, but we've certainly treated as what we have to live with in Europe, let's put it that way. The way to offset it is what we do, which is continued cost efficiency and continued launch of innovative products that we can charge more for the consumers desire. That's the story, and that's what we expect to continue.
Yeah. I guess the main thing here is the innovation rate. Have you any trends to share on that for you? Have you shortened your product introduction cycle, specifically in Europe, or what can you say about that?
We have done is we've focused more. This was a very conscious choice that we made a few years ago, that we have some areas where we're really leading, and we focused more of our investments on those areas and reduced our efforts in some other categories, and then focused more on cost there rather than innovation. That has allowed us to increase the speed of innovation in, as I mentioned, built-in kitchen and in premium laundry, really driving the key consumer benefits that we're talking about. Yeah, I would say, Well, and we have increased our spend in R&D as well, quite significantly over the last five years.
For the group as a whole, we've increased the spend close to 50%. Of course, we are increasing our rate of innovation, both by spend and by focus.
Yeah. Good. Finally, can you say anything about the M&A pipeline? I heard Anna talk about, you have a strong balance sheet, et cetera. Do you think anything could happen this year on the, of any significant size, that is?
Yeah, I mean, I've learned not to predict the timing of M&A, but I can tell you that we're working with a good pipeline, and we're working diligently on a number of opportunities there.
Okay, thank you very much.
Sure.
Thank you, Johan. I think time is running out a bit right now. I know there are a few more questions. I can see that on the screen. Please give us a call, after the call, because I think we need to hand back to Jonas for a summary of the first quarter and some final words. Please, Jonas, go ahead.
Absolutely. Thank you, Catarina. And thanks, everybody, for very good questions. Let us summarize some of the important highlights from the first quarter of 2016. We started the year with a positive organic growth, driven by two largest business units, as well as good performance from our professional business. Several of our business areas benefited from higher volumes, mixed improvements, thanks to our focus on active portfolio management and from successful product launches. Our European operations showed strong performance with higher earnings and margins, and a substantially lower and sustainably lower cost structure. Profitability in North America is being restored, and the stabilization of the cooking plant in Memphis is making progress. The team in Latin America continues to show good cost execution and to increase prices to mitigate the deteriorating market conditions.
Actions in small appliances are being taken and are on track, even though a full turnaround of this business will take time. Q1 was another good quarter with cost control and continued efficiency gain. With that, thank you very much, and look forward to talking to you all over the coming days and weeks, and also after Q2. Thank you, and goodbye.