Good day. Welcome to the AB Electrolux Investor and Media Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Keith McLoughlin. Please go ahead, sir.
Okay, thank you. Good morning, everyone, and welcome to today's telephone conference, which is related to GE's termination of the agreement for Electrolux to acquire General Electric Appliances. With me today, I have our Chief Financial Officer, Tomas Eliasson, our Head of Investor Relations, Catarina Ihre, and I also have our Head of Corporate Communications, Martin von Arronet. As most of you have probably heard this morning, General Electric has notified Electrolux that they have decided to terminate the agreement in which Electrolux had agreed to acquire the appliance business of GE. This termination is effective from today, therefore, the acquisition will not be completed. The proposed acquisition was announced on September 8, 2014. As you know, the U.S. Department of Justice announced this summer that they would seek to stop the deal and consequently sued both Electrolux and GE.
We are right now in the final phase of the regulatory process and would have expected a court decision sometime in the next month or two. Electrolux has made extensive efforts to obtain regulatory approvals and regrets that GE has terminated the agreement before a court decision has been rendered. We consider the settlement proposals that we have offered to the DOJ that they were reasonable and would have addressed their competitive concerns. Unfortunately, these proposals were rejected by the Department of Justice. Although we are disappointed that the acquisition will not be completed, this, of course, doesn't alter the strategy, the goals, or the ambitions of the company. We are confident that the group has strong capabilities to continue to grow and develop its position as a leading global appliance manufacturer. The strategy to grow profitably in segments, in product categories, channels, and emerging markets remains.
Our operations in North America have proved to be strong on their own merits, with good organic growth and a recovery in earnings during 2015. Major Appliances North America has a strong presence in the U.S. under powerful brands such as the iconic Frigidaire brand and the premium Electrolux brand, and we are confident that this position will be maintained and strengthened. With that, Tomas, would you give us an update, please, on the immediate financial implications of this decision today?
Thank you, Keith. For the fourth quarter, we estimate the total transaction and integration cost to be approximately SEK 175 million. This is, of course, nothing new and basically in line with our previous guidance. For the full year of 2015, the total transaction integration cost, in the income statement will be around SEK 580 million. Now, on top of that, we will expense the capitalized funding cost, the bridge funding cost of SEK 225 million during the fourth quarter or now in December. This amount, the SEK 225 million, will be accounted for in the finance net.
Of course, we should also mention that, under the transaction agreement, Electrolux is required to pay GE a termination fee of $175 million under certain circumstances. GE has requested a payout of this amount. Although this is, of course, significant amount, it doesn't change the very strong financial position of the company. We continue to have a strong balance sheet and a very good cash generation. Back to you, Keith.
Okay. Thanks, Tomas. Of course, we will continue to grow, and we'll grow profitably, both organically and through acquisitions. As you know, we have an M&A process that Tomas and I and our general counsel co-chair. We'll continue with that process. As we move forward, we will continue to focus on running a strong global business as one of the world's leading appliance manufacturers. Catarina, I think with that, we're ready to take questions and answers.
Yeah, good morning, everyone. Please, operator, could we have our first question, please?
Thank you. If you'd like to ask a question at this time, please press star one on your telephone keypad. We will take our first question from Andreas Kukhnin from Credit Suisse. Please go ahead.
Good morning. Yes, thanks for taking my questions. I guess, Keith, just on the last part, you said that still more acquisitions or other deals to do. I presume there were some other assets that you did not pursue because of focus on this deal. Could you just share with us what's kind of likely, what's reasonable to expect on, say, a 12-18 month time horizon? Just a quick one on the breakup fee. Are you going to contest this? Because the circumstances are obviously slightly unusual, that there isn't actually a final decision, but the deal, GE's decided to terminate.
Let me start, Andre, talk about the breakup fees, so the RTF. You know, it is in the agreement and under certain conditions, it's payable. We obviously got notified just a little while ago, we're going to review that. No, we're not making a statement today that we're gonna contest it. We're just saying we're going to review the conditions under which it's payable. Of course, we'll follow the agreement that we have.
Got it.
On the M&A process, yeah, of course, as we have talked about, we look at you know, literally dozens of properties, about every, I don't know, Tomas, every month, every six weeks or so, we have a review. Of course, the transaction with GE, given its magnitude, put a, you know, a ceiling on what we could do in some other areas. Now, of course, with this changing, that ceiling gets lifted. Also, as you know, and you see from Q3 and year to date, the cash generation of the company has been quite strong, and the balance sheet, I guess, Tomas, is as strong as it's been in a long, long time.
I think both those things open up other options and possibilities for the company from an M&A standpoint. Tomas, any other comments on that?
No, the balance sheet is back to 2011 level, so it's very strong. Of course, we don't, we can't and shall not give any specific guidance on what targets to expect, et cetera, et cetera, other than that. Of course, we've been holding back quite a bit during this process, and now it's sort of now we can open up to look at larger assets. Of course, we don't have any specific guidance on what and when.
Yeah.
Got it. Thank you. Would you consider buyback as a possibility to remedy?
Of course, we're gonna look at, you know, what are all the options to do with the cash for the company and make recommendations to the board. Of course, the board will make those decisions relative to the deployment of the capital and the cash between dividends and buybacks and acquisitions and reinvesting in the business. We'll obviously gonna do that with an eye on maximizing per share value. Again, the board will make those decisions.
Thank you.
Thank you.
Right. Could we have our next question please, operator?
Our next question comes from Lucie Carrier, Morgan Stanley. Please go ahead.
Hi, good morning, gentlemen. Good morning, Catarina. Just one question from my side. Can you maybe comment on the process that had led to the situation we are today, specifically maybe on the GE side? I have to say, it seems a bit surprising, considering that the trial was still ongoing. Can you make some comment maybe on either what happened during the trial that led to the decision?
yes, Of course, I have to be careful here because that question is probably best answered by General Electric. I can tell you what, you know, they've said to us, and I think, they'll be public about, which is their view, and we agree with this, is that the government took a very static, unrealistic, view of what is clearly a dynamic, highly competitive market, but they had a very different view of it. We think we had very good arguments, and as you say, the trial hadn't concluded, and the judge hadn't decided the case yet. I think for sure, there remains uncertainty, right? There's no certainty either in the decision or in the timing.
As you saw in GE's release, that they, after 15 months, which was the entire contract duration, they felt like it's best to move on and explore other options for their business. That's what we know.
Thanks. Maybe can I have a follow-up question on the previous one regarding M&A? You said that obviously you've been holding back due to the GE process. When you think about, you know, can you maybe explain which are the geographies or the business segments that you have seen M&A opportunities that you were holding back, or where you want to go now in terms of your strategy for M&A?
Yeah, let me just talk. Of course, I can't be too specific on that, but certainly, we've communicated that we see opportunities, and we have interest to grow the company profitably. We have an organic strategy that when we see a property through M&A that would accelerate that strategy, and that's a good financial fit on top of a strategic fit, we would pursue that. You know that, you know, part of the strategy is to grow the key elements of the portfolio that bring high margin, good profitable growth. You know that's includes professional, you know that part of it, includes small domestic appliances. You know, from a geography standpoint, we have, we're underrepresented in certain emerging markets, so there's opportunities there.
If there's a technology that could help accelerate us in key directions and dimensions of the group strategy, we would look there. I'd say it's a pretty open lens that we're looking through. For sure, it's gonna be connected to the strategy. It's gonna be a good, tight, strategic fit. It won't be some, you know, I'll go off the reservation or go into someplace new that we're not confident or comfortable or competent to execute.
Thank you.
Okay, could we have our next question, please?
Our next question comes from Martin Wilkie from Citi. Please go ahead.
Good morning, it's Martin Wilkie from Citi. Just a question on how you now think about the North American markets. You have been making some organic investments there in the past, The Home Depot channel, the Memphis factory. Do you have a plan B in North America? Should we expect some organic investment to try and get into some of the markets that the GE deal would have given you? Just in terms of how you think about North America and the investments you might make there. Thanks.
Good question. The answer is absolutely yes. The North American market, as you know, is, and the U.S. in particular, is one of the largest appliance markets in the world. It is growing based on demographics and household formation. We have a good, strong position, and we are and will be investing heavily in the market to participate in that growth with more R&D, more brand building, more channel and segment expansion. Yes, you should expect that we would not at all back up here in North America, but rather to accelerate forward.
Okay, thank you.
Okay. Could we have, our next question, please, operator?
Our next question comes from Natalia Mamaeva from Carnegie. Please go ahead.
Good morning, Catarina. Good morning, Keith and Tomas. A question from my side. When it comes to M&A, GE Appliances was quite a large part or quite a large acquisition. Would you believe that your next acquisitions will be in the same size? Or do you think you will go for smaller ones, maybe a couple of them, but the smaller ones?
Yeah, that's a, that's a good question, and of course, very hard to predict, 'cause that's the one thing you know about M&A, is you can't predict what property is gonna become available at what time and at what price. I would say that, you know, we know, kind of what our bandwidth is or firepower is, if I can use that expression from a balance sheet standpoint. Having said that, we know that, you know, and you can see through this, most recent work, that if we see an opportunity to make a transformational move, for in the portfolio, in the direction of the company, we're not afraid to do that. Again, It'd be very hard to answer that question, until we have the specific communications to make.
You know, I, our general notion is, you know, making a couple, one to two, three, you know, digestible acquisitions, kind of on a, you know, every 12 to 18 months. We've been averaging about one a year right now, you know, so maybe one to two, maybe up, sometimes three. If we see a, you know, a larger, more transformative play, as part of the portfolio, we certainly would look at that.
Thank you. When it comes to North America and your organic growth there, do you think that you will ramp up your investments there now, and also, what do you think, which areas will you invest more in your product lineup, or will you pursue more geographical expansion strategy?
Yeah. You know, our strategy, as you know, is to expand and grow profitably in our existing core markets. That's Western Europe, North America, Australia. Those are our big core markets that we wanna continue to grow and invest in. North America certainly will be part of that, and that it would be across products, segments, channels, and brands. We'll go across the entire spectrum of the business. In addition to that, we are looking to expand geographically. There are certain regions where we are underrepresented, and that's a growth opportunity for us. As you know, we've expanded over the years quite significantly in Latin America, specifically Brazil, Chile, Argentina. There's more opportunity in Latin America for us.
There's opportunity in, we've expanded, as you know, through acquisition in the Middle East and Northern Africa, and that provides a base to expand further into Africa and the Middle East. We have opportunities in Eastern Europe to grow. Again, we'll hopefully once things settle down in Russia and the Ukraine. There are opportunities for us, as you know, in Asia. I think both within the core markets, there's growth opportunities that we'll invest in, and there's also geographic opportunities for us that we've got to look at. Again, you know, with an intelligent approach so that we grow not just with hollow revenue, but with profitable growth.
Thank you.
I hope that answered your questions. Could we have our next question, please?
Our next question comes from Johan Eliason from Kepler. Please go ahead.
Yeah, hi, this is Johan Eliason, Kepler Cheuvreux. I was just wondering, I didn't catch the beginning of the call here, but did you say that one of the main reasons for GE to cancel the deal was that they were running out, the contract had expired, and they would risk the penalty fee? Was there another reason for them to cancel this agreement? Thank you.
Johan, make sure I understand, that they would run out, and they would cancel the penalty fee. Is that, was that your question?
No, no, that they risked-.
Oh.
Losing the penalty fee if the contract ran out, that's why they canceled the agreement.
Yeah. No, I don't, I don't think that was the, the reason. I think it was just, you know, we signed the agreement, as you know, September eighth, two thousand and thirteen.
Mm-hmm.
2014, sorry. Got this, you know. We started in 2013, but we signed the agreement in September 8, 2014. It was, we expected this thing would take, you know, 9 months± . We said: Look, let's make it a year plus 3 months. The agreement was for 15 months, which brought us to today.
Yeah.
September 8, 2014 to December 7, 2015. The, you know, the agreement actually terminates today, and it would have to have been extended. You know, they decided, you know, for their own reasons that, you know, given how long it's taken and remaining uncertainty and timing and decisions, that it's best for them to move on, you know. Of course, we're disappointed in that decision. We regret that they've taken that decision, given where we are in the final phase of the regulatory process and before a court decision was rendered. They're within their right to do this.
Yeah. Do you have a view on the potential buyer of this business?
I do not.
Oh, okay. Thank you.
Thank you.
Do we have a-- thank you, thank you, Johan. Do we have any further questions?
As a reminder, please press star one to ask a question at this time.
If there is no further question, I would like to hand back-- Well, yeah, one more coming in. Sorry.
Okay, we will now take our next question from Austin Earl from Marshall Wace. Please go ahead.
Hi, good morning, everyone. I just want to know in terms of the, of your last statement, whether this was always known that the termination would be 15 months?
We knew that that was the agreement was for 15 months. We've known that all along. What we certainly didn't know that they would exercise that, given where we were in the state of the trial, that was relatively recent news.
When was the 15 months made public?
It was in the documents. I don't Tomas, do you know if those, if that was in the public domain or not? I don't know.
The termination fee.
No, not the termination fee...
The 15 months.
the timing, the timing of the agreement, the 12 plus 3 months. 12 months plus three.
Yes, Austin, you can still.
It was mentioned during the court proceedings, but not as a start.
Okay.
Okay. Thank you very much.
Yeah.
Do we have any questions from media coming in? Well, should we move ahead with the next question then, please?
No problem. We will now take our next question from Andre Kukhnin from Credit Suisse. Please go ahead.
Yes, thanks for taking the follow-up. Just in the light of this, technicality of 15 months running out, if there is the ruling, in court and it's favorable, is there any scope to come back to this?
Actually, the trial will end now that they've terminated the agreement.
Oh.
The trial will not continue going forward. It'll, I think the legal counsel from both sides will be in court today, advising the judge that the agreement has been terminated.
Oh, I apologize. I didn't realize. Okay, thank you.
Yep.
Do we have any further questions, please?
We will now take our next question from James Moore, from Redburn.
Good morning, everyone. I think my questions have kind of been answered. I'm running out here, so can I ask, did Jeff Immelt notify you personally, or were you contacted by GE's lawyers overnight?
Yeah, this is overnight, this was a contact from one legal department to another, James.
There were no further reasons given. Given we're right at the back end of a court case, it does feel like this was a point of, well, let's just take the money, it's a coin toss, and we've got this risk situation, and the appliance markets are doing quite well. Were there no other reasons given?
No, the only reasons that I know are the ones that, you know, I've stated, which is what they've told us and are public about.
Okay.
At GE.
Very disappointing. Okay, thanks.
Can I just make a clarification here on the RTF? Going back to the question from Kepler here on the RTF, just so that it isn't any misunderstandings on this one, that the RTF as such, and the agreement as such, was not expiring today automatically. It's not like that. I mean, it could have gone on for 15 months, or sorry, another three, four, five months, whatever, and the RTF question, if you put it like that, would still be alive. It was not a question of getting or not getting the RTF, just to avoid any misunderstandings.
Right.
Right. Do we have any further questions, operator?
Yes, we will now take our next question from Matthew Spurr, Royal Bank of Canada.
Hi there, Matt Spur from Royal Bank of Canada. Two quick ones. Will any of the remedies that you offered, will you ever sort of make that public, what the scope of those were? The second one was on M&A, you mentioned about various geographies, and if I'm right at the start, you also mentioned about some technology that you could look at. What sort of technology do we typically look at here? Is it sort of mainly around the sort of connectivity and smart appliances side of things, or are there sort of some sort of fundamental change in appliance technology that some small companies may have on the horizon, something like that? Thanks.
Yeah. Let me start with the second part. The technology, again, is a, as you say, is a fairly broad domain. It could be product technologies, it could be, you know, professional technologies, it could be cooking, cleaning technologies, it could be, you know, even aftermarket technology. There's lots of opportunities there. It's not, it's not meant to be a very, very narrow statement. It's just, you know, as we look at our business, you know, and, and that also includes, to your point, you know, digital, the digital world. It's not, it's not at all meant to be narrow. It's actually to be quite broad, 'cause lots of opportunities here for innovation, 'cause ultimately, that's what we get paid for.
Repeat for me the first part of your question?
You made some potential offers to the DOJ in terms of remedies. Would you ever make those public, or tell us what? There was a lot of speculation, I guess, about whether you sell this brand or that brand, and just be quite interested to find out what was offered.
We probably won't get into the details of those confidential negotiations. you know, I would say that we had made several settlement proposals to the DOJ. We thought they were reasonable, and we thought that they directly addressed some of their competitive concerns. Unfortunately, they rejected those.
Can I ask?
Yeah
whether on their point on when they first published the objection was about the HHI. Would your remedies have got that HHI anywhere down to near what they sort of have as their guidelines as acceptable?
Yeah, of course, you know, the remedies had to impact the competitive environment, which they calculate. That was the essence of the case, right? The essence of their case was, look, when you calculate the HHI in this product category, in this segment, in this channel, so pretty narrow definition. But when you do the arithmetic on the HHI, so the market share squared and added together, as you know, it's a high number, and that was their case. Of course, our remedy proposals to them were to show that, look, we could remedy that, you know? We could bring that down substantially.
They, the difference in the case was we were taking a more, and we think, very good arguments to say: Look, you can't look at the appliance industry statically, arithmetically, and rearward-looking. You've got to look at it in terms of what's happening in the marketplace, dynamically and competitively and going forward. Of course, they disagreed with that.
Okay, thanks very much.
Yeah.
I think we have time for two or three more questions. Please, operator.
Thank you. We will now take our next question from Andreas Lundberg from SEB. Please go ahead.
Yes, hi there. I have a couple of questions. First, I'm sorry to come back to this, to try to really fully understand the contract that you had with GE, the 15 months or 12 plus 3. Was it so, correctly understood, if correctly understood, that it actually terminated today, and you would need the, need to extend it? It was a negotiation whether or not to extend it or to terminate it. Was that the situation?
Okay, I can take this one, Keith.
Yeah, please.
It did not automatically run out today. They had the right to cancel it as from today, but it wasn't an automatic cancellation as such.
Okay, I understand. When it comes to the North American situation, do you feel like you have lost momentum with sort of waiting for this deal to be, well, as it turned out, to be not approved? Or have you been, you know, investing as you would have done otherwise?
Yeah, I would say we've been running a big part of the pre-integration work was done by a large group of separate, dedicated people. The line organization, was, you know, I wouldn't say they weren't impacted at all, but they weren't heavily impacted, right? The line organization's been running the business, whether that's sales or production, or R&D. I don't think we've lost, well, we have not lost momentum. We've got good results, which you saw, which you posted, we posted in Q3, that's probably the best indicator that the business has got a quite good momentum in the marketplace.
All right. Great. Thank you.
Thank you.
Thank you. At this stage, I would also encourage media to pose any questions should you have. Please, operator, could we have our next question, please?
We will now take our next question from Christer Magnergård from DNB. Please go ahead.
Hi there, good morning. I have a question regarding your strategy when it comes to growth opportunities in M&A going forward. If you're about to change how you have worked previously, look at the previous years now. We have Olympic Group that was, timing-wise, not, maybe not the best time to buy it. Then you had the launch in China, which didn't really work out. Now the GE Appliance deal that unfortunately crashed. Is there a different way that you can work, or that, so that you can prevent all these kind of hiccups going forward, or will you continue to work in the same way as you have done earlier?
Yeah, actually, specifically to your question around M&A, let's just tick through those, right? To your point, you know, Olympic in the Middle East with a couple of revolutions there, probably timing wasn't too good. CTI in Chile and Argentina was excellent. A great company with great management and great results. You know that we acquired a company in China for the professional business called Veetsan. That's doing very well. Double digit, high margin business and puts us as the number one professional dishwasher company in China. We made the acquisition to expand a very strong cooking business in Australia with an outdoor cooking company called BeefEater. Again, going very well, very good earnings and returns there.
The, the fifth one, as you know, the GE one did not work out based on what we discussed today. The, you know, I wouldn't mix up operational issues with M&A, right? The, the M&A picture in total has been reasonably good. Of course, with this, and we're disappointed about today's decision, but, you know, we'll move forward, and I think we'll continue to have a good, strong, robust M&A process.
Okay, thanks.
All right, thank you. I think there is one final question on the call right now, please.
We will now take our last question from Karri Rinta, Handelsbanken. Please go ahead.
Yes, thank you, Karri Rinta, Handelsbanken. Maybe a question on the competitors in the U.S. have now had 15 months to sort of prepare for if the outcome had been different, if you had actually joined forces with GE. During the trial, you have mentioned that in the retail channel, you have seen some aggressive moves by Samsung and LG. I guess, I would like to ask whether the competitors have actually moved forward in expectation of this, both in terms of the retail channel, but maybe more so in the contract channel, i.e., have you started to see that you maybe lose business, or that your customers are inviting bids from other suppliers as well, due to the fact that the customers were anticipating this deal to be completed?
Yeah, I think in general, and as we've talked about, both at trial and publicly, you know, whenever there's a large play in motion, you know, all the competitors are looking to obviously not have that go so smoothly. They, you know, try to get another floor spot on the floor. You know, I think that has been happening, continues to happen. You know, as you can see from our results, we've been able to maintain our own there, in that environment. Specifically to your question in the contract channel, actually, we've had very good growth in that channel, and we see that growth continuing.
I don't see any stopping, you know, any blocks there in terms of our ability to continue to grow in the contract builder channel. I'd say a tough competitive environment, but no, you know, no big stoppers. You know, again, if looking at the results, you can see that that's the case.
All right. Thank you.
Thank you.
Before we conclude, I, again, would like to invite media to post any questions, should you have.
As a reminder, sorry, please press star one to ask a question.
If not, I would like to hand over to Keith for some concluding remarks.
Okay. Thank you, Catrina, thanks, everyone, for joining the call. Of course, as I mentioned, you know, we're disappointed and we regret that GE has taken the decision to terminate the agreement. Having said that, they're within their right to do that, and both companies have worked hard for the very hard in the last 15 months to try to get this thing done. We both knew that it was going to be a difficult case. We knew that from the beginning. I would say that probably neither side anticipated it would take this long. It's taken a long time. Having said all that, we, you know, Electrolux moves forward. We will move forward, and we'll use this emotion and energy to propel us forward. It's a large...
The appliance business, as you know, is a very large global market that's growing. We believe that Electrolux is well positioned to participate in that growth with innovation, and new products and new channels and new segments and new markets. Based on execution, that will enable us to continue to generate substantial free cash flow to be reinvested in return to the shareholders. We continue to execute the strategy and focus on our customers and bring more value to our customers every day. I'd say we're disappointed, but we're certainly not defeated. The future for Electrolux is bright. I would say stay tuned for exciting future developments you can expect from Electrolux. Thank you very much for calling in.
Thank you.
That will conclude today's conference call. Thank Thank you for your participation, ladies and gentlemen. You may now disconnect.