Hello. Welcome, everyone. Good morning, good afternoon, good evening, and welcome to this presentation and discussion of the second quarter results for Electrolux 2015. With me today, I have our CFO, Tomas Eliasson, and our Head of IR, Catarina Ihre. This presentation today will obviously focus on our Q2 earnings results, toward the end of the presentation, I will make a comment on how we view the status of the GE acquisition. With that, let's begin the presentation. If you turn to the Q2 highlights page, Electrolux generated strong organic growth figures during the second quarter, with volume, price, and mix contributing positively. Additionally, all six business sectors posted positive organic comps. The organic growth for the group was 7%. The total sales increase was 19% in the quarter as there was significant positive translation effect.
The market conditions in both North America and in key European countries continued to show positive trends in the second quarter, supporting our businesses in those markets. In Latin America, the Brazilian market continued to deteriorate in the quarter. We reported a solid operating income of 921 million SEK, driven by Europe, Middle East, Africa, Professional, and Asia Pacific. Market conditions in Latin America remained difficult, and the group result was also affected by continued production inefficiencies in some of the plants in North America. Higher prices in the quarter offset continued currency headwinds, mainly in Latin America and the Brazilian Real. Our cash flow was seasonally strong in the second quarter and are on par with last year.
If we turn to the next page, as you know, we like to give some market highlights on what's happening in the marketplace each quarter in terms of product and launches. Here are two recent launches that I'd like to mention. The first one that I'd like to highlight is a new range of laundry products, which we have recently launched within Professional. This launch is getting very positive traction in the marketplace. It's called the myPRO Washer and Dryer, and it fills a significant gap between the domestic and the professional businesses, and serves many small businesses such as small hotels, restaurants, hair salons, sports centers, et cetera. This is a completely new line and a new segment, we call semi-professional, and creates a new market opportunity for Electrolux.
The second I'd like to point out is a new launch in North America, where the team recently launched the company's first connected appliance, called the Frigidaire Cool Connect Air Conditioner, which entered the market in June. This product is setting a standard and is the first in a series of new innovative products in the connected marketplace. It can be synced up to a smartphone and be controlled remotely through both smart appliance app. The app can be downloaded for free on both Apple and Google platforms. Our team's research has revealed that over 62% of room air conditioner owners want to be able to use their smartphones to remotely control their units. This air conditioner is now available nationwide in the U.S. Just a couple of launch highlights.
If you turn to chart, and look at sales in local currencies over previous several quarters, you can see that the sales development for the group in local currencies. We show here that over time, Electrolux has achieved positive sales growth, both organic and acquired. Since 2012, Electrolux has posted over 4% compounded annual growth in local currencies. Of course, that's in line with our strategic target to grow 4% annually. In this quarter, as noted, our organic growth was strong at 7%. Now, let's go into the business areas, and we'll start with EMEA. Electrolux Middle East, Africa, major appliances for that region continued to show positive organic sales growth, driven mainly by good mix and slightly higher volumes.
Market demand in Western Europe continued to increase, while demand in Eastern Europe was impacted by a sharp decline in Russia and Ukraine. Electrolux sales volumes in several key European markets continued to grow in the second quarter of the year. Our mix improved in the quarter due to the ongoing strategic focus on higher margin product offerings and sales of branded business. Our underlying results increased by SEK 227 million versus the prior year. This was mainly a result of improved product mix and lower cost. Our ongoing cost efficiency program is contributing positively to the results. The EBIT margin reached 4.9% in the quarter. Price pressure continued to have a negative impact on our operating income. Let's turn the page and look at the market development in Europe.
The European market continued to grow in the second quarter and was up by 3%, excluding Russia. However, including Russia, the market was down 4%. Demand in Western Europe increased by 4%, while Eastern Europe declined by 23%. We saw a positive market volume in the UK, Germany, Nordics, Italy, and Spain. Demand in Russia and the Ukraine fell by more than 40%. We expect the total European market to grow by 1%-2% for the year 2015, although certainly the development in Russia continues to be very uncertain. Now let's turn the slide and talk about our development in North America. Our operations in North America showed sequential improvement, with significant sales increases of the air conditioning equipment in the quarter.
The seasonal pattern for air con is good volumes in the first half of the year, while it's weak in the second half. Electrolux sales of core appliances also showed good growth in key product categories. Our earnings in North America continued to be negatively impacted by the product transition to comply with the new DOE energy requirements within refrigeration and freezers. Earnings were also affected by the ramp-up of the cooking plant in Memphis, which has been slower than anticipated and generated inefficiency. The program to restore profitability and increase efficiencies in production is well underway. As we have previously communicated, it will require most of the full year 2015 before actions will show full effect. Let's turn the slide and talk about the market development in North America.
Market demand for core appliances in North America increased by 5.3% in the second quarter. The year started out a bit slow, demand picked up in the three months of the second quarter. This means we have a year-to-date growth for the industry in North America of 3.4%. We believe the underlying market for appliances in North America is healthy, and we continue to see consumer confidence in the macro environment to be positive for future appliance demand. As such, we expect full year market growth in North America to be in the range of 3%-5%. Let's turn and go to Latin America. Market demand for appliances in Brazil continued to deteriorate in the second quarter, and demand in several other Latin American countries weakened. Our business in Latin America showed positive growth, mainly due to price increases.
Weak market conditions affected the mix negatively, as consumers have started to trade down and operating income declined somewhat year-over-year. Continued currency headwinds and higher inflation also impacted earnings. Despite the challenging market environment, the team has shown good execution as we're taking actions to adapt the cost base to the weaker market. We continue to increase prices to mitigate the weak Brazilian real. Let's turn and talk about our operations in Asia Pacific. Market demand in Australia is estimated to have been flat in the quarter, but demand for core appliances increased while demand for air conditioners declined. Demand in China declined, and Southeast Asia showed low growth year-over-year. Electrolux sales volumes were up in Australia, supported by well-received product launches, while sales in Southeast Asia and China declined.
Our operating income in Asia Pacific improved in the second quarter compared to last year, resulting in an EBIT margin of 5.2%. The higher profitability was mainly due to positive impact of good price management, also from lower cost and improved mix from new product launches. Now let's continue with small appliances. New premium products within floor care and small domestic appliances led to an improved mix in the quarter, but was not enough to offset weak volume development. Sales were mainly impacted by lower volumes in the U.S. and Latin America. However, our sales of vacuum cleaners in Western Europe continued to show quite good performance. Due to positive price and mix, our operating income improved year-over-year and was just below breakeven. Headwinds from currency continue to hit earnings.
We have a strong focus to restore profitability in this business area and are taking actions in several markets, including North America. Now let's turn to our professional business. Professional products continued to show steady development and benefited from continued volume growth, both in laundry and food service businesses, as well as growth in new markets and segments. Sales growth was positive in Europe, North America, Middle East and Africa. Operating income for our professional operations increased in the quarter as a result of higher sales and increased operating efficiency. We have now closed the acquisition of the Chinese professional dishwasher company called Veetsan. This acquisition is strategically important for our professional business and will contribute positively to grow our presence in that region. Now I'd like Tomas to give his thoughts about our financials and our cash flow in the second quarter of the year.
Please, Tomas.
Thank you, Keith. Let's start with the financial overview, as usual, and a few comments here on the main KPIs. Net sales growth was 19.1% in the quarter, but more importantly, the organic growth was 7%, where we had 0.1% in acquired growth and, as mentioned, 12% in positive currency translation effects on the top line. The EBIT ended at SEK 921 million with an EBIT margin of 2.9%. A year ago, the EBIT was SEK 63 million, and the margin 0.2%. We should point out here now that we, on January 1st, changed accounting principles, or accounting practice, I should rather say, where we stopped using items affecting comparability.
What we have done now in all the numbers that you will see in the report, and already in the report last quarter, is that we have restated the earnings numbers for this. Items affecting comparability is now in the comparability, so to say. In Q2 2014, we had a huge charge of SEK 1.1 billion, which took down the earnings down to zero. The, let's say, the old number for Q2 2014 was SEK 1,167, and the margin was 4.4%. SEK 1,167 is the earnings number that we will use on the bridge that will come soon on the next page here.
Q2 2014 was also the last quarter we had where we took a big charge as items affecting comparability. Cash flow was SEK 3.1 billion, basically in par with what we had last year, SEK 3.3 billion. More on that later. Okay, let's move to the bridge. This bridge shows what happened in the quarter, going from an earnings of 11.67 to 9.21. If we start with the organic part, the first two columns here, you can see that the organic growth of 7% is divided in 4.6% volume and 2.4% price mix.
The volume effect was minus SEK 120 million, this is, of course, a blend of all the businesses, some up, some down, et cetera. On the price mix side, the 2.4% top line effect, it came in with SEK 205 million on the EBIT line. Here, though, we have to stop for a second and break this apart a little bit more, because in this 205 number, we actually have a negative mix this time, which is a bit unusual. We have a strong positive price effect. The strong positive price effect, or the price effect, was SEK 382 million, and the balance was a negative mix. The reason for the negative mix was two reasons for that.
One is the very strong air con season in North America, that was good, of course, in a way. However, it comes with a lower, much lower margin. In a year-over-year comparison, it takes down the overall earnings. The other effect here was Latin America, where the customers are trading down, you have a negative effect on that. The price number of SEK 382 million here in pure price should then be compared with a currency transactional effect, which is minus SEK 330 million. Just as we discussed last quarter here, it's always a question of how can you compensate these negative currency transaction effects? We did not fully do that last quarter because it was so quickly, it was so swift.
This quarter, we have done that. SEK 382 to be compared with SEK 330. We do have some other numbers which we should comment this time as well. You have SEK 10 million here on the acquisition column, not much, but still. Other, minus SEK 195 million. What is that? That is the GE acquisition, both transactional and integration effects in the quarter. It's quite substantial in the quarter. We will discuss that as well a little bit more in detail in a few pages. That explains how we went from SEK 1,167 to SEK 921 in the quarter. Of course, we are year-over-year down, however, sequentially up. We're not through the earnings recovery yet, but well underway. Okay, next page. Currency effects.
As you can see in the quarter here, we have the negative transactional effect was SEK 330 million, and the translation effect was SEK 184 million positive, mainly, of course, due to the depreciation of the Swedish krona. The net of everything was minus SEK 146. Just freeze the currency rates for a moment here, and then do a mathematical exercise, what will happen for the full year, looking at these currency flows. The transactional effect, or let's say the total currency effect, I should rather say, is expected right now to be around SEK 1,200, so SEK 1.2 billion negative. We said SEK 1 billion last quarter, now it's SEK 1.2 billion.
Some of the currencies are moving a little bit in the wrong direction. Also, the positive translation effect with the Swedish krona is tapering off now during the second quarter. Net, net, the total currency effect will go up a bit. Of course, our ambition is to continue to mitigate the negative transactional effects for the full year, for the third quarter and for the fourth quarter. Okay, let's move again to the next slide, which is about the pre-closure transaction costs for General Electric Appliances. What you see here is that we now have a new estimate for the full year or for the full project, I should say, pre-closing here. We do have a delay, though, as you all know.
It's gonna take a longer time, and this means that the legal costs will go up, both because of the delay, but also, of course, because of the litigation, which is starting right now as we're speaking. This is not inexpensive at all. The integration as such, will then sort of be pushed forward in time. We, of course, slow down in the integration activities now, so we don't burn money unnecessarily. However, there will be a burn every month as well. The bridge facility, of course, continues to tick forward. That also has a cost every month as we go forward. All in all, we have an increase of for the legal cost of SEK 95 million. You see the total is SEK 395 million now.
We have an increase of integration costs with SEK 50 million, the total is SEK 230, and we have an increase of the funding cost with SEK 55 million, so it goes to SEK 295. It's a SEK 200 million pickup of cost, which is all dependent on this delay here now. The first two rows here will be on the EBIT line, as we have communicated previously, and the funding here is in the finance net. Just to remind you, what will happen here is that the funding for the bridge is capitalized, the funding cost is capitalized, and then we will start to depreciate it when we draw down the bridge, and then it will be amortized during the life length of the bridge.
You can see we haven't said how much we will have in 2015 and how much we will have in 2016, because we don't have any guidance on that. Let's move to the next page, the cash flow. Cash flow, basically on par with last year. Earnings or cash flow from operations, a little bit down, working capital a little bit up, and CapEx a little bit up. Other changes, basically flat. The net debt we haven't mentioned here, but the net debt is maintained on a low level. The net debt over EBITDA is on the lowest level since 2011, pre the CTI and Olympic acquisition. Balance sheet is in good shape.
Let's move to the last page, the cash flow. A strong quarter, as you can see here on this four-year overview, the second quarter is always strong, for seasonality reasons. We do have a strong air care season this year, which helps, but maybe even more importantly, we have a very good development in the inventory management. We have good results from inventory management and days in stock reductions here in both the first and the second quarter. I think that was the highlights, and let me then hand over to Keith again.
Okay, thank you, Tomas. We'll move forward, let's summarize the presentation and an outlook for Q3 and the full year. If I can guide you to the outlook page. Looking ahead into the third quarter and the full year 2015, we believe that growth will continue for Electrolux and for the appliance industry. We expect the positive growth trend in Europe to continue, although the development in Eastern Europe is, of course, quite uncertain. We anticipate continued growth in North America in 2015, supported by improving macro conditions with low unemployment rates, improved consumer confidence, and from the gradual recovery in the housing market. Latin America continues to be weak. Visibility, transparency is relatively low. We expect demand to remain weak in Brazil, also in the second half of the year.
Demand in Australia seems to have stabilized, and there may be room for continued market growth, driven by activity in the builder market in that region. In terms of price and mix, we expect a slightly positive net impact in EMEA, in North America, Latin America, and Asia Pacific in the next quarter. We expect raw material costs to have positive net impact in the third quarter and for the full year for both steel and plastics. As you'll note, we have raised our estimate for the raw material impact from greater than SEK 500 million to greater than SEK 700 million for the year. In 2015, we continue to reduce costs and increase efficiency in our operations. We are focused on initiatives to further improve our cost base.
We expect benefit from cost savings to approximate SEK 1 billion-1.2 billion for the year. Our CapEx is quite stable, and looks to remain in the range of SEK 4 billion for the full year. Before we turn it over to questions, I would like to make just a brief comment on the GE acquisition, Appliances acquisition. As I'm sure all of you know, on July 1, the U.S. Department of Justice filed suit to block the transaction. As we have stated previously, and as our legal team, I think, did a good job making clear during a conference call that we held following the DOJ's announcement, we strongly disagree with the DOJ's assessment of the acquisition.
We believe this transaction will provide consumers with a greater choice of products at more competitive prices, and that net, net, this will improve the dynamics in the marketplace, and we intend to, and will make our case in court this year. With that, I think we're ready to take questions. Catarina, I turn the call over to you.
Okay, good morning, everyone. I think there are a few questions already in line. Please, operator, go ahead.
Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad, and you will enter a queue. We have a first question from Andre Kukhnin, Credit Suisse. Please go ahead, madam.
Hi, it's Andre from Credit Suisse. Thanks very much for taking my question follow-up. Firstly, on the North American production issues, you very helpfully ran us through the details of it at last quarterly results. Could you just update us on whether the Anderson facility is now resolved or close to it, as I think you expected, and then how Minnesota and Memphis are going?
Yes. Just Andre, quick update, and I'll go, as you suggest, plant by plant. I'd say Anderson is pretty well stabilized, and it's not perfect, but it's pretty close to being pretty stable there. As expected, the Anderson plant is running well back up to speed. Similarly, actually, the St. Cloud plant is actually a little bit ahead of schedule and running quite well. The issue for the freezer plant, as we talked about, is, you know, our solution for the DOJ there is a bit over-engineered in terms of cost per unit, and we've got to get some more volume in that factory. On the refrigeration and freezer side, I would say that we are tracking on or ahead of schedule in terms of getting the plants stabilized.
In Memphis, you know, we're still in that long tunnel of starting up a greenfield plant. I would say that one as expected, gonna take us most of the year to get on track. I'd say the first two, tracking on or ahead of schedule, and for now, Memphis, as we expected, is gonna take the full year to get stable.
Got it. If I can just ask a follow-up on the GE deal situation. Could you tell us if Hotpoint was already offered as a remedy solution to DOJ pre the filing that took place on 3rd of July?
Yeah, I think, Andre, as you know, we are now literally in litigation, I can't make specific comments on anything we were discussing in terms of potential remedies.
All right, I appreciate that. Thank you.
Yeah.
Okay, thank you. Could I have our next question, please?
The next question comes from Andreas Willi, J.P. Morgan. Please go ahead.
Yeah, good morning, everybody. My first question is on mix. You mentioned the difficulties in Latin America as kind of the price increases start to push the consumers lower. Is that something that still gets worse now in the coming quarters, given the further price increases you have made and the industry has made? On the other side, in Europe, do you see a positive mix impact now there as the consumers start to buy some more appliances because they want to upgrade rather than because they break down?
I would say, yes and yes, Andre. As I say, we would expect continued, negative mix pressure in Latin America just because people don't have the money, and it's a, you know, it's in recession and, high inflation, high interest rates. So people are trading down from, you know, two doors to one door, from frost free to cycle defrost. We are seeing a negative gravity effect, if you will, of a weak market, and I expect that's gonna continue in the second half. Conversely, to your point, Europe, we are seeing a positive mix effect. We have seen a positive mix effect, and I would expect as demand continues to strengthen, that would continue as well.
My follow-up on the process, on the GE negotiations. In your email this morning, you mentioned that you're now proceeding to court. You didn't mention a potential settlement ahead of that. I just wanted to check that nothing's changed, that you either tried to settle before or go to court and haven't given up on a settlement.
No, nothing has changed. We haven't given up on anything.
Thank you.
Yeah.
Okay, thank you. Could we have our next question, please, operator?
The next question comes from James Moore, Redburn Partners. Your line is now open. Please go ahead.
Yes, good morning, everyone. Morning, Keith, morning, Tomas. Three questions, if I could. On the 3 DOE Memphis plants, could you help us size the financial impact relative to the last quarter? I think you talked about the majority of that $400 million swing last quarter being the effect. The swing's a lot less, it's $280 or whatever, but I'm wondering if that's helped by air conditioning and it's similar now, but what and how will that fade as we move forward? On China, the new management, could you talk about how maybe you're tackling that differently and what the plan is there? Finally, on EMEA, the savings, from Italy and the negotiation there and the French closure, are they coming to an end, or is there still more to come through?
North America, James, you know, without breaking it apart too specifically, certainly air conditioner had a positive, materially positive effect in the quarter, right? We won't see that in Q3 and Q4 because retailers stopped buying air conditioners after mid-year, right? They're still selling them, but they stopped buying them. We had a very strong Q2, which impacted positively the earnings in North America for the quarter. That won't happen in Q3, which means we have got to improve the performance of the core white business to mitigate that performance, that positive effect in Q2. You know, we're not out of the woods there, but I think we have good momentum. I wouldn't just kind of add one plus one.
We actually have to offset that significant positive impact in Q2 from air conditioning with better performance in the other product lines, including the refrigeration, and Memphis plant there. In terms of China, as you mentioned, we have a new team there, new team in Asia, a new team in China. They are obviously, we're appropriately applying tourniquets because of the, both the weak market. As you know, the demand in China is down about 6%, and because, you know, our launch was not successful due to the difficulties in distribution, specifically in retail. They are reassessing, one, adjusting, and then two, reassessing the business model there in China.
As you know, at some point, you just got to say, "Look, stop throwing good money after bad," particularly in a weak market. I'm happy with the team there in terms of what they're bringing, in terms of experience and knowledge of China, and retail, and builder business, candidly. We'll come back to you in the fall with an update on what our path forward is in China. At the moment, the primary work there is, you know, containing costs so that we don't have a dilutive effect, a material dilutive effect to the business in China.
In EMEA, and Tomas, I'll ask you to comment as well, but we are seeing the positive effects, certainly, of the restructuring that we've taken, both in France at the Revin plant, and in Italy. Tomas, can you add to that?
Yeah, sure, absolutely. I mean, we can give maybe some more details. We haven't talked about the manufacturing footprint program for a while, but, I mean, there is still around like SEK 700 million to come in 2015 and 2016 from the projects which we have announced over the last three to four years. I mean, the biggest ones are, still, what you mentioned, James, the Italian thing. We have the Revin plant in France. We also have the restructuring in Australia and also what we're doing in Sweden and Switzerland. So that's still to come in 2015 and 2016, and a bit back-end loaded. I'm meaning that more in 2016 than in 2015.
Yep, very helpful. Thanks.
Yep.
Can I have our next question, please?
The next question comes from Olof Anderholm, ABG. Your line is now open. Please go ahead.
Yes, hi, it's Olof from ABG. Could you maybe discuss small appliances a little bit and talk about the efforts you're making in terms of returning this business to profitability and what kind of time frame you have on that? Thanks.
Yeah. Small appliances, as you know, is a very seasonal business. you know, we make 70%, 80% of our earnings in the second half, so we need a good Q3 and Q4. Specifically to your question, what are we doing to improve the profitability? We've had really two big challenges in small appliances. One has been Latin America. As you know, we bring in, you know, 100% of our product in US dollars, and we sell none of it in US dollars. It's been, you know, the currency effect has been dramatic, and we're trying to mitigate that with price.
The difference between major appliances and small appliances is we have local manufacturers of small appliances in Latin America, manufacturing in Brazilian reais, so the ability to raise prices is much more difficult. That's one headache. The other big challenge has been our North American business has been underperforming, specifically the upright vacuum cleaner business. We've taken, and it's been announced, significant cost reduction efforts to adjust the cost structure of that business in North America, commensurate with the weak volume picture. On the flip side, I'd say that our business in small appliances in Europe is improving. We're gaining market share. Gross margins are expanding due to mix. The Ergorapido business, the Instant Clean business is doing very well in Asia. You know, we've got two cylinders working.
We've got 2 other cylinders that we need to fix. Our expectations are we'll see sequential improvement in the second half, in the black, for sure.
Great. Also, while we're discussing the smaller businesses, Professional had a great quarter. What are the drivers here? Is that organic growth, or is there anything else supporting the margins here?
Yeah, actually, yeah, organically, the Professional grew over 5% in the quarter, so, you know, quite good for that type of project, long lead time, project business. They had a positive effect from both volume, from price, and most importantly, from mix. They're continuing to have a good rollout of new products and expanding gross margins. They hit, as you probably see, 13% EBIT margin for the quarter. I think when you do apples to apples, that's a record level of margin for that business. Good as we've talked about, just good momentum there, and I don't see any reason that that business derails in the short term.
All right. Thank you.
Thank you, Olof. Could we have our next question, please?
The next question comes from David MacGregor, Longbow Research. Your line is now open. Please go ahead.
Yes, good morning, everyone. Keith, just a few questions. You talked about the SEK 700 million revised raw material guidance. Is there any way you could break that down for us between the major regions that'll contribute to that number? Secondly, you talked about the price weakness in Europe. I'm just wondering if you can break that down with some discussion about price trends in the East versus the West. Finally, if you could just comment on kind of price achievements in Latin America, if there's any way to quantify what you're doing on price and breaking that down a little bit for us, that would be helpful. Thank you.
Okay, David, let me try to do some of that for you. Okay. Raw materials, actually fairly pervasive, right? As you know, particularly when we talk about petrochemical-based raw materials, we buy them globally, we buy compressors globally. I would say it's a fairly even distribution of raw material impact, you know, and probably not appropriate to slice it too thin there, but pretty broad and evenly distributed impact of it. In terms of pricing in Europe, that's a good question because to your point, even though the net price effect in Europe for us was about 1% negative, it was quite positive in Eastern Europe, right? Which means that it was more negative in Western Europe.
It's probably closer to 2% in Western Europe and certainly was quite positive in Eastern Europe as we're raising prices to mitigate the devaluing ruble, et cetera. That's a good question. It's different. It's very positive in Eastern Europe and negative in Western Europe. Having said that, you know, Western Europe is more than offsetting that with the good mix effect of the product. In Latin America, yes, price was a significant part of the improvement. The majority of the 11% growth there, you know, more than half of it was price. And we're continuing to have to raise price in Latin America. Thomas, any comments?
I mean, these price increases, of course, are mainly driven by the need to mitigate the negative currency effects, as we have discussed. The negative currency effect, just to give you some flavor of it, the negative effect from the real was SEK 265 million in the quarter. Out of the SEK 330 million in transactional effects, SEK 265 million was the real. That was mitigated by the Brazilian operation. Here we could also chip in here that this is also one of the reasons why you don't see a drop through of the organic growth here.
If you just compensate on a Brazilian Real by Brazilian Real basis with price, of course, you get an inflated top line, but you don't get any drop through on the bottom line. The BRL 107 million we did in the quarter should be seen in that context. We actually mitigated BRL 265.
Yeah.
If we hadn't done what we had done, well, I mean, we would have been in a big loss.
All right. Thank you, Tomas.
Thank you.
All right, David. I think we have one more question in line. Please go ahead.
The next question comes from Lucie Carrier, Morgan Stanley. Please go ahead.
Hi, good morning. Thanks for taking my question. Just actually a couple of follow-up. First of all, on Latam, I sense that obviously you are increasing prices and trying to mitigate the cost base. Can you comment briefly, maybe on the behavior of your competitors, if they are following it or following you in those efforts by the same magnitude? Then two question regarding North America. The first one is, can you maybe quantify or maybe just qualitatively the impact of the issue in Memphis versus the impact you are seeing on your EBIT from the issues at your refrigeration and freezers plants? Just was maybe to have a sense of has the refrigeration and freezers are kind of fading, how we should think about the margin path?
The second follow-up on North America, considering those manufacturing disruption, can you comment maybe briefly on your market share, on the different or the evolution of your market share on the core appliances and maybe the relationship with the distributors considering your manufacturing disruption?
yes. Let me get the first question there on Latin America was around the.
Competition.
Competition. Yeah, got it. Yeah. It's as you know, it's a relatively level playing field in Brazil, right? You've got a couple of major players, you know who they are, and they both have a similar situation in that we've got local assembly production, but we bring in a ton of subassemblies, parts, components from Asia in US dollars. We both have the same exact situation, and therefore, we have the same arithmetic, same economics. I think people are all trying to do the intelligent thing. I don't think there's an imbalance in the competitive landscape in Latin America. I think in North America, to answer your question, what's the effect of the DOE versus Memphis?
I think combined, I would say roughly the combined DOE, so both Anderson and St. Cloud were probably had a similar negative effect as Memphis. Of course, now as the refrigeration and freezer plants are starting to stabilize, we still have the remaining drag of Memphis, which will continue through most of the year. Related to that, in your question around market share, we have gained market share in some key categories. As you probably would guess, air conditioning. We've gained actually in refrigeration, we've gained in dishwashers, we've gained in laundry, and we've lost some in cooking and freezers, because of the struggles we've had with production.
Thank you very much.
Thank you.
Thank you. I think there are a few more questions now coming in, so please, continue. Go ahead.
The next question comes from David Frost, Barclays. Your line is now open. Please go ahead.
Good morning, gentlemen. It's David here from BarCap. Two questions from my side, please. First, on the bridge, the contribution from the, from EBIT is negative on growth, the volume growth was quite strong. I suspect it has to do with the things that we already mentioned around DOE transition, et cetera. If you could just confirm that and perhaps also comment that the kind of the underlying, incremental margins haven't changed and remind us what we should put in the model for that at a group level. That's question one. The second question is regarding the market share gains that you're achieving in the U.S. this moment. I was just interested in hearing your thoughts of, against whom you're gaining share there.
Is that against Koreans, or is it perhaps, against GE? Would that be a reflection of, you know, some underlying, you know, I wouldn't say struggles, but perhaps, some people taking eyes of the ball in GE in light of the pending transaction, much in a way that we're seeing, for example, happening at Alstom's business, in energy here in Europe. Thank you very much.
Okay, let me try to tackle the second one there. Tomas, we can ham and egg the bridge volume question. Yeah, I would say again, it's a mixed picture of market share in North America, right? We've gained in some categories, and we've lost in some others. I don't think I can pinpoint, and I know, 'cause I know it's not accurate, that okay, we're losing, you know, we're gaining all of it from GE, or we're losing all of it to Whirlpool or LG. It's, you know, it's literally customer by customer and product by product. It's not a, it's all going, we're all taking it from GE because they've taken their eye off the ball.
I doubt they've taken their eye off the ball one bit, you know what I mean?
Okay.
I wouldn't, yeah, I think that I wouldn't conclude that at all. I think they're competing in the market as aggressive as ever, just like we are. you know, when the deal closes, we'll be partners, and until it does, we're competitors. on the bridge, Tomas, any comments on.
Yes. Yes, of course. Then the first question on, let's say, the negative drop-through on the volume side of the bridge, the short answer is yes, you're right. Of course. I mean, we have these issues in North America with conversion costs, with efficiencies and all that. Even though we have a very strong sequential improvement from Q4 and Q1 into Q2 in a year-over-year bridge, it's still a big number. We're not back on track yet. The more normalized gross margin level in North America is like 16%, 17%, and we're not there yet. That sort of has an impact in a year-over-year approach as we have in the bridge. That's correct.
Then you had a question on the incremental drop-through on the volume side as, and there's no real change. I mean, if you take away the inefficiencies, you know, and the productivit
Issues we have, volume drop-through for the group should be around 19%-20%, or well, 19%, something like that. It depends on how... It differs a bit between the sectors. Of course, if you have a big value add, in the business, like in Europe, you're more on 24%-25%. And if you're more outsourced, you're down on, like North America, on maybe 16%, 15%, 16% or something like that. Or and then Latin America and Asia Pacific, which are even more outsourced, are a little bit lower than that. But on average, for the group, around 19%, I would say. Volume drop-through normalized, everything else equal. That's very helpful. Thanks, gentlemen.
Okay. Thank you. Should we move on to our next question?
The next question comes from Domenico Gigliotti, Equita. Your line is now open. Please go ahead.
Good morning. Two question. I'm trying to understand the trend in volumes in Latin America, because from your comments, I understood that prices were explaining more than 50% of the organic performance, but you were also commenting on a negative mix. I understand that volumes were up in a negative environment. If you can elaborate a little bit more. The second question is just a clarification on the, if you can repeat the transaction, so your Forex guidance for the full year, if it's for transaction or it is also including the translation impact. Thanks.
Yes, I'll take the Brazilian volume question, and Tomas, if you can take the currency question. Yes, in Brazil, in the... Well, I should say in Latin America, there was a positive, you know, relatively low single digit positive volume impact. A couple of things. One is we had a quite good quarter in Chile and Argentina, so that helped us in the quarter.
Mm-hmm.
Also, there was some gains in some of the key categories in Latin America. A little bit, you have to look at sequential and year-over-year, right? When you look at year-over-year, now, finally, we are seeing, as you'd expect, the effect of the World Cup, right?
Mm-hmm.
particularly in June. There was a, you know, we had a gain there compared to that. The market data that we have for Brazil so far just runs through May. We'll get the June data in, I guess, in a few weeks. You have both a sequential change and a year-over-year change. The market's down in the 15% range in terms of sequential changes, and then we have a little bit of a year-over-year improvement due to the comp with the World Cup. Tomas, can you speak to currency?
Yes, the currency, the SEK 1.2 billion, or -SEK 1.2 billion that we mentioned a while ago here, that is both effect. It's both transaction effect and translation effect. The difference here, compared to when we talked about this 3 months ago, is that the transaction effect is up to SEK 200 million, from SEK 1.3 billion to SEK 1.5 billion negative. The translation effect stays at around +SEK 300 million. The difference here is, for a change, it's not the Brazilian real. That's still -SEK 900 million out of the -SEK 1.5 billion transaction for the year. There's no real change on that one.
It's other currencies which are getting a little bit worse here, like the Australian dollar, the Canadian dollar, the Chilean peso, the Colombian, and so on and so on.
Okay.
I hope that answers your question.
Yes. Thank you. Very helpful.
Okay, thanks.
Okay, I think we have room for a couple of more questions, so please go ahead.
The next question comes from David MacGregor, Longbow Research. Your line is now open. Please go ahead.
Yeah, just a question on North American margins. Tomas kind of got to this in his answer to a previous question, where he cited gross margins in North America under normalized conditions should be about 16%-17%. I guess the question would be, you know, what should operating margins be in North America under normalized conditions?
Okay, you're talking about EBIT margins, David, so you know where the business has been, right? I think that I don't see any reason why it shouldn't get back to where it was. As I think I've stated and we've stated previously, North America should pull the group average up.
There seems to have been a lot that's happened in terms of cost reductions and improved efficiencies along the way, and would that suggest that next time around, under normalized circumstances, they should actually be better?
When you say next time around, are you talking next quarter or are you talking next year?
Well, I'm talking about once you resolve the issues in North America.
Yeah, yeah, sure. Absolutely.
Is there any way you can quantify your expectations there?
Yeah. I mean, I expect by next year, North America will be, you know, pulling the group, meeting or exceeding the group averages.
Okay. You don't want to quantify that for us?
Well, you know what the group average target is, right?
Yeah. Thanks, Keith.
I don't know if it answered your question, but anyhow.
We don't give specific margin guidance by sector and by business.
I'm not after specific, I'm more just trying to get a sense of what is achievable in that area.
Yeah.
David, I'm not trying to be coy, actually. Just make sure I understand your question. Are you asking, do I think the operating margins in North America will get back to where they were and above the group average target by next year? I think my answer is yes. Are you asking for more than that?
I guess, I just seems as though you've got the issues with the DOE, you've got the issues with the Memphis cooking plant. In the meantime, there seems to have been some pauses of progress in terms of cost reductions. It seems maybe mix is going to help you here a little. It just seems like if you're able to hold on to those kinds of gains that you've achieved through those kinds of initiatives, plus resolve the DOE issues in Memphis, you know, your margins ought to be a little bit better next time around, but maybe I'm wrong about that. I just... That's what I was exploring.
Yeah, I think the margins will go up. Now it's just what's up, right? How high is up?
Right.
Yeah.
Okay, thank you.
Get back to the group and average and above, and then we'll improve from there, as would be my guidance.
Okay, appreciate the answer. Thanks.
Yeah.
Thank you. There is a final question in the line now. Should we take that one and then summarize?
Okay, sure.
The last question comes from Matthew Spurr, RBC. Your line is now open. Please go ahead.
Hi, good morning, everyone. Two quick questions just to help with modeling, please. The transaction effect that you said, $1.5 billion, how do we think about phasing over Q3 and Q4? Can you just give us a quick guidance on that, given you've mentioned that it's a few currencies that we might not be that familiar with? A second quick one, and apologies if you answered it on a previous call, but in terms of the break fee that you have on the GE deal, are you still on the hook for that if it fails for antitrust reasons? Thanks.
Yeah, I mean, the phasing of the transactional currency impact in the third and the fourth quarter, if I understand it correctly, was that the question?
Yeah, well, you've had SEK 700 already, and you're talking about SEK 1.5.
Yeah. No, we don't have any specific guidance on that, I mean, Q3 and Q4. Just, I mean, just straight line it.
Okay.
Yeah. Yeah.
Yeah. On the break fee, the answer is yes, we're on the hook for that break fee if this doesn't go through.
Okay, thanks very much.
Yeah.
Okay, thank you. With that, I would like to hand back to Keith, to summarize the quarter.
Thank you, Catrina, and thanks, everyone, for your questions. Just a quick summary of the highlights for the second quarter. Talk about growth, so organic growth for 7% for the group, and it's encouraging that all six of the operating units contributed positively toward that. As you noted, we have a strong, very strong performance in our European operations, with continued higher earnings and a more sustainable fundamental economic cost structure. Our businesses in Asia Pacific, in small appliances and professionally, all improved year-over-year. We had a substantially improvement sequentially in North America, which was partly driven, for sure, by the strong sales growth in air conditioning. We continue to be impacted by the transition costs that we've talked about here during the discussion and the continued ramp-up of the cooking plant in particular.
As you know, we have a program to restore profitability there. Price increases in the quarter compensated fully for the continued currency headwinds, good work by the teams there to mitigate those currency headwinds. In particular, as Tomas mentioned, this was evident in our Latin American operations. As discussed, we intend to close the acquisition of the GE Appliances before the year end. That's our intention, that's our plan, that's what we're aiming toward. With that, I'd like to thank everyone for listening in to the presentation. Appreciate your support and questions, and for those that have the opportunity, wish you to have a great holiday. Thanks very much.