Ladies and gentlemen, welcome to the Electrolux conference call. Today, I'm pleased to present Keith McLoughlin. For the first part of this call, all participants will be in listen-only mode, and afterwards will be a question-and-answer session. I will now turn the call over to the speaker. Please begin.
Thank you. Good morning, good afternoon, everyone, and welcome to this telephone conference related to the acquisition of GE Appliances. From Electrolux, with me today, I have our CFO, Tomas Eliasson, and our Head of IR, Catarina Ihre. As most of you have probably heard this morning, this afternoon, the U.S. Department of Justice will seek to enjoin or stop Electrolux pending acquisition of GE Appliances. We disagree with the DOJ's assessment, and we will vigorously oppose it in court. Appliance industry is more competitive than ever, and we believe a combination of Electrolux and GE Appliances provides the scale to compete more effectively in this global marketplace and will accelerate consumer innovation, which will improve the appliance industry as a whole and for consumers.
In September 2014, we announced the acquisition of GE Appliances, which is one of the leading manufacturers of kitchen and laundry products in the United States, for cash consideration of $3.3 billion. We believe that the combination of Electrolux and GE Appliances has very strong competitive merits, which will impact favorably on consumers. The combination is highly complementary as regards to brand positioning, consumer, and retail channels. As we are confident that the acquisition will close this year, we continue with the planning and preparation for the integration of the two companies. With that, I'd like to hand over to Tomas Eliasson for some comments on the synergies and on the funding. Tomas, please.
Thank you, Keith. Just a few comments here on the synergies and the funding. As we have previously communicated, significant cost synergies have been identified, and we expect the annual synergies to be approximately $350 million, mainly from sourcing, from operations, and from logistics. Synergies will be in full run rate year three, and at that point in time, they will be very accretive to earnings per share. On the funding side, the bridge facilities that we have in place have terms until September 2016, which means that the funding is well under control and financially very competitive. With that, back to you, Keith.
Okay. Thank you, Tomas. As some of you may know, this transaction has already been approved by regulatory authorities in several markets outside the U.S., including large markets such as Brazil and Canada. It's not unusual, as you know, different assessments between an acquirer and the Department of Justice are not infrequent, and many times go down a litigation path, but that does not mean a transaction will not be approved. The litigation process will continue now in the United States District Court, and as such, we still expect the transaction to be approved and to close in the year 2015, this year.
The acquisition will enhance our position as a global player in home appliances and will offer us an unparalleled opportunity to invest in innovation and in growth, to benefit not only consumers, but also retailers, employees, and you, our shareholders. As we previously communicated, there are significant cost synergies, as Tomas just mentioned, that have been identified and planned, and we expect the acquisition to be value accretive fully from the first full year. Both Electrolux and GE have a strong interest in closing this transaction, as you can imagine, and both companies are now working to obtain the necessary regulatory approvals. Before I turn over to Catarina, as some of you may know, we had an additional open call yesterday with our legal team to discuss more of the legal aspects of the case.
Before we go into the Q&A, I think it's fair to say that now we are in the initial phase of litigation. As such, Thomas and I won't be able to discuss details about the case itself. That's why we had the call with the lawyers, because attorney-client privilege, they can be more open. Thomas and I, unfortunately, won't be able to answer details about the case, but, of course, we can talk about the business and the strategy and how we're managing things or any other question that you might have. I refer you to that call. Hopefully, some of you, or hopefully many of you had a chance to listen in on that one. With that, let's open it up for questions.
Let me turn it over to Katarina to moderate that. Katarina, will you, please?
Yeah. Good morning, everyone. We'll now open up for a Q&A session. I would ask our operator to open up for the first question, please.
I remind you to press zero-one to ask a question. We have a question from Mr. Andre Helfenstein from Credit Suisse. Please go ahead.
Hi, good morning. Yes, it's Andre from CS. Thanks for taking my question. Could you just run through the potential range of outcomes with the DOJ outside of litigation? Can you still settle it in with concessions? What are the options that are available to you on that front?
Yeah, I think, Andre, I think I can answer the first part of the question. The second part, I won't be able to get into too much detail, but the answer is yes. Often, and I think as was referred yesterday when the US Airways, American Airlines case came about, the exact same situation occurred, where the DOJ opposed the transaction, and sought to enjoin it or stop it through filing suit. That case was settled prior to going to court between the litigants, both the DOJ and the defendants. That, that's not unusual that it, that it gets settled prior to court.
The other option, of course, is to go to a neutral judge who's gonna evaluate the case on its merits with objectivity, and then for him to rule based on both parties' cases. Those are the really two options, is the case gets settled before we walk into a courtroom, and/or we go into court. It can get settled even during the court process, as you know, or ultimately, the ruling by the judge. Those are the three scenarios. I, unfortunately, I won't be able to get into the specifics around what we would do or wouldn't do.
As you can imagine, we are interested in this deal being approved, and we're gonna be rational and reasonable as the DOJ is, perhaps they could solution here, that's speculation.
Got it. Thank you. Just a quick follow-up. The cited 90% market share in cooking, do you agree with that? Can you give more detail on that?
No, I won't get too much detail, but we don't agree with their numbers. We will show numbers that are different than that. Having said that, you know, if you even take Electrolux out of the equation, in the builder market, as you know, Whirlpool and General Electric are the two largest players by far. That's what they were referring to. It, you know, the majority of that 90% is already Whirlpool and General Electric, 'cause they're the primary players in the builder market. That's what they're referring to.
Got it. Thanks very much.
Yep, thank you.
Okay, could we have our next question, please, operator?
The next question goes to Mr. David MacGregor from Longbow Research. Please go ahead.
Yes.
Hi, David.
Hello, everyone. Keith, I guess I understand you can't discuss specifically the, sort of the terms of the deal here, but maybe I could ask you a question just on the overall process. It just seems this Justice Department analysis isolates and centers upon the builder's purchase of cooking products. Where they may have made a critical mistake in their analysis is the builder's purchase decision is typically not with respect to a cooker, but rather, you know, a bundle of four to six appliances, which includes refrigeration, laundry, dish, I guess sometimes microwave ovens, but it also includes, you know, a level of service that supports the bundle purchase.
I guess for comparison's sake, we isolate and center upon laundry, the builder faces a similar situation where your competitor has a very large corresponding share in washers and dryers, while Electrolux GE would have a substantially smaller share, similar to what your competitor would have in cooking. Was there any discussion with Justice on how the builder actually purchases a bundle of appliances? And maybe why a separate analysis around cooking or laundry or refrigeration, for that matter, was just simply misguided?
Yeah, I would say, David, that certainly there were discussions around that. I think it was difficult for the Division, the Antitrust Division to get the nuances of the business that, you know, because you've been around it a long time, we've been around it a long time. I think it was difficult for them to get the nuances of how the business actually works, in general, and also the competitiveness of this industry. I don't think they got that at all, you know, when you think about how competitive this business is. I think that that's what we've got to either educate them on and/or prove if we have to go down that case, down that path. We had discussions about it. We tried to be as informative as we could.
Candidly, they didn't get some of the nuances of the business, so we have to explain that in more detail. Fortunately, now we can do it more openly. I mean, As my general counsel in the U.S. says to me, he said: "Look, this is the best thing that can happen, because now we're gonna have a real judge with real data, with real evidence, with real discovery." You know, up until now, it's been kind of a one-sided discussion, right? We talk, and they listen, and that's all you hear, right? You don't hear anything back, so.
Right. Then a second question, just what % of home buyers, when offered the, good, better, best option, actually go for the, better or best?
That is a difficult question to answer because it obviously, probably depends on the price point of the home, right? Obviously. You know, in the more the mid to higher end of the housing market, you know, you get traded up, of course. I think that's also a good question that I don't think they got the nuances of.
I'm just wondering if, you know, for the majority of consumers, choice isn't more important than price.
No, no, sure. Yeah, yeah. I think, you know, it's, you know, choice, price, brand, service, they're all important, but to your point, it's different weightings depending on what price point you're at.
Last question, is there any U.S. tariff protection on cooking products?
No.
Okay. Thank you very much, and good luck.
Thank you. Thank you, David.
Okay. Thank you, David. Can we move on? Just a friendly reminder to put one question at a time, please.
Our next question goes to Mr. James Moore from Redburn. Please go ahead.
Yes, good morning, everyone. I have a series of questions, and I suppose I'll try and put it into one and come back in. What gives you confidence that the deal will be approved in 2015, when the DOJ have rejected your arguments? I suppose that's the nub of it.
... Yeah, let me, let me start with, I think, the part of the question, I think, is the timing question, James, if I understand it right, and then also the content. Let me talk about both of them. Of course, we've got everybody that we talk to, all the people that do this for a living, say this whole process could run anywhere from 2 to 6 months. Communicating up to 6 months, just so we don't, you know, say 2 or 3, and then they wind up being longer. All the cases that have happened, obviously, it's not a criminal case, this is not a normal U.S. drag on for years kind of process. It's a relatively process. 2 to 6 months is the average, is the guidance we've gotten.
Up to six months, it's July 1st and whatever it is today, we've got six months to get. That's why we say close and, or be completed. The reason why we're confident is that, for the same reasons that we've been stating all along, maybe just talk about the big picture stuff, right? The, of course, a little bit of the irony of DOJ's decision yesterday is that the entire industrial logic for this deal, you know, for Electrolux to pursue it and also for GE to sell it, is that the appliance competitive landscape has changed dramatically over the last several years and has intensified dramatically over the last decade, right?
From what used to be a series of regional competitive landscapes to a much more intense global competitive landscape, where scale and leverage and efficiencies and innovation are required. You know, the irony of this whole thing is that's our case. Our case is, the industry's changed. It's gotten more competitive, it's gotten more global, and you can't win by being a small, regional player. You've got to have scale, you've got to have leverage, you've got to get efficiencies, you've got to lower your cost in order to fund any innovation to bring to the consumer. That's the, you know, that's the basis for the case. That's why we're pursuing this thing.
Honestly, that's, I think, not to speak for them, but I think that's why GE is selling the business and said: Look, we can't, you know, win by being a primarily a U.S. player, you know, a regional player. Of course, that's gonna be a key part of this thing. The notion of... It was interesting, I read, you probably, I don't know if you I'm sure you have read as well, the DOJ case, and there's a line at the very end that says something very strange.
That says, you know, "Although, Electrolux has searched, there are some cost efficiencies here by doing this, we can't quite see it." Of course, we said, "What?" You know, we've spent the last several months explaining to you about that is the value creation part of this thing, is the synergies that Thomas referred to earlier. The other, I guess, part of the case, of course, is we've got examples. We've got a real live example called Whirlpool-Maytag, 10 years ago, right? 13 years ago, in which, you know, the Koreans were, you know, a relatively small part. They were coming, and that was the case. Their case was, the Asians are coming. We can show lots of data, as you know, that says not only where have they been coming, they are here, right?
They've increased market share considerably in all categories. It's not just in refrigeration and laundry, but also in cooking. We've got lots of data. Again, what I think we're fortunate in the U.S., the U.S. system, the regulators, the antitrust regulators don't get to decide. They do not get to decide. The DOJ didn't decide yesterday. They just said that, look, they're gonna have to try to oppose this thing, but we both have to now convince a judge, a neutral judge with evidence that supports our respective positions and conclusions. They'll get to do that with their data, and we'll get to do that with our data.
What we're confident in is that we think that once we get to present our facts, to conduct discovery on both sides, right? They just right now, the only discovery that's happened is the Justice Department has discovered on, against us. We haven't been able to do any discovery, or cross-examination. Once we go through a, you know, a legitimate, open, objective process, that the facts will substantiate this thing. I mean, it's not gonna be hard for me to get on that stand and say, "Yes, this industry is very, very competitive and gotten more competitive over time.
It's very interesting. Can I just follow up with your comment about Whirlpool-Maytag and ask whether you feel the DOJ feels any duty of care about the precedent there of a 45% combined market share and 70% in laundry, when you've got maybe 35% and 50%-ish in cooking, I guess, when actually it's under the Obama administration and previously was under Bush, and there's been criticism of this administration that the last was not really adhering to the law of antitrust. Do you sense any duty of precedent care?
Yeah, again, I think from the, from the current administration's staff, no. I think from a judge who looks at data, and facts and evidence, I think the answer is yes. You know, what our attorneys have told us from the beginning, I think I've said this to some of you and probably most of you from the beginning, is on the merits, on its merits, every qualified that we can talk to, and I think that General Electric has talked to, has had the same advice, which is on its merits, this case should go through. However, and they always said however, caveat was always, however, you know, this is a political system that we can't predict that part. I think, candidly, I think we've walked into that a little bit, but that's okay.
You get through that political side into the back into the objective reality here in a courtroom. To answer your question, no, I don't think the DOJ cares about what happened in a previous administration. However, I think the judge is gonna look at that from a fact-based standpoint.
Very good. Thank you very much.
Thank you, James. Thank you. Could I have our next question, please?
The next question goes to Mr. Andreas Michalitsianos from JP Morgan. Please go ahead.
Good morning. The question I have is regarding remedies and the discussions, because it seems like the issue is in a relatively concentrated area, particularly the trade channel for cooking, where you probably add $200 million of revenues to the overall situation, which seems like something that could be addressed. Were there no remedy discussions so far or no successful remedy discussions? I'm just kind of surprised we got to this stage before this could have been addressed.
Yeah, Andreas, I'm not gonna be able to talk specifically about the specific remedy discussions, but you can see in their claim where the concentration areas that they're concerned about are. You know, it's very specifically about cooking and builder. There have been discussions around potentially remedying the situation. Candidly, obviously, they haven't been successful so far. We're still open to discussions, and we hope that they are. We'll see what happens here over the next couple of months, but we're gonna, you know, we're gonna try to not be emotional here. We're gonna try and do what's in the best interest of all parties, including our customers and our shareholders. We'll see.
Thank you.
Our next question goes to Mr. Peter Lawrence from JP Morgan. Please go ahead.
Hi, Keith. I was going to question you or ask your opinion on paragraph 37, so I'm glad you preempted me on that. It does seem a very weird closing argument from the DOJ, given that you've been very public about what the efficiencies have been. Just moving on from that, can you comment, please, on your combined market share in Canada, where the deal has already been approved, whether that is in line with the figures that have been quoted for the U.S. market? Secondly, with the Whirlpool/Maytag precedent, do you know if the DOJ at that stage was also referring to the HHI values and the uplift from the merger? Thanks.
Yes, I. Hi, Peter. Just not, I'd rather not get into specific numbers now because I'm gonna have to get into all these things, obviously, in a court session. The Canadian market concentration is not completely dissimilar to the U.S., as you know.
Yep.
It's a little bit different because, as you probably know, the GE brand is actually licensed to, you know, their joint venture partner, Mabe, in Canada. It's not GE company themselves in Canada. It goes through Mabe. It's a little bit, you know, complicated or a little bit different from in that regard. Peter, what was the second part of your question? I'm sorry.
Sorry, just on the HHI values, for the Whirlpool/Maytag, because presumably the uplift there would have been far in excess of what they're quoting for you and GE on the ranges.
Yes, I don't have those in front of me, but I recall they were enormously high, when particularly when you think about laundry in general, and at the time, vertical axis, top-load laundry in particular, were outrageous numbers, I mean, off the chart kind of numbers. Yes, these numbers are lower than what some of those numbers were at the time.
Okay. Thank you.
Yep.
Our next question goes to Lucie Carrier from Morgan Stanley. Please go ahead.
Hi, good morning, guys. Thank you. Thank you for taking my question. Just a couple of follow-up, actually. The first one is actually on the process. Are you now saying that you're going to court, or you are still in the process of evaluating potential negotiation with the Department of Justice? That would be my first question. The second one, should you consider potentially a deal with GE, but not the entire of GE?
Okay, let me start with maybe the second question. I think, candidly, it would be very difficult for us and for GE to consider acquiring part of their appliance business, if that's the question, if I understand the question. I don't see a scenario where, for either party, it would make much sense to, you know, split the baby here, right? I think the transaction from a GE standpoint and from our standpoint is kind of, it's the appliance business or not, and it wouldn't make sense, I don't think, for them, and probably wouldn't make sense for us to do a partial acquisition. I don't think that's a probable scenario.
To answer your first question. Of course, the DOJ yesterday filed a lawsuit against Electrolux to block the transaction, to enjoin the transaction. Of course, we're gonna defend ourselves in that case. We're right now that starts the, you know, the day 1 process of getting prepared to go into court. We're gonna, like you would in any court process or proceeding, litigation proceeding, we're gonna go into a phase of discovery, which, you know, won't be exceedingly long, but I think will be illuminating. Which is we'll get to see all of the documents, all of the information, all of the depositions that the DOJ has taken, right? Up till now, we've seen nothing.
We've seen they have not shared any of that, and they don't have to, up until now. They do. We're in a court proceeding. We have complete and full discovery process, and we'll take depositions, and we'll do cross-examinations, you know. Now it becomes an open process, and again, that's why our lawyers actually, they said, "Look, we're better off in this environment than the kind of blind environment we've been in." We'll get prepared to go to court, and there'll be a court date set, and so I'm not gonna guess exactly what that date will be. You'll know as soon as we do. It'll be public information. We'll get prepared for that. What happens...
My understanding, what happens normally is, you know, the dialogue that goes on between the two respective parties, and between the Department of Justice and Electrolux, to see if there's a solution that can resolve the matter without going into a courtroom and being decided by a judge. You never know. You can't predict that. You know, our only, our primary initiative right now is get prepared for court, get prepared for litigation, do discovery, get all the facts. Of course, we'll be also in discussions with the DOJ to see if there's a solution outside of court before we actually walk in the courthouse door, if that answers your question.
Thank you. Good luck, guys.
Thank you, Lucie. Could we move on to the next question, please?
Our next question is from Mr. Anders Kärre from SEB. Please go ahead.
Hi, Anders.
Hi there. I have most of my questions have been answered, but basically, I'm wondering if the objections or the sort of problem area is really only defined to the what has been discussed here at this call, i.e., the cooking, concentration on cooking to in the contracted channel, or are there other areas as well that are very important right now?
Yeah, I'd. That's, as you probably may or may not have had a chance to read yet, Anders, those are the areas that they highlighted in their case, in their suit. I'm just repeating what they said.
how big a part of the total, you know, combined business is this for you?
How big is the builder business and the cooking business?
Yeah, the cooking business into the builder channel.
Yes. Yeah. Again, you know, the cooking business, I don't, again, I don't want to get into specifics, 'cause that's partly their case, right? I would say the cooking business is an important business both to us and to GE. The builder business is a very important business to the GE business. It's much, much smaller, to Andreas' question earlier.
Yeah
... for us.
Yeah, all right. That sounds like, yeah, a very big thing. Okay, fine. Thank you.
Thank you.
Thank you, Anders. Are there further questions?
We have a question from Mr. Tim Schuldt from Mirabaud. Please go ahead.
Hi there. Thanks for taking my question. It's Tim Schuldt from Mirabaud, at JP Morgan. Keith, there's been some press reports that you are sort of entering a sort of exploratory dialogue, potentially around your tenure, as group CEO. Could you maybe just clarify to people on the call what your intentions are over the next 2 years with respect to your role as group CEO? Thank you.
Yeah, I have to say, maybe to quote Mark Twain, that the reports of my death have been greatly exaggerated. you know, I think the best I can come up with, or, and my communications folks can come up with, is that, you know, the press got mixed up the process that's underway in North America, which we are doing a search in North America. You guys know that. At the moment, I got a couple of the hats that I'm wearing. In addition to the group CEO hat, I'm also leading the North American major appliance business, and we're in a search. Yeah, we are looking, I am looking for a successor, but not for the group. I'm looking for a successor for North America. I think that's what triggered that report.
They got that mixed up, so, you know, a little bit of a flurry last week. I got lots of friends, well, lots of calls from lots of friends, but we got that sorted out. You know, I don't want to speculate on, you know, what the tenure is. Of course, that's ultimately, not my sole decision, right? I got a board that's, that has a responsibility for the overall leadership of the company. I'm committed to this company right now, and I'm gonna continue to stay that way.
Very clear. Thank you.
Good. If it answered your question, then we could move on, and I think we have another, 5, 10 minutes, before we close up.
We have another question from Ms. Andreas Willi from Credit Suisse. Please go ahead.
... Yes, thank you. Just a quick follow-up on the U.S. business, kind of XG, whether that's proceeding as planned and whether there is any delays as a result of this to turning around the business in terms of the three plants that have been causing issues, and if you could update us on that'd be great.
Yeah, I think unfortunately, as you know, we're in a blackout period. We're in a quiet period, I won't be able to answer that question with any specificity, I don't think. Tomas, Catarina, is that right?
Yes, that's correct.
Yes. Yeah, we'll obviously, we'll update you. We'll report here in a couple of weeks. We'll give you full details on the progress of North America then, if I can ask you to hold that question for till we're out of the blackout period.
Yeah, sure. Thank you.
Yeah, just to remind, we will report the Q2 results on Friday, July 17, and we will have an opportunity also then to have a discussion, both on these issues, but also on the Q2 results. Please, operator, if we could have the next question.
Our next question is from Mr. James Moore from Redburn. Please go ahead.
Yes. Hi, everyone. Just a couple of follow-ups, if I could. I just wonder whether you know, whether the HHI numbers shown in the docket that was filed yesterday are inclusive or exclusive of Kenmore? Just a little technical one there. The other question, well, I'll try it. I suspect it's something you can't really talk about, but I'm thinking of possible concessions, and I'm thinking whether we should think in terms of production facilities, like maybe a LaFayette, Georgia, which could be carved away from Appliance Park, or whether we should think in terms of brands of a Hotpoint. I guess that's a difficult question, but is there any light you can shed on that debate?
Yeah. I think, the best we can determine, on the first question, James, is that those HHI numbers are manufacturer share numbers, not brand share numbers, so they would include the Kenmore brand. As you know, Whirlpool successfully argued that that shouldn't be included in the numbers in their case, you know, and of course, we have the same argument because we don't own that brand. That's what it looks like, which inflates the numbers, as you know. You're absolutely right, I won't be able to answer your second question.
Okay. Just to be clear on the first, so this is a double standard from the DOJ, applying a different measure to what they did in 2006.
I don't know if that's true, to be fair, because I think the HHI numbers there were even higher, also included the Kenmore brand in laundry. I think they successfully argued the point that ultimately the DOJ did not oppose, as you recall. Just to be sure, I think the original numbers did include that, and they were even higher. I'm going off of, you know, recollection at the moment, so don't hold me exactly to that. I think it's a similar situation. They just argued that they shouldn't be included.
Okay, thanks. Very helpful call.
Okay. Thank you, James. Do we have any further questions online?
We have one last question from Mr. David MacGregor from Longbow Research. Please go ahead.
Yes, thanks for taking the follow-up. To what extent is the SEK 350 million of synergies at risk if this deal doesn't close, by the 31st of December, or doesn't close until maybe the 31st of December? How much would that 350 number change?
Yeah, I'll start it. Tomas, I'll ask you to jump in, too. I think the SEK 350 is the year 3 annualized run rate, David. I think the thing that's gonna be impacted is if it, you know, versus if it closed right now versus 4-6 months from now, is more the timing. I don't think the absolute amount changes much. Tomas, please talk to that, if you would.
That's absolutely correct. It's just a question of timing. I mean, the biggest part of the 350 is the sourcing operation and the logistics, and it's just a matter of when do you start? Three years from wherever we start, we will have the full run rate. The difference in timing here, July versus December, no, it does not change where we will be at the end of this three-year period when it comes to the annual run rate.
Thank you very much.
I think by that we have. If there are no further questions, we'll hand over again to Keith to sum up.
Yeah. Okay. Thank you, Catarina. Thanks, everyone, for your interest and your participation. I think this deal makes sense. Makes sense from a customer standpoint, makes sense from a consumer standpoint, makes sense for, candidly, employee standpoint, and of course, from a shareholder standpoint. I think, we think the strategic and industrial logic is compelling, ironically, it's all about the synergies. It's all about a changed global competitive landscape that requires scale and leverage to win. That's what the deal is about, we're confident that when we get the opportunity to present our case in a neutral, fact-based environment, that would become obvious, and we're cautiously optimistic that we'll get that done either in court or before court.
We go straight ahead, and we intend to get this deal done this year. Thanks very much. We'll talk to everyone soon. Bye now.
Thank you.