Good morning, ladies and gentlemen, and welcome to the first quarter results of Electrolux. Let's begin the call today with the CEO.
Good morning, everyone, welcome to this presentation and discussion of the first quarter results 2015. With me today, I have our CFO, Tomas Eliasson, and our Head of IR, Catarina Ihre. Let's begin the presentation. If you turn to the next slide, it has Q1 highlights. We started this year by generating total sales growth of 13.5%. This was a result of significant positive translation effect. The organic growth was slightly negative, about a half a percent. Our businesses in Europe, Latin America, and Professional showed positive organic growth with continued price mix contribution. European demand for appliances was stable in the quarter. Our focus work to reduce cost and improve profitability continues and is sustainable in Europe. In North America, the market for appliances had a slow start to the year.
Our earnings were negatively impacted by the major transition required to meet the new energy standards within cold categories. The ramp-up of the cooking plant in Memphis also impacted earnings negatively. Our operations in Latin America, Asia Pacific, and Professional showed good performance. On all group, EBIT declined and was 516 million SEK, corresponding to a margin of 1.8% in the first quarter. Earnings continued to be negatively impacted by currency headwinds. Let's look at some market highlights, and I'll just bring to your attention two of them. The Frigidaire Professional brand, a high-end sub-brand of the Frigidaire family, will occupy a strategic place in the North America portfolio. It is priced between the broad consumer segment of Frigidaire Gallery and the mass premium segment of the brand Electrolux.
Frigidaire Professional has great potential to drive profit for North America by serving as a crucial step up on the upgrade path for consumers within the market. Also, in the quarter, we had our largest product launch in Australia in the last 7-10 years. With this launch of new products, we bring state-of-the-art cooking technology and products under the Westinghouse brand in that market. They comprise cooktops with new features such as power buttons and cool touch doors, accessory packs for customers who want to personalize their ovens. There's also steam cooking products, which is becoming extremely popular in Australian households. More than 400 retailers attended a launch event in Sydney and Melbourne in March of this year. On the next chart, if you look at the sales in organically.
In this chart, we see the sales development of the group in local currencies. We show here that over time, Electrolux has achieved positive sales growth, both organic, and you can see the acquired bars, around 2012, 2013. Since 2012, Electrolux has posted a 4% compounded annual growth, as you know, related to our strategic target. Let's now look through the business areas, starting with EMEA. Major Appliances, Europe, Middle East, Africa, achieved organic sales growth of 3%, driven mainly by strong mix and stable volumes. Market demand in Western Europe continued to increase, while demand in Eastern Europe was impacted by a decline in Russia. Electrolux sales volumes in several important markets, such as Germany, the Nordics, Benelux, and Iberia, continued to show growth in the first quarter of the year.
Our mix continued to improve in the quarter due to the strategic focus on higher margin products and sales of more branded businesses. Our results increased by SEK 229 million versus the prior year, mainly as a result of that improved product mix and lower structural costs in the business unit. Our efforts to reduce costs and enhance efficiency are contributing positively to our results, which resulted in an EBIT margin in the quarter of 4.3%. Unfavorable currency movements and price pressure continued to negatively impact operating income. Now let's turn the page and talk about the market development in Europe. The European market increased in the first quarter and was up by 1.2% for the total market. Demand in Western Europe increased by 4%, while East Europe declined by 10%.
We saw positive shipment growth in the U.K., Germany, Nordics, Italy, and Spain, while demand in France was flat. We expect the total European market to grow 1%-2% in 2015, although the development in Russia is certainly not very clear. Let's turn the slide and talk about the development of North America. Our operations in North America had a slow start to the year, with sales volumes being impacted by the seasonally weak market and lower sales of air conditioning equipment. Our earnings in North America continue to be negatively impacted by the transition of the product ranges within refrigeration and freezers. This transition is a consequence of the new energy requirements imposed during the second half of 2014.
Earnings were also affected by the ramp-up of the cooking plant in Memphis, Tennessee, which has been slower than anticipated and generated inefficiencies. A program to restore profitability and increase efficiencies in production is fully underway. It will require most of 2015 before actions will show full effect. During the quarter, our North American operations also took a SEK 46 million charge in costs related to the GE acquisition and integration costs. Let's turn this slide and talk about the market development in North America. Market demand for core appliances in North America increased by 0.9%, so almost 1% in the first quarter. Although a slow start to the year, 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.
We expect full year market growth in North America to be towards the lower end of the previously communicated range of positive 3%-5% for the full year. Let's go to Latin America. Market demand for appliances in Brazil deteriorated in the first quarter, and demand for other Latin American countries continued to be weak. Our business in Latin America posted a slight growth of 2% in organic sales, mainly due to price increases, which mitigated the lower sales volumes. Operating income declined somewhat year-over-year, as weak market conditions affected both volumes and mix negatively. Continued currency headwinds and higher inflation also impacted earnings. Despite the challenging market environment, the team showed good performance as we are continuing to take measures to adjust the cost base to the weakening market.
Now let's turn this slide and talk about our operations in Asia Pacific. Our operating margins in Asia Pacific improved in the first quarter compared to last year. The higher profitability was mainly due to positive impact from volumes, but also from lower product and transportation costs. We have, in addition, started to see positive effects of our initiatives to adapt cost. Market demand in Australia is estimated to have declined in the quarter due to the significantly lower demand for air conditioners, while demand in China and Southeast Asia showed some improvement and increased year-over-year. Electrolux sales volumes were higher in Australia and Southeast Asia, while volumes for us declined in China. Positive country mix in China due to lower sales in Q1, was offset by negative product and customer mix in Australia.
As a side note, the BeefEater integration in Australia is proceeding well and according to plan. Let's continue with small appliances. New premium products within the floor care and small domestic appliances helped improve mix in Q1, but was not enough to offset the weak sales volumes. Sales were mainly impacted by lower sales volume in the U.S. and Latin America, driven by a seasonally weak quarter. Our sales in small domestic appliances, however, continued to show growth in Europe. Due to the lower volumes and continued price pressure, our operating income declined and was just below breakeven in the quarter compared to the same period last year. Headwinds from currency and the strong U.S. dollar also impacted this operating unit. We are committed to the ongoing cost reduction initiative to restore profitability in this business. Let's turn to our professional business.
Professional products showed a solid performance and benefited from growth in strategic markets and segments. Sales growth was positive in Europe and emerging markets. Operating income for our professional operations increased in the first quarter as a result of higher sales volumes and increased operational efficiency. In the quarter, Electrolux announced the acquisition of Veetsan, a leading professional dishwasher producer in China. The acquisition is still subject to approval by the regulators and authorities. Now I'd like Thomas to give his thoughts about our financials and our cash flow in the first quarter of the year. Please, Thomas, if I could turn it to you.
Absolutely. Thank you, Keith. Let's start with the financial overview, as usual, on the next page. Reported sales was up more than 13% in the quarter, but as you heard, all of it was due to a positive currency translation effect, and organically, we were basically flat or just below 0. Earnings were down compared to last year, but as you have just heard, the spread is quite big here between the various business areas. Some businesses are performing very good, some are actually at an all-time high, and others have challenges, both sequentially and year-over-year. You heard the results here from the 6 business areas, and maybe I can talk a little bit about the 7th business area, group common cost.
As you saw in the report, group common cost is less than expected. The group common cost, or the number you see, is made up of two parts. It's the, let's say, underlying group common cost, and it's the GE Appliances, the transactional cost, the legal fees, basically. Now, these costs are not linear over the year. They vary quite a bit, both of them. It's normally pretty low at the start of the year, and more during the second half of the year. We can talk a bit about the full year guidance here. The full year number is not changing. The group common cost is around SEK 750-760 million, and the transactional cost is expected to be around SEK 190 million.
The full year number is SEK 940, SEK 940-ish, which is basically spot on what the consensus is on the market. What you see here in the first quarter is a little bit of less activity, less projects, et cetera, in group common cost, and you see less transactional cost, but the full year number is unchanged. If you would just take the full year number and take it linear by quarter, you would end up on something like SEK 230, SEK 240 by quarter. As I mentioned, it doesn't really work like that. Over to cash flow, seasonally weak, down a bit, driven mainly by lower earnings and a little bit more than CapEx.
Let's then move to sales, the sales and earnings bridge on the next slide. Let's start with organic growth. First column, volumes were down 4.5% in the quarter, mainly driven by North America and Latin America and small appliances. If you see the EBIT drop-through, or the negative drop-through, is only 16.4%, which is a good number. The explanation is, of course, that we have very good positive leverage in the European business and in the professional business, which mitigates not all, but a very large proportion of the shortfalls in other business areas. If we then look at the next column, price mix, it contributed with 4% on the top line and SEK 297 million to operating earnings or EBIT.
If you compare this number, the 297, with a negative transactional effect of SEK 422 million, you can see that this quarter, we have not fully compensated for the currency with price mix, as we have done over the last 8 or 9 quarters. The reason for this is that the currency change, the depreciation, has been so quick, so it hasn't been possible to compensate in time when it moves like this. For the full year, of course, the ambition is to have price mix in line with a negative currency transaction effect. In the third column, you can also see that we had a rather strong positive currency translation effect of SEK 144 million this quarter. Let's dig a little bit more into currencies on the next slide.
Here, you can see the major currency effects in the quarter. The summary of the currency movements in this quarter is really that the U.S. dollar is basically strengthening against all currencies, with very few exceptions. As usual, it's the Latin American operation, both major and small appliances, that had to take the biggest hit. In total, $422 million. If we talk a little bit about the future here for the second quarter, at these rates, we see about the same effect transactionally, which means around $400 million, so a negative $400 million in the second quarter. For the full year, the number will not be that much different from the 2014 number.
It will be minus SEK 1.3 billion negative transaction. If you add all this together, you of course, you see that the transactional effects, they cool down a bit during the second half of the year, but it's quite natural as we get into better comps during the second half of the year. The translational effects, which were SEK 144 in the quarter, will, with these rates, probably be around SEK 300 million for the full year. If you take the transactional SEK 1.3, reduce it with SEK 300, you end up on like SEK 1 billion in negative currency effect. Let's move page and just do a quick update on the transaction costs for the GE Appliances acquisition.
We did an adjustment last quarter, partly driven by the currency. These costs are in U.S. dollars, so of course, they become more expensive. This time, we have taken the total transaction cost up another 40 million SEK, and it's on the legal side, that we foresee this increase. The rest of this metric is, metrics is unchanged. Of course, legal costs are all dependent on how the legal proceedings are going and the antitrust work and all that. We haven't closed yet, so we don't know, really. It is a guess, but we have reason to believe that it will go up a little bit more.
On the funding side here, we haven't changed the number, but we would like to take the opportunity to once again remind you that the funding cost, the bridge cost, the SEK 240 million, is capitalized, as we told you last quarter, and it will be recognized at closing. As soon as we close and we draw down the bridge, we'll get these numbers straight into the finance net. Okay, let's move pages then and look at the cash flow. Q1 is a weak quarter, minus SEK 383 million this year, lower than a year ago. Of course, we have lower earnings, a little bit more of CapEx. Everything under control. Here, let's... Oh, sorry, yeah.
What I should mention here, when we talk about cash flow, cash flow, of course, is closely connected to the net debt, and the net debt is, of course, closely connected to the finance net. You saw in the quarter that the finance net was minus SEK 66 million, which is quite a bit down compared to what it usually is or what it was a year ago. We have positive one-offs in the quarter, in the finance net of various kinds. I won't go into the details. I would rather say that the run rate if you take off those positive one-offs, it's not SEK 66 million, it's more like SEK 100 million or between SEK 100 million and SEK 110 million per quarter.
This means that if you look at the full year, we're talking about 400-ish kind of number, like SEK 400 million negative in finance net. Still, SEK 400 million is way below what we had last year. Last year, we had close to SEK 600 million. Of course, the difference is that the average net debt is down. The cash flow has been good over the last three, four quarters. We've made a nice recovery last year in terms of cash flow, net debt came down. The interest rate, as you all know, are very much down year-over-year. We do have a lower finance net this year, but it's not gonna be as good as minus SEK 66 million every quarter, because that would imply that we would end the year SEK 150 million, and that's not true.
It's gonna be about SEK 400 or below SEK 400, negative. Okay, let's look at the last page, which is then just the cash flow over the last three years, three years plus one quarter. Just wanted to show you this one to underline that Q1 is the weakest quarter of the year, just after the Christmas season, and all that, sales down, they pay your suppliers and all that. However, Q1, as you can see here in the graph, is always followed by the strongest quarter in the year. Q2 is always a very, very good quarter. With that, I would like to hand back to Keith again for a summary and conclusions.
Okay, thanks, Thomas. Nice job. Let's move on and try to summarize this presentation with outlook and summary for Q2 and the full year of 2015. If you go to the outlook page, looking ahead into the second quarter and the full year, we believe that growth will continue for Electrolux and for the appliance industry. We expect a positive growth trend in Europe to continue, although the development in Russia is quite uncertain. We anticipate continued growth in North America in 2015, supported by the improving macro and consumer confidence, but also by the continued gradual recovery in the housing market. Visibility in Latin America continues to be opaque or low. We expect to see demand to further deteriorate in that country during the year.
In terms of price and mix, we expect a slightly positive impact in North America, and a positive product mix impact in Europe and Asia Pacific in the Q2. Prices continue to be under pressure in Europe, but will be offset by better product mix. We expect raw material costs to have positive net impact in the second quarter and for the full year, driven primarily by steel and plastics. In 2015, we will continue to reduce costs and increase efficiency in our operations. We expect benefit from the cost-saving initiatives to approximate SEK 1 billion-SEK 1.2 billion for the year. Our CapEx outlook will remain stable in the range of SEK 4 billion for 2015. Catarina Ihre, with that, I think we're open for questions.
Absolutely. Good morning, everyone. By this, we open up the floor for a Q&A session. Operator, please, could we have our first question?
Yes, thank you. If you have a question, you have to press 0 and then 1 on your telephone keypad. You have to press 0 and then 1. Our first question is coming from Mr. Andre Kuklin from Credit Suisse. Please go ahead, sir.
Good morning. Yes, it's Andre from Credit Suisse. Can I just ask about North American performance, double-check a couple of things? Firstly, in the result that you reported of SEK -57, am I right to have heard that there was a SEK 46 million cost related to GE within that number?
SEK 46 million costs, those were the transaction costs, Thomas, that, we talked about at the group level in legal. Is that right?
The integration cost, which is in the North American results.
Okay, there was another SEK 17 million transaction cost in the central line.
On the central line. Yes, exactly. We booked the integration cost in the North American business area, and we booked the transaction cost in group common cost.
Got it. On top of that, was there a cost related to the new efficiency improvement program in response to the DOE and Memphis issues? Any indication of that?
no, I wouldn't say really in Q1. I would say, actually, there'll be a little bit of that in Q2, but we're, you know, we won't call that out as a separate item. We're obviously bringing in resources to get the business back where we need it to go, but it won't be a material item from your perspective.
Got it. I guess just very eager to confirm that these issues of Memphis and DOE-related issues will be retained and will be contained within the 2015 result, with no kind of residual impact foreseeable for 2016. Could you confirm that and maybe run us through how that will evolve quarter by quarter this year?
Yes, let me of course, I know this is an issue on everyone's mind, so let me just talk about it here upfront, what's happening and why it's happening and what we're doing about it. As we talked previously, and I'll give you more color, though, two primary issues. One is the significant transitions that were required in our cold factories, specifically our top mount refrigeration factory in Anderson, South Carolina, and our freezer factory in St. Cloud, Minnesota, driven by the DOE, Department of Energy, requirements to meet new energy standards. At the same time, as you know, we closed down and built one of the largest, most sophisticated cooking plants in the world in Memphis, Tennessee.
As we did both of those things, we consciously decided that we would upgrade and change virtually all the products that were made at both these factories. In hindsight, that became a bridge too far in terms of the bandwidth of the organization to manage all of that complexity simultaneously. Obviously, we're working through all that. We have the resources deployed both within North America and also from the group to regain stability. As you know, I'm in that role and have pretty good details on what's happening there now. I would say that on the Anderson, if I take it plant by plant, I would say the Anderson facility will have stabilized by midyear, Q3 at the latest.
I would say it'll take us most of the year to get both Memphis, which is the cooking plant, and St. Cloud, which is a freezer plant, back to stable operations, but quite confident that we'll get there. It's just, it's just hard work. There's no inventions here. It's just hard work. We'll get there this year.
Got it. Thanks very much. I'll get back. Thank you.
Thank you, Andre. Could we have our next question, please?
Our next question is coming from Mr. Andreas Willi from JP Morgan. Please go ahead.
Yeah, good morning, everybody. My question, the first one, just to follow on, on the U.S. Is there anything you could say on how you believe the underlying profitability in the U.S. has developed? Obviously, it's quite difficult for us to assess what the starting point for 2006 is, assuming no major issue. Are we, performance-wise, on a similar level we, that we were before we started to have the issues, particularly in the second half of last year? The second question on the currency, the guidance you've given on transaction is materially below what the model would spit out if one uses what you provide in the annual report.
Have you changed hedging, or are there other smaller currencies we don't know about that are basically keeping the transaction down at the SEK 1.3 billion, SEK 1.4 billion compared to the almost SEK 2.5 billion that the sensitivity you provide in the annual report will provide?
Okay, thanks. Let me address the first question, and Thomas, if I would all hand the response to the currency question. To answer your question, in the U.S., yes, I would say that there's no reason why the U.S. business should not be back to where it was prior to these challenges and the inefficiencies. As we've stated to you before, I'm quite confident the U.S. business will pull the average up to, of the group target. We'll be above the average of the group target. There's no reason for that not to happen. Thomas, if you can address the currency question?
Sure, I can do that. No, I don't really, I'm not really, I don't see that number two and a half billion, but, I mean, I can give you the major parts of the BRL 1.3 billion that we see now for the full year. There are no changes at all. I mean, it's BRL 900 million out of those BRL 1.3 is the Reais. Close to AUD 200 is the Australian dollar, and CAD 150 is the Canadian dollars. Then we have Chilean peso, rubles, yeah, that's the big ones. Then we have a whole band of smaller ones. Then we have, we do have positives as well.
Well, I mean, we have a stronger Swiss franc, we have a stronger British pound, and that together gives us a plus of SEK 300 million for the full year, as these two countries are import countries. From that sort of country, inside of the country point of view, it gives us good benefits. Yeah, SEK 2.5 billion, I'm not familiar with. I can look at it, of course.
Thank you.
Thank you.
Can we then hand over to the next question, please, operator?
Our next question is coming from Mr. David MacGregor from Longbow Research. Please go ahead.
Good morning, David. Good morning, everyone.
Yes, good morning. Keith, are you seeing any FX-driven changes in competitive behavior in the marketplace? Secondly, if you could just talk to the situation in North America with Memphis and the cold factories, and what would be the impact on the first quarter P&L, if you could break that out, and also what you would expect in the second quarter? Does it become more pronounced in two Q versus one Q? Thank you.
I think on the first question, David, it's hard to see, you know, material market impact and currency in the U.S. The market still feels, you know, that the market is okay. As you know, it was a weaker quarter than most people were predicting, including us, but it was in line with what Q1's been for the last couple of years, so I don't think there's any dampening of the expectation for the market being okay. That is still a quite competitive market, as you know well. I can't say that we've seen a significant impact driven by foreign exchange into the marketplace in the U.S., specifically related to pricing behavior. I think to answer your question on, let me give you a little bit on Memphis and DOE transitions.
I think that, as you know, this is not new news to us or to you. I think what we had to communicate a few weeks ago was it became clear that it was gonna negative, have a negative quarter, and it was gonna take us longer, 'cause previously we'd said, you know, we'd have this thing behind us by midyear, and it's gonna take us a little bit longer than that. However, I fully expect that it will be sequentially improved. Q2 will be better than Q1, and Q3 will be better than Q2. Then, and so that is, that's gonna happen. You know, my confidence that this thing will be turned around and back on track is quite high.
to call it exactly quarter by quarter is a little tricky, but every week I get greater confidence and line of sight. It's for sure, I can tell you that we will have sequential improvement quarter over quarter. It looks like Q1-
Is there any way to quantify the impact so that we can discern the progress that's being made in the underlying enterprise?
It's hard to do that, David. I mean, you'll see, of course, as we give you the results, you'll see it. I mean, and it is by far the most significant impact. And you'll see in the margin delta, you'll see it both in the gross margin and in the net margin, you'll see that impact.
Thank you.
Okay, thank you, David. Should we move over to our next question, please, operator?
The next question is coming from Miss Lucie Carrier from Morgan Stanley. Please go ahead.
Hi, good morning, everyone. Just one question, follow-up on the U.S. situation. Are you seeing any impact from this disruption in terms of your top line or kind of your market share on any specific product? That would be my first question. The second one on LATAM. Obviously, you've passed, you know, increase in prices. How long do you think you are able to do this, and in which magnitude throughout the year? Obviously you already commented that you expect the volume potentially to continue to deteriorate.
Yes. Let me start with the second question. Latin America, as you mentioned in the quarter, volume was down, was negative, price was, and mix was considerably up. It did, didn't fully offset currency, but we expect that, based on actions the team has taken, additional price actions the team has taken, that for the full year, the price and mix will compensate for the currency headwinds. To answer your question, as you saw, our sales actually were up in the quarter, but volume was down significantly, and that was all driven by price. It was virtually all driven by price. We expect that price activity to have to continue given the currency environment, given the currency environment there. I'm sorry, remind me again the first question.
It's early here in the morning. Tell me that first part of the question.
Yeah, the question was on the North America, considering the disruption you're having.
Yes.
at some of the factories in the U.S., are you seeing also any impact of that in terms of top line or in terms of your market share on certain products?
The answer is yes. We lost a little bit of market share in some of the key categories that those facilities make, we lost a little bit of market share in cooking. We lost, you know, some in freezers as well. We offset that with some gains in dishwashers and some multi-door refrigerators in Juarez. The answer is yes. When we're not able to produce at the throughput rates that we had in plan, we're, you know, we're not able to serve our customers the way we should, we've lost a little bit. It's not dramatic, but yeah, we lost a little bit of market share, yes.
Can I just add something on the currency thing here, please?
Yes. Yes, Thomas, please go ahead.
Yeah, to Lucie, your question on how long can you go on here and increase prices and then take volume losses? Just to give some color to that question, the expected negative currency effect on the BRL, which I just mentioned when we talked to Andreas Willi here just a few minutes ago here, is 900 million SEK, and that is the equivalent of a full year earnings of the Latin American operation. Given the magnitude of that, there is no other way, we just have to. If we didn't do it, we will go into red numbers, and that will not happen in the Latin American operation.
I mean, if you lose a couple of percentage in volume on that, I mean, the math, the financial math works out, so we will just continue. The second thing around that is, of course, we're not alone. This hits everybody that operates on the Latin American market, so it's not specific for Electrolux.
Thank you very much.
Thank you, Lucie. Could we have our next question, please?
Next question is coming from Mr. David Vos from Barclays. Please go ahead.
Yeah, good morning, gentlemen. I have 2 questions, if I may. First of all, on the North American market, we saw GE last week, I think, report growth in the region of high single digits. I think it was 8%, whereas your organic number is closer to 4% negative. Could you just comment on what drives that, please? The second question is regarding small appliances, this is perhaps not the division we talk most about, but the earnings trajectory clearly not favorable at the moment. I just wonder if you could elaborate a little bit on the actions you're taking to perhaps drive that back towards the erstwhile high single digit EBIT margins. Thank you.
Erstwhile. North America, to your point, the organic was -3.6%. A big part of that, which I'm not sure is quite visible to you, I guess it is in the report, is actually air conditioning volume.
Yeah.
The volume decline, if you look at our market results and compare it to what GE reported, we've got a big chunk of the air conditioning business, and it was down 35%. That's what overwhelms the volume picture, and of course, that has a substantial impact on the organic growth picture in North America, and that virtually explains the difference. To your point on small appliances, underperformance, and actions, of course, are both needed and underway to get the combination of cost structure and mix right, to mitigate some of the headwinds. As you know, when we talk about currency, there's a business that doesn't have the price lever.
The dilemma with the small appliance business, they get the same effect on these emerging market currency devaluations like the real. Because we source virtually 100% of the product, we buy them in U.S. dollars and then bring them into Brazil, as an example, and compete with local manufacturers who are manufacturing in Brazilian reais, they don't have the same pressure to increase prices like we do. That's a little bit of the negative arbitrage, if I can use that expression.
Mm-hmm.
that we have in small appliances, that we don't so much have in major appliances, where, as Tomas mentioned, it's a more level playing field. Having said that, you know, well, I'm not happy with the performance of that business unit, and we are obviously taking action to adjust other levers, whether it's cost or mix, to improve the performance there.
Okay, thanks. Thanks very much. Can I just come back to the North American question there? The way I understood that business was that it's about 10% of, you know, of the revenue is air conditioners. So if that's down 35%, I'm pretty much at the 3.5% decline that we saw, and it still leaves me about 8 percentage points delta with GE. Is that the right way of looking at it, or am I missing something there?
Yeah. Let me, if I can, let me talk about our business and the market and not yet talk about the GE business. I'll look forward to talking to you about that in a few months.
Sure.
Yeah, as we talked about, I think, you know, we lost a little bit of market share, in Q1, in the core white business. Our core white business, if you know, if you do it exactly against the AHAM core white, then we were down about 3%. You know, the market was up, you know, 0.X%, 1%, so we lost a little bit of volume there.
Mm-hmm.
Again, I can't speak for exactly what GE is doing or not doing at the moment. We're still competing with them.
All right.
Okay, thanks a lot. That's very helpful, gentlemen. Thanks, indeed.
Thank you.
Thank you very much. Thank you. Could we have our next question then, please?
Yes, our next question is coming from Mr. James Moore from Redburn. Please go ahead.
Yes.
Morning, James.
Good morning, everybody. Could you say a little bit about what needs to be achieved to resolve the challenges in the U.S.? Is it new tooling? Is it different designs? Just from an engineering standpoint, I'm just trying to really understand the risk of delay. Secondly, your raw material basket, I think you talked about a potential $ half a billion tailwind this year, commodity prices have still looked like they've been coming down. I know you talked about some cracker bottlenecks, do you think that there's scope for a better picture there? Thirdly, it's really a strategic question. You source a lot of components and other things in LATAM and in small appliances in U.S. dollars.
Strategically, have you thought about whether you could increase the local currency content of that to perhaps mitigate some of these swings in future?
Okay, James, thanks for that. Let me start with the little bit more detail around the plant by plant in the North America. I would say that in Anderson, which is the top mount or combi top refrigeration plant, the challenges really have been around how we're achieving the DOE metrics or reduction in energy. We've gone to a specific foaming agent that's new to us in that plant, not new to us in the company, right? Essentially, it's cyclopentane for those that are interested in that level of detail. Again, most of our refrigeration plants around the world run cyclopentane. Anderson had not. It's a much more environmentally friendly foaming mechanism as well.
It's all the right thing to do, and it meets the energy standards. This is the first time they're running it, and so they're just trying to get the process controls stabilized so that they can do that. There's no tooling, reengineering. It's more about process controls and stability within the manufacturing operation. Again, since we do that in all our other refrigeration plants, that's why I'm quite confident we'll get that operation stabilized here by mid-year, Q3 at the latest. That's the Anderson issue and solution. Memphis is, you know, a little bit different. Memphis is, you know, a brand new plant with over 500 new products. It's a cooking plant, so by definition, a very, very complex plant.
As we've mentioned to you know we took the opportunity to make some substantial product improvements and changes and new products. You know, unfortunately, I've been through a few of these in my career, and when you're in the middle of these startups, you know, you feel like you're in this tunnel that you'll never get out of because it's just 1,000 things to do every day. You just got to grind it out, and, you know, one at a time, product by product, platform by platform, and get it launched, get it produced, get it stabilized, get the feeders right, get the material flow right, and get the volumes increased to get stability into the operation. We are getting there.
We will get there, but it's just, it takes time, and candidly, it took us a little longer than we thought was needed, but we will get there. Again, there's no reengineering, redesign, retooling that has to happen there. It's just straight ahead. Freezer's a little bit different. Freezers is also, you know, the mechanism that we're using to achieve the DOE standards. We think long term is probably the best solution. In the short term, it costs us a little bit more than perhaps other methods that we could have chose. We think it's gonna give us opportunities to meet the next DOE change, which we're anticipating will happen in about three years. Long term is the right thing to do. Short term, probably added some extra costs.
It won't make sense to redesign the product. We'll just have to take actions to take cost out of the product in other areas. Of course, that's what we're doing. I hope that helps in terms of giving more flavor.
That's great.
the specifics and what we're doing. In terms of our raw materials, you know, there's a tailwind there, and it's a good one. And it's nice to see after so many years. What's our confidence level that we'll hit the half a billion? Pretty high. Pretty high. In terms of actual production flows, we have, to your point, because of this, the flows here between buying and U.S. dollars and selling and depreciating emerging market currencies, we actually have made some changes in terms of our local content.
We are, as we talked a few minutes ago about small appliances, we're actually manufacturing more small appliances in Brazil for the exact same reason that you raised the question, to mitigate some of these flows. You got to be careful here, because if you go too far, too fast, then the, then the currencies will go the other way, and you'll say, Why the hell did we do that? I think your point's right, we do need to balance this thing a bit. Thomas, do you have any thoughts or comments on that, particularly that question or any other things that I said here?
No. Well, on the raw material side, I mean, we did change the guidance a quarter ago to SEK 500 million. We're not changing it this quarter, we feel more strong in our belief, if we put it like that, right now. We're not changing the guidance this quarter.
I guess you do.
I guess we do.
Okay, thanks. Take care.
Okay. T hank you, James. Could we have our next question, please, operator?
Our next question is coming from Mr. Johan Eliasson from Kepler Cheuvreux. Please go ahead.
Yeah, hi, it's Johan here. Just two questions. I was just wondering a little bit about this process with the GE antitrust approval. I noticed that GE sort of guides for a capital gain in their Q2 results. Do you think the antitrust approval and deal closure could be that swift? Secondly, about these U.S. problems, I remember there was some sort of similar problem back in 2003 or 2004, when you joined Electrolux as head of North America, you also had similar problems getting products out, and you lost a little bit of market share. Can you sort of relay on what happened with your market share that year and in the following years? Thanks.
Yeah. Okay, those are good. Yeah, I'm going back to 2003. Okay. I'm an old guy. That's a hard thing to do. Okay, here's actually, it was 2001, to be specific. It actually was just before I got here. It was 2001. It was the DOE transition in the Greenville plant, and then to your point, to the Anderson plant. It was exactly a similar transition. You're exactly right. We did struggle with that transition. I guess maybe the good news is, like, what happened here, you get through it, right? It happened actually just before I joined, but you're right, that very similar situation, that you had to work through, and we did work through.
In terms of GE Corporation forecasting a capital gain in Q2, I have no idea what they're talking about. Let me just put that aside. What's our view on the DOE work? Of course, it's 100% outside of our control because it's in the regulator's hands. You know, what we can say is we know that they're not going to be accused of not being thorough. I can tell you that. It's, it's a thorough review. We don't have any reason to believe that this deal won't close, you know, this year. As you know, we're cautiously optimistic it's not the latter part of the year, but more toward the middle part of the year. We, you know, we don't know that for sure.
I can't speak honestly, what GE is talking about in terms of a capital gain.
Yeah. Okay. Thank you.
Thank you. I think there is one more question on the line right now, please go ahead.
Yes, our next question come from Andreas Willi, again, from JP Morgan. Please go ahead.
Yeah, I just had a follow-up question on the U.S. overall for you, Keith. In terms of your role there now as interim CEO, have you spent enough time looking at your operations to basically give some level of confidence that you haven't found anything else after the management change or any other risks that could hit us in the next few months, in terms of your time spent there over the last couple of weeks? Thank you.
Yep. To your point, I mean, I'm there. I got an apartment. I'm spending a lot of time there, right? I'm in the middle of it. For all the reasons that are obvious to you and to all of our colleagues on the phone, which is you got to get into the details here and understand it. I think the short version of that answer is there's no big surprises. In fact, Tomas, you and I spent a fair amount of time before we made this change and decision, and we had identified what we thought were all the key specific areas that needed to be improved and worked on, and they're turning out to be exactly right, exactly what we had thought, where the challenges were. I guess to answer your question, there aren't any surprises.
That doesn't mean there aren't issues. Of course, there are issues, but they're known issues, and we'll get them addressed.
Thank you very much.
Thank you very much. I think there are actually two more questions, quick questions we could have before we sum up.
Okay
-with, with Keith. please go ahead.
Next question is from Andre Kuklin, again, from Credit Suisse. Please go ahead.
Yes, it's Andre from Credit Suisse. Thanks for taking the follow-up. I just wanted to ask about the China progress that you're making. I think you said that the market started to recover, but your volumes are developing negatively. Could you just run us through that, what's happening there? I appreciate it's a small part, a very small part of your business, but obviously, it was an area of quite substantial investment, hence the question.
That's not as fair. I mean, as we talked about last time, on the C5, what we call the C5, so the China launch of Electrolux there, what we found is that the products were well designed, well, developed, and well accepted at the consumer level. However, we ran into difficulty, and I say difficulty, I mean, economic difficulty in the business model in terms of our distribution and route to market, to the big retail channels there. That's just, I guess, code for we didn't like the answer, in terms of what it was costing us to get it to the marketplace.
What we've asked the team to do is not to keep spending good money after bad and reevaluate alternative distribution models or arrangements with our customers in a way that, you know, we just don't want the growth, we want profitable growth. The team is in the middle of doing that. As you know, we've got an experienced leader that I just brought in there. To be continued, I would say. I think it's very intentional that our business is pulled back in China because candidly, we didn't like the economic model.
Got it. If I may ask, what are the potential alternatives for the not going through traditional channels?
Well, we could go through additional, through traditional channels. It just would have to be on different terms, number one. Number two, there's a, as you know, there's a very large, what we would call builder production contract market, there that we don't play in directly. There are, you know, there are other distribution points outside of the, you know, the big box retailers to get to Chinese consumers. There are several.
Got it. Thank you very much, Keith.
Thank you.
Thank you. Could we then have our final last question for this call, please?
Yes. Our last question is coming from Mr. Björn Enarson from Danske Bank. Please go ahead.
Yes, thank you, for the last question here. I have one question on the U.S. You, you are taking down your guidance, or at least you're highlighting the lower end of your guidance, but you had also a... We had quite a weak quarter behind us. Are you keeping your view on the remaining of the year? There are a lot of course, negative signals from the U.S. during the quarter, but a lot of that is weather related or strikes, et cetera. Are you expecting some kind of catch up in April, May, or how do you look upon the U.S.?
Yes, good question. I actually, you know, U.S. market feels like, you know, deja vu all over again, right? If you look at that chart that we showed earlier that showed the quarterly market demand in the U.S., it, you know, Q1 looks exactly like the last couple of years, right? Relatively weak. Q2, 3, and 4, in both in 2013, 2014, and our expectation is also 2015, will look similar. Our projection is that 2015, in terms of market demand, will look not too dissimilar from a pattern standpoint, quarterly pattern standpoint, than 2014 and 2013 was. That's our view.
Of course, you know, we'll see what happens in Q2, but, you know, to me, it looks like business is not too bad. I'm.
That's good.
Higher probability than not.
It doesn't sound like you are getting a negative signal, so it's not that you are trying to signal. It's more a weaker outcome that makes you point to the lower end.
Yeah, we had a weak Q1, so it's hard for me to say, "Look, you know, we, you know, we think we'll be in the range," but you have to comprehend, we got 25% of the year gone. I think there's, you know, an equal probability that Q2, three, and four will look like the last year and the year before.
Yep. Okay. Thank you.
All right. Thank you.
Thank you. By that, I'd like to hand over back to Keith again to summarize the quarter.
Okay, thank you. If you just flip to the summary Q1 chart, we'll try to summarize some of the key highlights in the first quarter, 2015. As we mentioned, we didn't talk a lot about in the Q&A here, but we had very strong and continued strong performance in our European operations with higher earnings, and I would say a sustainable cost structure. Also, our business and professional is at record levels of performance, and Latin America, I would say, in a very challenging market, also did well. Several of our businesses benefited from the continued mix improvement, thanks to the investment in R&D and the focus on the active product portfolio management, and new launches.
We increased prices significantly, alongside of mix, to partly mitigate, not fully this quarter, but partly, significantly mitigate, currency headwinds. As you know, sales and earnings in North America were negatively impacted by the transition costs and the ramp-up costs. And I can tell you for sure, the program is underway to turn around and restore the profitability, and increase efficiencies, in those production units. Finally, as you know, we've on our previous release, we raised our expectations for our commitment to the cost synergies from the pending GE deal, and revised the total amount to up to $350 million per year of synergies, positive synergies. With that, I'd like to thank everyone for taking the time and listening to this presentation.
Have a great day. Thank you.