Hello, good morning, good afternoon, everyone, and welcome to this Presentation and Discussion of the Electrolux Fourth Quarter and Full Year 2014 Results. Let me apologize for being a couple of minutes late. We're just having some projector, technical issues, but we've worked through that. With me today, as usual, I have our CFO, Tomas Eliasson, and our Head of IR, Catarina Ihre. Let's begin our presentation. We go to page two. Let's start with a full year 2014 summary, and then we'll get into the quarter. Total sales for the full year amounted to SEK 112 billion. The organic growth for the year was a little over 1%, 1.1%.
The year, as you know, started out a little slow in some of our core markets, but picked up during the year and improved throughout most of the year sequentially. The group's EBIT increased by 18% to SEK 4.7 billion in 2014. This is the result of an operational recovery in several of our major regions, including Europe, Latin America, and Asia Pacific. Professional products also showed a solid performance. Operations in EMEA, in Europe, accounted for 31% of total group sales, showed significant improvement during the year. Our team's focus on sustainable cost savings and active product portfolio management contributed positively. During the year, our cash flow improved from SEK 2.4 billion to SEK 6.6 billion, which corresponds to a cash conversion of approximately 140%.
In September last year, Electrolux announced the plan to acquire GE Appliances. We expect to close the deal during this year. The board's proposal of a dividend of SEK 6.50 per share reflects Electrolux's healthy balance sheet and determination to deliver economic value to all of our stakeholders. The proposed dividend corresponds to a payout ratio of approximately 83% based on reported EPS. Now let's look into the Q4 results on the next page. In the fourth quarter, Electrolux showed positive organic growth in our major markets in Europe, North America, Latin America, and in our professional business. The organic growth was mainly driven by improved price mix across most business areas. Our operating income increased to SEK 1,472 million.
In EMEA, we continued to improve our earnings and achieve higher margins as a result of our focused work to reduce costs and the ongoing savings program. Our operations in Latin America and Asia Pacific performed well and finalized the year strongly despite challenging market conditions. In North America, as in the third quarter, earnings were negatively impacted by the major transition required to meet the new energy standards within the cold categories, specifically refrigeration and freezers. We had continued ramp-up of the cooking plant in Memphis, also impacted earnings negatively in the quarter. All in all, we increased the group EBIT 20% year-over-year, corresponding to a margin of 4.7% in the quarter. Of the group's six business areas, five reached an EBIT margin of more than 6% in the quarter.
Cash flow in Q4 was solid and improved 24% year-over-year. Cash flow after investments amounted to SEK 1.8 billion. Now let's continue to the next slide and talk about some of the market highlights. Here are a couple of market highlights that I'd like to mention and that was important for Electrolux during the year. First, I'd mention in the fall, Electrolux participated in one of the largest trade shows for consumer electronics in Berlin, Germany. Our team was in place there with a large Electrolux presence and booth, and to give visitors and our industry leaders an experience showcasing some of the new premium AEG products and demonstrating our new connected appliances. Moreover, the team took the chance to showcase a brand new AEG combi washer with heat pump technology, an industry first.
At the end of the year, Electrolux received the Best of Year Awards from two important and leading consumer product reviewers. The award-winning products for Electrolux and Frigidaire branded products in categories such as electric cooktops, dishwashers, front load washers, chest freezers, and gas ranges. Third, Electrolux continues to receive recognition for its sustainability work and have won several awards throughout the year. In the fourth quarter, Electrolux was ranked the industry leader in RobecoSAM's sustainability performance rating once again. Lastly, a new company, Visual Identity, has been created to boost stopping power and ensure the brand stands out from the crowd wherever consumers meet and see Electrolux. The new identity will roll out in 2015 and will be seen in-store, online, on packaging, and through mobile devices.
If we go to the next chart, we can see the sales development for the group in local currencies. In the fourth quarter, we continued to show positive growth trend by increasing sales 2% organically. In addition to that, we had a 0.2% increase from acquired growth in the quarter, which relates to the small outdoor cooking acquisition we had in Australia. Electrolux has achieved positive organic growth since the beginning of 2012, corresponding to a 12% increase in local currencies, including acquisitions. This corresponds to a compounded annual growth of 4%, which, as you know, is our strategic growth target. Now let's look at Europe on page seven. During the fourth quarter, the market for appliances in Europe showed an improvement, and Electrolux sales increased, mainly in markets in Sweden, Benelux, and in Spain.
Sales in Eastern Europe deteriorated as a result of a much weakened Russia. Our mix continued to improve in the fourth quarter due to the continued focus on higher-margin product offerings and sales of more branded products. Prices continued to decline, but at a lower pace than previous year. Our earnings increased by almost SEK 400 million in Europe versus the prior year, primarily as a result of structurally lower costs and a very strong product mix. Our efforts to reduce costs and enhance efficiency are contributing positively to the results, and this resulted in an EBIT margin of 6.4% in Q4, which is the highest for our European business since 2009. Now let's turn the page and talk about the market development in Europe. The European market increased in the fourth quarter and was up by 2.4%.
Demand in West increased by 3%, while Eastern Europe grew 1%. We saw positive shipment growth in the U.K., Germany, Benelux and Spain. We expect the total European market to grow 1%-2% in 2015, although the development in Russia is certainly uncertain. Let's turn and talk about the development in North America on page nine. Our operations in North America showed a continued growth in the fourth quarter. Sales increased by more than SEK 1.3 billion to SEK 8.9 billion, driven mainly by improved product mix, which compensated for lower volumes in the cold categories, which were impacted by the transition of the new products due to the energy requirements on appliances. We had lower air con sell-in, which also impacted negatively the volumes in the quarter.
Overall, the operating income in North America declined year over year due to the continued investments related to the DOE transition, but also due to the new cooking plant, Memphis, being ramped up, which had an impact on cost efficiency. We expect these transitions to continue to impact earnings in the first half of 2015. During the quarter, North American operations also took a SEK 45 million charge or cost related to the GE acquisition, the integration work. Let's turn to the next slide and talk about the market development in North America. Market demand for core appliances in North America increased by 8% in the fourth quarter. For the full year, the market grew by 6%, which was slightly higher than expected.
The underlying market for appliances in North America is healthy, and we continue to see consumer confidence and the macro environment to be positive for future appliance demand. For 2015, we expect continued market growth for appliances in North America in the range of 3%-5%. Now let's go to Latin America. Market demand for appliances in Brazil remained challenging and declined somewhat in the fourth quarter. Demand in other Latin American countries also continued to deteriorate. Our sales growth exceeded the market growth, and we continued to strengthen our market position. Sales outside Brazil remained weak. Our operating income improved in the fourth quarter. Strong price mix development contributed positively to our earnings. In a challenging market environment, the team has showed good performance in Q4 and are continuing to adapt the cost base to market conditions.
We have defended margins and earnings at good levels in 2014. Now let's turn the slide and talk about our operations in Asia Pacific. Market demand in the three sub-regions in Asia Pacific showed a mixed pattern in the fourth quarter. Demand in Australia was slightly up, driven by hot weather with increased air con sales, while demand in China and Southeast Asia slowed down somewhat. Electrolux showed volume growth in all sub-regions, which was to a large extent offset by an unfavorable country mix. Cost reductions in our operations in Asia Pacific, however, contributed to good earnings and development in the final quarter of 2014. We've also started to see the positive effects of our initiatives to adapt cost throughout the year. The ongoing ramp-up costs related to the plant in Rayong, Thailand, continues to have an unfavorable impact on our results in the region.
Now let's talk about our small appliance business. New premium product launches within floor care and small domestic appliances helped improve mix, but was not enough to offset the weak sales volumes. Sales in small appliances declined during the fourth quarter, year-over-year, particularly as a result of lower sales of vacuum cleaners in the U.S., Latin America, and Japan. Due to the lower volumes and continued price pressure, our operating income declined in the quarter compared to the same period last year. Headwinds from emerging market currency devaluation and the strong U.S. dollar also had an impact on our earnings in this sector. Now let's turn and talk about our professional business. Professional products continued to show solid performance and benefited from growth in strategic markets and new channels.
Sales growth was positive in Europe, Middle East, Africa, and Asia, while the trend in Eastern Europe weakened. Operating income for our professional operations increased in the fourth quarter as a result of higher sales volume and increased cost efficiency. Now I'd like Tomas to give his thoughts about our financials and our cash flow in the fourth quarter. Please, Tomas.
Thank you, Keith. Let's go to the financial overview, as usual, and start at the top with the sales. In the fourth quarter, reported sales was up 9%. Organic growth was two, acquired growth 0.2%, and currencies had a positive top-line impact of 6.5%. For the full year, reported sales were up 2.7%, whereof organic growth was 1.1
EBIT in the quarter amounted to SEK 1,472 million, corresponding to a margin of 4.7%, 50 basis points up compared to a year ago. For the full year, the EBIT amounted to SEK 4,780 million, an increase with 18% and an EBIT margin of 4.3% compared to 3.7%. Sixty points margin accretion for the full year. The operating cash flow in the quarter amounted to SEK 1.8 billion, and the full year cash flow was SEK 6.6 billion, an increase with 175%. Quite an improvement, really here we have to look at 2013 and 2014 together. 2013 was not a good year from a cash flow point of view.
In 2014, we recovered all that, and in addition, we had very good operational improvements. The earnings per share ended at 11.3 for the full year. Now let's flip pages and go to the sales and EBIT bridge. The organic portion here, we have split in price mix and in volume. If we start with the volume, we can see that the negative volume here of 1.7% for the quarter had a top-line effect of SEK half a billion. The EBIT impact, however, was positive or just above break even here, SEK 35 million, which is very good. The reasons behind this is strong performance in product cost as well as savings programs continue to hit the EBIT line.
The price mix gave a top-line effect of SEK 1.1 billion and an EBIT effect of SEK 394 million. These SEK 394 million, as usual, should to a large extent, be seen together with a negative transactional currency effect of SEK 255 million in this quarter. Just as in previous quarters, the conclusion is that overall, the negative currency effect is mitigated through price and mix actions. However, this quarter, we also had rather positive translation effects due to the depreciating Swedish krona, and that contributed with SEK 127 million in the quarter. Moving to the next column here, acquired growth this quarter is for the Australian company, BeefEater, which is now consolidated in the group.
The column Other contains transactional costs of SEK 60 million for the GE Appliances acquisition, booked in group common costs. It might also be worth mentioning that we in the North American business had SEK 50 million in external integration costs in the quarter. Together with the SEK 50 million we booked in the third quarter in group common costs, we now have for the full year 2014, SEK 160 million on the EBIT line that impact the earnings. To sum it all up, we this resulted in an increase of the EBIT margin from 4.2% to 4.7% for the full year.
Now let's move to the currencies on the next slide. The transactional effects were 255 million SEK in the quarter, just in the range that we talked about in November, we said 250 million-300 million SEK. As you can see, the largest effects are from Latin America, where the US dollar is strengthening, against the currencies, where we have a lot of imports. If you look at the bottom here, you can see that we have price mix actions that for every quarter exceeds the negative transactional effects. For the full year, we had total negative transaction effects of 1.4 billion SEK, and we had price mix actions of 2.5 billion SEK.
Of course, not of all of the price, not all of the price mix is for negative currency, but if the currency goes negative, of course, the price mix will go the other way. These two lines are communicating with each other. Okay, let's, no, sorry, before we leave this page, let's talk about 2015. Sorry. If we look at the first quarter, 2015, and look at the current rates, it gets worse, and we expect the transactional effect to be between SEK 400 million-SEK 500 million in the quarter. We don't have a guidance for the translational effect, but that will be positive, of course, as well, in the first quarter of 2015.
For the full year, with current rates, the transactional effects will be somewhere between SEK 1.2 billion and SEK 1.4 billion. Of course, this puts pressure on our ability to mitigate through price and mix, but which we will continue with, of course, as usual. Let's move to the next page and look at the restructuring. We go back here to the third quarter of 2013. If you look at the first line, we announced a restructuring of SEK 3.4 billion. That would give us a saving of SEK 1.8 billion, plus we announced an impairment of an IT system here. What has happened then is that we took SEK 1.5 billion in restructuring in 2013. We took SEK 1.2 billion in 2014.
All in all, the restructuring is SEK 2.8 billion. The cost is less than we said in 2013. It's SEK 2.8 instead of SEK 3.4, but the savings of SEK 1.8 remain. And should also mention here that as we have communicated previously, Electrolux will eliminate the accounting practice of items affecting comparability as from now, as from 2015. This doesn't mean that we will not have restructuring going forward, but any restructuring that we will do in the coming years here, we will take directly to earnings. There will be just one EBIT line for the group. Let's move to the next page, and we want to give you an update of the pre-closure transaction costs for GE Appliances.
We divide this into three buckets. There is one, which is advisory, lawyers, auditors, et cetera, really transaction costs. We have integration costs, the integration, we're preparing for the integration right now. We have the bridge facility. The amount is going up a bit. It's partially because the legal fees are going up. It is a bit more than we had anticipated during 2014. We have currency as well. The currency, of course, impacts this as most of this is paid in US dollars. Of course, when the Swedish krona depreciate, we have to adjust.
In the next column, you can see here that, or in the 2014 column, you can see what we have booked so far, in Q3 and Q4. It's SEK 110 million as transaction costs. That is all in group common costs, SEK 50 million in Q3, SEK 60 million in Q4. We have another bucket here in the North American business. It's in the North American EBIT of SEK 50 million or $5.7 million. All in all, SEK 160 million in 2014. For 2015, up until we consolidate GE Appliances, there will be another SEK 520 million. The bridge facility is capitalized in the balance sheet.
We have incurred so far close to SEK 100 million, it is to be charged to the P&L as we use the loan facility, according to accounting rules. This will be SEK 240 million. It's $30 million. We said SEK 200 million previously, now it's SEK 240 million, that's all because of currency. There's no change in the cost as such. Okay, let's move to the next page, the cash flow. Cash flow in the quarter was SEK 1.8 billion, compared to SEK 1.5 billion year-ago. For the full year, the cash flow was SEK 6.6 billion, compared to SEK 2.4 billion, the improvement is in excess of SEK 4 billion for the year. You can say that this comes from three, of course, three sources.
Earnings is up, close to SEK 1 billion, CapEx is down, close to SEK 1 billion, the rest is really working capital recovery from 2013 and operational improvement in 2014. Let's move to the next page, the cash flow. We ended the year better than we had expected, as you can see in the graph here. Q4 was better than Q3, and in the end, 2014 became one of the best cash flow years ever for the group. Only 2009, currency adjusted, was actually better than this year. It's been a really good cash flow year. Of course, the net debt is also down to pre-2012 levels.
The financial net debt is below SEK 5 billion now, so the balance sheet is strong and healthy. The net debt over EBITDA is down to 1.52 after being on the 2.0 for basically 3 years in a row. With that, I would like to hand over to Keith for summary and conclusions.
Okay, thank you, Tomas . Let's move on and try to summarize this presentation with an outlook and summary for both Q1 and full year 2015. If you look at the Outlook page, we believe that 2015 will be another year with positive growth for Electrolux and the appliance industry. We expect the European market to be slightly positive, although the development in Eastern Europe is uncertain at best. We anticipate continued growth in North America in 2015, supported by the important replacement market, but also from the continued gradual recovery in the housing market. While visibility in Latin America is low, we expect to see demand situation stabilizing somewhat in that region. In terms of price and mix, we expect a slightly positive impact in both North America and Latin America in the first quarter.
Prices continue to be under pressure in Europe. Will be offset by better product mix. We expect raw material costs to have a positive net impact in the first quarter and for the full year for both steel and plastics. You can see that we are increasing the expected positive effect of raw materials up to SEK 500 million for the year. We continue to reduce costs, and in combination with already implemented actions, we will focus on initiatives to further improve our structural cost base. We expect benefit from cost savings to approximately SEK 1 billion-1.2 billion in the full year 2015. Our CapEx outlook will remain stable and remain in the range of around SEK 4 billion for the full year. With that, Catarina, I think we're open for questions.
Yes, good morning, everyone. We will now open up for a Q&A session. If I could ask the operator to hand over the first question, please. Operator?
Okay, ladies and gentlemen, as a reminder, it is zero one to ask a question. We have a first question coming in from Mr. Andre Kuknin from Credit Suisse. Please go ahead.
Yes, good morning. It's Andre from Credit Suisse. Thanks very much for taking my questions. Firstly, can we talk about this dynamic of price mix versus FX? The way you describe it seems like it's business as usual, and one should be offsetting the other, maybe with plus or minus timing difference. Is that how we should think about it kind of structurally, not necessarily quarter by quarter, but maybe on full year basis? Or is there a sort of elastic band issue there that you can stretch it only to a certain point?
Yeah, let me start, and Tomas, maybe you can add to it, please. I think what we're trying to describe is, I think the organization, you know, having now faced fairly significant turbulence in currencies over the last several years, has gotten into a good operating mode of, I would say, shortening the delay that would normally take effect, up or down, when you see a significant currency swing. I think that the delay between the time when a currency moves dramatically and the effect on price, the time for that has shortened. To your point, I think we're more just saying, look, we think, and Tomas has said this many times, that currency effects get mitigated into the marketplace, either with our suppliers or with customers.
The question is, what's the timing effect of that? I think you shouldn't try to predict it. It's hard to do quarter by quarter, but I think full year is probably a better guidance. Tomas, what would you say?
Absolutely. Full year is a better guidance because if it comes very quickly and very sudden, it becomes, of course, a little bit difficult here, because you can't immediately increase the prices. Over time, and let's say for a full year, it's absolutely the ambition to mitigate all of it. I can just give you a number here. Look at the total Latin American business, with the EBIT of, let's say, around SEK 1 billion or something like that. The very quick and rapid depreciation of the real at the end of 2014 and now, that means an EBIT impact of SEK 600 million.
Of course, it goes by without saying that, I mean, you can't absorb that kind of a negative currency effect. It has to be moved on to the customers. I mean, it can't happen overnight. Yeah, full year.
Right.
Yeah, that's the ambition.
Got it. Thank you. I appreciate the call. Just to follow up on this, given the move that you mentioned, would I be right to assume that you're putting prices up, as we speak in Brazil?
Yes, we have pricing activity in several markets and around the world as we speak, including Brazil.
Great. My last question is, just on Asia Pacific, the margin performance in Q4 was excellent. Could you comment on sustainability of that? Is there anything there that we should be aware of that, will be repeating or may not be repeating?
I think actually all three subsectors had a good quarter. I think, if I start with Australia had a quite a strong quarter. It looks like there is some stability in the Australian market. I've got to be a little bit careful there because, you know, that market's been weak for so long, but, actually, market grew in the quarter. Again, I think the caveat there is a big part of the growth was they had a good, strong. Obviously, it's a summer season for them, so a good hot summer, and therefore, it was a strong air conditioning season. That's probably the one caveat, that's, you know, is very weather-dependent seasonal business. Southeast Asia business for us is good.
I mean, we've, I think, regained the momentum we had there in terms of growth and margins and mix. Feel good about that. There also was a year-over-year improvement in China, partly because, as you know, we had heavy investments a year ago in terms of launch. Those launch costs were not at the same magnitude this year. It was all three regions. Again, I don't think you just kind of take the quarter and say, okay, that's the new level for every quarter. Of course not. I think there's some signs of good improvement in Asia that weren't just one-time effects.
Very clear. Thanks so much for your time.
Thank you.
Okay, should we move over to the next question, please?
Okay, the next question comes from Mr. David MacGregor from Longbow Research. Please go ahead.
Yes, good morning, everyone. Can you hear me okay?
Yes, David, we can hear you quite well.
Sure, absolutely.
Okay, thank you. I guess if I could ask my first question on Latin America, and you just, you talked about volume growth. I'm wondering, are you seeing an improvement sequentially in that market, or are we really just talking about being up against easier compares from a year ago?
Yeah, that's a good question, David, and I guess I first should say very good early morning to you. It is, I think part of it's the comp, I think to be fair. The market is, I guess, I would say, is less weak, maybe, I don't know, a better way to say it. It certainly isn't, I would not, and I don't want you to take it as we see Latin America, particularly Brazil and Argentina, strengthening stronger. We don't see that. It seems to be stabilizing a bit, and candidly, you can tell from the numbers that we've gained some position there. I think that's part of what we're seeing.
Okay. A couple of other things just quickly. On your slide, you talked about cost savings, in 2015 of SEK 1 billion to SEK 1.2 billion in SEK. Can you just talk about how that'll fold into the numbers on a quarterly basis?
I think the way we've described it previously, David, as you know, which it normally happens, is it's probably best to model that on a fairly equal basis, spread it out fairly equally quarter by quarter.
Okay. Just finally, on the price mix, you guys have done a very good job of covering the FX. That's evident from the numbers presented on this slide. Is there any way you can discern for us between how much of the price mix was driven by FX and recovery initiatives versus sort of commercial initiatives?
Yeah, that's hard to break out. Of course, the price is heavily related to the currency, right? I, you know, I mean, I think with all the currency movements, and Tomas, I ask you to comment on this as well, but I think the price component of the price mix is heavily related to the currency movements that we've been seeing around the world. You know, whether it's the Russian ruble or the Brazilian real, I mean, pick your favorite currency that's gone bonkers lately. I mean, most of the price increases are coming off of that.
The mix, of course, although is a very big part of this price mix equation, and that mix, of course, is all related to the new products and all the investments and the increase in R&D that we've communicated to you. Does that answer your question, or Tomas, anything I missed?
No, that, no. I mean, the price component is very much currency-driven, not completely, but very much.
Majority.
The majority of it, and especially from Latin America, from Australia, from, yeah, from Southeast Russia.
Yeah.
Yeah, to just to pick the big ones here, yeah.
Last, just last question is, to what extent do you think you'll be able to hold on to the pricing, given that raw material costs are coming off?
Good, good question, as usual. I think it depends how dramatic the raw materials move, right? If it's a gradual, which is kind of what we see right now, again, not so much. If you look at just the oil price, you say, "Okay, that's dramatic." If you think about as it translates through refineries into the products that we buy, you know, polypropylene, polyethylene, polystyrene, et cetera, you know, that it's not quite that dramatic, of course, versus what you're reading with West Texas Intermediate. If it comes in on more of a gradual reduction, we think, you know, we're able to hold on to the or get a good piece of it.
You know, if it, if it drops dramatically, you know, we've got big, sophisticated customers that are watching this stuff as closely as we are. I think a little bit like, as you know, it works both ways, right? When we have a dramatic spike in raw materials, they got to work their way through the marketplace. If we have a dramatic decline in raw materials, ultimately, they work their way through the marketplace, too, although there's a lag effect on both sides. As long as it's gradual, I think we're in relatively good shape.
Okay, great. Thank you very much.
Thank you.
Thank you. Thank you, David. Could we have our next question then, please?
The next question comes from Mr. James Moore from Redburn. Please go ahead.
Good morning, everyone. I've got 3 questions, if I could. The FX picture, you talk about having a likely similar FX impact to EBIT in 2015, could I ask a conceptual question on that? Maybe, is it that the mix pressure of FX is tougher in 2015 to pass through than in 2014? What I mean by that, I suppose, is you had the Brazilian real more in 2014, where you and your U.S. competitor have quite a lot of US dollar cost to control the market in terms of combined share. Whereas elsewhere, say Russia, where you have euro cost versus local manufacturers with local cost, maybe you'll lose a lot on the other side on volume if you try to pass the FX through.
It's quite a difficult question to ask, but do you see any conceptual challenges with that? That's the first question. Secondly, on your SEK 500 million plus raw material guidance, I'd just like to be clear, is that based on current steel and resin prices, or does it factor in any sort of future curves of those from further falls from the recent iron ore and oil price collapses? Finally, just a quick question on GE. Is there any update on timing, or antitrust that you can help us with?
Yeah. Let me take those maybe in reverse order, and Tomas, if you can try to think about answering that currency.
Yeah.
Mix question.
Sure.
On the GE integration and antitrust, of course, you know, as you know, we filed, we are meeting all of the Department of Justice requests for information. I'm not gonna tell you how many million documents we filed with them, but it's significant, and they're doing their work. Our integration pre-closing work is on track and is proceeding quite well. I'm very pleased with what's happening there in the preparation phase. Our best guess continues to be, James, and for everyone, a mid-year decision and closing. That's our best guess.
Okay.
On the raw materials, yes, the SEK 500 million is intended to reflect the recent changes in oil, in particular, in plastics. You know, most of our steel now is a big chunk of it, is under contract. We have some open, but most of it, particularly in Europe, is under contract, a little bit more open in the U.S. side. It's not projecting any future changes. It's comprehending what we know today.
On the currency, the mix, I guess my short answer would be, I, you know, that's a, you know, you're into kind of pretty sophisticated levels of mix of currency, but I would say in gross, at gross level, we will work it through to the marketplace, and I don't see a big negative or positive impact on it, given the change in currencies. I don't know, Tomas, do you have a different view of that?
No, no, I don't have a different view. I, and we understand the question, of course, the mix changes in terms of what currency you sell in and then what currency do you import in?
Right.
So to say, in Russia, of course, it's imports, it's EUR imports, and in Brazil, it's USD imports. I mean, I would say more important than that is the state of the business cycle or the state of the economy in these various countries. I mean, if the country and the economy is under pressure, it becomes more difficult, of course, to do things. The more under pressure the economy is in the respective country, the more volume you lose. I mean, when take Russia, for example, we just do it like we do it in every country, and whatever volume we lose, we lose, because we can't afford not to increase the prices.
Price, price dominates?
Yes.
Yes.
Yeah. Profitability.
That's very helpful. Thank you.
Thank you. Can I just remind you to please take, one question at a time, and we could take the next question.
Okay. We have the next question coming in from Mr. Ben Maslin from Bank of America. Please go ahead.
Thank you. Morning, Keith, morning, Tomas. Firstly, on the North American business, maybe can you just run us through, you know, what was the negative EBIT impact of the various headwinds you had this quarter, so Memphis, ENERGY STAR, and GE? It seems to be a bit worse than the guidance you gave us in November. Obviously, how do they look going forward? You said it's a drag on the first half, so a bit more kind of detail around the guidance there. The second question is just around the GE deal. We've had a big currency move since you announced it. Just to what extent is that transaction hedged, or how will currency affect the numbers you gave us back then? Thank you.
Okay, thank you. Again, I'll take maybe the first question, and Tomas, if you can prepare for the second one. Okay, yeah, North America, obviously, we're not happy with the performance in North America. It's mostly self-inflicted, you know, with these transitions, the DOE transition, as we communicated at the Capital Markets Day. I think the team, and we made the right decision that says, as long as we're going to go through a major transition in our cold products or refrigeration and freezers to meet the energy standards, which is mostly around different compressors, different foaming, different wall thicknesses to have to meet the energy standards. In addition to that, we decided to bring the next generation of product and new functionality, new features in there, which will play out well for us. I think that's good.
I think it just made the transition a lot more complicated, obviously, than it should have been, and we had some struggles with the transitions. That had a negative impact, as we communicated, and it had an impact both on volumes. If you look at our volumes in North America, they were down, and they were down partly due to air conditioning, but a big part was also the cold business, right? Because we couldn't meet the demand because we were struggling with the transition. That hurt. Additionally, the, you know, productivity wasn't there, right? You had under absorption in the factory, and you had higher cost per unit.
Of course, a similar story, different reasons, of course, when you start a big greenfield facility in Memphis, you know, it takes time to get that up and running and get at the right utility rates, the right yield rates. Both of those had an impact, and the impact came both from volume as well as cost efficiency. Both impact. That's kind of the bad news. The good news is, these are very much in our control. We'll fix them. They're already underway. We've got the resources focused on it, and both of them will be fixed and brought back in line. It's, you know, it's not going to happen this weekend, right?
It's going to take, you know, a few months and potentially a couple of quarters to get it, get it taken care of, which is why we feel it's important to know that it will continue to take us probably through a good chunk of the first half to get things back on track, but they will get back on track.
All right.
Right, the second part of the question, Ben, was that on the consideration for GE?
Transaction, the currency.
Okay, all right. Now, we have a natural hedge, you can say, to the very short answer for this transaction. I mean, it's gonna be paid in US dollars, all of it. What we have today is an imbalance between the net debt in the company and the capital employed and the cash flow in the company. We have nearly all net debt in Swedish krona, and we have the capital employed and cash flow, to a very large extent, in US dollars. What we will do is that we will use the rights issue to repay Swedish net debt, Swedish krona net debt, and then we will borrow, corresponding to 100% of the consideration in US dollars. There is no need for a hedge as such.
We will rectify or correct, adjust the balance sheet through this transaction, it really plays out well. Of course, going forward, of course, getting so much net debt increase in US dollars, of course, impact the total net debt when you translate that to Swedish krona. On the other hand, the EBITDA, the capital employed, and the cash flow goes up as well. Of course, it has a little bit of an impact on the ratios. I mean, we've said net debt over EBITDA will be 2.7-2.8 at consolidation when we take over GE Appliances. That might go up to maybe 2.85 or something like that, 10-15 basis points up.
Apart from that, the actual currency exposure, is handled through a natural hedge.
Got it. Tomas, if I can maybe just follow up on Keith's point. I mean, I think Capital Markets Day, you said that the combined effects of, you know, Memphis, ENERGY STAR, and so forth, would be, you know, SEK 100 million, SEK 150 million second quarter for Q4, you know, and then fading slightly through the first half of 2015. I mean, with the impact all in of those effects, you know, can you give us a number much bigger in Q4? What kind of drag should we now expect realistically for 2015?
Yeah, I think probably maybe a good way to do it is if you just kind of normalize the operating margin in North America, and then you can see this in Q4 was 1.5%, and look at the delta. That's it.
Okay, got it. Thank you.
Thanks.
All right. Should we move on to our next question, please?
The next question comes from Mr. Anders Trapp from SEB. Please go ahead.
Yes, hi there. I have a question on GE Appliances. I know they reported the other day. Do you have any kind of update on what the results were for the fourth quarter?
Yeah, just of course, you know, we know what you read. You know, we don't of course, we don't have any further insight than that. Looked like they had a good quarter. GE Appliances, well, you know, they report GE Appliances & Lighting, as you know.
Yeah.
The majority of that is appliances. It looks like they've had a good quarter, and I think sequentially are improving. We were hopefully, like you, we were pleased to see what was happening there.
All right. Thank you.
Yeah, thank you.
Thank you. Next question.
The next question comes from Mr. Kenneth Toll Johansson from Carnegie. Please go ahead.
Yes, hello. Some questions about the organic sales development in North America. You are underperforming the AM numbers and the market a little bit there. When Whirlpool had a Capital Markets Day in December, they talked about that they had seen some opportunities coming up already now that they could increase their position in the North American market as a result of you buying GE Appliances. Do you think that is mostly sort of talk, or do you see similar opportunities in Europe where Whirlpool is buying Indesit? How do you think about those issues?
Of course, you know, I can't speak for anyone else. I'll just speak for us. I think we, as you can see from the numbers, we did lose some position in Q4. Again, it was mostly self-inflicted, due to our inability to supply in some key categories. We also lost some position 'cause we have a very strong room air conditioning business, and it was a very weak room air season. The pre-buy for 2015 was quite weak because 2014 was so weak and the retailers had a bunch of inventory. I don't think right now. Honestly, I think very little has to do with GE.
You know, we'll see what happens when it closes, but to me.
Mm.
From our standpoint, we're not, we're not planning to lose that much, and, you know, probably other people are planning to gain a bunch, and we'll see what happens.
In Europe, have you noticed any differences with your discussions with retailers due to Indesit and Whirlpool?
We have not.
Okay, thank you.
Thank you.
I think we have room for two more questions before we will sum up the quarter. Please go ahead.
Okay, the next question comes from Mr. Andre Kukhnin from Credit Suisse. Please go ahead.
Oh, great. Thanks for taking my follow-up. Just a couple of quick ones. Firstly, on FX-related or FX-driven changes to competitive landscape, are you expecting anything to change with regard to your Turkish and Korean competitors in Europe, now that you're in a position of having a structural advantage being a Europe-based producer?
Well, I think, you know, of course, currency affects all companies, right? And as Tomas always says, you know, depends what you're buying in and what you're selling in, and if it's against you got to get it through to the marketplace. I mean, nobody's immune to that. You know, as the currencies move around and, you know, they impact us, but they also impact our competitors. And as just like we have to adjust to it, they have to adjust to it as well. Yeah, I think the currency movements will impact our competitors just like they impact us.
Got it. Just a quick follow-up. Could you share with us what you see as normalized margin for North America, so we can complete that maths?
I don't think, you know, obviously, we haven't communicated a specific margin target by sector. You know what the group objective is, and so just for, you know, to me, you know, which is kind of why, you know, I had to have a stiff drink, the other day, was just think about North America just having a normal quarter this past quarter, what the group would have delivered.
Got it. Sorry, can I just ask one more? On the, on your guidance for inflation for the year, is this now starting to look somewhat conservative, given that transportation costs and some of your, I guess, sourcing costs should be coming down, given the moves in commodities?
Make sure I understand the question. The guidance around which cost are you referring to?
Just on the general inflation, it's not something that you talked about in Q4, but at the Capital Markets Day, you stated, I think you expect another sort of over SEK 1 billion of inflation during 2015, and that's transportation costs and bottom components and sourcing costs. Now that steel plastics are getting cheaper and transportation costs should be coming down, is this still intact, or is it starting to look conservative?
Yeah, well, I think the raw material costs, of course, we've updated, you know, and increased the tailwind there, so that's pretty direct impact to see that. You know, a big part of our normal inflation, of course, is, you know, we've got to pay people for working, right? If you think about the inflation and labor rates in Latin America, right, in Argentina and Brazil and China and Thailand, these are double-digit wage increases, right? You know, I wouldn't just get too excited on the one side because part of the, you know, just a normal incremental inflation creep in a business this large with 60, will be 75,000 people, is, you know, it's gonna be over $1 billion.
It's gonna be SEK 1.2 billion-SEK 1.3 billion, if you take it by, let's say, cost nature here, and not by function. Exactly. Taking away all the sourcing and all the components and raw material and stuff like that.
Right.
Yeah. Yeah.
Got it. Thank you very much.
Thank you.
Could we have a final question if there is one?
There is a last, follow-up question coming in from Mr. Anders Trapp from SEB. Please go ahead.
Yes, hi there. I'm wondering if you could clarify or be a bit more specific on the headwind in North America, you know, hurting numbers so much or margin so much in the fourth quarter. Is this the peak of the headwinds, or should we expect, you know, the same kind of low margins, basically, for the first half year, where you also said that you're gonna have a headwind from these two factors?
I think, Anders, the best guide I could give you is I would anticipate Q1 to look similar, you know, although improving by month, and then getting better by the second quarter and getting through it by the midyear. That's the way I would think about it.
Although, on the European margin, how much of the, sort of, unexpected strength, or at least to me, unexpected strength, comes from the fact that it was the strongest growth in Western Europe since fourth quarter, 2006?
Yeah, yeah.
How much is your own job?
Yep. Yeah, I, to your point, you know, it's actually quite good to see some recovery in the European market, which has been a long time, to your point. I think that helps somewhat, but I would say the majority, the vast majority, was just within our control. Productivity, cost out, mix work, you know, like we talked about before, that independent of the market, we thought that and we saw that we could, and that we would restore profitability in Europe, on our own, with our own actions, with our own merits, and I think that's been 80%, 90% of it. To your point, it doesn't hurt that the market's come back a little bit. That helps.
It helps particularly, I would say, the way, the where it helps the most, Anders, is that, you know, the price isn't continuing to deflate at an accelerating rate. It's kind of stabilized around 1% now, and when it gets up to 1.5%-2%, that's a hard number to mitigate, as you know.
Mm-hmm. Yeah, your own internal work to continue to improve, you know, product pruning and, cost reductions in Europe is continuing in 2015, I assume?
Absolutely.
Yeah. Yeah, the program was started, let's say, early 2014, and what the communication at that point in time was that we will be done by the end of 2016.
Mm-hmm.
Yeah. So the translation, which I know you're getting at, Anders, is, do we expect earnings in Europe to improve year-over-year? Yes.
Excellent. Thank you.
Thank you.
I think by this, we conclude the Q&A session, and I'll hand over to Keith.
Okay. Thank you, Catarina, and thanks, everyone, for excellent questions. If I go to the summary page, so if we look at the summary Q4 page, just to repeat briefly some of the highlights of the fourth quarter. Continued improvement in the profitability of our European operations with continued cost savings, good mix work, and good portfolio management. Virtually all of our businesses benefited from improved mix. Thanks for the very active and determined work around product innovation, aggressive portfolio management, and new launches. Our operations, I would say, in Latin America and Asia had a very strong finish to the year, which we were quite pleased with, particularly in Q4.
Again, I think that's very encouraging for Tomas and I to see that kind of management control, in, you know, in relatively weak market conditions. That was very good to see. Sales and earnings in North America, as we talked about, were disappointing and were directly impacted by the DOE transition costs and the continuing ramp-up of the cooking plant, both of which will be taken care of as we go through 2015. Professional products showed another strong quarter, a solid performance, so we're continue to be pleased with the team there, managing that business and growing that business profitably. Lastly, as you see, our earnings were up 20%, quarter-over-quarter, and our cash flow development was quite strong. With that, I'd like to thank everyone for listening in, and, have a great day.
Thank you.
Thank you.
Thank you.