Hello, welcome. Good morning, good afternoon, everyone, to this presentation and discussion of the Electrolux second quarter results for 2014. This is Keith McLoughlin, and with me today, I have our CFO, Tomas Eliasson, and our Head of IR, Catarina Ihre. We will begin the presentation. If you go to the Q2 highlights. For the group, stable prices and positive mix was offset by negative volume growth, mainly as a result of the sharp sales decline in Latin America. The operating income for the quarter increased to SEK 1.2 billion. The positive trends we noted in the European market in the beginning of the year continued into the second quarter. Our work to reduce costs and restore profitability in Europe is continuing and is positively impacting the financial performance of the company.
In North America, the market continued to show a healthy recovery, supporting our businesses. Market conditions in Latin America deteriorated, mainly as a result of the slowing economy in Brazil. Operations in Professional Products showed strong underlying results, while operations in Asia- Pacific and Small Appliances were weaker. Electrolux showed a strong cash flow improvement in the second quarter, mainly as a result of improved working capital productivity and lower capital expenditures. Cash flow after investments amounted to SEK 3.3 billion. You flip to the market highlights page, our strategic focus to grow in areas where we have strong market position and offer best-in-class products are continuing. During the quarter, Electrolux continued to perform well within built-in products in Europe, and we strengthened our market position in those segments.
In North America, our strong focus on the Big Twelve products enabled us to drive further mix improvements. In Small Appliances, we expanded the range of small domestic appliances under the new Expressionist Collection, which includes cookers, toasters, mixers, and coffee makers. We expect this new line of products to gain traction and drive positive mix across our markets in Europe. Electrolux Professional Products is continuing to perform well by bringing the best professional appliances into the marketplace and have continued to gain share. During the quarter, the team excelled in many ways, including serving the World Cup in Brazil with professional kitchen products, to being recognized for the Best Design Award for our Thermaline high-capacity kitchen products. We continue to gain share in the professional market globally.
If you look at the currencies, the sales, this slide shows the company's sales growth in local currencies over the past few years. Organic growth in the second quarter was negative for the first time since 2011. Lower demand in Latin America is the main reason behind the shortfall. Despite the temporary trend in the curve, Electrolux has generated growth in local currencies of above 8% in the last two years, and as you know, our strategic growth target is 4% annually. Now let's go through the business areas, starting with our European operations. Our European demand continued to show a dispersed pattern, where demand increased in Iberian countries and Benelux, while it was weakening in Eastern Europe and the Middle East.
Mix continued to improve due to the good response to our higher-margin branded product offerings and strategic focus areas within the built-in segments. Prices continued to decline in the quarter, albeit at a lower level than previous quarters. In the quarter, our results increased by almost SEK 200 million versus previous year, primarily as a result of lower costs and a stronger product mix. Our efforts to reduce costs and enhance efficiency within operations continue to show effect and are contributing positively to our earnings. Unfavorable currency movements and price pressure continued to negatively impact operating income. Now let's talk about the overall market development in Europe. The European market continued to show a positive trend and was up by 1% in the quarter. Demand increased in most regions. Western Europe and Eastern Europe both grew by 1%, respectively.
Demand in Germany, one of our major markets, increased by 2%. The recovery in Southern Europe continued, with volumes increasing from low levels. The Iberian countries grew by 10%. Italy was flat. The Nordic region, France, and Benelux markets, however, declined. Looking into the full year 2014, we reconfirm our view that the European market is in recovery and demand will increase by 1%-3%. Now let's go to North America. Our operations in North America showed a solid performance and improved in compared to the second quarter of last year. Volumes in core appliances continued to increase. However, we saw a decline in our overall volumes, mainly as a result of significantly lower sales within the room air conditioning category.
Sales volumes were negatively affected also by a fire at one of our suppliers within the refrigeration and laundry segment. As expected, the mix continued to improve in North American operations, with a strong focus on growing in premium segments, such as cooking products and multi-door refrigerators. Price increases that were implemented at the end of last year are holding. Overall, the operating income in North America improved versus last year, mainly due to stronger product mix and stable prices, which contributed to the results. The consolidation of cooking products production to Memphis, Tennessee, from our plant in L'Assomption, Canada, is in its final stage, and actually the factory in L'Assomption is now closed. I'd like to add that the North American team has done a particularly good job with this very large, complex plant transition, both for the business and for our employees in all facilities.
Now let's turn to the next slide and talk about the market in North America. In the second quarter of 2014, the pace of growth picked up again, and market demand for core appliances in North America increased by 6%. The strong June month was partly driven by shipments to Fourth of July promotions. Year-to-date, we have about 4% market growth in the U.S. and North America. The underlying market for appliances in North America is healthy, and we continue to see consumer confidence and the macroeconomic environment to be positive for future appliance demand. As such, we reconfirm our view that the North American market will increase by 4% in 2014. Now let's go to Latin America. Market demand for appliances in Latin America continued to decline in the second quarter.
The sharp deterioration in the macroeconomic environment during the spring had a negative impact on market volumes. Brazil and several other Latin American markets displayed declines in sales volumes, the slowdown was further fueled by temporary negative impact of sales related to the activities around the World Cup. Our earnings were negatively affected by the lower demand in Brazil, as well as from inflationary pressures and continued currency headwinds. Price increases and the improved mix largely offset the currency headwinds and the high rate of inflation. Despite the weakening market conditions, our operations in Latin America showed a good relative performance, driven by higher prices and improved mix in most regions. Actions, including significant cost reductions, have been taken to compensate for the weaker market environment. Let's turn the slide and talk about our operations in Asia- Pacific.
Organic growth in Asia- Pacific was slightly more than 3%. Our operating margins declined in the second quarter compared to last year, but increased on a sequential basis. The lower profitability is a result of negative country mix effects, but also costs for marketing and product launches in China and Southeast Asia. The Australian market declined slightly compared to the corresponding period of last year. Our operating margin in Australia was negatively impacted by the ongoing ramp-up of costs related to the new plant in Rayong, Thailand. Increased prices offset lower volumes and contributed positively to earnings, while unfavorable currency had a negative impact year-on-year. Market demand in Southeast Asia and China continued to show positive growth in the quarter. Volumes in Southeast Asia had a positive contribution to earnings. Unfavorable country mix related to our growth in China had a negative impact on earnings for the business area.
Investment costs for product launches continued to have an adverse impact on earnings. Negative year-over-year currency movements affected earnings negatively in the quarter. Now let's continue with the Small Appliance business. Sales in Small Appliances declined during the second quarter of 2014. The lower sales growth was due to lower volumes in North America and a shortfall of sales in Latin America, where volumes have been affected by the weakening of the Brazilian economy. Growth in Asia continued to be positive, but was not enough to offset the lower volumes. Our operating income declined in the quarter compared to the same period last year. Lower volumes, unfavorable country mix, and price all had a negative impact on earnings. Continued headwinds from emerging market currencies and the strong US dollar also had an impact on earnings.
Now let's turn the slide and talk about our professional business. Professional Products continued to benefit from growing market demand. We strengthened our position further in strategic growth markets during the second quarter. The organic growth rate of 8% was mainly driven by increased sales in emerging markets and Europe, emerging markets account for about 20% of the sales of that global business. Operating income and margins improved in the quarter, primarily as a result of higher sales volumes. An improved cost structure also contributed to the results. Now I'd like to ask Tomas to give his thoughts about the financial results and our cash flow in the second quarter. Please, Tomas.
Thank you, Keith. Let's start with the financial overview, as usual. Starting at the top, in the quarter, net sales was down 4.9%, whereof negative organic growth was 3.8% and currency was 1.1%. As you heard from Keith, this sales decline was mainly related to the market downturn and the volume impact we saw in Latin America. The EBIT, or the operating earnings, grew by 13% versus last year and amounted to SEK 1,167 million, and the margin increased from 3.7% to 4.4%. In the earnings, we have a positive one-off of SEK 80 million.
Even if you take that out, we had a growth of 5% of the EBIT compared to last year, and the EBIT margin would have been 4.1% instead of 4.4%, if you take that out. Operating cash flow after investments or operating free cash flow in the quarter was significantly higher than last year, amounted to SEK 3.3 billion, and I will discuss that a little bit more later. Earnings per share grew by 27% and came in at SEK 2.85. Now let's move to the sales and EBIT bridge. This time, we have some news for you here. What we're doing here is that we are disclosing a split of the organic growth in price mix and in volume.
What we've really done here is that we have taken out price mix effects from the organic column here, and then kept everything else in the volume part. The reason why we do this is that we want to show you the interdependency between price mix effect on one side and currency effect on the other side. If we then start with the volume part, the revenue decline was SEK 2.2 billion. The EBIT impact was -SEK 263 million, giving a drop-through or a negative drop-through of 11.9%, which is really good given the circumstances, to a large extent, helped by the good traction we have in the savings programs.
We then move to the price mix part of the organic effects here, you can see that they gave a positive top-line effect of SEK 1.2 billion, and an EBIT effect of SEK 743 million altogether. Now these SEK 743 million should be seen together with a negative SEK 420 million in negative currency transaction effects. If the negative currency transaction effects would have been less, we would have had less positive price mix effects. Sort of corresponding items here. Just as in Q1, the take home message here is that the negative currency effects are mitigated through price mix actions. To sum it all up, this all resulted in an increase of our EBIT margin from 3.7% to 4.4%.
You can also see the one-off here in the other column here, the SEK 80 million, that contributed with 30 basis points in margin accretion. If you take that out, we are on 4.1%, but still a good margin accretion, all in all. Let's go to the currencies a little bit more in detail. The total of the transaction effects were SEK 420 million in the quarter. What is happening here, and what has happened in the second quarter, is that the currencies that we're exposed to are moving in the right direction. The currency effects are decreasing. Please remember that this is a year-over-year analysis and not a sequential one, we're still comparing Q2- over- Q2 in these numbers. If you do that comparison, it's negative.
That's what gives a negative currency effect in the quarter. As I said, they are moving in the right direction. If we look forward for the third quarter here, at current rates, we expect this number to be cut at least in half or maybe as much as maybe three quarters. The transactional effect, we expect to be somewhere between -SEK 100 to -SEK 200 in the third quarter. Of course, also don't forget what we discussed on the previous slide here, that the currency effects are very tightly connected to the price mix effects. Okay, let's move over to the next slide and have a look at the restructuring actions.
What we would like to do here is to go back to the third quarter last year, when we announced the final stage of the 10-year-long manufacturing footprint program. What we announced at that point in time was that we would take SEK 3.4 billion in restructuring charges for a saving of SEK 1.8 billion. It was SEK 2.2 billion for manufacturing, SEK 1.2 billion for overhead cost reduction, and then we added also an impairment of an ERP system, so a total of SEK 4.4 billion. What has happened then, since then, is that in Q4, we took SEK 1.5 billion in restructuring charges. We did the impairment of the ERP platform. Now, in Q1 and Q2, in total, we have taken SEK 1.1 billion in restructuring charges.
The total here is SEK 2.6 of the SEK 3.4, year- to- date, or since announcement, I should say. SEK 1.4 billion in manufacturing and SEK 1.2 billion in overhead cost reductions. As mentioned, this is the final stage of the very long manufacturing footprint program, and it's coming to an end. We still have SEK 800 million to go. When this program is closed, we will also eliminate the practice of items affecting comparability. There will, of course, we can't rule out that it might be restructuring projects in the future.
There will most likely be, but when that happens, we'll take it directly to earnings in order to be more transparent and have a more simple income statement. Okay, now let's move over and talk about cash flow. Cash flow statement, good increase year-over-year here, SEK 3.3 billion compared to SEK 2.6 billion a year ago. It's a pretty simple story. Earnings were up, working capital were better, investments were less, so green lights on all items here. If we then move to the next slide, we have the cash flow over the last four years. We just want to remind you that we have a strong seasonality in the cash flow. Q1 is always weak, as you can see.
Q2 is always very good, to a large extent, driven by this aircon season. Q3 is weaker, Q4 is normally a little bit better again. Don't expect SEK 3.3 billion for Q3 and for Q4 as well. With those words, I would like to hand it back to Keith again.
Okay, thank you, Tomas. Let's move on and summarize the presentation with an outlook and a summary for Q3 and 2014 full year. If you go to the Outlook page, if we look ahead into the third quarter and the full year 2014, we believe that recovery will continue for Electrolux and the appliance industry. We expect market demand in Europe to continue to improve and to be up slightly, which will impact our businesses positively in that region. We anticipate growth in North America in 2014, supported by the improving macro and a gradual recovery of the housing market. Visibility in Latin America, however, is quite low. We expect to see the demand situation continuing to be under pressure this year in that market.
In terms of price and mix, we expect a positive impact in both North America and Latin America during the third quarter. Prices continue to be under pressure in Europe, but will, to some extent, be offset by better product mix. We expect raw material costs to be close to flat in the quarter as steel prices remain stable, while we have some on-cost related to plastics. We continue to reduce costs, and in combination with already implemented actions, we are taking measures to further reduce our structural cost base, particularly in Major Appliances EMEA. We expect overall cost savings in 2014 to amount to approximately 1 billion-1.2 billion SEK. In line with our strategy, 2014 will be a year of improving our mix through product launches, requiring some increased investments in marketing and product development.
We will benefit from the momentum we have in North America and keep our strategic focus for expanding in new channels and segments in that market. With that, Catarina, I think we're open for questions.
Right. Good morning, everyone, and as Keith said, we'll now open up for a Q&A session. Please, operator, if we could have our first question, please.
The first question is from Andreas Willi, J.P. Morgan.
Good morning, everybody. My question is on your top-line guidance for Q3 and what we have seen in Q2. You, you expect market growth in Q3, but we have seen quite a negative growth in your business in Q2. Where is the improvement coming from? Which, which of these emerging markets that were so weak in Q3, do you expect Q2, do you expect to get better in Q3? Given the, the weak emerging market consumer we are seeing at the moment, as you highlighted in the press release, are you adapting your strategy in terms of investments and growth there, in terms of the money you put in, into some of these markets? Thank you.
Okay. Thank you, Andreas. Let me just go around the world quickly. We talk about the growth and our anticipation in Q3 and the remainder of the year. As we stated, we think there'll be growth in both Europe and North America that we'll participate in. You know, some of the declines in Europe, as an example, were very conscious declines, and that's why the earnings are improving, right? We're focusing on the premium products and built-in segments where we're gaining share, and we're walking away from some freestanding, unprofitable business. Those are kind of conscious choices, but we think going forward, the market and our business will track close to the market. Same thing in the U.S.
We think the U.S. market will grow. We'll grow with it. We won't have the air conditioning comp that we had in Q2. It'll be straight. Our core business, our core white volume in North America grew during the quarter. There's no pattern of change there. We had good growth in Southeast Asia and China, even to, even though, to your point, we do see the China demand slowing. We see that as a market, but as you know, the good and bad news is we're still relatively small. We've got growth opportunities in China and Southeast Asia. The big challenge, as you know, is Latin America. A significant slowdown there.
Going forward, we expect that our volume will continue to be down in Latin America going forward. In Q3, in the second half, we're cautiously optimistic that our price and mix will offset that volume. Therefore, we don't think the volume will be quite as drastic in the second half. Perhaps from a sales standpoint, we could mitigate or get close to mitigating some of the volume decline. That's our, that's our perspective.
Okay, did that answer to your question?
Yeah, in terms of your investments in some of these markets, like, are you, are you changing, like, the money you put in into China, given the weaker market, or you're going ahead as before with your launch strategy there?
Yeah, I would say in China, we're continuing. You know, again, this is a long-term play here, so we're continuing in China. I would say in Latin America, obviously, we've made substantial cost reductions relative to the weak market, so quite different between the two.
Thank you very much.
Yep.
Thank you. Could we have our next question, please?
The next question is from Domenico Ghilotti, Equita.
Good morning. First question is on the situation in Europe that you see after the consolidation in the market, after the announcement of the takeover of Indesit by Whirlpool. How do you see the impact for you on the European market? If you could elaborate also a bit more on the cost and benefits from the reorganization that you achieved in Italy last May.
Yeah. Let me start with the first question around the announced acquisition, Whirlpool acquisition of Indesit. Of course, it's not appropriate for me to comment specifically on that transaction, but to your point, consolidation generally is a good thing. You know, when we see a market that is consolidating, generally, that's a good direction. We have that view about what's happening in Europe similarly, if I can kind of just leave it at that. We think it's a good thing for the industry and therefore for us. In Italy, as you know, it's been a very challenging, but I think the team has done an incredibly good job working through a very complex negotiation with many stakeholders, so many union leaders, and local, state, federal officials.
We're pleased with the agreement we got to, where it will allow us to substantially lower or lower our costs, the inverse, improve our competitiveness, in that country, in our manufacturing facilities in Italy going forward. We've taken, you can see the charges that Tomas mentioned that were taken. They're largely related to that, and we feel good about the resolution, for all parties, and will have us in a substantially in an improved cost position in Italy.
should we expect that charges are basically in line with the original expectations? There are room for, say, some improvement and charges that you were expecting at the beginning of the plan?
Yeah, no, actually, for the specific Italian, obviously, the charges were lower than original assumptions. We got different, obviously, we've got different portfolio of facilities here that we're looking at. There, nothing was tied discretely to individual plants.
Uh-huh.
Yeah, the actual Italy came in a little bit lower. Actually, the short version is the costs were lower, and the benefit was higher on a ratio basis.
Okay, thank you.
Okay, could we move on to our next question, please?
Ladies and gentlemen, as a reminder, if you wish to ask a question, please press zero one. The next question is from Andreas Willi, J.P. Morgan.
Yes, a follow-up question on the, what you just said on the, on the restructuring. Given the change in Italy, should we still put in the full number for this year? Are you going to find alternative factory mesh, factory reductions, that you can book this year, or should we spread the charge, the remaining charge out, maybe over the next two years? Thank you.
Yeah, of course, it's hard to predict, you know, what quarter things, as you know, address. I would say my guidance to you would be, I think, Tomas, our guidance would be the original program of the 3.4 . You should anticipate, you know, exactly what quarter that happens in is going to be hard to tell you. You know, I think the primary message is what Tomas said earlier, which is it's coming to an end. It will be not more than the 3.4 , and when the 3.4 is done, it's done. We will eliminate, and stop and complete this overall restructuring plan.
If and when, again, to repeat Tomas' point, if and when we see an opportunity for a restructuring opportunity, we'll take it, you know, if it's value liberating, but we'll take it right to earnings. Of course, part of what that message is that there's not many more big ones left, right? We've kind of done all the heavy lifting. I think the clear message here from us is that kind of below the line item affecting comparability is going away.
I mean, we've been going on now for 10 years, since 2004, and the total sum of all these charges will be something like SEK 11 billion or something. That's SEK 1 billion a year that we've had for 10 years, and we're done basically now. That's the important thing.
Was there in the quarter any other unusual negatives in terms of capacity reductions or employee reductions, like in Small Appliances or Latin America, that you have not broken out specifically?
Yes, there always are, Andreas. Yes, I mean, we took out costs and people and, you know, depending on the market and the business sector. In both, and you mentioned one of them, but obviously Small Appliances, Latin America, Major Appliances. You know, that's business, so we don't normally pull them out. We just
Okay.
There's always a long list of pluses and minuses going back and forth. I mean, if it would have an impact, I mean, if it would seriously impact the earnings up or down, we would talk about it. I mean, the only thing that we've broken out is the insurance recovery.
Right.
Yeah, yeah.
Thank you very much.
Thank you. Could we have our next question, please?
The next question is from Karri Rinta, Handelsbanken.
Yes, thank you. Two quick questions. Firstly, on the Asia- Pacific and more specifically, China. I think previously you have talked about this new product ramp-up in China consuming most of this year. Can you comment a bit more specifically? Today you mentioned this as sort of a adverse country mix, which I assume means growth in China. At which point would we get to a point where we start to have a bit easier comparables, i.e., so that on a year-on-year basis, this trend would turn positive? Is it sometime second half this year, or are we talking about 2015? That's my first question.
Yeah. Let me take that one first, and we can continue. Yes, when we talk about negative country mix, that's exactly what we're talking about, which is the growth in China at low, or in this case, with the investment, negative EBIT against a flat or slightly declining double-digit margin Australia. That's exactly what we're talking about, part A. Part B, I would say that the positive comp is going to come next year. I think this is long term. It's hard work. It's the retail transition is going to continue. I don't see it in the second half of this year. I would say, Tomas, next year.
Yeah, yeah. I mean, It's gonna continue for a number of quarters. We're coming from a situation where Australia was 25, so sorry, 75%, and then Asia was 25%.
Yeah. No, I'm sorry. I when I said the comp, I really meant the China comp, not the Australia comp.
No, I was thinking of the mix.
We'll never flip that. Yeah, we'll never flip that.
We're moving to a situation where we would be like, more like 25, 75, the other way around. Right now we're on 50/50, so it's gonna take some number of years before we're there.
Sure.
I mean, not like a decade, but another couple of years-
Yeah
before we have, let's say, before the country mix effect fades out, and you have still a neutral comps on that one.
Yeah.
Yeah.
Yeah. I think the question was more on when is China gonna start turning positive?
Okay.
I think it'll be more next year than this year.
Yeah, it was more of China, but the added color was helpful as well. Thank you. The Indesit transaction, you mentioned that consolidations tends to be positive, but in this specific case, and when it comes to the European market, I guess now we're talking more multi-year, half a decade change, rather than something that would sort of boost the European market or pricing next year, that's my sort of a question, or what are your more specific thoughts on that, if any?
I'm not sure I fully get the question, actually. Could you repeat the question?
I guess the question is that given the still the quite high overcapacity or oversupply that we have in Europe, and then, as you mentioned, the Whirlpool's acquisition of Indesit is a good thing, but before we get rid of this overcapacity, then I at least... I guess it's too early to assume that pricing would improve significantly in Europe next year because of the Indesit transaction.
Yeah, I think the trend is, I mean, the general business trend right around consolidating generally, you know, is a positive impact. We think that is not gonna be different here. You're asking about the timing? Yeah, I don't know. It's, you know, we'll see how long that takes. I don't know.
All right. Thank you.
Okay. Do we have any further questions?
We currently have no further questions. I hand back to the speakers.
All right, I hand back to Keith to summarize the quarter. Go ahead, Keith.
Okay. Thank you, Catarina. Tomas, thank you, everyone. If you just look at the last page in the deck, which says Summary Q2, I'll try to summarize the quarter here. Overall, we saw continued good trends in our major markets, with both markets in Europe showing a gradual recovery, had a good mix development and cost out actions in Europe, which helped improve the earnings. There's a clear focus on earnings recovery and restoring earnings in Europe. Hopefully, you see that. I think Jonas and the team are quite focused on that. Growth in the U.S. picked up in the quarter, and as you know, sequentially, it actually picked up with a very strong June as well, and our operations there continue to perform well.
We expect market growth will continue at a steady pace and in the range that we've previously communicated, about 4%. As we've already highlighted, we've seen a significant downturn in Latin America, particularly Brazil, Argentina. However, given the weak demand in that region, I actually feel very particularly good about the team's work there, because with that kind of downturn, to protect the earnings and improve the cash flow, I tip my hat to Ruy and the team. They're very good work. We do think, as you know, that's more of a quarterly, a few quarters, not a few years, change in the Latin American market. Asia-Pacific and Professional continue to show good growth in the second quarter.
Lastly, as Tomas mentioned, and explained quite well, we had another strong quarter of cash flow and very good, focused determination around cash conversion, Tomas, throughout the group. With that, I'd like to thank everybody for listening and for your continued interest and support in this company, Electrolux, and for those who have the opportunity, I wish you a very great summer. Thanks very much.