Good morning, and welcome everyone to this presentation and discussion, fourth quarter and full year 2013 results for Electrolux. With me today, I have our CFO, Tomas Eliasson, and I'd like to also take the opportunity to present to you our new Head of IR, Catarina Ihre, who will also be our moderator during the Q&A session. Now let's begin our presentation. 2013, strategic and operation, along with some significant headwinds. Total sales amounted to SEK 109 billion. The organic growth for the year was 4.5%, and currency effects were a negative 5.3%. This second of achieving our growth targets, including acquisitions, the total growth in local currencies year, percent.
This means we're delivering on our strategy, continued profitable growth is critical for our capability to continue to deliver economic value going forward to all of our shareholders. North America, which accounts for 30% of sales, showed strong sales and earnings growth based on continued positive volume trend and improved price and mix throughout the entire year. All businesses in Europe suffered from weak consumer demand during the year, with declining volumes and negative price effects. In currency impacts, we're able to create an underlying operating income of 4 billion SEK. In Europe, we continued to focus on our strategy and increase the pace of new product offerings. We invested in profitable growth in marketing, R&D, and design, and implemented efficiency enhancements in production. In 2013, we announced the updated manufacturing footprint program, as well as a decision to reduce our overhead costs.
The total estimated charge is 3.4 billion SEK, for a savings of 1.8 billion SEK. The savings will be fully realized by the end of 2016. In 2013, we charged 1.5 billion SEK, and the remaining charge will be taken during 2014. The board's proposal of a dividend of 6.5 SEK per share reflects Electrolux's healthy balance sheet and maintains flexibility to expand our operations in a profitable way, both organically and through acquisitions. Now let's look into the fourth quarter. In the fourth quarter, we had positive organic growth in all of our business areas, every operating unit, with particularly healthy growth in North America, Asia Pacific, small appliances, and professional. Volumes and mix were the primary drivers. In the fourth quarter, currency fluctuations continued to be a headwind.
In total, this had a negative impact on earnings of slightly less than SEK 450 million. Demand continued to slow in Latin America, mainly as a result of the slowdown in Brazil. In addition to the weak market, our results in Latin America were negatively impacted by the currency movements. Despite positive volume growth and mix, earnings in all of our European businesses continued to be negatively impacted by the continued weak market conditions and price pressures. The savings programs have been initiated and will deliver significant impact later in the year. Operations in the other business areas showed solid underlying results. Our cash flow was solid in the quarter, mainly as a result of improved working capital productivity. Now I'd like to give you some market highlights before we get into the business area results.
On the next page, if you go back to the middle of 2012, you'll recall that we began the first launch of the Electrolux Inspiration range in selected countries as part of our profitable growth strategy to strengthen our position in Europe. During this year, we have successfully completed the full launch of the Electrolux Inspiration range across all markets in Europe. By that, together with the renewals of the other two main brands in Europe, AEG and Zanussi, we have now completely renewed 80% of the product portfolio in that region. In small appliances, including floor care, we have completed the new vacuum cleaner lineup and have gained good momentum in our key growth markets around the world. One of the most important launches was initiated in the second half of the year with a brand-new premium product being launched in China. The launch is progressing well.
We are repositioning the Electrolux brand and will, over the next several years, strengthen our foothold in the Chinese premium appliance market. Now let's switch the slide and take a look at our sales development in the various geographical regions. North America continued to grow at a steady pace, as did Australia and New Zealand. Both these markets are very profitable and therefore important to the group. Although growth remains positive in Latin America, there has been a slowdown in pace, particularly in the second half. Europe moved more or less sideways and ended up slightly positive for the quarter. Our growth in Asia continued and was up 17% in the quarter. If you move to the next slide, it's interesting to just look back a little bit, this slide shows the company's sales growth in local currencies over the past few years....
We can see clearly that the organic growth and sales is on the rise. Sales have been fueled both in addition to organic, by acquisitions that we made at the end of 2011. Combined with the acquired growth, Electrolux has in total generated 14% growth in the last two years, well above our strategic growth target of 4% annually. Now let's go through the business areas, starting with Europe, Middle East, Africa. Major appliances EMEA continued to face a challenging market environment. However, Electrolux achieved higher volumes compared to the same period last year. Our organic sales were slightly positive, mainly driven by improvements in mix, like the key Electrolux Inspiration range just mentioned previously. Despite lower demand in Western Europe, Electrolux was able to gain volumes in key product categories.
Prices continued to decline in the fourth quarter, while mix continued to improve due to the good response to the higher margin branded product offerings. In the quarter, our results were impacted by SEK 104 million of unfavorable gross currency movements as the euro and the US dollar strengthened in relation to some European currencies. We are taking major actions to reduce costs in Europe. We will complete the next stage of our manufacturing footprint and reduce overhead costs over the next three years. Now let's talk about the market development in Europe. On the next slide, you can see that the European market declined by about 1.3% in the fourth quarter. The markets in Southern Europe remained weak. In France, demand fell by 3%, in Italy by 2.6%, and in Spain by just under 3%.
Sequentially, however, these markets are not getting worse, but rather going sideways. The market conditions in Central and Northern Europe have been stable during the quarter. The market in Eastern Europe started to slow down, mainly as a result of some weakening that we saw in Russia. Most of the markets in that region were unchanged. Looking ahead into full year 2014, we estimate that the market for appliances in Europe will be flat to slightly positive. Now let's take a look at North America. Major Appliances North America grew 7.6% organically, driven by strong volume growth in most core categories. During Black Friday, which is the most intensive promotion period of the year, Electrolux chose to focus more on the contribution and margins, and therefore stayed out of some of the most competitive product categories.
There was significant inventory reduction during the quarter to generate cash, which negatively impacted earnings due to under absorption. Earnings were also impacted by customer and product mix that had a negative impact. The EBITDA in the quarter was affected by a pension gain of 130 million SEK. On an underlying basis in local currencies, operating income improved slightly compared with last year. We have recently implemented a series of price increases in The U.S. market, which we expect to have an effect already in the Q1. Now let's turn to the next slide and talk about the market development in The U.S. As you can see on the next chart, in the last quarter of 2013, market demand for core appliances in North America increased by 10%.
Consumer confidence continues to improve and is at a higher level than a year ago, we continue to see housing data improving. For the full year 2013, the North American market increased by approximately 9%. Currently, we estimate that North American market will increase again in 2014, by 4% plus. Now let's go to Latin America. Market demand for core appliances declined in the fourth quarter. The ending of the Brazilian government's tax incentives for white goods had a negative impact on market volumes. Also, the macroeconomic environment has weakened somewhat. Our earnings were negatively impacted by the lower demand in Brazil, as well as volume losses related to the fire in the warehouse in Curitiba, in that country.
Higher price mix and cost savings had a positive contribution to earnings, were more than offset by the negative impact of currency headwinds. Actions, including cost reductions, have been taken to compensate for the weaker market environment and the currency headwinds. Price increases have been implemented in the Brazilian market and will contribute positively to our earnings. New innovative products will also help further improve our price mix. Now let's turn to the next slide and talk about our operations in Asia Pacific. Our operating margins in Asia Pacific declined compared to the fourth quarter of last year. The lower profitability was mainly due to country mix effects between Australia, New Zealand, and Asia, but also to costs associated with the product launches in China and Southeast Asia. Market demand in Australia continued to show gradual recovery.
Our sales growth of 5% was mainly driven by price increases and better mix. The operating margin in Australia improved and remains at double-digit levels. The implemented price increases in the third quarter have begun to show effect, and unfavorable currency did have a negative impact on earnings in Australia. The markets in Southeast Asia and China continued to show growth in the fourth quarter. In Southeast Asia, volume growth had a positive contribution to earnings. In China, volumes were lower as we shifted focus from low-margin volumes to capture growth in the higher-end, newly launched product segment. Positive product mix shift contributed positively to earnings. Negative currency movements, combined with launch costs in China and ramp-up costs in the plant in Rayong, Thailand, affected operating income negatively in the quarter. Let's continue with small appliances.
Organic growth in small appliances was a positive 4.8% in the quarter. Sales increased in all regions and were positively driven by both price and by mix. Sales volumes for vacuum cleaners and small domestic appliances were particularly strong in the Asia Pacific region. Operating income improved in the quarter, supported by favorable price mix. Continued headwind from unfavorable currency movements, however, had a negative impact on earnings, particularly for our small appliance operations in Latin America. The strengthening of the US dollar against the Brazilian real has led to increased costs for the sourced products in this business unit. We have intensified marketing activities for the new product launches in Asia Pacific and North America, and this also had a negative impact on earnings in the quarter. Now let's turn the slide and talk about our professional business.
Market demand for professional products continued to improve in our strategic growth markets during the fourth quarter. The organic growth rate was above 10% in the quarter. Growth in The U.S., which accounts for 15% of the professional business, is increasing, and sales in emerging markets grew as well. Operating income and margins improved in the quarter, primarily as a result of higher volumes, but also due to price increases. Now I'd like Tomas to give his thoughts about our financials and also to talk about our cash flow in the fourth quarter and the full year. Please, Tomas.
Thank you, Keith. Let's, as usual, start with an overview of the financial results for the fourth quarter and the full year 2013. If we start with the sales, organic growth is 3.6% in the quarter, and for the full year, organic growth was 4.5%. Currency in the quarter was -4.6%, -SEK 1.3 billion on the top line, and for the full year, the currency effect on the top line was -SEK 5.8 billion, meaning -5.3%. All in all, net sales was down 1% in the quarter and -0.8% for the full year. Earnings ended at SEK 1.2 billion in the quarter, corresponding to a margin of 4.2%.
The cash flow was steady, good cash conversion, SEK 1.2 billion, and we'll get into more of those details in a minute. Earnings per share ended at SEK 3.8, compared to SEK 3.9 for a year ago. All these numbers are excluding items affecting comparability. If we move to the next slide and take a look at the sales and EBIT bridge for the quarter, split in organic growth and currency effects. We'll start with the organic growth of 3.6%. That added SEK 1.05 billion to the sales. The EBIT impact was SEK 75 million, meaning an accretion of 7.1%.
The currency effects, in all, took off, as mentioned, SEK 1.3 billion from the top line, -4.6%, and the EBIT effect of the currency effects was SEK 442 million, split in SEK 117 million in translation effects and SEK 325 million in transaction effects. All in all, this meant that the margin went from 5.4%- 4.2% in the quarter. We move to the next slide. We can dive a little bit into the currency effects on the EBIT line. Here you see all the four quarters and the full year for the major currencies. The negative currency, the negative transaction effect in the quarter was SEK 325 million.
This is SEK 375 million in gross transaction effect, then a positive SEK 50 million in hedging contract effects. Translation effect was SEK 117 million. All in all, SEK 442 million. You can see in the table that one third of the negative impact was from Latin American currencies, where these currencies continue to weaken against the US dollar and the euro. This is the general development for us, is that the US dollar and the euro are strengthening against important currency pairs for us. Also the Australian dollar and the Egyptian pounds, and not mentioned here, the South African rand as well, and Russian rubles. If we then move to the next slide, and take an overview of the restructuring charges that we took in Q4.
First, let's go back to Q3 and just to recall what we announced in October in the Q3 report. At that point, we said that we would take a restructuring charge of SEK 3.4 billion, and we would do an impairment of SEK 1 billion, a total of SEK 4.4 billion. Those charges were to be taken in Q4 2013, as well as in 2014, as the various projects are starting. What we did in Q4 2013 was to take a charge of SEK 1.5 billion for the restructuring. That is, about SEK 1 billion for overhead cost restriction, reduction, and about SEK 500 million for manufacturing footprint. Then we did the impairment of an ERP platform, and that ended up at SEK 900 million.
All in all, SEK 2.4 billion that affects the earnings in the fourth quarter, recorded as items affecting comparability. In 2014, we will take the remaining charge of SEK 2 billion in Q1 and possibly later on in Q2 and Q3 as well. All in all, we expect the total charge to be SEK 4.4 billion for 2013 and 2014 together. If we leave the P&L then and move over to the cash flow. Cash flow in the quarter was SEK 1.2 billion lower than a year ago, but a good cash conversion. Of course, earnings are down 2013 compared to 2012, and that, of course, affects the cash flow as well. However, operating assets and liabilities in the quarter were up.
We had good effects from inventory reductions. We also had some pension fund payments into the company as well. CapEx was slightly above last year. With that, I would like to hand back to Keith again for conclusions and outlook.
Okay, Tomas, thank you. If you flip to the outlook page, we try to summarize what we see in Q1 2014 in the full year. We believe that 2014 will be another year of growth for Electrolux and the appliance industry. We expect market demand in Europe to be flat to slightly positive, and that will impact our, all of our businesses in that region. We anticipate continued growth in North America in 2014, supported by the continued gradual recovery in the housing market. We also continue to see solid growth in our emerging markets with the Brazilian growth numbers, however, slowing. In terms of price and mix, we expect to see a positive impact from prices in both North America and Latin America, beginning in Q1. As the year continues, the year-over-year effect will diminish.
Prices continue to be under pressure in Europe, while the negative country mix will be offset by better product mix. We expect raw material costs to be close to flat in the first quarter as steel prices remain stable while we have some on cost for plastics. For the full year 2014, the net impact for raw materials is likely to be flat, ± SEK 100 million for the full year. In line with our strategy, 2014 will be a year of product launches, requiring our investments in marketing and product development. We will utilize the positive momentum we have in North America and small appliances to increase our investments in brand building in those markets and regions. We are, as we speak, having a major product launch in China, and we'll continue to support that in 2014 to establish Electrolux in that important market.
We will continue to reduce costs in 2014 and take further measures to structurally reduce our cost base, particularly in Europe major appliances. As previously communicated, there will be some temporary cost increases as a result of consolidating our production of cooking products in North America through about mid-year. If you turn the page, let's I'd like to finally close and summarize just the fourth quarter. We continued to deliver on a strategy and grew organically in all business areas in Q4. What has affected us during the period is continued headwinds from currencies and the weak European business. North America showed strong growth, which results on a high level, even though under absorption and negative customer and product mix affected the leverage. We saw a promising growth and profit development in small appliances and our professional businesses.
In Latin America, the weak market development continued and affected volumes negatively. In addition, the warehouse fire previously communicated in Brazil caused some volume losses, which impacted profitability during this quarter. In Europe, the market continued to be weak, but we increased our market share on the back of volume growth. We have a strong focus going forward to restore profitability in this important business in the company. By that, we're open for questions, and I'll ask our Head of IR, Katarina, to take over and handle the moderation. Please, Katarina.
Well, good morning, everyone. We will now, as Keith said, open up for Q&A session. I would just like to remind you all that please take one question at a time. Please, operator.
Our first question comes from Ms. Andreas Willi from JP Morgan. Please go ahead.
Yeah, good morning, everybody. My question is on The U.S. and mix impact there. If you could maybe give us some more explanation for that, because at least my expectation was that if you have positioned your brands higher, you have Home Depot, builder channel, and you didn't participate aggressively in some of the promotions, why do you see the negative mix impact, which is quite material in the quarter? Maybe if you also could quantify the impact of the stocking on the profitability in Q4 in The U.S. Thank you.
As you mentioned, there was a negative impact on mix in the quarter, both from a product standpoint and a customer standpoint. It was mostly just about the choices that the team made there and how to participate during that promotional period. Which customers and which product categories? As you stated, even though we weren't overly aggressive, broadly, of course, we had to participate, but it was the choices they made relative to the customers and the products where we did participate that had a net lower average margin for us. Again, just operational decisions during the period impacted by the mix from customer and product.
In terms of the under absorption, I don't think we would give a specific number on that, but, you know, honestly, Tomas and I have been pushing North America to say: Look, we like what you're doing there, but we want better cash conversion. And they got the message, and they brought their inventory way down, which, of course, helped the strength of the cash in the quarter. When you do that, and unfortunately, they had to do it, you know, a lot in one quarter, you have significant under absorption at the factory. Good for cash, not so good for earnings in the quarter. No fundamental issue with the business. We see North America continuing to grow top and bottom line. A couple of acute things in the quarter, but no fundamental issues.
The destocking is done in that sense for you in The U.S.?
Yes, that's correct.
Yeah. Thank you.
All right. Could we have the next question, please?
Our next question comes from Mr. Aaron Ibbotson from Goldman Sachs. Please go ahead.
Yes, hi there. Good morning. Thank you for taking my question. I just had 1 quite simple question, and that was, given the sort of quite material recent FX moves, and, Tomas, your sort of very good knowledge of how FX tend to impact your businesses. At current state, i.e., end of month rather than end of year, what are you foreseeing that the sort of full year number could potentially look like, when we're ending this year, assuming that nothing changes from here? Do you have any feel at all? Thank you.
Yes, well, we have a feeling for the first quarter, and I think we refrain from talking about the full year. For the first quarter, if we look at the current rates, or let's say, the rates as they were, the day before yesterday, or three days ago, actually, and just sort of extrapolate that into the first quarter, it's worse in the first quarter than it we had in the fourth quarter of 2013. This is because these important currencies, like the Brazilian real, for example, have continued to depreciate during January. The rates are much worse now than the average rate in the fourth quarter of 2013.
We're looking at a transactional effect that will go above SEK 325 that we had in the fourth quarter. It could be as much as somewhere between SEK 450 million and SEK 500 million in the first quarter, given the rates that we have today. Also, let me say again here that when we talk about currency, we talk about gross currency effects. We don't include in that number any mitigating effect, because, of course, we increase prices. Of course, we take other actions to mitigate as much as we can. There's a time lag on this, of course, as always. The currency effects in the first quarter will be more than we have in the fourth quarter.
Okay, thank you.
Could we have our next question, please?
Our next question comes from Mr. Andre Kukhnin from Credit Suisse. Please go ahead.
Good morning. Thanks for taking our question. Could you just run us through the magnitude and timing of your price increases in Brazil and in North America during start of this year and when you raised prices in 2013? Just trying to get sort of to what annualized effect we can expect for 2014. Also, could you quantify the magnitude of price declines in Europe?
Yes. Let me start with the last question first, and I'll come back to first. Europe, the deflation has been around 1.5%. That's kind of where it's been. It was actually a year ago, it was closer to 2%, so it's gotten actually a little bit better going over time, but it's still deflationary.
That's probably the most realistic number to anticipate. We don't see that changing dramatically until we see the market coming back much stronger. That's Europe. For North America, you know, I think as we've communicated previously, we would expect that when you get through it all, net, net, you're in the low single digits, net price effect after all the work. Brazil, it's. You know, I'd rather not try to quantify that right now because we're trying to obviously offset significant currency headwinds, and it's probably a little bit premature until we see how much of that sticks to give you an exact number. Let us get through Q1, and we'll have a better idea on what's sticking in the marketplace there.
Of course, we're looking to, in a significant way, mitigate or go against those currency headwinds.
Got it. Thank you. If I may, just a quick follow-up on the previous question on FX. Thanks for guidance for Q1. Can you give any projections on how that would look for the full year if the current rates stay where they are? Basically, how the table on slide 18 would look if the rates prevail.
I don't think we don't want to go into that today, so.
Okay. Thank you.
Thank you. Could we have our next question, please?
Our next question comes from Mr. Christer Magnergård from DNB. Please go ahead.
Yeah, good morning, and Catarina, welcome.
Thank you.
Just a question on the lower inventories in The U.S. I have to just understand this. Demand has been extremely strong in 2013. Why have your inventories been so high? Basically, that's my first question. Secondly, have you enjoyed over absorption, so to say, in 2013 earlier in North America?
Yeah, I mean, actually, essentially what happened was The U.S. started the year with high inventories, and they stayed at high levels through most of the year. They actually, it was a Q1 issue that they didn't actually take care of until the end of the year, I mean, just to be very transparent. Of course, you know, there's two sides to it, right? I mean, you know, if you get under absorption, you have over absorption during a period of time, but that was mostly during the Q4, the previous year, get carried into Q1 of 2013. That's what happened.
If I look at the 13 on an average in profitability-wise, that gives a better picture than Q4 or Q1?
Yeah, I think that's right. I think that's fair.
Secondly, just a very quick update on the Italy, production facilities that there are some noise in the media about wage cuts and the Italian Prime Minister complaining. Can you give us some update on that?
Yes. As you know, part of the manufacturing footprint program includes a study of our Italian footprint in major appliances. There are four major, four big sites serving the major appliance businesses in Italy. We have been through and are going through a thorough analysis and investigation. We've completed that analysis on our own and have engaged now in the last week or so with all the respective stakeholders, including union officials, employees, and politicians. That's the noise that you're hearing, is the reaction to that engagement process with the key stakeholders.
Again, it's probably not appropriate to guesstimate or to speculate on what's gonna come out of those discussions, but we've begun the engagement process with those key stakeholders, and we will, we expect to have it all worked through with final decisions by April.
Okay, thanks.
Okay. Should we then move on to our next question, please?
Our next question comes from Mr. Johan Eliason from Kepler Cheuvreux. Please go ahead.
Hi, this is Johan. Just a few questions on Asia Pacific here. You talked about the extra costs for the new refrigerator plant in Thailand. Could you quantify that somehow in the quarter? Also on this China marketing, any quantification there would help as well for the marketing costs in this quarter. Thank you.
The marketing expense, a little over SEK 100 million in the quarter for the China C5 launch. You know, that's a continuation of the beginning of that started in Q3. That's that part. We actually haven't broken out our, you know, what our plant costs are. I'd rather just leave that alone. You know, there was an impact and has been as we ramped that new plant up through most of the year. To answer your question, a little over SEK 100 million in Q4 for the C5 launch.
Is that the sort of level you expect now, as you say, the China launch will continue, or you're spending even more going forward?
I would expect that into 2014, given that we'll have a couple of more quarters, it'd be between SEK 50 million and SEK 100 million net increase, year-over-year, from 2013 to 2014.
On a full year basis?
Yes.
Okay. Thank you.
Well, maybe we could just add a few things here to understand the margin, EBIT margin in Asia Pacific. You see, the EBIT margin, as you can see the numbers, the EBIT margin was 4.5% in the fourth quarter this year, and it was 9.3% a year ago. The big chunks in this is the mix development here, where we have not so much growth in Australia and New Zealand, which is a high margin market for us, and a very good and very high growth in China, which doesn't have a very high margin at all.
Yeah.
Yeah. That's the two big chunks, geographical mix, and the launch costs in China, and then a little bit as well from the ramp up of the factory in Southeast Asia. That's the three parts that explains it.
Just this, you say low margins in China, partly it's obviously because of the marketing. You all do talk about premium products in China. Eventually, we should expect it maybe not to be as good as in Australia in that market, it should be a good margins on the Chinese business if I'm right?
Yeah, over time, of course, there will be much better margins in China, but we are not at all at this point in time on that volume that we need to have.
Mm-hmm.
We need to grow a couple of years here before we reach these margin levels. At least it's positive. If you recall, not so many years ago, this was a bleeding hole.
Mm-hmm.
It was. Now we're at least positive, but we need to do some work for another couple of years before we get to good margins in China.
Yeah. Okay, thank you.
Thank you. Should we move on to the next question, please?
Our next question goes to Mr. James Moore from Redburn. Please go ahead.
Yeah, hi, everyone. Hi, Keith, Tomas, Catarina. I see some data that suggests European appliance pricing pressure got a bit worse in the fourth quarter. I wonder if you could just talk a bit broadly about what's going on in the market at the moment, because the Turkish lira has weakened, and we have a player there who could use that. I wondered if that's what's happening. We've seen the Fagor insolvency. How is that affecting Europe? There's talk about consolidation with Indesit and other assets in play. There's a lot of flux in Europe over and above what's been a difficult volume market. I just wondered if you could give us a sense for what you're actually seeing on the ground with respect to pricing.
No, no, that's fair, James. I mean, actually, the pricing in Q4 was a tad bit worse than it was in Q3, you know, back 20 basis points. You know, it's hard to really say, yeah, it's changed materially, but actually, it was a little bit worse, about 1.7% versus 1.5%. That's, that's about, actually, you're reading it about right. I don't take that as, "Hey, look, we got a new trend happening in Europe, in pricing." I still think it's in that, you know, 1.5% range, but it's a pretty competitive market for sure, given all the things you talked about and the fact that there's still double-digit unemployment in the Eurozone.
Having said that, you know, most economists are forecasting a positive GDP, right? That'll be the first year in the last 3 years for that to happen. We're forecasting for the first time that actually we could see some net positive appliance demand in the year. But it's a tough market for sure.
Maybe I could just follow up that the consensus is about SEK 5.5 billion for this year. I wonder whether you could just help us a bit with the many moving parts that are going on as to what you think the points that aren't that well reflected in the consensus are. You've obviously talked about the currency, and I suppose we can guess there might be some hangover 2Q, maybe even 3Q there. Are there other big moving parts that you think we need to think about?
Yeah, James, as you know, we don't forecast that. I don't want to directly respond to the consensus. I mean, you guys are reading the marketplace. I think we're trying to be as clear as we can about we think the volume's gonna be flat to up slightly. We think we're gonna have a positive mix effect. We think we'll have continued price pressure. As we've communicated, we're gonna take out a lot of costs.
Okay, thanks.
Thank you. Let's take our next question, please.
Our next question is from Daniel Cunliffe from Nomura. Please go ahead.
Hi, thanks for taking the question. Just on coming back to The U.S., can you quantify the size of this sort of inventory reduction that we've seen? I guess that's question number one. Secondly, can you just confirm that there are no further sort of expected inventory cuts as we head into 2014? Finally, if you can just give us a size, try and quantify of the sort of the margin boost that you had to 2013 from overproduction. You said that was sort of largely in Q1. If you just give us a magnitude of how much that sort of artificially inflated your margins last year in The U.S., that would be helpful. Thank you.
Yeah, I wouldn't overly read into inflated margins from last year. I mean, to me, it's just, it's about a SEK 40 million-SEK 50 million reduction in inventory. It's done. Just so.
US dollars.
US dollars, I'm sorry. Yeah, that's right. Get the right currency. That happened in Q4 in terms of inventory reduction. To answer your question, no, that's done. Now we're coming into 2014 where we need to be.
Right. Okay, that's very useful. Thank you very much.
Okay, let's move on to our next question, please.
Our next question comes from Mr. Ben Maslen from Bank of America. Please go ahead.
Thank you. Morning, Keith. Morning, Tomas. Still on The U.S. Firstly, just the AHAM data, which has been pretty volatile in the last few months, around the holidays, just what your expectations are for January. Secondly, just more generally on the pricing environment in the States. As you said, there's been more negative promotional activity in Q4, and we see a negative trend in the PPI data. Why does industry pricing come under pressure at a time when volumes are just so much stronger? I would have thought it would be the other way around. Thank you.
Yeah, welcome to the appliance industry. Don't look for logic all the time, but let me answer your first question, which is, January is gonna be affected, I think, negatively by the weather pattern in The U.S., right? I mean, it's just been Honestly, it's been colder in North Carolina than it's been in Stockholm, right? I mean, it's kind of crazy, right?
Yeah.
I expect actually, I don't expect too much, honestly, in January, given the weather patterns and all the challenges happening in The U.S. I don't think it's a sign of anything fundamental other than really, really, really cold, bad weather.
Right.
I think that's what's happened there. In terms of pricing discipline or lack thereof, I think there was Q4, which it normally is, was a, was a promotional environment. I mean, the appliance industry is promotional in general, as you know, but Q4 in particular, is a heavily promotional environment. You know, kind of the bad joke in The U.S. at the moment is Black Friday has turned into Black November, right?
Right.
That's about what's happening. I don't, you know, I don't think that says, hey, that means that, you know, people aren't looking to make money. I just think people say, well, it's gonna be a promotional week or month, and I got to get my fair share, and if I don't, I'm gonna lose out, so I better be aggressive. It's wacky. Fundamentally, we think The U.S. market, and when you put it all together, is growing, will continue to grow, based on both GDP and housing recovery, and it'll be, you know, it'll still be the appliance industry.
Got it. Okay. Maybe a follow-up, Keith. I mean, there's a story in The Wall Street Journal today that Whirlpool are, you know, complaining about more Asian product coming to The U.S. I mean, do you actually see that happening, or is that kind of posturing ahead of trade case and more noise?
No, I think there's Asian product that is coming into The U.S. I wouldn't disagree with that. I think, you know, there's, you know, the Chinese and the Korean players are targeting The U.S. as an opportunity. We, you know, so we see that. That's not a new data point, but I wouldn't disagree with that statement.
Okay. Thanks so much.
Yeah.
Thank you. Could we take our next question, please?
Our next question comes from Mr. Anders Trapp from SEB. Please go ahead.
Yes, hi there. I have a question really on how to think about the choices between growth and margins. I mean, on a group level, you have sort of been trying to educate the investor and analyst community that, you know, there's sort of a choice between those two, and when you are at a certain margin level, it's best to go for growth because that adds most value to the stakeholders of the company.
I'm just wondering if we should think like that also, when it comes on the, on the sort of business area level, namely, or mainly The U.S., that, we should rather look for that you will try to grow the business quicker and, not really expect, you know, a chance of getting up to double-digit margins or so, if that's the way we should think about, the way you go about your business?
Yeah, that's a good question, Anders. I mean, the way we think about it, including at the operating unit level, is we start with a return calculation, right? What's the return on invested capital, you know, and is that sufficiently north of our WACC, so that it makes sense to grow the business. That's hurdle number one, which, as you know, is a combination of the margin, and the asset velocity. We say, okay, once we make sure we get that where it needs to go, then let's, you know, put the, you know, put the fuel to the fire and get it growing.
In, in the US, just to answer your question, in particular, they're very clear that they have to manage both the income statement and the balance sheet, the margins and the assets, and to do both, right? To get, to get the return, and as you know, if you do the quick math on the ROIC for the US business, it's quite significant, and, well, well, well above the cost of capital. You know, they're looking to participate, but, you know, you gotta be, you know, it's a fine line, as you know. You know, you get too froggy and on growth and market share, you know, it's a, as we've talked before, it's a four or five to 1 ratio, right?
I mean, you need four to five times the volume to mitigate, you know, a price decline. They get that. They understand the math. It's a balance, but I would answer your question clearly. We first make sure that we see a path to positive value creation in ROIC and then say, okay, now the maximizing equation for economic value is to grow that.
Sort of a bit of a follow-up. Looking at the total US market for appliances, you know, we know what you make, we know what Whirlpool are making, et cetera. We know that you at least turn your capital four times on the group level, probably faster than that in the US market. You must have very high return on, you know, invested capital, return on capital employed in The U.S. Same for Whirlpool, I assume same for GE. It looks like right now it's a very sort of excess profitability in the US market, and therefore, sort of open for trying to grow the business from competitors.
Have you seen any increased, you know, efforts from the competitors, you know, the smaller ones, that really wants to grow in The U.S. against the spectrum?
Yeah, I think your assessment is correct, and that is, you know, with The U.S. market growing again and the return calculation, it's attractive. It's attractive for us, it's attractive for our competitors, both the domestic competitors and, to your point, for the foreign competitors. You know, do I think that this, in particular, Asian competitors are targeting the US market as an opportunity? Yes. Do I think that's a new phenomenon? No. I don't think it's something that we, you know, we're seeing acutely in the last few months. It's been the last five, six, seven, actually, since I've been here, almost really eight, nine years.
Yeah, yeah, I understand, but my point, my question is really, you know, with the profitability must be much higher in industry today than it was five years ago, and therefore, is that, or the return rates, and therefore, has that had an impact on the, on the competitive, environment or not?
I don't see a dramatic change in the competitive environment. I don't.
Oh, all right. Thank you.
Does that answer your question?
Yep. Thanks.
Good. Thank you. Should we then move on? I think we have room for another, say, three questions before we have to wrap up. Next question, please.
Our next question comes from Mr. Martin Wilkie from Deutsche Bank. Please, go.
Hey, good morning. It's Martin from Deutsche Bank. Just a question on some of the other investment costs that you've been making in 2013, and what we should expect into 2014. You mentioned China continues over. You also, the dual running of the Memphis facility, I think you mentioned earlier, that does continue into 2014. If you could just perhaps quantify that, but also some of the investments you've been making in the channels in North America, The Home Depot, and places like that. Are those investments incrementally now done, or are they still gonna be something of a drag in the first half of 2014? Thanks.
Yep. Let me try to address each one of those. We talked about the China, another $50 million-$100 million, I would comprehend, year-over-year. Memphis, you know, Memphis is gonna run somewhere into the summer. All right, early summer or late summer, as we talked about last year, you know, it's about $300 million for the year, so half to 50%-60% of that probably is a fair calculation. The Home Depot's, you know, team's done a good job there in doing what we said, which was they crossed to breakeven, and that's now positive territory. There's no added incremental cost going forward in 2014 on that.
Do you think then that margins can increase in North America in 2014? Obviously, you've talked earlier about some of the production differences, things like that. With some of these costs rolling away, and if you do get the positive volumes, should we be expecting margins to improve in 2014 in North America?
Our objective in North America and all the businesses, but in North America in particular, is to grow the top line, then have margin expansion.
Okay. Thank you.
Thank you. Could we have our next question, please?
Our next question is from Mr. Domenico Ghilotti from Equita. Please go ahead.
Good morning. I have a question on the price environment in Europe. You said that in general, it's a deflationary, but have you been able to raise or are you raising prices in some selected markets where you have currency headwinds?
Yeah, I think, we, you know, the team, you know, is trying to case-by-case, country-by-country basis, do that. To be fair, I think more of the net average price increases in Europe are coming from mix improvements.
Mm-hmm.
It's a hard market. It's a difficult market to get structural price increases, even with some of the currency movements right now. I can't, with any confidence, say to you that we expect structural price increases in Europe in the current environment.
Mm-hmm. Not even in, really in markets that are facing devaluation, quite aggressive devaluation?
Well, maybe, you know, here and there, but.
Mm-hmm.
I don't think you'll see it.
Okay. On Latin America, just to have the mood on what's going on there, in particular in Brazil. Should we expect a decline in the market demand in the first half? Should we read your statement on a tougher early 2014 as a decline of the overall market?
It could be. We're hoping for the first half to be flat and then, you know, modest, you know, low single digits, two, three, 4% in the second half. That's kind of, you know, my best guess.
Mm-hmm
... of what's gonna happen. You know, could Q1 be negative and Q2 be flat, and then 2% and 4%? It could be like that.
Okay. Thank you.
Thank you. Could we now have our last question, please?
Our last question comes from Mr. Kenneth Toll Johansson from Bank of America. Please go ahead.
Yeah. Thank you. A strategic question on Europe then. As was mentioned before, there are a lot of assets that might be for sale in Europe, in your industry. How important is it for you to protect Europe from other entrants into this market? I'm thinking a little bit about the situation when Maytag was for sale many years ago, Whirlpool bought it, and it was rumored that there were Chinese players interested in those assets and so on. When you think about M&A going forward, how do you balance the European situation with your will to expand into emerging markets?
Yeah, that's a good, that's a good question. Again, so I'll talk about it a little bit, and, Tomas, jump in if you have additional thoughts as well. Number one, of course, you know, Europe is still 30% of this company, right? It's a very, very important part of this company and will be for a long, long, long time. We're paying attention, if I can use that expression. Right, so, I mean, we understand, and we're engaged in all of the asset conversations and opportunities and challenges in Europe at the moment. In some cases, it's a very difficult equation to solve because part of it is, to your point, makes sense to protect and have some interesting parts of the portfolio that is attractive, whether that's in Eastern Europe or key markets where we're underrepresented.
Unfortunately, there's also big parts of several of these assets that, you know, we don't. We just talked, somebody asked me earlier, we don't need more assets in Italy, right? It's, it's a hard equation to make work for us, but we also understand that, you know, you gotta be mindful strategically of the competitive environment. I'm probably not gonna answer your question specifically, obviously, but, you should be confident that we're awake, and we're evaluating, analyzing, and, gonna make good business judgments on what makes sense short, medium, and long term to create and sustain economic, and therefore, shareholder value. I don't know, Tomas, do you have anything to add to that?
It's a tricky question, of course. Of course, as Keith says, we have to be engaged. It's a big asset, it's on the market, of course. On the other hand, just to repeat that, we are only going to do good acquisitions. Acquisitions which are accretive pretty quickly to the shareholders and to all our stakeholders. Of course, then some of these assets are, of course, on the market for a reason. The reason is that it doesn't work. How do you get that equation to work? Yeah, it's tricky. Yeah.
Yeah. Thank you very much.
Thank you. As the last question on a quarterly call, it was interesting to discuss a bit more on long-term strategies. By that, I leave the word to Keith again.
Okay, just a quick summary, 'cause I think we've summarized a few times here, but I'd say for 2013, you know, good top line growth in what obviously has been a relatively tough macro environment, particularly given Europe in the longest recession since World War II. I think pretty happy with growing the company well above our 4% goals here again. Bottom line at SEK 4 billion, as you know very well, includes that European macro environment, as well as SEK 1.5 billion headwinds in currency. I'd say the fundamentals of the company are quite strong. Going into 2014, as was asked previously, our expectations are that earnings will increase, cash flows will increase as well.
That'll come from aggressive actions to improve the profitability in Europe, primarily through cost reductions, and then executing our strategy, which is growing in the emerging markets. Participating, as was asked previously, in what is a very attractive US appliance market at the moment. Continuing to invest in product innovation, which will drive mix, and continuing to do what we have been doing for decades, which is be an operationally efficient enterprise. I think straight ahead, we go into, and even with all the currency movements and everything happening in emerging markets, we're cautiously optimistic about a good 2014. Thanks again for joining us, and for your relationship in connection with Electrolux. Have a good day.