Welcome everyone to this quarter's conference call. Today, broadcasted from NASDAQ, as we have the closing bell here in New York. Anyway, as usual, we start this conference call with a 20-minute long presentation from our CEO, Keith McLoughlin, and our CFO, Tomas Eliasson. You would find the slides available at electrolux.com. After the presentation, we will have a Q&A session, and we will try to conclude the conference call around 2:00 P.M. Central European Time, which is 8:00 A.M. New York time. My proposal is to use the Q&A session as efficient as possible and let everybody have the chance to put forward a question. Therefore, I would like each of you to put forward one question at a time. With this instruction, I would like to hand over the word to you, Keith.
Okay, thank you and welcome to this discussion of the second quarter results, 2013 for Electrolux. With me today, I have our CFO, Tomas Eliasson, and our head of IR, Peter Nyquist. As Peter mentioned in the introduction, we are broadcasting the audio live from Times Square at the NASDAQ MarketSite in New York. As you probably know, we will have an Investor Day here today, focusing on our North American business. Considering the strong results in North America, the timing could not be better, and by the end of the day, we will ring the closing bell here at the NASDAQ exchange. With that, let's go ahead and start our presentation.
On the next page, Electrolux, you can see, generated strong organic growth during the second quarter, with volume, price, and mix contributing positively, driven mainly by the businesses in North America, Latin America, and Asia. The market conditions in North America are continuing to display healthy recovery, supporting our businesses in that market, while market conditions in key European countries continued to be weak in the second quarter. We reported a solid underlying operating income of SEK 1,037 million. In North America and Latin America, significant price mix improvements, together with operational efficiency, contributed positively to the earnings. Electrolux sales in Europe performed in line with the market, but earnings were negatively impacted by negative currency effects and price mix. Our operations in Latin America and Asia showed continued strong volume growth.
Now I would like Tomas to give his thoughts on our results and then to talk about our improvements in cash flow in the second quarter. Please, Tomas.
Thank you Keith. Let's move to the next slide. Let's start with the sales and organic growth overview for the second quarter. This slide shows the diversified revenue base for the group, with two-thirds of the sales now are generated from regions outside of Europe. As you can see, North America is larger than Europe in sales value. The total American sales now, combined north and south, accounts for 54% of our total sales, compared to 51% for the full year 2012. For the future, it's of course, fundamental to continue to diversify the revenue base and increase the presence on the fast-growing emerging markets. As shown here, growth numbers in Latin America, Middle East and Africa, and in Asia are all above 20%. We switch pages.
Let's go through now the sales and EBIT bridge for the quarter, split in organic growth, currency, and acquisitions. Our reported main net sales were down 0.3% in the 2nd quarter, and whereof organic growth was +5.9%, very strong, and currency effect was -6.2% on the top line, and there were no impact from acquisitions. The earnings went from SEK 1,112 billion to SEK 1,037 billion. Let's dig into the organic part and the currency part, starting with the organic growth. The 5.9% in organic growth contributed with SEK 1.5 billion in sales and an EBIT of SEK 106 million, representing a leverage of 6.9%, giving 20 basis points in EBIT margin accretion, 6.9% is, of course, a bit on the low side, but the spread across the business sector is rather wide.
North America and Small Appliance are performing excellent and had a very strong leverage. Professional and Latin America were a bit weaker, and EMEA, of course, put a lot of pressure on the leverage. All in all, however, we must underline that organically, there was a result improvement, and a margin accretion in the second quarter, just as we saw in the first quarter. The EBIT increased with 10%, and the EBIT margin organically went from 4% to 4.2%. Switch to the currency effect, currency had a negative impact on the top line with SEK 1.6 billion and on the EBIT with SEK 181 million, representing a dilution over the margin of 0.4% this unit.
The SEK 181 million was composed of SEK 125 million in transactional effects and SEK 56 million in translation. The negative currency effect was mainly within EMEA and Latin America, about half and half in both regions. In Latin America, the Real went through another substantial depreciation at the end of the quarter, causing currency losses. There were also currency losses in Venezuela and in Argentina. In Europe, the two larger ones this quarter were the British pound and the Egyptian pound. To summarize, organic and currency together resulted in an EBIT margin going from 4% to 3.7%. Flip page and go to the cash flow. We had a very strong operating cash flow in the second quarter and amounted to SEK 2.5 billion, which was a good recovery from the relative weak cash flow we had in the first quarter.
The main driver for the cash flow in Q2 was the U.S. air conditioning business. Our net operating working capital is now at 11.1% of sales on a rolling 12-month basis, which is an improvement of nearly 7 percentage units over the last 5five years. The CapEx in the second quarter was similar to last year and continues to run higher than depreciation as a result of our growth ambitions. The main investments are still in the new cooking plant in Memphis, USA, and the new refrigeration plant in Rayong, Thailand. With those remarks, I hand it back over to you, Keith.
Okay. Thank you Tomas. Let's turn the slide and talk about our European operations. Europe continued to encounter a challenging environment during the quarter and delivered a zero result. The break-even result is unfortunately in line with our 1st quarter result, but was expected. Electrolux sales increased organically by 2.5%, turning positive after many quarters of decline. Volume growth was mainly driven by growth in key accounts, followed by slightly positive growth in Western Europe, offset by weaker Eastern Europe and Egypt. Prices continued to deteriorate in the 2nd quarter in certain product categories and markets. The mix improvement accelerated due to the successful launch of high-end appliances across the markets in Europe. A good product offering and strong presence in growing retailers like IKEA, further improved our product mix. Approximately half of the group's negative currency effect impacted Europe, as Tomas mentioned.
Higher costs for SG&A, driven by activities related to the Inspiration Range launch, also impacted the results. Given the development in the first half and unclear market conditions in Europe, we are continuing our efforts to optimize our cost structure. Let's turn the page and talk about the market development in Europe. The European market turned slightly positive and was up by 0.8% in the second quarter. Western Europe was flat at plus 0.3%, while Eastern Europe grew by 2%. The markets in Southern Europe have continued to be weak. In France, demand fell by 3.3%, in Spain by 4.3%, and were flat in Italy. Market conditions in Central and Northern Europe have somewhat stabilized during the quarter.
The market in Eastern Europe showed growth, mainly driven by the market in Russia, while most other markets were unchanged. We estimate that the market for appliances in Europe will decline in 2013. Now let's turn the slide and talk about North America. Our operations in North America continue to perform strongly and showed an improvement compared to the second quarter of last year. Sales grew by 3.2% organically and amounted to eight and a half billion SEK, mainly supported by strong demand and Electrolux entering into new distribution channels. Sales volume grew in most core categories, and price mix was positive. Volume, price, and mix also had a positive impact on operating income, which increased to SEK 663 million, resulting in a 7.8% margin for the quarter.
Year-to-date, margins for the first two quarters of the year were 7%, compared to 4% in the first half of 2012, which is a record for our North American major appliance business. The favorable pricing was almost flat for the quarter, the year-over-year effect becomes less, as most of the price increases were implemented at the end of 2011 and the beginning of 2012. Mix had a positive impact on earnings, followed improved product sales in food preservation and a general trade up in the marketplace. Consumers are starting to buy more premium products in the U.S.. Operations were impacted by extra costs due to the consolidation of our cooking production to Memphis, Tennessee, and our infrastructure investments and expanded distribution. These costs will continue to impact operating income for the majority of 2013.
Now let's turn the slide and spend a few minutes on the market development in North America. As you can see on this next slide, the recovery in the housing market in the U.S. has started to generate increased consumption of appliances. Market demand for core appliances in North America increased by 9.2% in the second quarter, and it is picking up strongly compared to the first quarter. Strong consumer confidence is improving at a higher level than a year ago, and we are seeing new housing statistics gradually improving. As such, our view is that demand for appliances in North America could increase by 5%-7% in 2013. Now let's turn to the next slide and talk about Latin America. Market demand for appliances continued to increase in the second quarter, although at a slower pace than the prior quarter.
Growth was mainly driven by higher demand for air care and food preparation in Brazil. The markets outside Brazil, which now account for about 35% of sales, showed another quarter of growth. Our earnings were positively impacted by volume, price, and mix. The results were, however, impacted by higher costs for sourced product and unfavorable currency movements as the U.S. dollar strengthened against the Brazilian real, which made raw materials and components more expensive since they are priced in U.S. dollars. The price increases implemented in the Brazilian market in the first quarter are sticking and contributed positively to our earnings. Our businesses in Mexico and Central America also contributed positively. The impact of the new government center program in Brazil started as of the first of July.
It is hard to predict, as is shared with other product categories, and focuses more on the lower end to see what the full impact will be, but we'll discuss more of that as we see its impact. Now let's turn the slide and talk about our operations in Asia Pacific. Our operating margin in Asia Pacific declined compared to the second quarter of last year. In Australia, the market is estimated to have grown in the second quarter. New products and air conditioners and food preparation impacted our sales positively, supporting our market shares in these categories, offset by declines in refrigeration. Our operating income in Australia deteriorated compared to a year earlier. The favorable product mix and lower production costs were more than offset by continued price pressure and negative customer mix. Electrolux is currently selectively implementing price increases in Australia.
The markets in Southeast Asia and China continued to grow considerably in the second quarter. Electrolux sales in Southeast Asia and China have continued to show double-digit growth for the past 15 consecutive quarters. Higher volumes in Southeast Asia and China contributed to our operating income in the second quarter. However, investments related to the new range of products for the Chinese and Southeastern Asian markets, to be launched in the third quarter of 2013, impacted earnings negatively in the quarter. Now let's turn the slide and talk about small appliances. Small appliances achieved an organic growth of 6.5% during the second quarter. Sales were positively driven by all parameters, volume, price, and mix, and we saw a higher sales growth within small domestic appliances in Asia Pacific and in Europe.
Market demand for vacuum cleaners in Europe and North America showed a slight increase in the second quarter compared with the preceding year. Our operating income doubled in the second quarter compared to the same period last year. The margin improvement was mainly the result of higher sales volumes, improved mix, and higher prices. Continued headwind from unfavorable currency movements had an impact on earnings, but was offset by the positive price mix contribution and higher sales volumes. Now let's turn the slide and talk about our professional business. Market demand for food service products continued to decline in our most important markets, whereas demand for laundry products started to show positive sales growth in the second quarter. The U.S. business, which accounts for 15% of the professional business, is showing signs of recovery, and emerging markets continue to display progress.
Operating income from professional products was lower in the second quarter as a result of weaker volumes compared to last year. The negative country mix, due to weak market conditions in Western Europe, was partly mitigated by improvements in price and mix. Costs related to investments in prioritized growth areas, as well as product launches and restructuring initiatives, continued to impact results negatively. Investments related to the Electrolux Grand Cuisine launch continue to impact operating profit negatively. Let's turn the slide and conclude this presentation by looking ahead into the third quarter and the full year 2013. Looking into the third quarter and the full year 2013, we expect market demand in Europe to be weak, which will impact all of our businesses in that region.
At the same time, we anticipate growth in the North American market in 2013, supported by a recovery in the housing market. We continue to see solid growth coming from emerging markets. In terms of price and mix, we expect to see slightly positive impact from prices in both North America and Latin America during the 3rd quarter. As the year continues, the year-over-year effect in North America will decline. Prices continue to be under pressure in Europe, and the negative country mix will hopefully be offset by better product mix for Electrolux during the 2nd half of 2013. The 2nd half in Europe is seasonally stronger than the 1st half. We expect raw material costs to be close to flat in the 3rd quarter as steel prices have come down, while we will continue to have slightly higher costs for plastics.
For the full year 2013, the net impact is likely to be positive net in raw materials. In line with our strategy, 2013 is turning out to be an intensive year of product launches, requiring increased investments in marketing and product development. We will utilize the positive momentum we have in North America and in our small appliances to increase investments in brand building. We will also have a major product launch in China during the second half of 2013 to establish Electrolux in that important appliance market. We will see a reduction in our cost during the year, which is related to our cost-saving initiatives. There will also be some temporary cost increases as a result of consolidating our production of cooking products in North America.
Finally, as mentioned before, we expect increased costs for logistics during 2013, as we see costs for ocean freight and land transportation still holding up. As mentioned previously, we also see cost for warehousing and transportation increasing temporarily as we are entering new distribution channels in North America. Peter, with that, we're open for questions.
Okay, great, Keith. As I said in the beginning, we should try to use this session as efficient as possible and ask one question at a time. You have always opportunity to line up again for the further question. Operator, we are now open for questions, so please.
Our first question comes from Mr. Daniel Cunliffe from Nomura. Please go ahead. Hi, Daniel.
Hi there. I guess just one question. On Latin America, if you add back the $80 million FX, around about a flat margin, despite 8% volumes, 8% price mix. You talked about a raw material impact here, but I'm just trying to get a bit more color on why that margin was essentially flat despite good volumes and price mix? Was this all raw materials, or was this sort of something else, like other additional costs that we need to be aware of? Thanks.
Yeah, no, good question. The part of it, of course, was raw materials. Part of it, as Thomas explained, was currency. Part of it was in June, as you read about the civil unrest and the riots in Brazil, about mid-June, orders stopped, right? Just literally, we lost a couple weeks of orders. The last thing is we are a little bit in, particularly in a couple of our key categories in Latin America, running at very high sales to capacity ratios, and the efficiency of that production is less efficient at those high sales to capacity ratios. We're, as you know, we're investing to increase our capacities there to serve that growing market.
Well, I mean just to follow up on that, As you increase that efficiency, when do you start to see the sales capacity efficiency improving, i.e., so the drag, sort of goes away somewhat?
Yeah, we want that capacity won't come online, until next year.
Okay. All right, thank you.
Thank you.
Thank you, Daniel. Next question, please.
Our next question comes from Andreas Willi from JP Morgan. Please go ahead.
Hi, Andreas.
Good morning gentlemen. Question on Europe? The outlook statement is in the release, reads a little bit more positive in terms of the improvement you're seeing, maybe also in Northern Europe, and you expect that market now to recover a bit. Maybe you could talk a bit about pricing, what's going on in Europe between Indesit making comments about increasing prices, but then you have Arçelik from Turkey using the weak lira. What do you see in terms of, or what do you assume when you say you expect earnings in Europe to recover? What do you assume in what's happening to pricing in Europe, both yours and the market?
Let's talk about Europe. Of course, you know, there's not great visibility and transparency in Europe, as you know, just share with you what we see. We see Southern Europe continuing to be weak. We're seeing demand in Spain, France, Italy, continuing to be negative. However, we have seen and are seeing improvement in Germany, in Switzerland, in Nordics, in Sweden, in the U.K.. We're seeing some signs of recovery in Central, Northern, and Western Europe, which is a good sign. That's partly what we're seeing. Those signs get us to be cautiously optimistic that perhaps, you know, we've hit the bottom. Of course, you know, before you go up, you gotta stop going down. We think we're. Our best guess is that we're near the bottom here.
The other comment, of course, is the second half, as you know, seasonally, is a stronger half for us, particularly given our weighting in the cooking business and the cooking season. It's those two things, I think, that would say that we would expect the second half to be better than the first half. Relative to pricing, you know, that's a difficult question to predict. We see continuing price pressure in the total market. That doesn't mean that it's declining more, but it's kind of just staying, you know, down a flat deflationary, about 1%. That's what it seems like it's been, and Tomas kind of has been for several months now, of course, a few quarters.
Yes. Okay Andreas, happy with that?
Thank you.
Okay, thank you. Next question, please.
Our next question comes from Mr. Johan Eliasson from Kepler Cheuvreux. Please go ahead.
Hello, Johan.
Yeah, hi. Just a bit curious on the North American business, obviously impacted by the weather, with air con sales down. What does that have for impact on the margins with this fluctuation on the air con sales? I mean, how sustainable is really the sort of good margins we are currently seeing now in North America, obviously, where I'm aiming at?
Let me maybe first help you guys pull apart the air conditioning business in terms of our organic sales. To your point, up until the last 10 days, the weather patterns in the U.S., and particularly the Northeast and Midwest, have been very cool and very wet, which means the air conditioning business for us is down 20% in the first half. If you look at that organic Q2 number at 3.2%, when you exclude the air conditioning effect, it's up close to 6%, about 5.8% core appliance growth, so very good core appliance growth. I don't there's not a huge differential in the margins, so they're not gonna drag it or pull it hard one way or the other.
I'd say the margins that you're seeing there are the result, obviously, of very, very good work, price, volume, mix, cost out, and our expectations are that North America will continue to help the group achieve its objective of 6% margins through the cycle.
Then you talked about the seasonality on the earnings in Europe. With this good margins now in North America in the first half of the year, should we sort of expect a less seasonal pattern in the North American business now?
Yeah, of course. I think the seasonality of the business doesn't change. I mean, we, you know, normally we would have expect a good cooking season in the second half. As you know, and as we've communicated, a little bit of the dampening effect will be, you know, the increasing ramp-up of the Memphis, Tennessee facility. As we ramp that up and increase more people and more cost, you know, we'll feel that in Q3 and Q4, but that's a temporary phenomenon, as is the investments in the infrastructure for Home Depot, both of which will go away into 2014.
Okay, great. Thanks.
What we could add is that for the aircon business, as Keith mentioned here, it doesn't, I mean, it doesn't make that much to the margin as such. It's on the average margin for the North American business. Short term, it has more of an impact on the cash flow. The this, let's say, decline in sales in April, May, and June had an impact on the cash flow, of course, so it was a bit less than it should have been. Despite that, all in all, it had a positive impact on the second quarter, just because of the business model we have with air conditioning.
All right. Good point.
Yeah, if I'm right, air con is sort of in-sourced products, aren't they?
Yes, it's fully in-sourced. Yes.
Yeah.
Yeah.
Right.
Sorry. Yeah.
Outsourced.
Outsourced. Yeah. Yeah.
Yeah. Correct.
Okay. Are you happy with that, Johan?
Yep.
Okay. We'll take the next question, please.
Our next question comes from Mr. James Moore from Redburn. Please go ahead.
Hi there. Yeah, hi there, everyone. Good morning and good afternoon. I'm just curious about the U.S. volume development. If we look at it, excluding air conditioning, where you mentioned it's around 6% against a market of about 9%, it just feels a little light. Because of the Home Depot contract not lapping yet, and the fact that you've grown in the number of stores heading there, I'd have thought there would have been a bit of a boost versus the market from that. Could you give us a bit of a flavor for what's happened, if there's any particular segments where there's been a bit of share loss and whether it's a comp issue? With the Home Depot, it's down really, where we were at the end of last year, and you mentioned some running rates at the end of last year. Just trying to understand that dynamic.
Yes, James let me maybe peel it apart within the core appliance group. Obviously, volume was up. It was up a little bit less than the total market. Let me break it down a little bit. We gained market position and share in our core categories of freestanding cooking, built-in cooking, refrigeration, both top mount and multi-door bottom mount, in freezers, and we lost some share in laundry. As you know, laundry in the U.S. market in particular, generally true in others, is a, it's a two for sale, right? When you sell a washer, 70% of the time you get a dryer with it, so it's by far the largest category. It's our weaker category, as you know, in the U.S. market.
There was significant, about 17% growth in the quarter of the laundry category that we're underrepresented in. That's the mix effect you're seeing on volume. In our core categories, we continue to gain position.
The Home Depot development, you mentioned some numbers for the fourth quarter. I'm just trying to think about how that's ramping up, because there was a big inventory build to start with. I imagine there's going to be a period of inventory build that then sort of normalize. Could you help us on where we are in that?
Yes, I would say that, for the Home Depot business, you know, we're tracking according to plan and according to expectations. Obviously, we let Home Depot speak for themselves. You know, I've met with Jack and the senior management at Home Depot recently, and everybody was quite positive on the traction and the development and the sell-through. You know, that is continuing, again, according to plan. We would expect that it won't be long, you know, by the end of the year into the beginning of next year, where we'll cross that break even in terms of the investment relative to the sales and the contribution and earnings into positive territory.
Thank you very much.
Okay, t hank you. Next question, please.
Our next question comes from Mr. Andre Kukhnin from Credit Suisse, London. Please go ahead.
Hello Andre.
Hey, hello, everybody. Sorry to labor on the U.S.. Just another question there. You mentioned that you're seeing evidence of customers trading up, with a bit more discretionary demand. Could you just walk us through how you positioned for that? i.e., has Frigidaire kind of been positioned high enough within the mass segment to capture this, and whether the Electrolux brand is now strong and widely recognized or widely seen, to benefit from this, trend?
Yes. Let me talk about both master brands here within the architecture. Within Frigidaire, the team has done a lot of good work over the last year or two, couple of years, in repositioning Frigidaire, and by that I mean expanding the offering into the, what we would call the Frigidaire Gallery and Frigidaire Professional range. Within Frigidaire, they have base Frigidaire, which is, you know, the opening and a few steps, mass product, which then trades up into Frigidaire Gallery, which then trades up into Frigidaire Professional. That offering and that lineup of product and distribution has been increasing over the last 12, 18, 24 months. With the trade up in the market, even within the mass market, we're seeing the benefit of Frigidaire Gallery and Frigidaire Professional sales.
Addition to that, as you mentioned, Electrolux, which is the premium brand in the U.S., that business is growing. It's growing because of the trade up in the overall consumer appetite. It's growing because we've got, we're over-indexed in the representation in Home Depot with the Electrolux brand, and it's growing because our business in the builder market, which is growing, indexes, particularly in the single-family home, custom home business, to premium. More by coincidence, we're actually, the team here is launching the new Electrolux campaign just this week. There's a brand new consumer campaign advertising, merchandising, package promotional activity on the Electrolux brand in the premium segment. If I think good news is the team has anticipated, and we've, you know, internally, we've talked about what we need to do to get ready for the potential U.S. recovery for a couple of years now, and I think we're ready.
Got it. Would you say that trend of trading up is a net positive for you then, or neutral?
It's positive for us.
Right. Thank you very much.
Thanks, Andre.
Thank you. Next question, please.
The next question comes from Mr. Christer Magnergård from DNB. Please go ahead.
Hi, Christer.
Hi there. I had a question on acquisition, well, acquisition pipeline, actually, because you talked about potential acquisition a couple of quarters ago. You had a pipeline, you had a short list of targets, et c., but we haven't seen anyone yet. If you can talk about the M&A pipeline that you have currently, and if you have any hot prospects that you think you will finalize in the near term.
Okay, that sounds like, Tomas, a performance review question for you, so we're gonna let you handle that.
Well, sounds like it. Of course, we can of course not speak about any targets or negotiations that we might be in right now, but this is a process that takes a year or two to build this pipeline. We have to go to a situation where you have a long list, which is, let's say, around 100 of targets or something like that, and you have to have a short list, which is like 10 to 20 targets, I mean, just to take some rough numbers. To come to that situation, you have to spend a lot of time and a lot of work, but we are getting there, and we have good traction on that. Of course, Christer, I can't mention any specific forms of objects now, of course, and we can't give a forecast. You never know.
Great. Yeah, just housekeeping-
We're getting there.
Yeah. Yes, a housekeeping question as well. How much was the Memphis plant cost in Q2, and what do you expect in H2?
I didn't hear the question.
The Memphis plant cost in Q2.
Yeah. I think we said we're gonna do a combination between the Memphis and the Home Depot. We said, look, that'll be about SEK 400 for the year. We're tracking that rate. You know, it's gonna be a little bit heavier as we go into through the first few quarters, but, you know, you guys can kind of spread that out, and you'll be close enough.
Thanks.
Okay. Thanks Christer. We'll go further with the next question, please.
Our next question comes from Mr. Rasmus Engberg, from Handelsbanken. Please go ahead.
Yes, hi. I had a question on the raw material guidance. You stated you expect a flat impact in the third quarter and then a positive impact for the full year. You sure you're not meaning slightly positive there, or just trying to come to grips with the magnitude that you're starting to see in the fourth quarter and how that runs going forward?
Yeah. Let me start with, you know, kind of I know it's you're interested in, and of course, we are equally, maybe more so interested in, you know, what raw materials are gonna do going forward and particularly into 2014. Let me kind of start with, you know, if you would, you know, let us get into Q3, let us get into the negotiations, and we will update you with the Q3 release, and certainly no later than Capital Markets Day to kind of say, here's what it is, because as you know, we'll have most of certainly our steel locked by then. Let us talk to you about quarter 2014 during that timeframe. I would say for 2013, the guidance on raw materials hasn't changed.
We expect a net positive and that we will and are seeing continuing lower costs for steel, which is a good thing for us. They're being partially offset by, you know, pretty high petrochemical-based, resin-based plastics, materials. Net, net for the full year, there'll be a net slight positive. We're just trying, from a guidance standpoint, quarter by quarter, kind of giving you what the fade rate is, but the net will be a slight positive for the full year.
It'll be a fairly substantial figure in the fourth quarter, at least?
I said there'll be a net slight positive for the full year.
Yeah.
is what I said.
Okay, t hank you.
Thank you.
Thanks Rasmus. Let's go ahead with the next question, please.
Our next question comes from Mr. Domenico Ghilotti from Equita. Please go ahead.
Good morning. I had a question on your prices in Europe in particular. You were mentioning some currency headwinds in some specifics in European markets. You mentioned UK, probably also Russia and so on. Have you launched, or are you going to launch some specific price increases in these countries where you have currency headwinds?
Yeah. Of course, you know, in all the markets that we serve, where we have a currency headwind, you know, the team is obviously wrestling that through, both on the customer side and on the supplier side, to mitigate that. You know, in some places, we've been successful, as you know, in Brazil, as an example.
Mm-hmm.
In other countries, we've been less successful, so it's hard to go country by country and say, yeah, here's what's gonna happen with suppliers and customers relative to pricing. That's directly connected to currency changes. You know when we've communicated that, we've also initiated some price increases in Australia.
Yeah.
That's, you know, that's an uphill battle. The team's pushing hard on it. To your point, you know, all the operating units know that, you know, it's not just a one-way street here, right? When currency moves, we've got to respond to that, and we've got to engage with the marketplace upstream and downstream, to help mitigate that.
Okay. In general, Europe has been tougher to go through price increases compared to the countries where you, that you mentioned before, so Brazil and Australia, for example.
Yeah, I want to make sure I heard the question. If you're saying that we've mentioned a couple where we had some success, that's right.
Yeah.
I mentioned that. We've also had some success in our professional business. You know, in weak markets like Europe, it's more challenging, just, you know, to be straight ahead. I mean, it's more challenging when the market's weak.
Oka, t hank you.
Your question is spot on. If I could just add that when it comes to currency fluctuations, hedging is not the solution. Hedging is only to dampen the volatility a little bit. There's only one way, just to underline that, there's only one way to deal with it, that is to negotiate with your customers and negotiate with your suppliers. There's no other solution. You just have to bite the bullet and do it.
Okay.
The next question?
Our next question comes from Mr. Jonathan Moberly from Exane BNP Paribas. Please go ahead.
Hello Jonathan.
Hello, hi. Yeah, I have a question regarding North American margins. Obviously, a very healthy level this quarter. I'm thinking more from a point of view of strategy. Obviously, whenever you've communicated the group strategy, it's always been kind of 6% margin, 4 x asset turn, grow that. With the margins where they are in North America at the moment, can we take it that, you know, you'll be looking to invest in marketing and brand, in new products, and we should see those margins perhaps coming back? Are you happy where the level is, and there's enough left over for the investments that are needed?
Yeah, that's a good question. I would say it this way: I would say that based on our momentum and the market and the execution of the North American team, I would expect that North America should be able to help pull the group average targets up in margin. Now, in order to maintain that sustainably, will it be wise to reinvest some of the traction in increased brand strength, particularly for the Electrolux brand in the U.S., to invest more in making sure we've got the service capability to service the builder channel, as an example, and to invest more in R&D to bring innovation? We talked about, you know, being under indexed and being in some categories like laundry, you know, should we reinvest in that? Of course, the answer to that is yes. It'll be a balance.
Okay, t hank you.
Thank you. Thanks to Jonathan. The next question, please.
The next question comes from Mr. Daniel Cunliffe from Nomura. Please go ahead.
Hello. I just a second question. Just a follow-up on Europe, please. I guess in terms of maybe two areas, really. In terms of the second half, you talked about a fairly strong recovery. I suppose, really straightforward question, how confident are you in, I suppose, about SEK 700 million is what consensus expects to sort of get to the consensus expectations in H2? Just to break that down a little bit, in terms of the mix, I think it was around just over 3% this quarter. It's clearly a strong number. Do you expect that to sort of continue into the second half? The pricing, which was sort of fairly negative, 1.5%.
I guess you did talk about that pricing being continuously weak. Just in sort of the thought that if volumes start to stabilize or slightly pick up as we head into next year, do you see sort of a 1% constant price fall year in, year out, or do you see sort of the market slightly helping the pricing? I guess, you know, question on price plus mix and then European outlook. Thanks.
Yeah. One, just to confirm your observation, which is, yeah, there is a been a and continues to be about a 1% to 1.5% deflationary price environment in Europe in our business. I can't see with confidence that that's changing right now. Experience tells me when the market starts to improve, that gets mitigated, right? In the current picture, we don't quite see it, so I'm not expecting the price to get materially better. I'm not expecting to get materially worse either. It's kind of been about that level now for a few quarters, several quarters. From a volume standpoint... let me start with the mix. The second question was mix, and as you stated, we had a good, healthy mix in Q2.
We expect that mix will continue to be positive going forward. We're getting good sell-through of the Electrolux Inspiration Range, and that's having a positive effect on the mix. You know, at some point, that's going to lap itself, so you got to be a little bit careful of saying that's an indefinite increase. I think we've got some, enough headroom here, for a while to continue to see positive mix improvement. Of course, volume is a big question, right? There's a little bit of positive volume. You know, that was good for a change in Europe. Still less than 1%, though, right? It's hard to get too euphoric about a volume recovery in Europe. As you know, we've communicated our expectations continue to be that Europe, for the full year, will be down in volume 1%-2%. I think that's our best guidance for that.
You know, I would say that we are, as you heard earlier today, probably in our comments today, we're beginning to see that perhaps, you know, we're at the bottom, and that we'll you know, we'll see some, certainly should see some positive effect from seasonality. We hope and don't, we don't anticipate, of course, we don't know about macro conditions, but feels like we could be at the bottom and have some positive impact. You know, I'd like to not comment specifically on bi-sector earnings forecast, but we would expect that the second half in Europe will be better than the first half, based on what we talked about.
Just a quick follow-up on the price mix question. You talked, I think, at your Capital Markets Day last year, about the potential of the price being positive as opposed to being negative over the last several years. Do you think that's likely in Europe, if you add sort of a combination of new product innovations to the mix side, offsetting sort of a weaker price, or is that sort of still too early to tell at this stage?
No, I would hope that, for a period of time, that our mix effect will offset the weaker price. I do.
Okay. All right, thank you.
Yeah, thanks. We're prepared for the next question.
Our next question comes from Mr. Alec Emerson from Goldman Sachs. Please go ahead.
Hi, Aaron.
Yes, hi there. Good afternoon. I got a specific question. Apologies if it's already been asked. I came onto the call a bit late, but I was just curious to know if you guys have an update on if you're seeing any sort of price aggression from the Koreans, specifically, maybe in central Europe, so sort of Germany, Belgium, Nordics, et cetera. Has it eased versus the first quarter or intensified, or do you see it as similar?
Yeah, I would say that certainly the competitive environment in Europe is intense, you know, because you got a weak demand picture, and everybody's trying to get a little bit more than their fair share. Certainly the competitive environment in Europe is strong or intense, and of course, that's partly why prices are down. Essentially, what's happening is people, in order to gain share and volume and sales, are taking products that used to be positioned at, pick a number, EUR 999, and now those same products, the same features and values, are now EUR 899. You get compression in the marketplace. Is that an accurate description, including Korean competitors with the European competitors, is that what the current environment looks like? The answer is yes, it is.
Maybe I misunderstood you earlier, but I almost got the impression that you felt that it was easing just a little bit, i.e., you're not seeing, you know, it sort of intensified maybe through last year and into the first quarter. Was that a misunderstanding? Would you say it is equal incremental price pressure coming from, I guess, in particular, Asian players?
I guess what I was trying to say is we don't see it getting worse, but on the price side and on the competitive intensity side, but candidly, from where we see right now, we don't see it getting materially better in the near term either. We would say more flat, 1%-1.5% deflationary environment.
Okay. I'll settle with that, t hank you.
Yeah. Thank you, Alec. Next question, please.
Our next question comes from Mr. Andreas Willi from JP Morgan. Please go ahead.
Hi there again Andreas.
Yeah, it's a follow-up question on Egypt. I would have expected you to have written down the goodwill by now, given what's going on in the country. Maybe you could just give us some information there. Thank you.
Okay, Thomas will you take that one, please?
Yes, I can do that. When it comes to impairment of our units, the business sectors are the cash-generating units. You count EMEA as one, including Egypt. There is no imminent write-off at all.
Thank you.
Okay, thanks Andreas. Next question, please.
Our next question comes from Mr. James Moore from Redburn. Please go ahead.
Hi again James.
Yeah, hi there. I've got a couple of follow-ups. I wondered if you could help us all a little bit with the investment and how it might phase and drop out. I know you mentioned something on Memphis earlier, but I'm still struggling to see it clearly. We've talked about Memphis, we've talked about the China launch, the U.S. distribution costs. I wondered if you could just give us a sense of what they've been in the first half and what you think they might be in the second. Do they all drop out next year? Do they part drop out? Do you have a bit of clearer thinking? Are there any other additional investment items that we should think about over and above that for the second half or next year?
Let me give you a couple of responses to break it down in a couple of buckets, James. One is the China launch is 100% second half. We talked about a couple hundred million sets around the China launch. That's, so far that's been, essentially, there's been a little bit, but the big part of it, the consumer launch part of it, which is a big part of it, is over and above, is in the second half. We talked about the infrastructure development and investment for the builder channel and Home Depot, combined with the dual plants and cooking for the full year in roughly 100, 400 million. For, I think, honestly, James, for your purposes, I'd spread that out fairly evenly. Is it going to be a little bit higher in Q2 and Q3? Q, yeah, but a little bit lower in Q1 and Q4.
Yeah, but, now we're starting to get pretty fine, that I don't think really matters relative to the valuation and you guys analyzing the company. I would spread those out. Going forward, both of those go away. A question that, you know, is a fair question, and I'm engaged with, obviously, the marketing group, MaryKay Kopf, and the business team in Asia is: Assume success in China. You know, is it going to be smart for us to say, "Okay, stop investing?" You know, that's an ongoing discussion, dialogue. I'm heading to Shanghai in a couple of weeks with Tomas, to sort out, you know, what we're sorting, the distraction is going to be there. Let's say, to be continued on that part of the discussion relative to going forward.
As a follow-up, albeit totally unrelated, Europe, it's been seven pretty awful years, and every dawn starts at some stage, so let's be hopeful for a second. I just want to understand your comment on the market, which has been up 0.3 or whatever, year-on-year. When I look into the detail below that, it seems to me that it's true of almost all Western countries, even the negative ones, they're getting less negative on a year-on-year basis. When you look at the picture on a sequential basis of the second versus the first, which is ultimately probably more important, do you see that sort of similar improvement, or is it just a comp issue?
Yeah, that's a good question, James. I mean, part of it's comps, but we actually see some. We see Well, now, as we talked about last quarter, what was worrying me over the last two quarters was slowing down in Central and Northern Europe. That's what I was scared to death of, on top of the already very negative Southern Europe. That part, Central and Northern Europe, seems to be coming back a little bit. That's the cause for some cautious optimism that perhaps, okay, you know, we're at the bottom, and now we've got a Central and Northern, and the U.K. will continue to gradually improve, and then over time, Southern Europe will come back. You know, there's a fair amount, as you know, a fair amount of speculation here, trying to guess what's going to happen in macro Europe.
That's the reason for the change, is we see our sales in Central and Northern Europe improving.
To go a layer further, I'm sorry to keep pushing, but if you looked at the months, of the quarter, April, May, June, and I suppose you've now got some visibility on July, does that picture look consistent, too?
I would say the trend is good, James.
Great, t hank you very much.
Thank you.
Next question.
Our next question comes from Mr. David Bolt from Barclays, London. Please go ahead.
Hi, David.
Hi there, guys. Good morning, to you. I just have a question on the cash flow development for the year, in particular, working capital. As we've seen, two perhaps unusual quarters, if you could just comment on what we should expect for the full year, and maybe the phasing within that.
Okay maybe, Tomas, you take cash flow?
Yes. The cash flow for Electrolux is very seasonal. The cash flow is good in Q2, as we have seen, and in Q4. That's the two good cash flow months. Q1 and Q3 are always weaker.
Mm-hmm.
Then for the guidance for the full year, well, we don't give a specific number on that. We expect the inventory situation to improve over the second half of the year, but we don't expect the full cash conversion to reach 100% due to the fact that we continue to do investment for growth going forward. I don't think we can say more than that.
Okay.
Yeah.
Thank you very much.
Next question, please.
Our next question comes from Mr. Martin Arnell from ABG Sundal Collier. Please go ahead.
Hi Martin.
Hi there. I have a follow-up question on North America. You mentioned that the effect of price increases has come to an end now or almost to an end now. Is there potential for another round of price increases here going forward? Also, can you comment on the near-term outlook in air con, given the weather in July so far?
Yes. Let me just on pricing, of course, we have not communicated to our customers any intention for additional price increases at the moment, and therefore, we don't have anything to say specifically around that right now in specifics. Having said that, you know, are we always looking for making sure we're priced appropriately in the marketplace, given the opportunity to bring value to our customers and their customers? Of course, we are. At the moment, we don't have anything specific to communicate. We're obviously constantly looking at the marketplace and making a judgment on if there's opportunities. If there are, we will first call our customers and second, call you. We'll look for that. In terms of air care, good question, w e're in New York, as you know and heard, and it's hot as hell here.
We got hot trucks of air conditioners flowing throughout the state and the city. And yes, over the last, 10 days, the air conditioning business has lit up. The question is, how long is it gonna be? Right now, the forecast is the heat stays through, I think, Sunday. If it cools back down, we probably need, and I talked to our North American guys last night about this question, it's a good question. Will that be sufficient to drain the inventory build up from the, from the cooler first six months? Not completely. We'll need a second wave of heat, in Chicago, Philadelphia, New York, sometime between now and the end of August to drain the rest of the inventory, but it's a good bump for us.
Okay, thank you very much.
Okay, I think we have time for one more last question here, before we have the final remarks from Keith here.
Our last question comes from Mr. Johan Eliasson from Kepler Cheuvreux. Please go ahead.
Yeah, hi. Just coming back to Europe. You talked about marketing spend in North America and in China coming in. In Europe last year, you had the product launches of the Electrolux and the Zanussi brand, and I think you talked about some extra spending in relationship to that. Has that continued in any way in the first half of this? I think you talked about in-store profiling, where you would sort of gradually expand in Europe with a new design look, for example. Is that something that has been impacting the European profitability in the first half of this year as well?
Yes, it has. Exactly, it has. If you guys do the math well, you can see that there's, you know, an SG&A bubble in our Europe business, and that's exactly related to the Electrolux Inspiration launch. Yes.
And those are they continuing at this level now this year, or should we sort of see a tapering off?
Yeah. Right now, I am in direct, obviously, with Tomas, in direct conversation with the business unit, our judgment at the moment is that it would be a mistake not to invest in this launch. Having said that, you know, do we have to be sharper on other costs? Yes, but we're trying not to cut the fuel line, you know, to the engine, which is this innovation and supporting this huge investment we made in this launch is supporting that. I would expect that that's gonna continue, certainly into the second half year.
Mm-hmm. Okay, many thanks.
Before Keith's final remarks, I just wanna remind you of that we are actually broadcasting the Investor Day here from New York. It's starting at 11:00 A.M. Central European Time. Oh, sorry, 11:00 A.M U.S. time.
Exactly.
Exactly, and 5:00 P.M., Central European time. By that, please, Keith.
Let me just summarize Q2, give the headlines, which you guys know, of course, which is, you look at underlying, right? What's the fundamental performance of the business, excluding currencies and blah, blah. 6% top-line growth, good, strong growth, well above our target of 4%, as you know. What's important to me, as I look at it, is it's all the levers are coming in the right direction. Volume's up, price is up, mix is up, and the growth is coming in all regions. EMEA is up, North America is up, Latin America is up, Asia Pacific's up. Geographically and the key operating levers are from a top-line standpoint, all moving in the right direction, netting 6%. The gross margin continues to be strong and solid, which means that our cost per units are coming down.
The operating efficiencies of global operations and modularization are having this effect, in addition to raw materials. Inversely, mix is up, which means that the product innovation pipeline is reaching consumers, and they're voting for it. The bottom line, excluding currency impact, is up 10%. 6% top line, 10% bottom line. The big story, as we talked about and you guys asked about appropriately during the call, is a very, very strong performance in North America. Over $100 million of earnings in Q2, which is a record for this business in this region. Of course, that's helped tremendously by both the market being up over 9% and very good performance and momentum within the operating unit, in product, in cost, in distribution.
Europe, the flip side to the story, continues to be, you know, tough market conditions, and that impacts, you know, big time, our major appliance business, Thomas, and our professional business, and we see that. We don't wanna be overly optimistic, you know, and we're not. As you can see, we're still forecasting down for the full year, 1%-2%, and that's what we believe is gonna happen, you know. Maybe there are signs that the bottom. We've hit the bottom here. For the second half, as you talked about, we expect the second half will be better than the first half due to seasonality, due to the commodity trends, due to the momentum we have in several parts of our businesses.
Looking forward to 2014 and beyond, you know, our confidence to continue to deliver top-line growth increases every quarter because we've got a more diversified revenue base, we're expanding geographically and into product categories that we haven't been in, channels, segments. We see the opportunity to sustain and build on the gross margin based on the innovation, as well as the reducing cost per unit. We think we haven't lost, and we won't lose our asset discipline and turnover. When you add that up, you know, achieving the financial targets of 6%+ EBIT margin, 4+ turns ROIC above 20%, and then growing at 4% compounded, looks well within reach for us. Thank you for that. Thank you for your continued interest and support in this great company, and have a great weekend and have a good holiday. Thank you.
Thank you.
Bye-bye.
Thank you so much.