Good afternoon, everyone. As usual, we will start this conference call with a presentation about 20 minutes with our CEO Keith McLoughlin and our CFO Tomas Eliasson. The slides are available at our webpage, Electrolux.com. We will have a Q&A session after the presentation, and we will try to end this session around 4:00 P.M. Central European Time. My proposal, as usual, is that you line up with one question at a time, and then you can line up again for a 2nd question to make the time as efficient as possible. With those words, I would like to hand over the word to you, Keith.
Okay, thank you, welcome everyone to this presentation and discussion of Electrolux first quarter results for 2013. With me today, I have our CFO, Tomas Eliasson, and as you've heard, our Head of IR, Peter Nyquist. Let's go ahead and begin and start the presentation. Let's look into the Q1 highlights. While market demand in most of the core markets in Europe continued to deteriorate, we were able to grow the business organically in line with our strategy. We recorded a solid underlying organic growth of close to 4%, driven by strong volumes and price mix improvements, mainly in North America, Latin America, and Asia. While we have started to see signs of recovery in North America, the market conditions in Western Europe have continued to weaken, negatively impacting our European businesses during the quarter.
Operating income came in at SEK 720 million, excluding items affecting comparability. Our European operations suffered from weak market development in Western Europe. Lower volumes and a negative price mix had an adverse impact on our results for major appliances, professional products, and small appliances in that region. In North America, we continued to outperform the market with strong volume growth and improved price mix. Similarly, our Latin American operations continued to show volume growth and positive price mix. At the end of the first quarter, Electrolux experienced strong currency movements, which had a negative effect on our results of more than SEK 300 million. The Latin American operations accounted for almost one-third of this amount, and the rest is in our European major appliance business and in small appliances.
Now let me hand it over to Tomas and ask for his thoughts about our results. Please, Tomas.
Thank you, Keith. Let's start with this slide that shows sales and organic growth in the first quarter by geography. This picture describes how Electrolux has globally diversified its revenue base and now has 2/3 of the sales generated from regions outside of Europe. In the quarter, North America and Europe, as you can see, were at the same size. If you really dig into the numbers, North America was actually a few kronors ahead for the first time. Taking the two Americas together, they now account for 54% of our total sales, compared to 51% for the full year, 2012. This slide also explains some of our diversity when it comes to currency exposure.
What is very clear here is the difference in growth rates between emerging and mature markets, and the exception to that is, of course, North America, where the growth is really taking off. The development in Asia, Latin America, and Middle East Africa, with very good growth numbers, shows the future potential in the emerging markets. Just as an example, in only three years, a little more than three years, Major Appliances Asia, the Asian part of APAC, has gone from an annualized sales level of just above SEK 1 billion to nearly SEK 3.5 billion at the end of the first quarter, and the growth continues. During that same period, Major Appliances Latin America has gone from an annual sales level of SEK 11 billion to SEK 18 billion, and this excludes acquisitions. Pretty amazing numbers.
Europe, of course, remains an important market due to our large exposure, but the impact from the weak European market is mitigated by our strong presence in emerging markets and in North America. If we move to the next slide, let's now go through the usual sales and EBIT bridge for the quarter, split in organic growth, currency effects, and acquisitions. Our reported net sales, if we start at that end, declined by 2.1% in the quarter. But 3.8% positive was organic growth, and minus 5.9% was currency. We had no impact from acquisitions in the quarter, as both Olympic and CTI are now more than 12 months in the group.
If we start with the organic growth, we had SEK 922 million in sales increase, 3.8%, and an EBIT leverage of SEK 131 million, which gives an acceptable, I would say, leverage of 14.2%. This meant 40 basis points of accretion to the EBIT margin. If you just stop there for a second and look at those numbers, it actually means that taking away the currency effects, the EBIT in the quarter was SEK 1,038, as compared to SEK 907 a year ago. That was an increase of 15%. Price, volume, savings, and efficiency programs contributed all of them positively to this result.
If we move over to currency effects had a negative impact or an adverse impact on sales with almost SEK 1.5 billion and a total EBIT impact of SEK 318 million. This was mainly due to the strengthening of the U.S. dollar against a dozen of our largest currency pairs. The net negative transaction effect was - SEK 267 million in the quarter. If you include the translational effects, which are always smaller for Electrolux, the impact was -SEK 318 million . Of this SEK 318 million, if we try to understand what's behind it, there are two big chunks here. The first one being the Brazilian real against the U.S. dollar, and the other one being the Hungarian forint against the U.S. dollar.
These two accounts together for 2/3 of the whole negative effect. In Brazil, we import components and products to Brazil, and we pay in U.S. dollars. This makes it more expensive. In Hungary, we have a large production and sourcing hub for both EMEA and small appliances, and a lot of this sourcing is done from Asia and paid in U.S. dollars. The rest of the negative effect, as has been mentioned, was mainly from other parts of Europe. Going forward, we see that with the rate of the Brazilian real today of the U.S. dollar, if we assume the same real rate going forward, the negative effects will fade out in the second quarter.
For the forint, however, at current rates, we will continue to have a negative impact, especially in Q3 and Q4 this year. All in all, this means that the EBIT declined from 3.5% to 2.8%, mainly driven by currency. We then move to the next page and look at the cash flow. Cash flow in Q1 is seasonally always the lowest in the year, and our operating cash flow this quarter was -SEK 2.8 billion, compared to -SEK 43, or basically flat a year ago. The decline in cash flow was mainly driven by sales performance and impacted inventories and other working capital.
The increase of inventory reflects the seasonal build-up, as well as working capital needs, driven by the strong growth in North America. There were also some timing differences between Q1 this year and Q4 last year, impacting receivables and payables. CapEx in the quarter was lower than last year, but continues to run higher than depreciation as a result of our investment and growth ambitions, and will continue to do so for the full year as well. The investments we've made during this first quarter referred mainly to new products. The financial net debt at the end of the quarter was SEK 9.1 billion, compared to SEK 5.7 billion at the beginning of the year, an increase of SEK 3.4 billion.
Now, most importantly, looking ahead here, we expect the operating cash flow to turn to positive in Q2 and also turn to be positive for the full year. The net debt will thus come down, and the net debt of EBITDA will be well in line with the requirements for our BBB+ rating. Back to you, Keith.
Okay, thanks, Tomas. Let's turn the slide and look into our operations in Europe. The results for our European operations were weak. Electrolux volumes were down as the market weakened and led to lower sales compared to the same period of last year. Price pressure continued in the first quarter in certain product categories and markets. The product mix was positive due to the launch of the next generation premium appliances on the Electrolux brand, the Inspiration Range, across the markets throughout Europe. Country mix continues to be negative as the Nordic and Central European countries are impacted by the slowdown in Europe. Our results were impacted negatively by SEK 100 million as Tomas mentioned, in unfavorable currency movements as the U.S. dollar strengthened in relation to several European currencies.
As we have continued our product launch of the Inspiration Range, we have also seen an increase in our SG&A marketing cost. Given these market conditions, we are continuing to take action to bring down cost. We are improving our manufacturing footprint, capitalizing on our shared global strength, and reducing overhead cost. In addition, we are improving our product mix through the launch of the high-end appliances on the Electrolux brand. On the positive side, our analysis shows that already now, these activities are contributing to a strong and healthy gross margin. Let's turn the page and talk about the market development in Europe. As we have said, the European market continued to deteriorate in the first quarter and was down by more than 1%, and there are no current signs of improvement. The West declined by 3%, while the East grew by 2%.
We saw a weakness accelerating in all of our Western European markets, except for the U.K., which was up 2%. The market in Iberia was down by 10%. Italy declined an additional 4%, while the Nordics also weakened. 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 continue to be weak in 2013. Let's turn the slide and talk about the development in North America. Our operations in North America showed a substantial improvement compared to the first quarter of last year. Sales increased by almost SEK 600 million to SEK 7.6 billion, mainly as a result of favorable market environment and new distribution channels.
Volumes were up and price mix improved. Volume, price, and mix also had a positive impact on operating income, which increased to SEK 457 million, resulting in a 6% EBIT margin for the quarter. As in previous quarters, price continues to be a major contributor to the strong earnings improvement year-over-year, our previous price increases are sticking. During the quarter, we continued to capitalize on the positive trend in the market and increased marketing spend to support the Electrolux and Frigidaire brands. Operations were impacted by extra costs due to the consolidation of our cooking production to Memphis, Tennessee, and our infrastructure investments in 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.
We are seeing evidence that the recovery in the housing market is finally generating increased consumption of appliances. Market demand for core appliances in North America increased by 5.5% in the first quarter. Our view is that the demand for appliances in North America could increase with up to 3%-5% in the full year 2013. Let's turn to the next slide and talk about Latin America. Market demand for appliances continued to increase in the first quarter, driven mainly by higher demand for air conditioners and cookers in Brazil. The markets outside Brazil also showed another quarter with solid growth. Our earnings were positively impacted by volume growth and price increases.
The results were impacted by higher costs for sourced products and negative currency movements as the U.S. dollar strengthened against the Brazilian real, which made raw materials and components more expensive since many are priced in U.S. dollars. During the quarter, we began implementing selective price increases in the Brazilian market. Furthermore, we will continue launching new and innovative products in order to further improve our product mix. Now let's turn the slide and talk about our operations in Asia Pacific. Our operating margin in Asia Pacific declined compared to the first quarter of last year. In Australia, the market started to grow for the first quarter compared to the same period of last year. A warm start to the year drove air conditioning and refrigeration sales, which impacted our sales and market shares positively during the first quarter.
Our operating income deteriorated as a result of continued price pressure and negative customer mix. The price erosion was partly carried over from last year due to the appreciation of the Australian dollar, which makes imported volumes much more competitive. The markets in Southeast Asia and China continued to grow considerably in the first quarter. Electrolux sales in Southeast Asia and China have continued to show 14 double-digit growth for the past consecutive quarters. Higher volumes in Southeast Asia and China contributed to our operating income in the first quarter. Earnings were negatively impacted by increased investments in new products for the Chinese and Southeast Asian markets. Now let's talk about our small appliance business. In the first quarter of 2013, small appliance group sales showed a positive organic growth as a result of improved price and mix.
Higher sales growth in cordless, handheld vacuum cleaners, and coffee machines in all regions contributed to the product mix. Market demand for vacuum cleaners in Europe and North America declined in the first quarter compared to the corresponding period of last year. Our operating income declined in the first quarter. Unfavorable currency movements had an impact on earnings and more than offset the improvements in price and mix. Currency negatively impacted operating income by about SEK 100 million during the quarter. Increased costs for plastics also impacted the results during the quarter. We will continue launching new products and leveraging from our investments in the small domestic appliance business. During the quarter, we have also taken measures to consolidate selected operations within small appliances. Actions have been taken in Chile, Australia, and Europe.
These costs for these activities, SEK 82 million, have been charged against operating income on the group level as items affecting comparability. Now let's turn and talk about our professional products business. Market demand for food service products, as well as for laundry products, continued to weaken in our most important markets. Consequently, sales of Electrolux food service and laundry products declined. Operating income for our professional operations declined in the first quarter as a result of lower sales volumes. Negative country mix, due to the extremely weak market conditions in Western Europe, had a negative impact on earnings. Costs related to savings and restructuring initiatives, as well as continued investments to grow in new markets and channels, also impacted the earnings negatively. Investments related to the Electrolux Grand Cuisine launch continued to impact operating profit negatively.
Let's turn the slide and conclude this presentation by looking ahead into the second quarter and the full year of 2013. Looking ahead in the second quarter and the full year, we expect market demand in Europe to decline further, 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 gradual recovery in the housing market. We will continue to see solid growth coming from emerging markets. In terms of price and mix, we expect to see slightly positive impacts from prices in both North America and Latin America during the second quarter.
As the year continues, the year-over-year effect will decline. Prices continue to be under pressure in Europe, the negative country mix is still a challenge for Electrolux during the first half of 2013 in Europe. We expect raw material costs to be close to flat in the second quarter as steel prices have come down, while we will have some on-costs for plastics. For the full year of 2013, the net impact is likely to be positive from all raw materials. In line with our strategy, 2013 will 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 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. However, 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 ocean freight and land transportation becoming more costly. As also discussed, we see cost for warehousing and transportation increasing temporarily as we enter new distribution channels in some of our key markets, specifically in North America. Peter, by that, I think we're open for questions.
Thank you, Keith. We are now ready for the Q&A session. As I said in the beginning of this presentation, we should use this session as efficient as possible and let everybody have a chance to put forward a question. Please, therefore, I would like you to put each one question at a time, you can line up again if you have more questions. Operator, we are now ready for the first question.
Question comes from Mr. James Moore from Redburn Partners. Please go ahead, sir.
Good afternoon, everybody. It's James here. I just wondered if you could help us understand the investment side of the P&L a bit better this year. You were very clear last quarter that we've got some pressures from Home Depot, from Memphis, from China. Just as we roll forward into next year, could you clarify that you're relatively confident that those will drop out? Do you see anything on the horizon that will take its place, or do we expect that to come down to the EBIT line at that stage?
Let me take them one at a time. Of course, the having duplicate cooking facilities, one in Quebec and one in Memphis, will be gone by this time next year. That cost goes away because we'll go back to having one facility versus two. The investment in the infrastructure to service both The Home Depot account and the builder account, will be more than offset by the business gain we get in revenue, and should get increased earnings. The cost doesn't go away, is that it gets absorbed and drops through by gain increased business. On the China side, you know, that one, it depends. It depends how strong the business is, how well received the market launch is, and, you know, I'll let you know.
If it feels like it makes sense to continue to invest in the brand building there, we'll do that. Certainly, the development part, the product development part of the investment will be behind us. You know, part of it depends on how things are going there. We may continue to invest in some of that, but fundamentally, the one-time costs that we identified are indeed one-time costs.
That's very helpful. I don't know if I could just follow up and ask how much the Home Depot picture boosted us in the quarter and whether you're running ahead of expectations. Is it more or less profitable than you thought?
I would say that, the Home Depot curve is on plan, and that was an aggressive plan.
Excellent. Thank you very much.
Okay.
Next question, please.
Our next question comes from Mr. Andreas Willi from JP Morgan. Please go ahead, sir.
Yeah, good afternoon. Thank you very much for the opportunity to ask questions. On the foreign exchange, which is the negative surprise today, obviously, you can't be blamed by movement in exchange rates, but I was a little bit surprised there wasn't more hedging protection. Maybe you could talk about your hedging strategy, whether there is something you learned from this quarter, what can be done better and avoid this in the future? Maybe give us some clear indication at current spot rates, what we should pencil in for Q2 and the full year. Thank you.
Okay. Thank you, Andreas, for that question. Tomas, I'm going to give you an opportunity here to address that.
Yes. Now, well, as you know, Andreas, hedging never can take away a currency fluctuation as such. The currency rate is what it is. The hedging can only, let's say, postpone some of it for some time. The rate is what it is. We don't hedge on a 12-month horizon. We hedge some of the more convertible currencies, 70% over eight months. We hedge other more, let's say, expensive currencies on a very much shorter horizon. The coverage we have by currency is somewhere, let's say, between 15% and 50%. You basically hedge your outstanding customer, your receivables and your payables, basically.
When we look at the currency here, the transactional currency effect is a year-over-year effect, and that we don't hedge away. You get some help from the hedging operation, but you can't sort of take it away. That's the policy we have.
I think the other thing, Taj, maybe because you've shown me earlier, yesterday or last week, the movement in the US dollar at the end of January and February. Can you maybe speak to that a little bit?
Yes, absolutely. What has happened here is that if we go back one quarter, we were pretty clear that the situation with the Brazilian real, which is about one third of the negative effect in this quarter, we had that already in Q4, and we said that we will continue to have a negative impact from the Brazilian real in Q1, and we had. That's no difference. Now, going forward on the Brazilian real, if it stays on this rate, that negative effect goes away in Q2. What has happened is that we've had a strengthening of the U.S. dollar, which started in late January, February.
We have almost all our currency pairs when it comes to purchasing, is that we're net buyer of U.S. dollars, and that hits us all over the place, or not all over the place, but where we have huge manufacturing hubs and production hubs. That's what has happened. Of course, this was nothing we knew anything about in Q4. It is what it is. Yeah, that's the explanation.
Okay, you're happy with that, Andreas?
Yeah, maybe in terms of a current rate for the full year, what's the headwind you would expect from transaction?
We don't disclose or we don't have a guidance for that as such. I mean, the Hungarian forint will continue to be negative especially in Q3 and Q4. That we know at current rates. The Brazilian real will go away at current rates, and those two currencies account for two-thirds of the negative effect. We don't have any more guidance other than that.
Okay. Thank you very much.
Thank you, Andreas. Next question, please.
Our next question comes from Mr. David MacGregor from Longbow Research. Please go ahead, sir.
Good afternoon. Can you talk a little bit about how much price you brought forward from 2012 into the first quarter of 2013, just because maybe you haven't yet fully anniversaried pricing?
Yeah, if you look at, David, if you look at the, give you a kind of breakdown of the 12%. You're talking for the U.S. in particular? Is that right?
Can you hear? Yeah.
Yeah. Okay. I'll give you kind of the big picture, U.S. The 12% top-line growth, 8% was volume, and 4% was price and mix. I'd say about half of the price increase was carried from previous year, and the other half was selected increases during the quarter.
That anniversaries that went here in this current quarter?
Yes.
Okay. If I could just maybe ask you about Brazil while I'm on the call with you. You've historically been very concentrated in the major metropolitan markets down there, I'm just wondering if there's at a time when it looks like things are slowing down, you've got the stimulus that's about to conclude, and that raises further questions about growth. Is there an opportunity for you to kind of achieve a higher level of growth by moving beyond metro markets and out into some of the more rural markets? Can you just talk a little bit about growth in the face of some of these headwinds in Brazil?
Yes. Specifically, you're probably referring to Northeast Brazil. There is, in fact, an opportunity for us and a plan from us to participate in parts of Brazil, specifically northeastern Brazil. As you know, with the CTI acquisition, there's opportunities in other parts of Latin America, particularly as you go up the, if you would, the West Coast of South America, come up into and through Colombia and into Central America, into Mexico, there's quite significant growth opportunities as well.
Yeah. Are those priorities for you right now? I'm just talking about where they stand in terms of your to-do list.
They are very high priorities.
Thanks very much, Keith. Good luck.
Thank you, David.
Thank you, David. Next question, please.
Our next question comes from Mr. James Stettler from Canaccord. Please go ahead, sir.
Hi there, James.
Yes, hi, good afternoon. just on Europe, I mean, obviously the way things are going, what more can you do in terms of cost cutting? Should we expect further charges? I mean, is there more you can do in terms of, footprint rationalization to the production?
Let me talk about Europe and what we have to do there to face the market weakness. I guess good and bad news is, as you know, we anticipated this trend quite a while ago. You recall, in the fourth quarter of 2011, we took a restructuring charge, both from a manufacturing footprint standpoint, but importantly, from an overhead standpoint. You'll recall that roughly SEK 700 million in overhead, SEK 500 million of that was reducing our fundamental cost structure in Europe because we anticipated a weak and weakening market. We have taken out and are taking out additional costs as we speak. They're in the operating results, we'll continue to do that to get the suit size right to the market demand. Having said that, as you can see in the SG&A-...
You know, we're still focused on the strategy, so we're investing in the launch of Electrolux Inspiration in the premium range. If, if you happen to live in, for example, in Scandinavia, you're seeing Electrolux all over TV, with this new range, and that's part of the investment that you're seeing. You have to make choices. The way I would describe it is, you know, where we can reduce and need to reduce just fundamental overhead costs, we're taking those down to the smaller, market demand picture. Where there's opportunities to invest, we're prioritizing, and Jonas and the operating teams are prioritizing and focusing. We're not gonna throw the baby out with the bath water, right? Europe is gonna come back.
We've got to make sure that we're following the strategy, investing in new product, investing where it makes sense from a brand standpoint, and obviously prioritizing and taking out other costs. We do not have, other than what we've previously announced in terms of the manufacturing footprint, any additional news to communicate to you on that.
Thank you.
Thanks.
Okay, thanks. Next question.
Our next question comes from Mr. Martin Wilkie from Deutsche Bank. Please go ahead, sir.
Hi, thanks. Good afternoon, it's Martin from Deutsche Bank. Just going back to the impact of the currency on your margins. You commented in your release this morning that gross margins in Europe actually remained quite healthy. In fact, at the group level, gross margins up year-on-year. When I look at the progression of your EBIT margin year-on-year, it does look like, you know, you're obviously going to step up in some of the SG&A costs. I appreciate, obviously, you are investing in that area, but I just want to understand why the gross margin is still up, even though you've seen this currency headwind. Thank you.
Again, when I say gross margins, what I'm doing is I'm looking at gross margin before operating exchange differences, right? Excluding operating exchange differences, when you look at our gross margin, it's up for the group, and it's up actually everywhere, including Europe. When you drop through the operating exchange differences, which is that big number related to currency, that's where it drops. It actually is flat for the group. To your question on SG&A, yes, SG&A is up as a function of the investments we're making in marketing and the launch that we have in the Inspiration Range, as well as in North America. Those are the three big buckets of the SG&A. Does that answer your question?
No, absolutely, yes. If these currency effects sort of fall out the mix over the next three or four quarters, all other things being equal, you then expect the gross margin to be back to where it was or even higher than it was in the back half of last year. Is that how I should see it?
Well, I mean, the product cost development in EMEA is developing very nicely. We have a lot of actions that are improving, or sorry, a lot of items are improving. The material cost, the sourcing cost, the manufacturing productivity, the warranty cost, everything is moving in the right direction within EMEA. Sort of behind the scenes here, we have a very nice development here. We're doing the right thing. It's just that we're being hit by lower volumes. We continue to invest on the SG&A side.
I think to answer your question, if, you know, if that OpEx operating exchange impact goes away, if you assume that, will we see a lift in gross margins? The answer is yes.
Very good. All right. Thank you very much.
Thanks, Martin. Please, next question.
Our next question comes from Mr. Ben Maslen, from Merrill Lynch. Please go ahead, sir.
Hi, Ben.
Thank you. Hi, hi, Keith. Hi, Tomas. First question, please, just on Latin America and the kind of sequential margin weakness. I know Q1 is normally weaker than Q4, we saw a bigger drop than usual. Can you just talk through the kind of drivers of that, whether currency was part of that at all, and whether you'd expect margins to stay below last year's level for the year? Thank you.
For Latin America, two things I would say. One is, as Tomas explained, you know, about a third of it, did impact Latin America.
Yeah, a third of the negative currency effect.
Right.
Yes.
The other part, which, you know, I think you know, is, you know, we got some price increases in Latin America. You know, that doesn't happen, as you know, casually. There was, you know, there was a good first part of the quarter when, you know, we didn't have any orders from some big customers. And so that was partly impacted. The good news is, we've got things clarified and aligned with our big customers, and orders opened up and came back strongly in the last 45 days, and that included some pricing with it. That's, that's the story in Latin America. We feel very good about our Latin American operation and the opportunity to continue to perform and outperform the market.
Yeah.
On the margins?
You mean on the margin?
... Last year, I mean, you know, you're behind after Q1, can the pricing and actions you've taken get you kind of back ahead of the margin run rate that you had last year?
Yeah. Our plan does not call for a margin shrinkage in Latin America.
Okay, great. The second question, just coming back to the cash flow, and how much of the big working capital outflow, how much of that is just driven by kind of seasonal factors, and how much of it is just the natural, the kind of, you know, cash.
... Yeah, actually in cash flow, it might be a good time to walk through that a little bit more. You know, part of it, to your point, was funding the growth, but there also were some one-time items. Maybe, Tomas, you can speak to that a little bit.
Yeah, we can do that. Absolutely. It's of course, as you mentioned, Ben, there's an inventory buildup, of course, for the season, and we have growth, and that is especially in North America, and that requires more working capital. We, if we take payables, for example, I talked about timing effects. In payables, we made some pretty substantial pre-buying in some businesses in December to in front of expected price increases and the sales tax increases. We bought goods, and we pay that now in January, February. That explains why the payable temporarily it goes the other way.
We are not worried at all about accounts receivables and accounts payables. They both show a very healthy development, and they will continue to show a healthy development. When it comes to inventories, well, we do grow and seasonally, we have to build for the spring here. When, as I said earlier here, the important thing here is that it will turn positive in Q2, and it'll be positive for the full year, even though cash conversion will not be 100% this year, as we invest more than depreciation. I can't give you that split between those two that you asked for. We, I don't have those numbers from the top of my head.
Okay, great. Thank you, Tomas.
Thank you, Ben. Next question, please.
Our next question comes from Mr. Andrew Kuske from Credit Suisse. Please go ahead, sir.
Hello, Andrew.
Hey, good afternoon, everybody. Firstly, a broad question on pricing in U.S. and Europe. Clearly in U.S., the price increase is sticking, but how do you see it sort of rolling out over the next 12 months now that raw materials have started to come down? In Europe, are you seeing kind of acceleration in negative pricing, or is it sort of negative at a certain pace, given that the market's been kind of weak for a while and is getting weaker?
Yes. Hey, Andrew. I would say in North America, given our assumption and what we're seeing of positive demand, that we feel like prices will stick, you know, that they're kind of flattening out, and but they'll stay healthy. That's our expectations for the U.S. We don't expect that they will decline. Second, in Europe, prices are down, as you mentioned, but they're down pretty much at a stable rate. It's a deflationary market, but to your point, it's been deflationary now for several quarters. You know, down about 1% or so, and that seems to be about where it is in the current demand environment. I don't think that's changing, but I think it stays stable at that level.
Right. Got it. Just a quick follow-up on FX. You used to disclose your Hungarian forint net flows, and you stopped doing that a couple of years ago. Could you just give us an idea of where you are on foreign versus... is that versus, all versus euro, versus SEK?
Yeah. This is versus U.S. dollars, because we source a lot of products from China into our sourcing hub in Hungary, so it's foreign for U.S. dollars. If I understand your question right, you were wondering about the net flow, right?
Yeah, because the product is sold in euros in the end, right, from that Hungarian hub?
The net exposure in the quarter is, in SEK 650 million.
That's quarterly net flow or annual?
Quarter.
Okay, great. Explains the size of the impact. Great. Thank you.
Thank you, Andrew. Next question, please.
Our next question comes from Mr. David Vos from Barclays. Please go ahead, sir.
Hi, David.
Hi there, Keith. Hi, Tomas. Just one question, follow-up on cash flow, please, if I may. You know, I understand the seasonal effects, et cetera. There's also quite a large delta in the other operating assets and liabilities line. I was wondering if you could shed some light on that, please.
It has to do with our sales performance. might sound strange, but it is. If you have a good year, like we had in 2012, as compared to 2011, then you pay customer bonuses after the closure of the year. This is, of course, accounted for in the P&L during the year, but you pay it in January and February, and this mainly affects Europe and the U.S. These and then some smaller areas as well, and this amounts to around SEK 650 million in a year-over-year effect. That explains two-thirds of what's happening in other working capital. That's the main explanation.
All right. We should expect to reverse, see that reversing in Q2?
Yeah. We're not going to pay any customer bonuses in Q2. No. No.
Thank you.
No.
Thanks very much.
Thank you. Next question, please.
Our next question comes from Mr. Rasmus Engberg, from Handelsbanken. Please go ahead, sir.
Yes. Hi, I just wanted to ask you if you could outline how you see your growth rates in the Americas divisions, both of them, panning out over the year. Is it more stable market growth, or do you think it might accelerate or slow down?
Let's start with the northern hemisphere. As you probably saw in the materials, we've increased our market estimates for North America from, you know, very low single digits, 1%-3%, up to 3%-5%. Of course, when you have a Q1 that comes in at 5.5%, that's not that challenging. We think it will be more positive. We do see the effect of the housing activity, right? Not just new construction, but house prices, housing inventory, affordable mortgage rates. There's just that hugely important housing industry is turning in the U.S., and that has a very direct and positive impact on appliance demand. We're trying to recognize that, and we see that continuing.
Latin America, as you know, we've said that we think Latin America, through the cycle, is a, you know, 4%, 5%, 6% demand business. We continue with that perspective. You know, we've had a few years here, as you know, of significantly higher, but we think that was partially inflated by government incentives. We expect the Latin American market, Brazil, as well as remaining part of Latin America, to be in the 4%-6% growth range. Lastly, I'd say in both markets, we expect to outperform those markets.
Yeah. Okay, thank you.
Thank you.
Thanks, Rasmus. Next question, please.
Our next question comes from Mr. Andreas Willi from JP Morgan. Please go ahead, sir.
Hi there again, Andreas.
My second question is more kind of maintenance in terms of what we should pencil in, if there are any changes on the financial side, on interest, tax, CapEx for the full year?
Yeah. The CapEx will be approximately at the same level as 2012, or maybe a little bit more as we continue to invest a lot on the growth markets and also in the U.S. So that will stay probably a bit above the 2012 level. The finance net is of course affected by the change of accounting, the pension accounting, so that's why that number has jumped up with SEK 150 million. If you look at the paid interest as such, we're probably looking at something around SEK 640, SEK 650 or something, same number as we had in 2012.
Taxes, taxes in the income statement is 25%. We said that last time as well, 25% this year, 25% next year. That's how far we can see that. There is one change, and that's on the cash tax side, paid taxes. That rate is actually going down quite a bit, so a couple of SEK 100 million or a little bit more than that. I would say that of all these three that we've talked about, paid it's not paid cash, paid taxes, will be less this year compared to 2012.
Thank you.
Thanks, Andreas. Next question, please.
Our next question comes from Mr. David MacGregor from Longbow Research. Please go ahead, sir.
Hi there again.
Yes, thanks for taking the follow-up question. I wonder if maybe, Keith or Tomas, you could just give us a really quick walk through your six segments and just talk about how you think about peak margin capability, at some point in the future. What should we be thinking about in terms of achievable peak margins for each of these segments?
You know, if we say, as you know, David, we've communicated that we are quite confident we'll be able to achieve a 6% margin through the cycle with 4 turns on the asset side and returns in the mid-20%s and growing about 4%, we would expect all of our operating units to be able to achieve that. I don't see a reason why there should be one that can't achieve that.
We're all going to contribute in varying degrees, right?
Of course. it's never... The one thing I know for sure is it won't be everybody at the same time, right? I think Q1 is a good example of that, right? It'll be up and down and people at different rates and. I expect all of them to be able to achieve that.
If you think about the individual segments and what you've spent in restructuring and all of the work that you've done there, it looks like a lot of progress. Should you not have lower break evens, and as a consequence, as volumes come back, you should be actually able to surpass prior peak margin performance in these segments?
I think, to your point, our break even has lowered materially over the last few years, which is, you know, why we can run in the mid-60% sales to capacity ratios, you know, and hit 6%, 7% EBIT margins in some of these sectors, running at those lower utilization rates because of, exactly to your point, because all I think the heavy lifting the teams have done have in fact lowered the break even. If then your flip side of that question is, okay, well, if demand comes back in the U.S., and not if, but when demand comes back, in Europe, you know, is there gonna be positive leverage from that? The answer is yes.
What does a typical cyclical recovery look like in terms of volumes in North America?
That's a good question, because the cycle's been so damn long. That's a good question. You know, well, you know the history as well as I do. I know you follow it closely, right? We're down, the U.S. appliance market, down 25+% peak to trough, right? You know, when could that come back, and what will it look like coming back? You know, I have said in public forums before that, you know, if the U.S. market, you know, the overall economy recovers, and as you know, there's, you know, there's still plenty of issues in the U.S. at the moment relative to the overall debt and budget issues, deficit.
Assuming that that gets sorted out, and if you assume a 3%, 4% GDP growth in the U.S. and put a housing recovery on top of that, you could get high single-digit demand for appliances.
For a number of years?
Potentially.
Okay, terrific. Thanks for taking the question. I appreciate it.
Yeah, thanks, David.
Next question, please, operator.
Our next question comes from Mr. Domenico Ghilotti from Equita. Please go ahead, sir.
Good afternoon. I was interested in some call on the Australian market because you were mentioning growing market share, price pressure and the negative plan mix. If you can elaborate a little bit more on your commercial strategy?
In Australia?
Yes.
Yeah. You know, Australia is an important but challenged market for us, right? We have, you know, 30%+ market share, double-digit margins, and a low or slow or actually had been declining market. It grew a little bit in Q1. Honestly, that was mostly because it was so darn hot in January that all the compressor-driven products got sold out. But Australian market, let's start with the end user, is a unique market at the moment because, as you know, you have this bifurcated economy where, you know, the mining industry has been quite strong because they're shipping half the continent to China, called iron ore. You know, that's generated a lot of economic value in terms of GDP.
There's also essentially full employment in Australia, yet the consumer goods business, both durable goods and just consumer spending, in general, is and has been quite weak. The best explanation I can get from our folks in Australia, and talking to some of the economic experts is, you know, the Australian consumer savings rate is at an all-time high, and they're just concerned about. Because they've been through this cycle before, right? They've been through the down cycle before. They're concerned about that, they're just saving and not spending. There's been significant slowdown in consumer demand. In fact, we've had customers, important customers, go Chapter 11. I mean, it's that kind of weak, is what the picture has been.
You put on top of that, the strengthening of the Australian dollar, again, driven by the mining sector, and there's been an increase in imports at lower prices. That's kind of been the struggle, weak demand and margin compression from a pricing, competitive pricing activity. Having said all that, you know, I got to acknowledge the team is still running double-digit margin business there, right? They're fighting it off, but it's, you know, there is compression there.
Okay, you would expect this to continue also because it's a more structural situation?
Yeah, we don't at the moment. We can't see a big turnaround in Australia. We don't see that. I would say it's more going sideways.
Okay. Thank you.
Thank you, Domenico. Thanks. Next question, please.
Our next question comes from Mr. James Moore from Redburn Partners. Please go ahead, sir.
Oh, thanks for taking my follow-up. Keith, I just wondered if I could ask another question about Europe. I mean, it looks like you're taking great share in the U.S., I think we understand that. It looks maybe it's perhaps a touch the other way in Europe. I'm just trying to understand if, say, a Korean or other is currently being more aggressive in the premium end, how are you going to balance the price-volume question?
Very good, very good question, James. That, of course, you know, the tightrope, right? Is it price or is it volume? Is it margin or is it market share? That's the tightrope that Jonas and the team are walking in a market that's weak. Just to, you know, be wide open, we lost some share this quarter in Europe. We lost share part that I understand in Eastern Europe, specifically Russia, because we're a little bit at a competitive disadvantage because we're not inside the trade barriers with all of our production facilities, and we get import duties. Some of our competitors, as you know, through historical acquisitions, have local, either Ukraine or Russian-based manufacturing. The gain is happening from some of our competitors there.
I'd say in the other markets, it's exactly what you said. It's trying to walk that tightrope that says, you know, we've got a brand-new launch of a premium range called Inspiration, I think the team is trying to walk that tightrope. I agree with their current performance, which is lean a little bit more on keeping the price, getting the product positioned right, invest in the brand, and get it established. You know, if you, if you got to give up a little bit of volume to get that placement right, then that's what we should do. That is the tightrope we're walking at the moment.
Very helpful. Maybe if I could just follow up with some technical ones for Tomas. The inventory build, I'm just wondering whether there was a degree of overabsorption that helped the margin, and if there was, if you could give us some sort of scale of that. You kindly gave the Hungarian forint dollar flow. I wonder if you could give the Brazilian real U.S. dollar flow as well.
No, overabsorption, I wouldn't say as such, not like that. On the inventory side, the in SEK, the underlying flow for real U.S. dollars was just below $1 billion.
It's brilliant.
Yeah.
Thanks, Tomas.
Yeah, all right.
Thanks, James. Next question, please.
Our next question comes from Mr. Martin Arnell from ABG. Please go ahead, sir.
Yeah, hi. My question concerns the outlook for pricing in North America. It looks like in the past that you've had some difficulties keeping prices stable or up when the market have recovered, partly, I guess, due to irrational behavior from competition. How confident can you be about stable pricing going forward this time?
It's a good question. I mean, it looks to us like there's some, there's more intelligence in the system in the U.S. than there has been in years past, and I, and I'm just going off the last two years, year and a half. You know, can we be certain that that will remain? No. You know, or does it feel like there is intelligence and discipline and, you know, and people want to make money, both at the retail level and at the manufacturers level. It seems that way. I mean, the other thing, just to appreciate, of course, is forget about, or not forget about, but just look, don't look at the manufacturers, look at the retailers' ASPs. If you look at the retailer, U.S. retailers' average selling prices of appliances, guess what? They're all up.
They're all up considerably. They, you know, I think the retailers have appreciated that maybe this isn't such a bad idea either. That doesn't mean they won't be retailers. They will. They, you know, they'll beat our brains out every chance they get, but we can't... I would say we're confident, but we can't be certain.
Okay, thank you.
Yeah, Martin. Next question, please.
Our next question comes from Mr. Jonathan Mounsey from Exane. Please go ahead, sir.
Hi. Thanks, yeah. Thanks for giving me a chance to ask a question. In terms of Europe, I'm just trying to understand in terms of modeling this going forward, what the exit rate in terms of the declines looked like at the end of March compared to the average declines you've seen in the quarter, really, what the shape looks like, and also how that's looking as we move through April. If you could give us some color on that, please.
Yeah. Actually, I would say it's interesting. It actually got a little bit more difficult in Q1 as the quarter progressed, but April is looking better. It's a, you know, it's not a linear thing at the moment, which says that there's lots of volatility, I guess, is the obvious answer. April, you know, our order book in April is not bad.
Are there any countries where that's particularly the case? Anything that's starting to recover, maybe the Southern Europe?
Well, you know, the positive countries at the moment for us are, and for the industry, is Russia, the U.K., a couple of the northern countries, small countries, Finland, Norway. Though the rest of the countries have been negative in Q1. In Q2, I have to be fair, I've just looked at the total sales in April, so I don't have a country breakdown in my head. I can find that out, but I don't know, Tomas, you don't have that?
No, I don't have that either, no.
We probably shouldn't disclose that anyway, but, yeah, I'd say April looks okay for the moment.
Okay. Thank you.
Next question, please.
Our next question comes from Mr. Johan Eliason from Kepler Cheuvreux. Please go ahead, sir.
Yeah, hi. I was wondering if you could come back to the North American development again and the sort of market share. Are you keeping your sort of 10% market share in the premium sector in the quarter? Did that part of the business contribute to the EBIT in this quarter? Thank you.
Yes, I would say, Johan, that our market share is increasing, obviously in the U.S. You know, not at a hockey stick rate, but at a, I think at a steady rate, and that includes both the Frigidaire brand and the Electrolux brand, as the premium market again begins to recover, coincident with the housing recovery. I think the answer to your question is yes.
Did it contribute to the EBIT line as well?
Yes.
Great. Thanks.
Thank you.
Thanks, Johan. Next question, please.
Our next question comes from Mr. Domenico Ghilotti from Equita. Please go ahead, sir.
A follow-up on the comments on the Russian market. Would you be interested in having some local manufacturer there in order to avoid the duties?
Yes.
Yes. Okay. Are you considering?
Yes.
Okay. Thank you.
We have a manufacturing plant in Ukraine, so for that reason, so we are inside the CIS area, but of course, yes.
Yeah. Does it help us to have more local production inside the trade zone? Sure. Sure, it does.
Yes, it does.
Okay. Thank you.
I think we have the last question coming up here, operator.
Yes, our last question comes from Mr. Johan Dahl from Erik Penser Bank. Please go ahead, sir.
Last question. What an honor. Thank you very much. Very quick question to you, Keith. I mean, the quite significant negative currency effects, which, I don't know, maybe it's a SEK 300 or -SEK 500 for the full year. It seems to have happened during the first quarter and as such, be a surprise to you. What is still you were quoted on the newswire saying you were happy with the current consensus. I was wondering, what has changed for the better? What would you highlight that is actually a positive surprise to mitigate that negative effect on currencies?
Yeah, I think what we're saying is that you can see that the obvious results in North America were quite strong. You know, I think we had communicated clearly at Q4 that we expected the U.S. to be positive and Europe to get weaker before it gets better. You know, we've said that three or four quarters in a row now, and I think, you know, the good news is, we think the total doesn't change, but that some of the mix here, just to be clear, you know, if I was in your shoes, I'd put a little bit more in the North American column and a little bit less in the European column. That's really what all I was trying to say.
Understood. Thanks.
Yep. Thank you.
With that, Keith, maybe you can finalize this conference call.
Yes. Again, thanks everyone for dialing in. Obviously, a unique quarter, given the weakness in Europe and the phenomenal strength in North America. I think part of the advantage of being a true global appliance player is the fact that you can weather these kinds of things and still deliver 3.84% target growth rate for the group in constant currencies, because we're able to absorb a -11% overly exposed professional business in Southern Europe, Italy, and comprehend that with 20% growth in Asia and 12% in North America, and 7.5% in Latin America.
I think that's an advantage, and I think a validation, in my mind, of the execution of a strategy of diversifying our revenue base and participating in more and more of the growth around the world, number one. If you look at the markets, excluding Europe, all markets showed positive growth in Q1. Every market outside of Europe showed positive growth in Q1. Electrolux grew faster than all of those markets, in every one of those markets. As you've heard me say before, the customer votes, right? There's only one way why Electrolux, or how Electrolux is growing faster than all these markets that are growing. It's because the customer is voting based on the value that the organization and the operations are delivering.
I do think the earnings, you know, we don't control currency, but, you know, we're still, that's the disadvantage, I guess, of being a large global corporation, is we get these unique currency swings once in a while. It's interesting. I was looking, tells you what kind of life I have, late last night at the historical currency swings in Q1, and they haven't been this large in a long time. You know, they were usually, I don't know, Peter, Tomas, in the SEK 40 million-SEK 50 million range, right?
Over SEK 100 million. Yeah.
I mean, when was the last time it's been SEK 300 million+ , right? It's been a long time.
It's a long time ago, yeah.
Yeah.
You know, it happens. It happened. You know, when you look through that, which I think we have to do, is say, "Okay, what is the underlying operating performance?" It's not too bad. To have price increases in North America, in professional, in Latin America, as you know, is becoming a habit, and I like that habit. That's a good habit for the organization to be into. You know, we've already talked about the results in North America. I'd also just like to mention that the pipeline, and that's why when you hear us talking about, okay, you're investing in brand, and you're investing in R&D, and you're investing in design, we're not doing that, you know, for PR effect, right? We're doing that for new products.
The pipeline of new products in the company coming out this year is phenomenal. We have got hundreds and hundreds of new products coming out this year, which is going to have across all sectors, including major appliances, professional and small appliances, which is going to contribute, continue to contribute to the earlier question around: Do you see gross margins lifting over time? The answer is yes. That's absolutely the strategy. Then I will close by saying that the fundamentals are intact. As Tomas mentioned, the operating performance within the manufacturing, purchasing, operating units is quite good and quite strong. We'll do that. That's kind of where we are. You know, do we know when Europe's going to recover? No. Do we know that it will? Yes.
The question then becomes, if in fact, there is a sustainable, which we believe there is now, recovery in the U.S., coupled with the growth and the, and expanded position that we have now represented in the, in emerging markets, when Europe recovers and you look at, I'm sure you do, as almost as closely as I do on what's happening with the direction trend-wise with raw materials, I like what that picture looks like for this company. I'm quite confident and quite optimistic that this company will continue to deliver real economic value and therefore value to our shareholders. Thanks very much, again, for calling in, and we appreciate your support of this company. Have a good day.