Okay, good afternoon, everyone. As usual, we start this conference call with a presentation from our CEO, Keith McLoughlin, and our CFO, Tomas Eliasson. You would find the slides on our homepage, Electrolux.com. We will have a Q&A session after the presentation, which will end around 1600, the whole conference call, actually. My proposal as normal, to make the Q&A session as efficient as possible and have one question at each that you put forward. By those guidance, I would like to give the word to you, Keith.
Okay, thank you. Welcome everyone to this presentation and discussion of the fourth quarter and full year 2012 results. With me today, I have, as you've heard, our Head of IR, Peter Nyquist, also our CFO, Tomas Eliasson. If we can, let's go ahead and jump into the presentation. Let's start with some comments on how we did in the full year for 2012. The organic growth rate for the full year was 5.5%. Acquisitions contributed to another 4% of sales. Operations in North America and Latin America, which currently account for 50% of total group sales, showed strong sales and earnings growth. In both regions, there was continued positive volume trends and improved mix and price increases.
All of our operations in Europe are suffering from the weak consumer demand environment, with declining volumes and negative price mix. The substantial improvement in the results from SEK 3.2 billion to SEK 5.2 billion was achieved through our strategy of increasing the pace of new product offerings, investing in profitable growth, and implementing efficiency enhancements in production. During the year, we continued to generate strong underlying cash flow. The board's proposal of a dividend of SEK 6.50 per share reflects Electrolux's healthy balance sheet and maintains flexibility to expand our operations in a profitable way, both organically and through acquisitions. Now let's look into the Q4 results. In the fourth quarter, Electrolux delivered its strongest organic growth rate for 2012 of 7.5%.
The organic growth was supported by strong volumes and price increases, mainly in Latin America, North America, and Asia. Our operating income increased to SEK 1.628 billion. In North America, positive price mix and volume growth were the most important factors for the significant improvement. Our operations in Latin America finished the quarter with very strong volume growth and with positive price and mix. Earnings in all of our European businesses continued to be negatively impacted by the weak market conditions. In the quarter, we saw some cost increases for source products and transportation, which was higher compared to the fourth quarter of 2011. Our underlying cash flow continues to remain solid, mainly as a result of improved working capital productivity.
Measures to improve our manufacturing footprint in Europe were initiated, around 1 billion SEK was charged to EBIT as items affecting comparability. Now I'd like Thomas to give his thoughts about our results and then talk about our cash flow in the fourth quarter. Please, Thomas, if you take it.
Thank you, Keith. Let's start with the EBIT, sales and EBIT bridge, as usual, split in organic growth, currency effects, and acquired growth. Totally, as you heard, net sales increased by 2.9% in the quarter, whereof 7.5% was organic growth, and currency had a negative effect of 4.6%. We had no impact from acquisitions in the quarter, as both Olympic and CTI are now more than 12 months in the group. The organic growth was record high and contributed with SEK 2 billion in sales and an EBIT of SEK 228 million. This gave a leverage or drop through of 11%, which is a little bit on the low side, but still accredited with 50 points to the EBIT margin.
In these numbers, we of course, have the cost issues that Keith mentioned, and we also have the impact from the weak markets in Europe. Let me hear straight on comment on the group common cost development in some more detail. The spend run rate has been and will continue to be in 2013, around SEK 225 million per quarter. What happened in Q4, where you have seen a much higher number, was that. Well, two things happened. We finished a number of projects, mainly in the marketing brand and design area. That took up the spend to about SEK 280 million in the quarter. On top of that, we have a number of, we have group bookings.
To mention some of them, we had to take some environmental provisions. There were some risk costs. We had to adjust the insurance captive provision, and there's, of course, also internal profit eliminations. These costs are not running costs for the group staff and functions, and they are a bit difficult to predict, and they go sometimes positive, as they did in Q3, and sometimes they go negative. To remember for you is that going forward, the spend rate is around SEK 225 million per quarter. Moving over to currency, it had a negative impact on sales with SEK 1.3 billion, and the EBIT impact was SEK 40 million negative. All in all, an increase from 5.1% in EBIT margin to 5.62%, 50 basis points up.
Let's move to the next page and look at the sales and EBIT bridge for the full year. For the full year, we had a strong 8.3% in net sales growth, where 5.5% was organic. Acquisition 3.9% and currency -1.1%. Organic growth contributed with SEK 5.2 billion, and the drop-through was 17.2%. Acquisitions added SEK 4.2 billion in sales, corresponding to 3.9% in growth, and EBIT was SEK 222 million and, with a margin of 5.2%, which actually is higher than the consolidated group margin, so it was a credit.
We have to mention here as well that from an accounting point of view, CTI and Olympic are accounted for as acquisitions only in nine months in 2012, because they were consolidated October 1st last year. If we look at the full year impact of those two companies, regardless if we count for it as acquisitions or organic, the EBIT contribution from these two companies was SEK 351 million, which is a little bit below the previous guidance of SEK 400 million, and the difference is due to the soft development in Olympic, but SEK 351 million for those two companies. Net-net of everything, the EBIT margin increased with 80 points, from 3.9 to 4.7%. We move to the next page and look at another chart, another analysis here.
We have just closed 2012. It might be interesting to switch the perspectives and summarize the year by analyzing a little bit more what happened inside the company in 2012, and how various functions contributed to the margin expansion in 2012, the 80 basis points margin expansion on the EBIT line here. What you see here in this table is the cost and profit excess expressed as % of sales. If we start with direct material and source products, for the full year, we took a hit through more extensive, expensive raw material purchases and higher costs for source products. The total cost increased with 50 points for the full year, from 56.1 to 56.6.
We should say here that during the end of the year, this development went the other way. We had good effects from product cost and productivity and other changes as well. Next line, conversion costs or manufacturing conversion cost, it developed very positively. You can see an improvement of 110 points, and this is the result of continuous productivity improvement and the successful manufacturing footprint program. On the next line, we have tooling, R&D, warranties, and logistics that went down with a total of 50 basis points. Logistic costs are starting to come up, as you've heard, but the main positive contributor here is warranty costs, which came down pretty heavily during the year. This is a reflection of that service call rate.
Our main quality KPI was the best ever for the company in 2012. All in all, this meant that the gross margin increased with 110 points. On the SG&A side, we have investment in on the going to market costs, especially in North America and Latin America, and also in Asia, of course, but you've seen the result in the sales as well. Bottom line, an expansion of the EBIT margin with 80 points, from 3.9% to 4.7%. If we leave the P&L then and move over to the cash flow, in the quarter, the cash flow, the operating cash flow was SEK 1.4 billion, compared to just below SEK 1 billion a year ago. Pretty good improvement.
The main contributor in the fourth quarter, seasonally, was, as usual, the strong earnings performance. Working capital and CapEx was about the same as a year ago. For the full year, the improvement was even better. We had strong contributions, both from earnings and from working capital productivity, and CapEx was just a little bit up. We should also mention here that our net operating working capital, meaning receivables, payables, and inventories, measured as a percentage of sales, for 12 months on a rolling basis, is now close to 10% of sales. This is down from 15%, five years ago, so 500 basis points improvement. Quite some liberation of cash from the balance sheet.
This strong cash flow at the end of the year meant that the net debt, at the end of 2012, stopped at SEK 5.7 billion, compared to SEK 6.4 billion at the beginning of the year. We reduced that with SEK 700 million. With that conclusion, back to you, Keith.
Okay, Tomas, well done. Thank you. Let's turn the slide and talk about our operating units. If we start with our European operations, during the fourth quarter, Electrolux sales decreased as a result of lower price, mix, and volumes that were down in line with the market conditions. On a full year basis, Electrolux has been able to capture some market share, driven by our branded businesses as well as our private label accounts. Our operating income amounted to SEK 343 million. As you probably remember, last year, we charged EBIT SEK 690 million related to overhead cost reduction and WEEE costs in Hungary. The negative impact from negative price and mix, specifically country mix, was offset by cost savings and improvements in our manufacturing efficiency.
Several activities have been initiated, as you know, within this business area to optimize costs. During the quarter, we have successfully started to downsize and specialize parts of our production, beginning with the plant for refrigerators in Mariestad, Sweden, and for the plant for cooking products in Schwanden, Switzerland. The production at the plants in Mariestad and Schwanden will be focusing on premium products, while some of the production will be relocated to the group's production facilities in lower-cost areas. Now let's turn the page and talk about the market development in Europe. In Europe, the European market continued to deteriorate in the fourth quarter and was down by 1%. There are no current signs of demand improvement. West declined by 2%, while Eastern Europe declined also by 2%.
We saw an accelerating decline in Benelux, France, Germany, and Nordics, as Iberia and Italy continued to be weak. Market growth in the East was driven by the market in Russia, while most other markets were unchanged. We estimate that the market for appliances will continue to be weak in 2013 in Europe. Let's turn the slide and talk about the development of North America. Our operations in North America showed a substantial improvement compared to the fourth quarter of last year. Sales increased by almost SEK 1 billion to SEK 7.2 billion through volume growth and improved price mix. We continued to gain share in the North American market during the fourth quarter. Volume, price, and mix also had a positive impact on operating income, which increased to SEK 367 million.
As in previous quarters, prices have contributed to the strong earnings improvement year-over-year. Our previous price increases are sticking, we have been more precise with our customers in supporting promotional activity. During the quarter, operations were impacted by extra costs of approximately SEK 100 million. These are costs for warehousing and transportation, which were higher as a result of entering new distribution channels. In addition, production costs increased due to the consolidation of cooking production to Memphis, Tennessee. These costs will continue to impact operating income in the majority of 2013. Now let's turn the slide and spend a few minutes on the market development in North America. Market demand for core appliances in North America declined by 2% in the fourth quarter, which was slightly weaker than expected. For the full year, market declined by 2%.
Consumer confidence is on a higher level than a year ago. We have seen and are seeing better housing statistics. Therefore, we expect the North American market to be positive, to be up in 2013. Now let's turn to the next slide and talk about Latin America. Market demand for appliances grew considerably in the fourth quarter, partly driven by government incentives in Brazil and strong market growth in other Latin American markets. The tax incentive program in Brazil has been extended until mid-2013. There were four primary reasons to why we were able to increase our EBIT margin by 450 basis points to 10.2% in the quarter. First, our business in Chile and Argentina generated a positive contribution to our EBIT. CTI continues to exceed our plan and expectations.
Second, the strong growth in Brazil and other countries in Latin America generated a positive contribution from higher volumes. Third, mix was positive, thanks to better customer mix and continuous flow of new products into the marketplace. Fourth, we've been able to increase prices in the Brazilian market. In the last quarter, we were unfavorably impacted by the development of currencies. The strengthening of the US dollar versus the Brazilian real has made raw materials and components more expensive since they are partly priced in US dollars. Now let's turn the slide and talk about our operations in Asia Pacific. In our Asia Pacific business, we posted solid results and maintained a healthy 9.3% margin for the quarter. Demand and market volumes in Australia slowed down, which impacted our sales negatively during the quarter.
Our operating margin in Australia was maintained at double-digit levels despite increasing price pressure. A favorable currency and cost savings had a positive impact on our earnings. The markets in Southeast Asia continued to show strong growth in the fourth quarter. By growing even faster than the market, we were able to gain some market position. Our operations in Southeast Asia continued to show good profitability. Electrolux sales in Southeast Asia and China have now showed double-digit growth for the past 13 consecutive quarters. Let's talk about our small appliance businesses. Group sales increased during the fourth quarter, year-over-year, in particular, as a result of higher sales within small domestic appliances in Asia Pacific and full-size canisters in North America. Market demand for vacuum cleaners in Europe and North America declined in the fourth quarter compared with the same period of last year.
Lower sales prices, negative currency, and increased costs for source products had a deterioration and negative impact on the operating income. The acquired company, Somela in Chile, had a positive impact on results. Now let's turn the slide and talk about our professional business. Market demand in Europe for food service equipment declined in the fourth quarter. Consequently, sales of Electrolux food service business declined as well. Operating income for our professional operations declined in the fourth quarter as a result of those lower sales volumes and a negative country mix due to lower sales in Europe. However, price increases and cost savings partly offset the decline in income as margins were relatively stable. Continued investments related to the launch of Electrolux Grand Cuisine impacted the results negatively in the quarter. Market demand for professional laundry equipment declined in the fourth quarter.
In particular, markets in Europe became softer during the quarter. Group sales decreased due to lower sales volumes. Operating income declined, margins were maintained despite lower volumes. Price increases and an improved product mix made a positive contribution to the operating income. Looking ahead, looking into the first quarter and the full year of 2013, we believe that 2013 will continue to be a challenging year for the appliance industry and for Electrolux. We expect market demand in Europe to decline further, which will impact all of our businesses that participate in that region. At the same time, we anticipate growth in the North American market in 2013, supported by a gradual housing recovery. We will continue to see solid growth in our emerging markets, with resilient growth numbers normalizing.
In terms of price and mix, we expect to see a slightly positive impact from prices in both North America and Latin America during the quarter. As the year continues, the year-over-year effect will decline. Prices continue to be under pressure in Europe, and a 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 first quarter as steel prices have started to come down, while we'll have some on-cost for plastics. For the full year 2013, the net impact is likely to be slightly positive from raw materials. We're likely to see a reduction in our costs throughout 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. 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'll also have a major product launch in China during the second half of 2013 to establish Electrolux in that important market. Finally, as mentioned before, we expect increased costs for logistics during 2013 as we see ocean freight and land transportation becoming more costly. Also, as mentioned before, we see costs for warehousing and transportation increasing temporarily while entering new distribution channels in North America. Peter, with that, we're open for questions.
Okay, thank you, Keith. By that Operator, I would like to take the first question, please.
Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad. You'll enter a queue. Our first question comes from Mr. Andreas Willi from JPMorgan. Please go ahead, sir.
Yeah, good afternoon, and thanks for the time. First question is around what's changed since the Capital Markets Day and communication. Some of the headings for the 2013 earnings bridge seem to have already been known or there at the time of the Capital Markets Day, whereas at that event, we focused maybe more on the positives and less on some of the near-term headwinds. Has something really changed in Q4 that gives you maybe a little bit more cautious view on some of the earnings bridge for 2013, including the cost savings you target? The second question, you had very good market share developments in U.S., particularly.
Do you expect to hang on to that and keep outperforming the market by a similar degree, or was there something specific that drove that big Q4 for you? On the last question, if you look at foreign exchange, there are lots of moving parts with U.S. versus Brazil, but then also cheap resourcing in China versus the European currency, selling from Europe into the U.K., which is more difficult. Maybe you could give us some guidance how we should see the transaction impact in 2013, and what kind of hedging do you still have? Obviously, in Q4, you still benefited from hedging gains.
Okay.
Okay.
We'll start. Thank you for those questions. Let me start with the first one, and I'll address the second one, and maybe Tomas should take the third one. How's that? Is that fair enough?
Yeah.
Changes. What did we say in Capital Markets Day and end of Q3? We said that we thought that Europe was weak and getting weaker. Unfortunately, we've been more right on that than wrong. Europe is weak and getting weaker, and we're seeing the consumer confidence contagion spreading north, from south to north, central and north Europe. That we said, and we're reinforcing. Second, we said that we thought that there would be growth, and that we would see growth in the other regions that would offset that, and we're continuing to say that. We said that we thought we would have a net/net positive price mix effect, and we're continuing to say that. We said that we would save over SEK 1 billion in operational costs, and we're continuing to say that. What's changed?
The only thing that's really changed is the spread between raw materials, between steel and plastics, has narrowed somewhat. We know what steel is because we're essentially locked, and plastic petrochemical-based resins continue to go up. The spread in our raw materials between plastics and steel has narrowed a bit. Still net positive, as we communicated at Capital Markets Day, but that has narrowed a bit since then. The other two things that we're communicating clearly is what is the investment cost associated with getting significant amount of business in a new distribution channel called Home Depot.
We're communicating what that is, and also the fact, as you already know, that we're building a very large state-of-the-art cooking plant, and there will be a time period here through the majority of 2013, where we have 2 facilities running, that we'll only wind up with 1 facility. I don't see a big change in the communications from what we said previously. Let me answer your question around Q4 growth in North America. As you pointed out, substantially above the marketplace. Where is that coming from? That's, well, of course, part of that's coming from opening up new distribution channels. That's a not insignificant part of the growth that we saw in Q4. We're also expanding our business in all other channels.
Every major channel has an expansion of business with Electrolux, both on Electrolux and importantly, on Frigidaire. We had a significant marketing campaign in Q4 that we communicated to you. As we would hope, that marketing campaign has a positive effect on demand. We had a good Black Friday because of the promotional activities and marketing campaigns. Of course, there were still some price and mix effect. That was what happened in Q4. Do I expect that with the momentum we have in North America, that we will continue to outperform the market? The answer is yes. Thomas, maybe you can talk to the currency question.
Yeah. If I understood the question right, it was about the various currency pairs and outlook going forward. Yeah, okay. It's very difficult, of course, and dangerous to talk about currency. I mean, we can't predict that. What we can talk a little bit about is what the situation is right now. The big negative on the transaction side this year, and also in the fourth quarter, has been the Brazilian real compared to the US dollar. That has cost us a lot. That has been like half a billion SEK negative for the year. Other important currency pairs for us is, of course, as you mentioned, British pounds, but that sort of flattened out here in the fourth quarter, so it seems to be stabilizing now.
Other important pairs are Poland and Hungary, as we produce a lot in Poland, and import back to Western Europe. Poland is negative. The Hungarian forint is positive. Of course, Australian dollars versus US dollars is also important as we import a lot to Australia, and Australia is one of our big profit makers. That's been fairly positive lately for us. How this will develop forward, I mean, we will not, I think, give any guidance on. If we look at the hedging results here, we have year-over-year, SEK 70 million plus from the hedging operation. If you look at what's happened in the quarter, it's minus SEK 30 million.
The reason why it's positive year-over-year is because it was negative -SEK 100 a year ago. We went from -SEK 100 to -SEK 30. That gives the +SEK 70, let's say, in the bridge. I think that's all we want to say about the currency.
Are you happy with that, Andreas?
Yeah, thank you.
Okay, thank you. Next question, please.
Our next question comes from Mr. David MacGregor from Longbow Research. Please go ahead, sir.
Hi, David.
Yes, good morning. Or afternoon, I'm sorry. I guess, just on the North American business, how do you keep the price mix going? At the Capital Markets Day, there was a lot of talk about innovation, but in your outlook for 2013, you're really talking about just maintaining prices in North America as opposed to continuing to pursue price increases. I'm just wondering how you feel about the pricing of all that innovation you're taking to market?
Yes. David, of course, we got price and mix, right? Which side of the ledger do you put new product on? We put that on mix. All the new product that we're taking to market, we expect to see a positive mix effect, and that's why we're communicating a positive price mix for the year. Our expectation is that, and we've got, of course, some confidence without knowing exactly the future, but we feel like we're going to be successful in maintaining the gains in price that we've had, and that we'll add to that with the positive mix of those new products that you referred to.
I guess I'm trying to calibrate language here. In your slide deck, you say price mix in total is slightly positive with prices maintained.
Yeah.
If you're expecting a fairly good lift on the mix, are you suggesting the prices might be negative?
No, I'm not.
Okay. I had a second question, just with respect to the recent ITC ruling. I know you just opened a Mexican laundry plant. I'm just wondering how you redirect those units. How does that impact your North American margins?
It obviously, in the short term, it has a, you know, an impact on us. As you might expect, like in any product, when you get an increase in cost, whether that's in raw materials or tariffs or whatever it happens to be, those costs generally flow through to the marketplace. It will have a short-term negative impact on our business, but, it's temporary and not material because it's not the total business, as you know, it's a portion of the business.
Right. Well, good luck.
Thank you.
Thank you, David. Next question, please.
Our next question comes from Mr. James Moore from Redburn London. Please go ahead, sir.
Hi, James.
Hi there, Peter. Hi, Tomas. Hi, Keith. I've got a couple of questions. Thanks for taking them. Organic sales growth and pricing are doing very well. B etter than most people expected, but there are arguably some issues on dropping that through to EBIT. We see some new investment costs for Home Depot, for moving to Memphis, the launch in China. What I suppose my question is do you see 2013 as an exceptional year for these operational one-time items?
Can we think about a cleaner 2014 with some leverage as those drop out? Or is there anything that you can see today on the horizon for future exceptional operational costs that you could help us with? That's the first question. Secondly, could you reiterate your confidence on hitting the three savings programs? It looks to me like you might be running a little slowly, a little slower on global operations at the moment.
I just want to hear you talk about the ultimate targets for 2015. You think they can be hit, and can you help us with what that means for savings in 2014 and 2015?
Yes, James, let me start with the first part of the question, and then I'll begin the second in a minute. Tomas, you can help fill that in with specifics. To answer your first part of your question cleanly and precisely, the answer is yes. I expect these one-time investments of the marketing launch in China, of The Home Depot infrastructure costs, and of the duplicate plants in 2013 to not be there in 2014.
Okay.
On the operations side and the cost outside, again, reiterating what we've communicated in total between the manufacturing footprint of SEK 1.6 billion savings, the global operations of SEK 3 billion, and the overhead cost of SEK 700 million. Tracking on that, maybe, Tomas, you can give some more specifics on how we're doing.
If we start with the cost savings program, the SEK 700 million or close to SEK 700 million saving that it's a little bit behind. We delivered SEK 250 million in 2012, and SEK 200 next year. A portion of it, SEK 200 million-plus, will spill into 2014. The full number of close to SEK 700 is still there, so that we can confirm. On the global operations side, we still have the same communication as we had on the Capital Markets Day. We will have SEK 700 million in 2013. There's SEK 200 million more in cost. Yes, we still believe that we can do the SEK 3 billion.
On the manufacturing side, of course, we have communicated we will do SEK 1.6 billion in savings, from 2012 to 2016. We had SEK 250 million this year. There will be like most likely SEK 250 million next year. We shouldn't forget here that, these savings, the majority, more than SEK 1 billion of these savings, is coming or will come from projects that we have not started yet. That is to be decided, and to plan for, et cetera, et cetera. I mean, we have more projects to kick off, but they are not kicking off yet.
That's very helpful. Could I just come back on the issue of the leverage? In terms of the marketing spend, we've learned a lot about stuff you've already done for Electrolux and Zanussi in Europe and recently in the U.S. and next year in China. Just stepping away for a second, if you look at the running rates for marketing spend as a proportion of sales or any other cost items as a proportion of sales, such as R&D, do you think we're now, we've come up to levels that you see as staying flat going forward, or levels that are exceptionally high and will come back over time?
I think, James, probably the best way to think about it is the journey, right? It's, the real question or the thing that I focus on, of course, is the gross margins, right? Are we getting the lift in gross margin from the innovation, from the products, from the brand, from the marketing, from the operational cost outwork? Are we getting... From the pricing, are we getting that lift? As you know, in 2012, in addition to 5.5% top-line organic growth, there's 110 basis points of gross margin improvement. It's both of those are moving in the right direction. Is there additional marketing and R&D costs to help that happen? Of course. Here's what I'd like to say.
I'd like to say to you, my marketing expense is going to double because my gross margins are 28% or 26%. That's not going to happen in 2013, but you got, you know, this is a relationship here, right?
Mm-hmm.
Well, my objective, our objective, is to continue the top-line expansion or growth, to expand the gross margin, and have the right ratio, which to your word, the leverage, that says we're getting more than we're putting in, we're getting that out. Let me, I say that a little bit as a strategy or philosophically, but let me come back to your question specifically. Yeah, we don't have built in our plans a significant increase in marketing. We've had, as Thomas mentioned, in the quarter, actually, some one-time costs that are just some programs we had lit off, and we got to pay those bills. Fundamentally, we don't have, you shouldn't expect a significant, on a % of sales basis, increase in marketing until you see the gross margin go up.
Okay. Thank you very much. Thanks, Tom.
Yes. Yeah. Can I just verify that, the going up to the 15.1% you see now in the P&L, I mean, that's what we have going forward as well.
The total.
Yeah, the total, yeah, as a percentage of sales, yes.
Thank you, everyone.
Okay, thanks, James. The next question, please.
Our next question comes from Mr. Ben Maslen from Bank of America. Please go ahead, sir.
Hi, Ben.
Yeah, thank you. Hi. Hi, Keith. Hi, Tomas. A few questions, please. Firstly, just on the extra cost for this year, just so we can get our bridges right, can you maybe just quantify, you know, what you do expect the year-on-year increase to be in marketing and logistics? I should guess are the two big numbers. Secondly, just on Latin America, obviously a very strong margin in the fourth quarter. Now, how much of that pickup is seasonal? Just so, you know, we don't get carried away, you know, what's a reasonable margin to assume going forward? Can you hold that 10%, or will it pull back in the seasonally weaker part of the year?
Finally, just on pensions and IAS 19, just maybe a bit of color on what the pension liability will step up to, and what's the reasonable assumption for the interest net, for the year? Thank you.
Okay, thanks. Let me get the first couple, Tomas.
I'll do the pensions.
you clean up for me. Let me actually let me start with Latin America, as you point out, you know, how about that, right? I mean, nice, 19%, 20% growth in the business with double-digit margins for the quarter. Very nice job by the team there. Was that seasonally strong? Yes. Do I expect that, you know, Latin America operates at double-digit margins going forward? No. I think still they should be out there. I think they've reached a new level. If you look at their full year, or margin, you know, north of 7%, do I expect them and have we challenged them to, you know, to maintain that and improve that level? Yes, I don't think it's 10%, to your point. I think it.
That was a seasonal impact, and everything lined up, but I think they have gone from six to seven, to validate that.
Right.
Answer your question around the cost, so your bridges work, or communicated, including the China launch. If you include that, the marketing, design, and R&D increase total would be about SEK 750 year-over-year.
Mm-hmm.
Then at the Memphis cost is about SEK 300. The Home Depot cost is about SEK 100.
Okay.
If that answers that, then, Tomas, can you help with?
The answer, I think just the missing one is the logistics, Keith.
Yeah, that one we talked about. I'm sorry. That one we talked about previously, about SEK 700. If you probably should include The Home Depot on top of that, so call it SEK 800.
Got it. Okay. Thank you.
Thank you.
On the pensions, what we know now, sir, is what the 2012 restate will be. The 2013 numbers we won't know until we've done 2013, but we can take 2012 as an indicator. As the numbers were or came out here at the end of the year, the pension debt increase will be SEK 4.8 billion, and the equity change will be SEK 4.1 billion, and we'll have a deferred tax asset of SEK 700 million. That's the balance sheet change. There's some minor changes as well, but that's the big one. Income statement impact will be SEK 150 million on the EBIT line.
Mm-hmm.
There will be SEK 150 million on the finance net. Earnings before taxes would be around SEK 300 million. After taxes, the net income effect will be SEK 235 million. That corresponds to SEK 0.8 per share, which should be compared to the current earnings per share level, which is SEK 12.1 or SEK 12.2, rather.
Got it. Okay.
That's the big numbers.
Yeah, very clear. Thanks so much. Thank you.
You know this, Ben, but so everybody else here is, hear this. These changes is just accounting changes.
Yeah.
This is taking away the corridor method and taking everything straight to the equity, and partially through the P&L and the rest of it in comprehensive income. There's no cash flow effect whatsoever from this.
Very clear. Thank you.
Okay. Thank you, Ben. Next question, please.
Our next question comes from Mr. Andreas Lundberg from ABG. Please go ahead, sir.
Hi, Andreas.
Hi there, guys. Thank you for taking my question. Just getting back from Latin America, which obviously was very strong in the quarter, except for seasonal effects you talked about quarter, any other differences versus the previous quarters, which also been, rather strong? Thank you.
Maybe ask that again, make sure I got the question exactly.
Yeah. I mean, except for the seasonal effects you talked about in the previous question here in Latin America, were there any other drivers behind a very strong performance in addition to what happened in the previous quarters?
nothing other than, you know, just, you know, sometimes everything lines up on all the right side, right? I think we had a little bit of that in Latin America, but I think the fundamentals are not, were not unique. I mean, there's good, strong momentum in that marketplace, that, as you know, it's averaged 19.9% for 10 years.
All right.
I think it stays strong. Now, you know, a lot of people talking about Brazil slowing down and China slowing down and If the market runs in the mid- to high single digits, I expect we will continue to perform in the double-digit growth range.
Okay, thank you. Just clarification on the IAS question here previously, was that the numbers for 2012 you were talking about?
T hose numbers for 2012, that was a restate numbers for 2012. Yeah. we have this described a little bit in detail-
Yeah.
in the report as well, but yes.
Okay, thanks a lot.
Yeah, just adding to that, we will come back here later on with restatement here, before the Q1-.
Yes.
Restatement.
Exactly. Because we have, of course, restated, now, all the quarters for 2012, and we will be very clear and transparent on that, what the effect will be.
Yeah. Okay, thank you, guys.
Thank you, Andreas. Next question, please, operator.
Our next question comes from Mr. Johan Eliason from Schroders. Please go ahead, sir.
Hi, Johan.
Yeah, hi there. I was just wondering a little bit on how this year will pan out a little bit. I mean, if you talk about market volume, which is sort of demand and price mix and, raw materials, you're kind of positive on most of these factors. You have the numbers you have given us now on cost saving, R&D, et cetera. How will it pan out over the year? Will we see sort of the year normally starting weak and then the margins improving, or is there any significant launch impact or new plant impact that might change this trend for this year?
Yes, that's a good question, and I think generally, it'll be the normal pattern, right? Which is it will sequentially get stronger through the year. Q1 will be the weakest, then Q2, then Q3. As you know, sometimes Q3 and Q4 flip, but always second half is stronger than the first half, and Q1 is always our weakest quarter, and that won't change. The only thing that's unique a little bit is the C, what we call C5, but the launch in China is in the second half. That will be acute to the second half. Honestly, I don't think it's big enough to overwhelm the seasonality of our business, so I would expect our pattern to continue to be the same. The other is we'll start to be in.
We will relieve the some of that logistics and distribution infrastructure cost I mentioned. You know, we'll cross the break-even point on the Home Depot side, so that'll actually come off in the by the fourth quarter at the latest. I think those two will get close to offsetting, maybe not quite, but it's probably a long-winded answer to say that I think you should expect the pattern to continue.
Okay. Thank you very much.
Yeah.
Okay, thank you, Johan. Next question, please.
Our next question comes from Mr. Daniel Cunliffe from Nomura. Please go ahead, sir.
Hi, Daniel.
Hi, it's Daniel Cunliffe here from Nomura.
Oh, Daniel.
Just easy way for communicate. To Smith these, well, kind of quickly. The two questions, first of all, just on Latin America again. You were, you mentioned the effects and impact of raw materials, but then sort of stronger volumes, price mix. I just really wanted to get a flavor of how that's going through the balance of 2013. You mentioned you stepped up to 7%, but I'm just sort of wondering, in your mind, what's more important really here?
Is it sort of the raw materials that sort of could start to work against you, or you think that sort of volumes and pricing becomes more of a positive driver? I guess that's question number one. Question number two is really the in terms of the the whole issue with Home Depot. I just really wanted to get a flavor of, you talked about, you know, potential costs, $50 million, I think, for the first couple of quarters. What type of volumes do you see possible once you see the whole 2,000 stores coming online? Just sort of any indications of, you know, that -$50 million, at what point do you see that going?
You said it was potentially fourth quarter, it goes breakeven, but can you give us a sense of how much of profit that could generate in terms of relative to the U.S. division at least?
Yeah. I'll start with the Latin America question. Of course, the big driver for us is when we got that kind of top-line growth. As you know, it's all three, right? It's volume, it's price, it's mix. They're all moving in the right direction simultaneously in order to get that significant growth. I see that overwhelming the cost issues around raw materials, so t hat's what's been happening. I think that continues. I think that the key for us is, can we maintain that momentum in the marketplace through that pipeline of new products? I will tell you, we launched 80 products in Brazil and Latin America in 2012. We're gonna launch 100 in 2013.
That gives me some confidence that volume, price, mix, momentum in Latin America will continue this year.
A similar sort of drop through that you've already seen, or sort of, I'm just sort of wondering how that drop through has impacted?
Yeah, I think it'll be similar. I don't see any reason for a significant change there in drop through. Do you, Thomas?
No, no, not really.
Okay.
No.
Similar.
Yeah.
Home Depot, okay, so what could it be? Let's just use some reference points. Lowe's has got 1,600 stores, and we do $1 billion of business with them. Round numbers, right? Home Depot has 2,000 stores. What % of that could we get? It could be a relatively big number, you know? You know, half that would be pretty nice, right? A quarter of that would be pretty nice. I'll let you make your own estimates. At the end of the day, you know, you know, Home Depot's got a lot to say about how many of those stores we're in and how well we perform, and, of course, their customers have an even bigger vote on how much of that business we get.
I would say that I think I would, you know, let them decide for themselves how they want to communicate, but we are quite happy with the progress so far with that customer.
The question is also on the profit. I mean, Lowe's versus Home Depot, is there a difference in the type of product that you're sort of putting through both stores in terms of, you know, the Electrolux, Frigidaire? I mean, how is that sort of, you know, there a difference in terms of, which product you're selling to which store?
Actually, our assortment with Home Depot is a little bit stronger, in terms of the mix between Electrolux and Frigidaire. There's actually a stronger assortment of the premium product in our current lineup and assortment at Home Depot than Lowe's. That doesn't mean we don't love the Lowe's business. We do, right? There, there is a, there is a better mix assortment in Depot at the moment.
Great. Thanks very much.
Thank you.
Thank you, Daniel. Daniel Cunliffe. Next question, please, operator.
Our next question comes from Mr. Anders Trapp from SEB Markets. Please go ahead, sir.
Anders, are you there?
Anders, your line is open.
Okay, I think we'll take the next one, please.
Next question comes from Mr. Kenneth Johansson from Carnegie. Please go ahead, sir.
Hi, Kenneth.
Yeah. Hi, I'm here. One short housekeeping question and then one more philosophical, I think. What kind of tax rate do you expect next year with the changes going on in the Swedish tax rate? Does that affect anything at all? Secondly, in the U.S. market, we see that you are investing heavily in order to increase your presence over there, and that's logical, of course. We also see retailers adding a lot of more floor space to white goods, and we see also your competitors being more aggressive on that market as well. Do you see a risk that the supply in that market is increasing significantly and that that may lead to price war?
I'm thinking a little bit about the situation when you have the Cash for Appliances program in the U.S. that sort of build high hopes and ended up in a price war. Do you see a risk for that happening in the U.S. in 2013?
Okay, Tomas, you want to take the tax question?
Yes, I can take the tax question, and I can give you a very quick and simple answer. Even though Electrolux is a Swedish company, the majority of the taxable income is not in Sweden. It's in other countries in the world. We are, how should I put it? Yeah, I mean, it's a struggle every quarter to keep the tax rate, but the guidance that we have is 25% for this year and for next year. That's how far we can see. The Swedish income or corporate income tax cut that is coming in place will help us to maintain the 25% tax rate, but it will not move it down. That's the short answer.
Thanks.
Yes. If I understood correctly, the question around the U.S. market and pricing.
Yeah.
competitiveness and derailing into a price war. You know, as I mentioned, because we're communicating that we expect that, you know, we can only talk about our business, of course, but we expect that our prices will be stable. That obviously has some suggestions around what we think is going to happen in the marketplace. It looks to us like things are and have the potential to continue to be stable. Now, you know, we can get on a call in the middle of the year and saying all hell broke loose, but we don't see that at the moment, and we're not anticipating that.
Mm-hmm. Okay. Thank you.
Yeah.
Next question, please.
Our next question comes from Mr. Alessandro Cecchini from Equita. Please go ahead, sir.
Hello, everybody. Hello. I would like to ask about if do you expect to outperform market in Europe in 2013 in term of volumes thanks to product launches and innovation? It's my question.
Yes, we do. We expect to outperform the market, exactly for the reason that you talked about, which is, as you know, we've just essentially finished redoing the entire offering from over the last couple of years between AEG, GE, Electrolux, and now Zanussi. We would expect to outperform the market.
Okay. Next question is about price mix. What do you expect in Europe about price mix for the next year?
I think we're gonna have positive product mix that's gonna be offset by negative country price mix. That's what I think is gonna happen. I think at least in the first half, we probably should be more specific about that. It's pretty hard to see Europe very far out.
Mm-hmm.
For the first half, I would say that the positive product mix is gonna, one, it's gonna be positive, and two, we're gonna have negative country mix.
Mm-hmm
Because of the slower demand in the central and northern country markets.
Okay, thank you.
Thank you, Alessandro Cecchini.
Thank you.
Operator, we take the next question.
Our next question comes from Mr. Rasmus Engberg from Handelsbanken. Please go ahead, sir.
Hi, Rasmus.
Sir.
Hi. I just wanted to ask you, if I recall correctly, you said you thought that your EMEA profits in 2013 could increase over 2012. Do I got that correct? Is that still your view?
It is.
Good. Thanks.
Yeah, sure. Thank you, Rasmus. You happy with that?
Yeah, very.
Good. We're ready for the next question.
Our next question comes from Mr. Martin Wilkie from Deutsche Bank. Please go ahead, sir.
Hi, Martin.
Hi, good afternoon. It's Martin from Deutsche Bank. A couple of questions. Firstly, just going back to the EMEA region. I know Olympic is now considered part of the organic growth, but could you just let us know, how Olympic developed in the quarter? Was that a drag on profitability, or is that effect broadly neutral in terms of what it did to your margins in Europe, in Q4? The second question was, obviously extremely strong growth in Latin America. As I understand, those tax breaks in Brazil were extended reasonably late in the quarter. I mean, do you think there was any sort of pre-buy when people thought those breaks may not be extended, or do you think it's just an uncertain, ongoing sign of strength in the market? Thanks.
Yes, thank you. I'll start with Olympic, and I'll give you three data points. December was in the black, was positive. Q4... I'm talking earnings. Q4 was flat, full year was minus SEK 80, SEK 85, Thomas?
Yes. Yeah, minus 80-ish.
Okay.
Um.
The size was SEK 1.9 billion.
Right.
for the full year.
Which is down about 20%.
Acquisition, yeah.
Acquisition time. That's called revolution, I guess. Okay, Latin America tax breaks. Yes, they were extended late, but as you know, they've been extended now at least 2 or 3 times. I don't think there was a big pre-buy. There could have been some, to be fair to your question, but I haven't had those conversations, or they haven't come up as a big reason from our operating units. You know, intuition would say, yeah, maybe there were some, but we're not calling that's what happened in Q4, and therefore, we expect a big dip in Q1. We don't.
Let me just clarify on Olympic then. With that, sort of pick up in profitability in December, so should we expect, or do you expect Olympic then to be profitable for 2013?
I'd like it to be break even.
Okay, thank you very much.
Yeah.
Thanks, Martin. You happy with that?
Absolutely. Thank you.
Okay, great. operator, next question, please.
Our next question comes from Mr. Peter Testa from One Investments. Please go ahead, sir.
Hi, thanks very much. Just a couple of things quickly. Maybe going back to James Moore's earlier question about projects and investment in projects. You were very specific about the 3 projects mentioned in Memphis, The Home Depot, and so on, not continuing into 2014. You're in a business where you see a lot of opportunities, and I'm trying to understand the extent to which one should think about project spending be a regular feature of the business. When you have the ammunition of the cost savings, which you'll get in 2014, 2015, the extent to which you think one should also consider the investment side of that, using that opportunity to improve the business. First question.
I mean, you know, to me, there's a difference between, you know, if you go get a, an opportunity to participate in a channel that represents almost 15% of the U.S. market.
Mm-hmm.
I'd say I make that investment, right? In terms of infrastructure and supply chain and warehousing and IT systems. That doesn't happen every quarter, right? That doesn't happen every year. Similarly, we don't build the world's largest cooking plant every quarter or every year. To me, those are significant one-time, smart, intelligent, value creative investments that we need to take. They're not... You know, they don't happen that frequently. Obviously, the smaller ones do, and we'll do that. The other, to your point, which I think will become more part of the previously communicated, previous restructuring plan is, you know, I'm sure we will see and find value-liberating restructuring opportunities to fulfill the previously communicated plan. I don't have any...
I'm not worried that we're not gonna find it, and when we do, we will, but it won't be a new plan. It'll be part of that previously communicated. Am I answering? I guess, I'm not sure. Am I answering your question, I guess?
Yes, I think you are. I mean, that, taking, for example, the cooking plant of the Home Depot investment, these are investments which came through over, you know, a two-year period, started last year, carried through this year. They're large rolling investments. Of course, they don't happen every year, but every two or three years, you have historically and had significant steps taken, and I'm trying to understand the extent to which, you know, are they really just the last holes that you felt in when looking at your map in the business, or whether one should be more maybe sanguine about future plans like this?
Um-
More.
Yeah. I'm optimistic about what's happening in our US business.
Mm-hmm.
From a top-line standpoint, from a margin extension standpoint, from an innovation standpoint, from a cost standpoint. I think we're gonna like this answer, and we're gonna like this investment.
Okay.
Yeah.
Great. The other question I had was just on the U.S. investment in terms of Home Depot role. Do you have any updated views on terms of timing of stores?
Yes, we've committed to and with our customer for them to make those communications. If you will, you know, let Depot make those announcements. We expect, and we know that there'll be a continuation and expansion.
Okay. All right, fair enough. Just last thing, on the logistics side, you said it was plus SEK 700 million. Did I get that number right?
Yeah. Yeah.
On which we-
Okay. Logistics.
Yes. Yes.
Log-
Great. Okay. Thanks for the answers.
Thank you.
Peter, next question.
Our next question comes from Mr. David MacGregor from Longbow Research. Please go ahead.
Hi there again, David. Thanks for taking the follow-up question. In your press release, you talked about growing your emerging markets business over the next few years from 35% to 50%. I guess kind of a big picture question, but can you talk about, you know, what regions would be the priorities for growth within that delta? You know, is it, with the existing brands, is it largely distribution, or is there some substantial CapEx required to build manufacturing distribution facilities to support that growth?
Yes, good question, David. First, of course, it's the obvious suspects, right? If you want to sell lots of high-ticket consumer durables, you need people with discretionary income, right? You go where the people are, whose disposable income is increasing, so Brazil, Chile, China, Indonesia, Russia, Middle East. It's all the obvious suspects in terms of where we're focusing, in terms of we get the growth.
I'm sorry, Keith, is one of those more of a priority than the other?
Yeah, we have a priority. I'd like not to have that in the public domain, but yeah, we do.
Sure.
Yeah.
Okay.
Yeah. Yeah, we have priorities. to your point, you know, as you know, you know, you wanna get the revenue and follow that with investment, right? just to take an example, you know, Brazil, we have capital plans to support that 20% growth rate in Brazil because they've outstripped their capacity, so we've got to put in more capacity. that's, you know, I hope to have more of those opportunities in China and Russia and others. yep, capital or capacity will follow the demand. We're, we're not in the mode of build it and they will come. We tried that in China one time, that didn't work too well.
Okay. To what extent do you think acquisitions would play a role in that growth?
I think they will play a role.
Okay.
Yeah.
Great. Thanks very much. Good luck.
Thank you, David.
Thanks, David. I think we have the last question coming up here for second try from Anders Trapp, I guess it is.
Yeah, hello? Can you hear me?
Yep.
I was going to actually ask about the China launch and what you expect, what you will do there more in detail and what you expect to come out of it. I first, I want to again confirm the answer on the question on the logistics and warehousing for 2013, the cost effect. Was it correct that it's going to be SEK 700 plus SEK 100 higher-
Yes.
Cost?
That's correct, Anders.
Yeah. Okay, good. yeah, the China, if you could, detail a bit of what you will actually achieve there or hope to achieve there?
What. Yeah, I don't know. Maybe I just email you the business plan maybe or something.
Yes, that would be great.
That'd be good. Okay. Yeah, let me give you a kind maybe... Hopefully, this will help. We think obviously that 1, you got a large market that's growing. 2, you've got a segment of that market.
Yeah
C alled the trade-up market, right? The kind of after Chinese consumers buy their first one or two sets of appliances and their disposable income increases, they then want, you know, a higher style, in many cases, Western brands. We'd like to get or have ambitions to get 5-10%, maybe 15%, but 5-10% of that market, and watch it grow. That could be a substantial business for us in terms of turnover, but importantly, we're interested in making money there. We think it could be good both for the top line and the bottom line, and that's our angle of pursuit, angle of attack, get 5-10% of that mass premium market and let it, and watch it grow.
How much of your total sales could that amount to in five years? What type of sales could that be in five years?
It's in the billions for sure.
Okay. Okay, thank you.
Thank you.
Okay, thanks, Anders. I think we had the last question there, so Keith, maybe you can have some closing remarks.
Yep. Good. Thank you, Peter, and thanks, everyone, for investing your time with us and, in many cases, your dollars as well, and your money. Let me summarize 2012. Short version, you know the financials better than I do, 8% top line, 5.5% organically, 110 basis point expansion in gross margin, 30% increase in earnings, 37% increase in free cash flow. What you wouldn't see or won't know is we also had record quality performance, which is why our warranty as a % of sales, for the first time ever, is below our R&D as a % of sales. That's a very good and important milestone in our journey. We've had record safety performance. People in Electrolux are safer coming to work than they are at home.
We're in a manufacturing business, most companies cannot say that. We've had, as you know, again, record level performance in working capital productivity to continue to liberate cash off the balance sheet to be reinvested. I will tell you, as I mentioned with some of the questions, our innovation pipeline is full. This will be a very significant year in all regions and all product categories to bring new products to the market, which will support and fuel that continued top line and gross margin expansion. Here's kind of the case summary, right? The strata as connected to the strategy that we've talked about, all of you that I know well, and that we've connected over the previous calls and Capital Markets Day. I look at 2012, and I this is what I see.
I see a continuation of many, many years of operational cash flow productivity, just crushing out cash independent of the macro cycle, which is great adroitness in this organization and company to be able to move with what's happening externally and reduce costs or reduce working capital and liberate cash. As you know, the primary shareholder value creation over a long period of time has been that cash flow productivity. What I see in 2012 is a continuation of that DNA in this company. What I'm excited about, and again, one in a row, so we can't declare victory yet, but on top of that cash flow productivity is substantial organic growth. I don't know when the last time this company grew organically 5.5%. It's been a while.
On top of the cash flow productivity, substantial organic growth, which again, is validating what we've talked about, which is we need to diversify our revenue base, diversify our business so we participate more in the growing middle class and the adjacent products, second. Third is that expansion of gross margin is coming from innovation and brand and pricing and all of the things that we need to do to be able to afford to get the cycle going virtuous, which means, James, to your question, I hope we do more marketing investment in brand. I hope we do more R&D because our gross margin is spreading higher and higher, and we can get that cycle going. To me, what honestly I'm excited about is, okay, good, fine results. What have you done for me lately?
fundamentally, the model economically is playing out relative to the strategy, which is maintain that operating discipline, get the top line moving again, get expansion of growth margins, so you can afford to reinvest in what people ultimately pay for, which is innovation. That's what's happening. The game here for us is steady, consistent, deliberate, intelligent, over time, investments and return to generate economic value. I know that some of you are disappointed in what we're communicating about 2013. I want you to know that I'm very confident that these decisions and the investments we're making are the right ones to create economic value and for the shareholder. You know, we're not running a sprint here. You know, this is a long-term, consistent, every month, every quarter, every year, investment, return, expansion, investment, return, expansion, and drive it.
I appreciate your guys' support. I appreciate your questions, and I want you to know that I'm very confident in the direction of it. I know you want more faster, and so do I, and so does the board. We're on the right track here. Thank you.