wondering what's happening. We're actually now at The Cube here on the, on the roof of the Royal Opera House here in Stockholm, and Keith will tell you a little bit more about that later on. Good afternoon, everyone. We will start this conference call, as usual, with about a 20, 30-minute long presentation from our CEO, Keith McLoughlin, and our CFO, Tomas Eliasson. After the presentation, we will have the Q&A session, and we will conclude the presentation around 4:00 P.M. Central European Time. As we actually broadcast now here from the top of the, Royal Opera House, I will alternate the questions between the audience here and also you actually hooked up on the phone.
As usual, we will try to be as efficient as possible, so everybody put forward one question at each, and then you can line up again for further questions. With those in structure, I would like to give the word to you, Keith.
Okay, thank you, Peter, and welcome everyone to this discussion of the second quarter results for Electrolux 2012. With me today, as mentioned, is our CFO, Tomas Eliasson, and as you just heard, our Head of IR, Peter Nyquist. As Peter mentioned in his introduction, we are actually broadcasting from The Cube by Electrolux on the top of the Royal Opera House in Stockholm. On this first slide in the presentation, you can actually enjoy the same view as the audience here in Stockholm. The Cube is actually a pop-up restaurant that's temporarily set in a remarkable location. Some of the star chefs Electrolux is cooperating with are invited to prepare unique dining experiences for food-loving consumers and customers here. I should tell you, the idea with this marketing concept is to highlight Electrolux's 90 years of experience and expertise from developing professional kitchen equipment.
Electrolux is not only the leading global supplier to professional kitchens and laundries and the largest supplier of Michelin restaurants in Europe, Electrolux is actually the only appliance manufacturer to provide complete, high-performing kitchen solutions to both consumers and professionals. This is an advantage we're using in our product development process and in marketing, just like we're doing here with The Cube. The Cube by Electrolux is currently also found, as we speak, simultaneously in London, at the top of the Royal Festival Hall, and before coming here, The Cube was in Milan, overlooking the Piazza del Duomo, and before that, in Brussels, at the top of the Triumphal Arch. We also ran a similar concept at Palais de Tokyo in Paris. After London and Stockholm, the idea is to continue with further cities.
With that introduction, let's go ahead and start our presentation on slide two. Electrolux generated record high organic sales growth during the second quarter, with both volume and price contributing positively. Our operating income increased to SEK 1.5 billion, and four of our six business units achieved an operating income at or above our 6% EBIT target for the group. In North America, price increases, together with operational efficiency, were the most important factors for the significant improvement. Our operations in Latin America and Asia showed strong volume growth. Electrolux in Europe continued to gain market share, although earnings were negatively impacted by the weak market environment. The improvements of our operations were partially offset by higher costs for raw materials and sourced products, but to a lesser extent than in the first quarter.
Now I'd like Tomas to give you his thoughts about our results in the quarter. Tomas, if you would also talk about our cash flow. Please, Tomas.
Thank you, Keith. Let's start with the EBIT bridge. I will go from Q2 last year to Q6, meaning organic growth, acquisition, and currency. The net sales increased with 15%. Organic growth was 5.8%, currency 3.6%, and acquisitions 5.6%. If we begin with organic growth, the sales increase was SEK 1.4 billion. The EBIT contribution was SEK 429 million. That meant a drop-through of 30%, which is a good level for this business. Margin accretion was 150 basis points. Main contributors to this development was increased prices, increased volumes, as well as cost savings. Negative was input costs, meaning raw material impact and sourced products.
Currency added SEK 772 million to the sales, and the EBIT effect was -SEK 80 million, meaning a dilution of 50 basis points. Let's go one step further here. We're talking about currency. What is behind this number, the -SEK 80 million? Well, if you look at the gross transaction effect, it was actually -SEK 340 million in the quarter. The main driver this time, well, let's say more than 75% of that is the cross rates between Brazilian reais and U.S. dollars, as the U.S. dollar is strengthening, giving us increased costs in the Brazilian operation.
On the other hand, the hedging operation year-over-year was +SEK 230 million, so that takes us sort of down to around -SEK 100 million, and then we had some positive translation effects. All in all, it was -SEK 80 million, a dilution of 50 points. Acquisitions added SEK 1.4 billion in sales, with a very good EBIT margin of 6.8%. Here we got an accretion of 10 basis points. In acquisitions, the Olympic Group is still slightly negative, but CTI is a bit better than planned. All in all, it follows the plan, SEK 100 million a quarter in earnings.
In the last column, we have some sale of assets this quarter and a quarter a year ago, net - SEK 40 million that we have to take out to get comparable numbers. That gives you the 100 basis points margin accretion from 3.1% to 4.1% in the quarter. What we will do now is to look a little bit further into the organic development. If we switch to the next slide here, we will break up the organic part, the 150 basis points of margin accretion, by looking at the accretion and dilution on some specific items. If we start with price mix. Price mix together gave an accretion to the margin of 130 basis points.
Price was up in North America, in Latin America, and in the professional business. Mix was negative, primarily driven by geographical mix effects in Europe and also in Asia Pacific. Volume was up, mainly driven by volume increases on the emerging markets, Latin America, Asia Pacific, and also small appliances had a very good volume effect, 40 basis points margin accretion. Raw materials continues to dilute the margin, 40 basis points this quarter. On the last line here, you see a net number. This is cost investments as well as cost inflation versus cost savings, both from the official cost savings programs and other improvement that we have. This is 20 points accretion to the EBIT margin. We're very happy about that.
All in all, 150 basis points from the organic part of the business margin accretion. Below this line, you see currency, you see acquisitions, you see sale of assets, which we discussed on the previous page. Before we leave this slide, just a few words on the sequential development here. I know that many of you are interested in that. Sequentially, I mean, from Q1 to Q2, prices were up, especially them from North America and Latin America. Mix was flat sequentially from Q1 to Q2. Volume was up pretty much. Raw materials were flat sequentially, which meant that sequentially, there was no effect on the EBIT margin from raw material price increases. Currency worsened, as you have seen, sequentially.
If we go to the cash flow on the next slide. Cash flow was very strong in the quarter, SEK 3.6 billion. The operations cash flow increased with a $500 million Swedish krona, driven by the improved results. Change in operating assets was driven by the working capital improvements and very good development, very good results from the working capital programs that we're driving, and especially from trade payables. CapEx were on the same level as a year ago. That gave us a cash flow at the bottom line of SEK 3.6 billion compared to SEK 1.4 billion a year ago. I would like to say also here that if you look back historically on the working cap or the cash flow development in the group, Q3 is always down.
It's a weak quarter, a weaker quarter in terms of cash flow and working capital. Don't expect Q2 to happen in Q3 again, so you understand what I mean. In Q4, it normally picks up again. Yeah, with that, I would like to hand over to you again, Keith.
Okay. Thank you, Tomas. If you can ask everyone to just turn to slide, and we'll talk about our European operations. In a difficult market, Electrolux continued to gain market share in Q2. The launch of Electrolux branded products, the relaunch of the Zanussi products, and the completed launch of the AEG products have all combined to the positive development. Our operating income amounted to SEK 215 million, and includes a one-off sale of SEK 50 million from property and assets in Spain. Adjusted for the one-off, our operating income was in line with the second quarter of last year. Transition costs ahead of the relaunch of Electrolux brand impacted earnings negatively as we transition from the old product to the new product.
Positive market growth in Eastern Europe, which primarily is in the mass market segment, and the weak demand in the South, Italy in particular, which is more of a pre-premium built-in segment, has contributed to a negative impact on our mix in the region. Finally, as regards to our European results, higher volumes and cost savings had a positive impact. Now let's turn the slide and talk about the market development in Europe. Here's the quarter-over-quarter bridge over several years you're familiar with. If you look at the most recent quarter, the European market in total declined by 2%, appliance demand, whereas Western Europe was down 4% and Eastern Europe up 3%. The markets in Southern Europe have continued to be quite weak. In Italy, demand fell by 14%, and in Spain, by 17%.
The market conditions in Central and Northern Europe have slowed somewhat as well. Market demand in France turned negative in the quarter. The growth in Germany was less positive than in the first quarter of 2012. The market in Eastern Europe continued to show growth, although at a lower pace than previously seen, mainly driven by lower growth rate in Russia and declining markets in Southeastern Europe. Considering the continued weak market development in Europe, we estimate the market to be down by around 2% for the full year 2012 compared to 2011. Now let's turn the slide and talk about North America on slide eight.
Our operations in North America showed a substantial improvement compared to the second quarter of last year. We were able to reach our target of 6% EBIT margin during the period. Our sales were up in the quarter. Price and mix increases were the main triggers for the sales growth. We grew our core appliance volumes during the quarter. Market demand for air conditioners decreased as the air conditioning season started much earlier this year in the U.S. Price is a major contributor to the strong earnings improvement. Our previous price increases are having effect or sticking. We have been, and the team has been much more precise with our customers in supporting promotions. Improved efficiencies within manufacturing and the supply chain also had a positive impact on our results.
Higher costs for raw materials and sourced products had a negative impact on results, to a lesser extent than in Q1 2012. Now let's turn the slide and spend a few minutes on the market development in North America. Industry shipments of core appliances were approximately in line with the corresponding quarter of last year, so flat. This is clearly better than in Q1, where it was down about 8.5%, and is partially explained by weak comps, but also driven by, we think, some small, modest improvements in North American market. Consumer confidence, while low, is still higher than it was a year ago, and we have begun to see some improvement in the housing statistics. For the full year 2012, we expect the market for core appliances to be flat to up 2%.
Let's turn the slide and talk about Latin America. Market demand for appliances grew considerably in the second quarter, driven by government incentives in Brazil and strong market growth in other Latin American markets. The incentive program in Brazil has been extended now until the end of August. Our operating income rose considerably compared to the second quarter of last year, above our 6% EBIT target. Our new business in Chile and Argentina generated a positive contribution to our EBIT. CTI and its operations continue to exceed our plan. The strong growth in Brazil and the other countries in Latin America generated a positive contribution from higher volumes. Price mix was positive, thanks to price increases and continuous stream of new products being brought to the marketplace. In the second quarter, we were unfavorably impacted by the recent development of currencies.
As Tomas talked about, the strengthening of the U.S. dollar versus the Brazilian real has made raw materials and components more expensive since they are partly priced in U.S. dollars. Finally, higher costs for raw materials were more than offset by improved efficiency in our operations. Now let's turn the slide and talk about our operations in Asia Pacific. The operating margin in Asia Pacific declined slightly compared to the second quarter of last year to just under 8%. The Australian market declined slightly compared to the corresponding period of last year. Our operating income in Australia deteriorated compared to the year earlier second quarter. Lower prices and lower capacity utilization and some higher investments in product development had a negative impact on the results.
The markets in Southeast Asia continued to grow considerably in the second quarter. By growing even faster than the markets, we're able to increase and gain market share. Our operations in Southeast Asia continue to show very good profitability. Electrolux sales in Southeast Asia and China have now showed double-digit growth for the past consecutive 11 quarters. Let's talk about our small appliance business. Market demand for our small appliances in Europe and North America declined in the second quarter. Our volumes increased somewhat, which resulted in market share gain. At the same time, CTI subsidiary, Somela, improved sales and earnings. Operating income for the second quarter, excluding the positive impact of the acquired company, was in line with the corresponding period of 2011.
Higher sales volumes were offset by lower sales prices, some negative currency impact, and some much higher investments in our brand spend. Now let's turn the slide and talk about our professional products business. Market demand for food service products, as well as for laundry products, declined in our most important markets, particularly in Southern Europe. Operating income for our food service operations was slightly lower than in the corresponding period of last year, when you exclude the positive one-off effect of SEK 90 million associated with the asset sale that we communicated a year ago. Lower volumes and negative country mix were partially offset by price increases in our operations in our food service segment. This is a healthy result considering the Electrolux large exposure to the Southern European professional market.
Operating income for our professional laundry business for the second quarter declined, where lower volumes were partially offset by price increases and a positive mix. Let's turn the slide and conclude this presentation by looking ahead into the third quarter and the full year 2012. Looking into the third quarter and full year, let's start with the market. We expect market volumes to be slightly positive for the third quarter and for the full year. If I could break that down, we obviously expect the European market to continue to be weak. In North America, we expect some modest growth, and we expect emerging markets will continue to contribute to higher volumes for us.
In North America and Latin America, we see a positive impact from price in the third quarter, we expect a positive impact for the full year on price for the group. We still expect raw material costs to exceed 2011 by a maximum of SEK 500 million, with the majority amount impacting the first half of the year. As was communicated, SEK 300 million-SEK 500 million have already hit us in the first half. As I mentioned earlier in the presentation, we are now launching our high-end Electrolux products into the European market. We started the launch during the second quarter, we will step up our marketing during the second half to get penetration of that important premium brand pan-Europe.
Our acquired units will give us a positive contribution of approximately SEK 400 million compared to 2011. As there's great uncertainty in Egyptian market, we have seen weaker performance from Olympic. As Tomas mentioned, CTI in Chile is exceeding expectations and plans, and we're confident in hitting the 400 number for the full year. We're also seeing positive development from our cost savings program initiated at the end of 2011. In combination with already implemented actions, we expect overall cost savings in 2012 to amount to approximately SEK 1 billion. Finally, as we have seen in the first half of the year, we expect increased costs for transportation and some storage products to continue throughout the year as previously communicated.
By that, Peter, I conclude my remarks, and we can open it up for questions.
Sure. As we have a live audience here in Stockholm, I will try to rotate the questions between audience here and you who have actually joined us via telephone. My thinking was that we actually start with two questions here in Stockholm, then I'll call for the operator to manage the telephone participants. Charlotte, I guess you had a microphone. Let's start here in Stockholm with two questions here. I think Anders was the quickest one here.
Yes.
Hi, Anders Trapp, SEB Enskilda. Let's continue where you finished off, Keith, with the sort of guidance. It looks very much similar, the full year guidance looks very similar to what you presented after the first quarter. Would you say there is any real change or difference in your full year guidance or view of the full year today than what you mentioned three months ago?
When you put it all together, Anders, I don't see any major change. I mean, Europe's gonna be a little bit weaker, and the U.S. is gonna be a little bit stronger. But in total, I don't see a major change from what we said, even at the Q4 and at the Q1. The market is actually playing out roughly as we communicated.
Yeah, just one. Thank you very much. Just one detailed question also about the hedging. I wonder what you gave a lot of details on the hedging. I just wonder the absolute hedge result in the quarter, not compared to last year, but the absolute hedge result, what that was. If you could give us that would be great.
Sure, I can do that. I mean, the number I gave you here.
Comparison. Yes. Thank you, Tobias. The quarterly result was +SEK 60 million.
Thank you.
Yep.
Kenneth Toll with Carnegie. A question on the U.S. I mean, profitability starts to look really decent now after several years of very poor performance. There have been some, Whirlpool have sued the Koreans for price dumpings, et cetera, that might have helped. Do you expect any pushbacks now from the very large and powerful retailers you have, when the EBIT margin starts to come up again, that they want to have a share of that?
Actually, I think that our customers are more focused on their margins than our margins. There's no doubt that they pay attention to commodities. I think I would answer your question less about what's our margins and what kind of reaction do we get to that, and more, they're gonna, you know, they'll track commodities, and when they see commodities go down, they wanna talk. Of course, when they go up, they don't wanna talk. Depending on, I think that conversation is gonna happen at some point.
Yeah. That, the biggest risk is a competitor that comes and offer them higher margins through lower sales prices to them, I guess?
Yeah, there's always a risk, as you know, of people acting with very short-term behavior that financially is not overly intelligent or rational. There's always that risk.
Okay, thanks.
Should we then try to contact the operator? Operator, I would like to have questions showing up on telephone conference, please.
Okay, ladies and gentlemen, if you have a question, please press zero one on your telephone keypad, you'll enter a queue. We have a question already from James Moore of Redburn. Please go ahead.
Yeah, hi there, everyone. I wondered if I could ask a question about raw material. Is it too early, or do you have a sense for how that might look as a headwind or a tailwind in 2013? It feels to me like that might be a tailwind next year. Is that, is that too optimistic?
I think, and actually, I think I included it in my report today, James, that, you know, if you kind of just snapped the line, took the picture right now in terms of where commodities are and what the forecasts are for DRU and cold rolled steel and other key commodities, it could suggest that we could get a benefit in 2012. What I'd ask, and that's about all I could say right now, what I'd ask is that as we get into Q3 and certainly into Q4, you know, that's when, you know, we're gonna know, right? Because we'll start locking in on contracts, and we'll tell you exactly what we think it is.
You know, again, if you just took a snapshot today, it could be a positive view for, you know, for us for 2012. You know, I wouldn't model that yet. Let us do some work and come back to you when we know some specifics.
Can I just follow up on Brazilian volumes? After the incentive program runs out, do you think the Brazilian market will go negative for a bit in the sense of demand having been brought forward?
Yeah, that's a good question. As you know, this is not the first time that the Brazilian government has incentivized appliance demand. It happened, you know, about a year ago, 12, 14 months ago, and we were worried about that very thing, which is as soon as they come off, the market would decline for a quarter or two, and it didn't. Do I think people will pre-buy if they actually stop it in August, which, as you know, they went from Q1, extended to Q2, now they've extended it to August. Do I think there'll be some slowdown in September? Probably, but I'm hoping that it's offset by a pre-buy in August. We're not, in our plan, anticipating a major drop-off in the second half, or in Q3.
I think there will be a pre-buy in August that could offset some drop-off in September, but that's our view.
Okay, thanks.
Another question from the participant on the telephone conference via telephone.
Yes, we have a question from David MacGregor of MAC. Please go ahead.
Yes, David MacGregor at Longbow Research. Good afternoon. Keith, I just wanted to ask you about the second half outlook for North America. You'd offered a full year outlook of flat to 2%, AHAM Core 6 down 5% at mid-year. It implies you're looking for a high single digit performance in the second half of the year. I'm just wondering, you know, what your thoughts are behind, you know, what would drive that kind of performance?
Just again, as we've talked, previously, you know, we originally came out and said flat, up 2%. I think last time we said it'd probably be more toward the lower end of that range, given the Q1 results, you know, that we're down 8.5%. Q2 came in flat, so we got a first half of down, you know, 4.5%. If you look at the quarters, look at the comps in Q3 and Q4 of next year, we think it'll be slightly positive. It needs to average 4%-5% to, you know, to get to break even. You know, we need a good second half. We do see some modest recovery in the housing market there. As you know, a big part of the U.S. demand now is replacement driven.
You got this huge core base that just when your refrigerator fails, it gets replaced, and we're starting to see the beginnings of the housing recovery. As I've said now, we've talked many times, we think that's a long, slow, gradual process, and we still believe that. We think it, we don't see it going back down. We see it gradually improving. To your point, it's gonna take, you know, we're gonna need a couple of 4% or 5% quarters in Q3, Q4, to make that forecast around flat come true. Right now, we don't have any information that says that we need to adjust that forecast, but, we think it's possible. It's not an easy putt.
Does your mid-year price increase stick?
I'm sorry?
Is your mid-year price increase sticking?
Yeah. Did you get a copy of the report?
I did.
I'm, yeah, I'm just teasing. I'm just teasing you. I think the team has done a fantastic job over the last four or five quarters, executing what we've been talking about for the last four or five quarters, which is a series of deliberate and, passing through of this spike in raw materials, and we're reading about it. I think what all I can say right now, David, is that we see the prices have stuck, and our intention, of course, is to hang on to them.
Congratulations.
Thank you.
Just here in the audience in Stockholm. How about you, want to hear?
Hi, I'm Johan Eliason . Staying in North America, your press release that you will start selling through Home Depot. Could you kind of elaborate what's the sort of market position of Home Depot in your market segments and the potential for you?
Yeah, so let me start with Home Depot's market position. For major appliances, Home Depot represents about 12% of the U.S. market, about 12% market share, and they have around 2,000 stores around the country and have some actually in Canada and Mexico, the core of it is the U.S. market. They have not been a customer of ours previously, we were pleased that they selected us as a key supplier that will begin rolling out to 120 stores in August. From August till October, we'll get our products floored on those 120 stores. Of course, you know, we have expectations for that to continue, that's gonna be based on performance. We're very pleased with our ability to service the customer.
To be honest, it's gonna help all of our customers. As you know, as you get more business, you can afford to invest more. We'll have more innovation, more investments going into products for all of our customers and to strengthen our brand. I think it's positive for the whole market.
Does it help your premium segment in any way in the U.S.?
Home Depot has elected to take on all three of our core brands. They'll take on the Frigidaire brand for the mass market. They'll take on a brand that probably you're less familiar with, but in U.S., people would be familiar with, which is called Frigidaire Gallery, which is kind of a step up from Frigidaire, and then also the Electrolux brand, premium brand. Yes, we would expect it would have a positive mix impact.
Okay. Next question here among the audience in Stockholm. Another question. Stefan in the back.
Yes, I was just wondering on the U.S. housing recovery, if you can share sort of your position as, particularly when it comes to new builds now, whether, you know, you now have a full product offering, I think? Whether or not, if you do see a recovery, if we can also see some positive dynamic effects on the replacement market?
Yes, yes. As you know, historically, the housing market, new construction market, pre, you know, recession, pre-2006 bubble crash, you know, was around 20%-23% of the demand for appliances, not insignificant. Of course, that's evaporated as it's gone from 2 million starts to 300,000 starts, right? Now it's at 700,000 starts, right? It's coming back, and it's at a highest level it's been at since, I think, around 2008. It still needs to be around 1.4, 1.5, but it went from 300 to 700, it's moving in the right direction. We have a smaller share of that market historically than some of our big competitors, U.S. competitors, primarily.
Our share of that market has been increasing, particularly as you referred to with the launch of Electrolux. Now we have a full offering, and we have greater share today, even in a smaller market than we had three, four, or five years ago. As we've talked previously, I'm a little bit of a different view relative to the U.S., which is I think the recovery takes a little bit longer, but I think when it does, you get an economic recovery and throw a pent-up housing demand on top of that, appliance demand could get pretty sporty. To your point, it has domino effects for replacement demands and housing resales. Not just new starts, but resales, and of course, that triggers appliance demand. There.
my view is there is a optimistic, perhaps potentially quite optimistic demand future in the U.S. I know that's not 2012. That I know. I don't know which year after that it's coming, but if, you know, I'm pretty confident it's coming at some point, and we got to be positioned, and we will be positioned to participate in that.
Okay, Stefan?
Yep.
Okay, let's rotate back to the operator. Operator, please.
We have a question from Andreas Willi from JP Morgan. Please go ahead. I'm sorry, he seems to have left. Our next question is from Mr. Rasmus Engberg, from Handelsbanken. Please go ahead.
Yes, hi. Congratulations to a strong result, guys. I wanted to ask you if you could shed some light on the sequential trends in price mix in the third and the fourth quarter compared to the second, what your expectations are?
Yeah. Oops! We expect that price mix in total will be positive into Q3 and for the full year. I don't think we have specific numbers on saying quarter- by- quarter. That's probably a little bit too explicit.
Okay, but do you think it's, is it tailing off, as the year-on-year effects from the price increases get smaller?
Yeah. At some point, to your point, we're going to start comping, right?
Yeah.
We started price increases, as you recall, in like Q1, Q2 last year, then again on August, then again in February. Yeah, we're going to start comping those price increases for sure. Right now, in Q2, you just read about all of them.
Yeah.
Right? They didn't exist a year ago in full force.
Mm-hmm.
To your point, you know, the comp is gonna, you know, we're gonna have to comprehend the year-over-year. Right now, exactly to your question, which I appreciate, we have not communicated any decision for future price increases.
Okay, thanks.
Thank you.
After that, I think getting into the third quarter, you will see probably the balance in mix, moving more to mix rather than price, as you have, for example, the air condition ends, and then you end into more core in the U.S., core appliances. That's a little bit of change of the mix rather than the price.
Just maybe to build on that a little bit, to get that seasonality with the U.S., you know, there's a reason why generally our U.S. second half earnings are stronger than the first, and then you know what that is. That's called cooking season, right?
Yep.
Cooking is September, October, November.
Mm-hmm.
You know where our margins are relative basis in that category versus others. If you say I got one month in Q3, and I got two months in Q4.
Mm.
You know, you guys, you guys know the drill.
Yep. Thanks.
Yep, thank you.
Thank you. Let's take another question from the operator, please.
Okay, our next question comes from Andre Kukhnin from Credit Suisse. Please go ahead.
Hello, Andre.
Hey, good afternoon. Thanks for taking my question. I'd like to hear a bit more about the small appliances business. Firstly, what's happening there in terms of how much of it is market with the high volumes but low prices, and how much of it is you investing in brands? Can we hope for a kind of a similar rebound in margins in this business like we had last year when we started with sort of 3% - 3.5 %, and then went to 10% in the second half?
Yes, good question. Actually, I did a little bit of history here, and certainly just the most recent one last year. You recall last year, small appliances contributed about SEK 500 million of earnings for the full year, SEK 400 was in the second half. This is clearly.
Yeah
a second half seasonal business, and it probably would surprise some people on the call, but there's large parts of the world where people actually gift small appliances during the holiday season. It actually is a holiday-driven business in many countries in the world. Our plan and our expectations is that, you know, we see a similar pattern. To maybe dig a little bit deeper to your question, small appliance is another business that got hit by the currency effect, right? Maybe you can speak to that a little bit, Tomas, in a minute. We are investing heavily in some launch campaigns, specifically in Japan.
We have got a big launch on this product we call ErgoThree, which is kind of the UltraSilencer, which has been deemed the best vacuum cleaner in the world, only developed for the Japanese market. That product is being launched as we speak. We are spending significant marketing dollars in Q2. It will continue in Q3. Of course, we're counting on that having an effect. That's part of it. We're also seeing significant penetration and growth and market share in small domestic appliances, which right now, have a lower margin than full vacuum cleaner canister markets. You're seeing that combination of our investment, and we're getting a bit of a hit from currency and a little bit of a negative mix from small domestics with high volume growth, but lower average margins.
The other is North American market and the European vacuum markets are soft. They are quite soft. Did you have any relative to the currency and small appliances, Tomas?
Well, just a few words on that. Of course, small appliances is, let's say, the most sourced business that we have in the group. It's more than 80% sourced finished products. Of course, currency then has a big impact, currency as well as the suppliers, of course. We are a net buyer of U.S. dollars, so when the U.S. dollar is strengthening, it puts a lot of pressure on us, and it hits small appliances right now.
Great. Thanks very much. Very exhaustive.
Let's take two more questions here in Stockholm. Any more questions in the audience? We return back to the operator, please, can you?
Okay, we have another question from James Moore of Redburn. Please go ahead.
I just wanted to follow up again with the question really on mix, if I could, Keith? Without numbers, could you just talk a bit more through the mix issues in EMEA and North America that I sense gave a bit of headwind in the quarter? I'm trying to get my head around the higher margins you make in areas like Italy and others, and some of the faster growth in Eastern Europe, and whether we get to the point where the Southern European margins come down towards the EMEA level, and we no longer face so much future mix pressure, or whether there will be some more of that to come?
On the small appliance businesses, could you give us a sense for whether you're going to change the strategy and insource some of these components a bit more so as not to face any pressure from suppliers?
Yeah, maybe Tomas, looks like you have the data there. Maybe you can share that.
On the sourcing. Well, not in the numbers, really, but the short answer to your question, James, is yes.
On the sourcing question.
How long do you think that would take?
Sorry?
How long do you think that would take?
Oh, I can't say, really. I mean, but it's not a quick operation, of course, but we need to, let's say, resource back some value added into our own operation to decrease the sensitivity.
Mm-hmm.
You know, we're doing that, right? It's not like it's a thought in the back, you know, the dream somewhere. Of course, we have plans to back that up, so we're taking some action to where it makes sense. As you know, we're very sensitive to balancing the velocity, GMROI equation, right? Margin versus velocity and return. That business, you know, with 50+% returns, we, you know, we'll be cognizant of that. It does, to Tomas's point, it does look like there are certain categories where it's going to make sense for us to assemble. Let me come back a little bit more to your question on mix, James. The country mix, this won't shock you, in Europe, was the overwhelming negative factor, right?
Mm-hmm.
A little bit, you know, the, you know, everybody talks about the contagion in Europe from a financial standpoint. There's a little bit of a consumer contagion happening in Europe, in our view. Southern Europe, which we, as you know, in many markets, are over-indexed on the premium built-in segment with high margins, is down double digits, as we talked about. We're also seeing that spread to parts of Central Europe and even Northern Europe. In fact, our business in France, demand in France for our business in the quarter was down. That's the first time we've seen Central Europe, both France and now Scandinavia and Germany, still positive, but slowing down.
The consumer confidence issue in Europe is real, and it's not positive, and the trend is not positive. As you know, and as we reported, Eastern Europe continues to grow, albeit at a lower rate. As you know, the margins and the segment of the product that goes into Russia versus Italy or France or Switzerland or Scandinavia are night and day. There's a fairly substantial negative country mix that happened in Q2.
The reason I ask is because traditionally, you've had quite good seasonality in profit in EMEA, in the second half versus the first half, and I'm trying to get my head around whether you think these mixed pressures will mean that we don't get so much of that this year, or whether you will still get that normal seasonality.
I think that Europe demand picture is not good in the short term, next couple of quarters. I think this thing is the Eurozone, deleveraging, rebalancing, all the stuff that has to happen. Until they get sorted out, it's hard to stand here with confidence and say, "Oh, no worries, seasonality comes back and consumers start buying." I think that needs to get sorted out, and I think until it does, it has a somewhat negative impact on our demand picture in Europe. We believe, I believe that it will get sorted out, but I think that's gonna take a few quarters. I think, I, to me, I'd be remiss to tell you, "Yeah, don't worry about Europe demand. It's gonna bounce right back." I think that's a naive statement.
Great, thanks.
Okay, we have one more question here from Johan Eliason.
Hi. Talking about this mix, country mix dynamics in Europe, fast growth in Eastern Europe with lower margins. Your Ukrainian acquisition was supposed to be a one fix of this issue. Are you seeing positive developments there?
We are. Two things, right? One is you have the cost to compete in the segment, and having local production there and getting at lower cost, unit cost, labor cost, et cetera, helps us compete. That's positive. The second positive is you get inside the trade barriers, right? The import duties. That's a very important part. That's all the good side. The negative side is we've only got one category now, two categories, laundry and refrigeration. Read that, not cooking, right? We're going more into the mass market there, or it is the mass market. It's a segment wise, it's a lower segment. Our investment and our business in the serving Russia and Eastern Europe from the Ukraine is good, it's positive, but it's a different business than selling premium built-in kitchens in Italy, I can tell you that. It's good, but it's not that good.
Okay, do we have another question from the operator?
Yes, sorry. We have a question from the line of Björn Enarson from Danske Bank. Please go ahead.
Yes, hi. Question on Asia-Pacific and Australia, specifically? We've seen some weak volumes, and also price-wise, it's been weak for some time. Do you need to take some actions to get around that, or is profitability still okay in that region? If you can give a few comments, that would be great.
Yeah. To your point, you know, really, Asia-Pacific, you got to say Asia and Australia. I think your question primarily is around the high margin Australian business.
Yeah.
Let me refer to that specifically. The market in Australia continues to be soft. It was negative again, down about 2 points. You know, when you look at Australia, it's definitely a bipolar market, right? You got this huge mining economy, you know, it's digging up half the continent, cold iron ore and sending it to China. Then you got the kind of the consumables, consumer-driven economy, which is very weak. We've actually had, you know, a fairly major customer go into organized bankruptcy in Australia. Because the consumer demand is quite weak there. People are saving, they're not spending, so it's a weak demand environment.
We have, as you know, because of the strength of the Aussie dollar, been under pressure from a price and market share standpoint for several quarters in Australia. I think we've talked about that a little bit. The team has actually turned that. We actually gained some share in this quarter, which to me was an important part. You couldn't just watch the thing erode and let market share go away. It looks like we've got that stabilized, the market share position, which is important. To your point, you know, there are some significant investments going on in products to get repositioned there. It's a tough market, very competitive, you know, we've got currency from a pricing standpoint, going against us.
The team has done a good job in stabilizing the market position, but I think it's gonna be a tough fight here for a while, you know, until the Australian economy starts to come back.
The launch, the product launch that you are mentioning in the report, are they significant? Is there anything similar to the AEG launch in Europe, for instance, or what are we seeing? Are you basically mixing up and is it significant?
I would say it's important, but it's not like the AEG or bigger than that, is the inspiration launch in Europe. It's not of that scale. It's more mixing up. You know, here's new products in cooking, here's new products in refrigeration. Actually, to be fair, we've also introduced the AEG brand as an exclusive distribution brand in Australia, and that's having a positive impact, which we're basically taking, essentially taking the European AEG products. Why not? Positioning them as a niche built-in product offering in Australia, and that's having a positive effect.
Thank you. Perfect.
Do we have another question from the operator?
Yes, we have a question from the line of James Aaron from Goldman Sachs. Please go ahead.
Hello, James.
Hey, it's James Aaron from Goldman Sachs. We've talked a lot about mix in Europe, but I was hoping we could talk a bit about price. You announced last June that you're gonna put price increases through in October. We've not seen that in the numbers. Just wondering how that was looking sequentially and perhaps year-over-year, and how that looks for 2013 as well. Thank you.
Getting price in Europe, we've gotten some selected prices up in specific products in certain countries, in Europe. In net effect, you can't see it, right? It gets overwhelmed by the negative country mix. Getting prices up in Europe has been and continues to be quite a challenge, particularly in this market. I don't think you should forecast or anticipate strong positive price impact in the near term, anyway, next coming quarters, in Europe, given the demand picture.
Any plans to try and increase prices towards the end of the year?
We could not.
are you gonna see the market, how the market turns out?
We've not communicated any price increases. Of course, we've talked to our customers first, when we do that, but we have not communicated that. It looks like a weak demand environment to me.
Okay, thank you.
Thank you.
Any questions here in Stockholm? Stefan, over there.
Yeah, firstly, just to follow up on that price in Europe. I mean, it makes perfect sense, but didn't you get your prices in Europe up in 2009, and what's the difference this time?
Yeah, we actually got some price increase in 2009. You're exactly right. I can tell you right now, it's a bigger struggle. You know, I don't have a why did it happen then, why didn't it happen now? I know right now the customers are not accepting price increases, and so it's very difficult.
Okay. on the new Electrolux products, I understand that it's probably too early to talk about the success of them, but the timing of them-
Yeah.
Do you think that the timing is right? I mean, with the AEG, it took some time before it actually gained traction, so maybe it's a sort of good to launch them now or bad to launch them in this type of market.
Yeah, no, that's a good question because sometimes it's the, you know, it's the opposite of what you think. You say, "Hey, you got a weak market, why would you launch a premium product or launch anything with significance in a weak market? Wait for the market to recover." Actually, partly what happens is the retailers are looking for something different, you know, because they're feeling the same pressure everybody else is, right? Which is you got fewer customers coming in, everybody's price shopping, everybody's, you know, doing click and mortar things. They walk into retail, then they got their iPad, and they check the price somewhere else, and they don't get it. It's all in a weak market like that, not a positive.
To give new product and to give the salespeople on the retail floor something to talk about other than, "Is my price cheaper than Joe's or Sally's?" Actually, sometimes you get more placement that way, and we're seeing some of that. Having said that, you know, would I prefer the market to be buoyant and growing? Yeah, of course. Again, you got to think about this business in the, through the cycle and, you know, we're thinking about it for the next decade, right? Not the next couple of quarters, and you've got to get real estate and the right mixture of premium versus mass versus. I don't think you can wait. I think you've got to come as you have innovation, you've got to bring it.
We take the last question from the operator. Please, can we have one more question, please?
Yes, it comes from the line of Christer Magnergård of DNB Markets. Please go ahead.
Yes, good afternoon. Continuing on Europe, since Europe is the only, basically the only one, only division that doesn't meet your 6% EBIT margin target, if you could exclude small appliances. To go back to that level, is it only country mix and that demand should pick up again to reach that, or do you think that you can reach that profitability target in the current market environment? In that case, what will drive your margins to that level?
Yeah, I think the biggest factor is the overall demand picture, which will have impact on price and mix. If you say: What's the single largest negative weight on our European performance? It's that mix, country, segment, negative weight, right? If we're not selling premium cooking appliances in Europe, that puts an enormous pressure on our operating income and on our margins. The volume, we're actually our market share is moving in the right direction in all the key categories. That's kind candidly, very, very important for us because we had a trend going the wrong way there for a few years, and that's now we've got a couple of quarters of stabilizing. That's very, very important. I'll tell you that, it's not because of productivity.
We've got fantastic productivity in our European operations at the moment in terms of cost per unit, variable cost productivity, fixed cost productivity, very good productivity in Europe. It's more of a market issue. You tell me when you think Europe's gonna stabilize and come back. Our view, my view is probably not this year, but when it does, we'll get that lift both from a segment standpoint, more premium built in, and from a country standpoint. In the meantime, we're not slowing down, so we're rolling out launches, and we'll be prepared when the market does come back, and it will. We'll be prepared to take advantage. Tomas, do you have any other comments on Europe?
Yeah, well, just to underline that efficiency-wise, Europe is developing very well. Don't forget that the overhead cost restructuring program kicked off in December last year, is mainly aimed at Europe, and will deliver in 2012 and 2013. That will contribute, of course.
Yeah.
Yeah.
Just a final question on the currency, since you had quite a big headwind on transaction effects, but were saved by the hedges. When those hedges will roll out, will we see a SEK 350 million negative headwind from currencies, or will that be lower?
What can we say? We can just go back to. I mean, it's very much a question of the U.S. dollar for us. I mean, a U.S. dollar strengthening against our important currencies, Euro, Brazilian reais, pound, will have a negative impact, but probably not that much.
Okay, thanks.
Hey, it's 4:00, I know that all you guys have a very busy day. Maybe, yes, sure. Tomas, you want to say something?
Yeah. Can I say something?
Yeah, sure.
Yeah. All right. Am I on? Yeah. I didn't get any questions on group common costs, but I would like to answer anyway. Cause I think it's good, it's important for you when you do your analysis and when you look at the numbers going forward. As you saw, group common cost was up in the second quarter compared to the same number, compared to a year ago in Q2. We are investing in global design, global marketing, innovation, R&D, global purchasing, et cetera, et cetera. The group common cost is going up, and it will go up in 2012 compared to 2011. The increase that you saw in this quarter, half of that was, let's say, extras, adjustments. The other half was underlying run rate increases.
What you can expect going forward is something like SEK 200 million plus, not SEK 299 million, but a little bit about SEK 200 million for the coming quarters. It'll stay on that level until we're through the initial, let's say, investment phase on our global functions, because we have a lot of startup costs now, project costs, you might say, in the P&L. Eventually, it will change. We can't give any specific guidance on it, but just for your forecasting. Okay.
Maybe if you can conclude.
Sure.
-this conference.
Okay, let me try to summarize as I normally try to do. I would say, in summary, given some pretty difficult market conditions, in our, particularly in our core markets, that we are quite pleased with the overall results in Q2. I believe importantly, and some of us talked about this earlier, they're validating our strategy, validating what we've been talking to you about now for several quarters. Start with, of course, you know, 11% top line growth, excluding currency, half from acquisitions, half organically, and these market conditions suggest that we're getting traction around those core elements of our growth strategy in terms of expanding into emerging markets, expanding into adjacent categories, one.
Second, you know, 50% bottom line improvement, albeit off a weak quarter last year, is substantial, and I think it's a result of focused and funded consumer-relevant innovations in our product, and that they're having a positive impact on our gross margin, and on our market share in all of our key markets. That's not happening by accident. Consumers are voting every day. The improvement in cash flow, I think, similarly, driving operational excellence in the plant side is expanding our margins, and is also in the capital productivity, is helping to expand the margins and grow our innovation and growth, and fund our innovation and growth initiatives, while obviously liberating more cash off the balance sheet to be deployed.
Lastly, I'd just say that, you know, these kind of results, I promise you, doing this for a long time, they don't happen by accident, all right? They happen by a strong leadership group with talented people working very tightly, very clearly with accountabilities and deliverables and execution, and that's really what this is about. Somebody said to me today, "Well, how can you explain this?" There's really only one answer, and the answer is execution of the strategy. Now, there's no brilliance, there's no, you know, heroism here. It's just crushing it out and good, strong, determined, managing people and processes and making it happen. I'm very proud of the team. While we have little confidence in the mature markets, that demand is gonna snap back. Just hopefully, we've been clear on that.
We don't think that the mature markets, boom, come back in Q3 and Q4. We are confident that as we continue to diversify our revenue base to the growing markets and the actions that we're taking in the mature markets, will in fact prepare us well as those core markets come back. We'll take advantage of the growth in emerging markets. We'll take the actions, whether they're restructuring or cost or product or marketing investment in the core markets, and as markets rebound, we'll be in a good position to do that. Thanks for coming, and thanks for your continued interest.