Good afternoon, everyone. We will start this conference call with a 20-minute-long presentation from our CEO, Keith McLoughlin, and our new CFO, Tomas Eliasson. As you probably know, the slides are available on our webpage, Electrolux.com. After the presentation, we will have a Q&A session when we will try to conclude the conference call around 4:00PM Central European Time. Again, my proposal is to use the Q&A session as efficient as possible and let everybody have the chance to put forward questions. Therefore, I would like each of you to ask only one question at a time. With this instruction, I would like to hand over the word to you, Keith.
Okay, thank you. Welcome everyone, to this discussion of the first quarter results, 2012 for Electrolux. With me today, as you just heard, is our Head of IR, Peter Nyquist, and for the first time, our new CFO, Tomas Eliasson. It's actually great having Tomas on board. I can tell you, after only 2 months on the job, he understands this business and is already making an impact. My guess is you'll notice that during this conference call. Very welcome, Tomas. Let's go ahead and start the presentation. If you can refer to the Q1 highlight slide. Despite continued weak demand in mature markets during the quarter, we were able to improve both sales and earnings compared to the first quarter of last year.
Sales growth reached a record level, not only based on acquisitions, but also driven by strong organic growth, especially in Latin America. We've raised prices, and we see traction in North America, Latin America, and for our professional products business. Our European appliance operations are regaining market shares after several quarters of losing share. In Latin America, after a period of negative customer mix, we saw a positive mix development during the quarter. The improvements of our operations were partially offset by higher costs for raw materials and our sourced products. Now I'd like to Tomas, to give us his thoughts about our results and then talk about our cash flow in the first quarter. Please, Tomas.
Thank you, Keith. So let's flip to the next page, let us start with the results. What we will do is to look at the result bridge that explains how we go from Q1 last year to Q1 this year, and we will split it in organic growth, currency, and acquisitions. Net sales increased by 10.4% in the quarter, where of 3.5% was organic, 1.1% came from currency effects, and 5.8% came from acquisitions. If we then look at these different categories, starting with organic growth, we saw that we had a contribution on sales with SEK 835 million, and the EBIT leverage was 20%, SEK 167 million, and this gave us 60 basis points accretion to the EBIT margin.
The 60 points is a decent drop-through for this kind of business. Of course, price, volume, savings, and efficiency programs contributed to the EBIT improvement, positively. Increased input costs had a bit of a negative impact. If we then move to the currency gave us SEK 245 million more in sales, and the EBIT effect was SEK 80 million, and this gave us an accretion of 30 basis points to the margin. Acquisitions, which is the Olympic Group and CTI, gave us nearly SEK 1.4 billion in increased sales and SEK 100 million in EBIT, which meant an accretion of 20 points to the margin. In the last column, you see something called sale of assets. We had some sale of assets, one-off revenues or income, in Q1 last year.
Part of it refers to a divestment of a non-core business within the professional business area, there were a few other ones as well. Overall, 60 points improvement in the EBIT margin, from 3%- 3.6%. Let's move to the cash flow on the next page. First, some background. The first quarter is, as you know, the seasonally weakest quarter, as earnings are a bit lower, and as we build inventories for the latter part of the year. This seasonal inventory effect is especially strong for our air conditioner business in North America. Given this background, our cash flow from operations was close to flat and amounted to -SEK 43 million in the quarter, which was a significant improvement compared to Q1 last year.
The good cash flow was driven mainly by improved earnings, as well as continued working capital efficiency. For the working capital, including inventories, accounts payable, and trade receivables, it went down to a level of 12% of net sales. This is a record performance. The reduction of working capital has been generated despite underlying growth in our operations. The operating cash flow, we should also mention, includes increased investments, and they amounted to more than SEK 1 billion in the quarter. The largest investments, or the CapExes we have right now are the current two new production facilities that we're building, which is the cooking facility in Memphis, in the U.S., and the refrigerator facility in Rayong, in Thailand. Back to you, Keith.
Okay, thank you, Tomas. Now let's turn and talk about our European operations. After some quarters of declining market shares, we were able to increase our market share in the first quarter. The major part of our share gain has taken place within the built-in segment, supported by our launch of AEG branded products. In addition to higher volumes, this launch of high-end products has contributed to an improved product mix. Our operating income amounted to SEK 281 million, which is slightly lower than the first quarter of last year. Positive market growth in Eastern Europe, which primarily is in the mass market segment, and the weak demand in Italy, which is more in the premium built-in segment, has contributed to a negative mix, a negative impact on our mix from a country standpoint.
Our prices were lower than a year ago due to the decline in 2011. We are increasing prices in selective markets, the positive impact is partially eaten up by clearance of old generation of Electrolux products as we bring the new Inspiration Range of products to the marketplace. Finally, on our European result, higher volumes and a positive product mix have a positive impact on the results. Now let's turn and talk about the new generation of high-end Electrolux branded products. You see on the next page, a picture of the new refrigerators, and our new Electrolux appliances, they're based on all new, all high-end platforms, offering great design and features and functions built on the group's global know-how and expertise in professional products, matched with that modern and distinctive design.
This is a launch that goes across all product categories in the business. These products were presented last week at the EuroCucina Fair in Milan. I'm happy to report to you that I was there and quite proud of the response. It was overwhelmingly positive by the trade, by our customers, by the media, and a great launch together with the new AEG and a relaunch now of the new Zanussi line, make our product offering in Europe across the entire spectrum of segments and Pan Europe, so across all countries, quite strong and quite competitive. Now let's turn the slide and look at the market development in Europe as a total market. Here's the chart we normally show, which shows the quarterly comparison year-over-year.
The market in Europe, in total, declined by 1% in the quarter. The markets in Southern Europe have continued to be weak. In Italy, demand fell by 17% and in Spain by 10%, as examples. The market conditions in Central and Northern Europe continue to be stable, as we have seen throughout the last few years. The market in Eastern Europe showed growth, although at a lower pace than previously experienced, mainly driven by growth rates in Russia. Considering the continued weak market development in Europe, we estimate the market to be down around 2% in 2012 compared to 2011, consistent with our previous guidance. Let's turn the slide and talk about North America. Our operations in North America showed a substantial improvement compared to the first quarter of last year.
The major contributors to the improvement are price and factory productivity. In January, we raised our prices for the third time in less than a year. In addition, we have managed to be more disciplined and more precise in supporting promotions, collaborating with our retail customers. As I mentioned, in addition to the higher prices, we had very good improved efficiency and a positive impact on our results. In the first quarter, higher cost for raw materials and source products had an adverse impact on our results. Now let's turn the slide and spend a few minutes on the market development in the U.S. On the next slide, you see that same quarterly year-over-year comparison. Industry shipments for core appliances declined by 9% in the first quarter.
This negative development was expected since Q1 of last year was stronger than the rest of 2011. The market has been even weaker than we had expected just a quarter ago. Following the retailer's expectation of a strong season for air conditioners, our shipments for air conditioners grew substantially, however, during the quarter. In spite of the weak start, our estimate for 2012 remains. We expect the market for core appliances to still be within that range of 0%-2%, although with the actual results in Q1, we would expect that to be toward the lower end of that range. Now let's turn the slide and talk about Latin America. Market demand for appliances grew considerably in the first quarter, driven by government incentives in Brazil and strong market growth in other Latin American markets.
The incentive program in Brazil will continue, as announced by the government, into the second quarter. Our operating income rose considerably compared to the first quarter of last year. First, our new business in Chile and Argentina generated a positive contribution to EBIT. CTI's performance continues to exceed our expectations. Second, after a long period of negative customer mix, our mix was positive in the first quarter. Third, the strong growth, of course, had a positive impact on our earnings. Higher cost for raw materials, however, had an adverse impact in the quarter. Now let's turn the slide and talk about our operations in Asia Pacific. Our operating margin in Asia Pacific declined slightly compared to the first quarter of a year ago. The Australian market declined compared to the corresponding period of last year.
Our operating income in Australia deteriorated compared to the year earlier, based on lower prices and lower capacity utilization. We also had increased costs for source products and transportation costs. The markets of Southeast Asia continued to grow considerably in the first quarter. By growing even faster than the market, we're again able to gain some market share. Our operations in Southeast Asia continue to show very good profitability. Our Chinese operations had a positive impact on earnings in the quarter. Our Asia Pacific results, I should mention, are also impacted by substantially higher R&D spend for our forthcoming product launches scheduled for the end of the year. Now, let's talk about our small appliance businesses. In small appliances, the market demand in Europe and North America declined in the first quarter.
Our volumes increased, which resulted in market share gain, and at the same time, CTI's subsidiary, CTI, helped improve sales and earnings. Operating income for the first quarter deteriorated compared to the corresponding period in 2011, primarily as a result of increased costs for source products and some lower sales prices and costs associated with product launches scheduled for the year. Higher volumes and improved product mix positively contributed to the results. 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. Operating income for our food service operations was in line with the same period of last year, if you exclude the positive one-off effect of 50 million SEK, associated with an asset sale in the first quarter of last year.
Price increases were offset by a negative mix and higher R&D costs. Operating income for our professional laundry business for the first quarter improved thanks to price increases and improved mix. Now, let's turn the slide and conclude this presentation by looking ahead into Q2 and for the full year of 2012. Looking ahead, we expect from a volume standpoint, we expect market volumes will be slightly positive for the second quarter and for the full year. We expect that the European market in total will continue to be weak, and in North America, we expect to see some growth in the second half of the year. Emerging markets will continue to contribute substantially to higher volumes. From a price mix standpoint, we expect a positive impact from price, both for the quarter as well as for the full year.
As you know, in North America, we have seen a positive impact in the first quarter, and we expect that impact to continue throughout the remainder of the year. In Europe, we expect prices in the second quarter to continue to be negative year-over-year, but sequentially positive. We still expect raw material costs to exceed the 2011 level by a maximum of SEK 500 million, with the majority of that amount to impact the first half of the year. We are continuing to launch new products, and the AEG launch is an important factor in that, but during 2012, we will also launch our new high-end Electrolux products called the Inspiration Range across all European markets.
As mentioned earlier in the presentation, these are high-end products, and we plan to invest heavily in that launch, and that will see an increase in marketing spend in Q2. Our acquired units will give us positive contribution of approximately SEK 400 million compared to 2011. As there is great and continued uncertainty in the Egyptian market, we see a weaker performance from Olympic at the beginning of the year, with some recovery toward the end of the year. The Chilean CTI unit, on the other hand, has, and we expect will continue to outperform. We also have great expectations from our cost-saving program initiated in 2011, and in combination with already implemented actions, we expect overall cost savings in 2012 to be approximately SEK 1 billion.
Finally, as we felt in the Q1, we expect transportation and source products to continue to have a negative impact on our results. Peter, that's the summary, and for that, I can turn it over to you and open for questions.
Sure. Thank you, Keith. We are now ready for the Q&A session. As I said in the beginning, we should use this session as efficient as possible and let everybody have a chance to put forward questions. Therefore, again, I would like each of you to only ask one question at a time, and if you have more question, you're welcome to line up again for further questions. Operator, we are now ready for the first question, please.
Our first question comes from Mr. David MacGregor from Longbow Research. Please go ahead.
Hello, David.
Yes, good morning, everyone. Good afternoon, excuse me. pricing seems to be holding up relatively well, which I think is a surprise for some people, given the weakness of the volumes, but it's frequently been attributed to the fact that there's a lot of replacement demand in the market, which is generally inelastic by its nature. to what extent is replacement demand? You know, can you talk about what percentage of European demand you think right now is replacement demand? Then if I could maybe get you to also speak to your sense of how likely the industry could succeed with mid-year price increases. Thank you.
... Yeah, you had questions, I think, on both sides of the Atlantic there, so let me try to address both of them. Certainly, the replacement component of the total demand, particularly in the mature markets of North America and Europe, has increased over the last several years, but particularly in North America, as the housing market has contracted. The replacement demand for, in North America, as a % of the total demand, has increased from what historically was 50%-55% to upwards of 70%-75%. And Europe, just to give the comparison, that number is probably closer to 60%, maybe 65%, but probably closer to 60% in terms of the total demand, the replacement. I think your point on, is there a little bit less elastic demand picture?
You know, when a refrigerator fails, people buy a new one. There's no hesitation there. It happens in the next 24- 48 hours. To your point, there is some of that. I also think that, you know, some of the increases we're talking about, if you say, had net, net, there's, at retail, a 5% increase. If you were buying a range, a cooker that was $500 before the increase, you know, now it's $525. From a relative increase standpoint, I don't think it's so dramatic where it's, you know, gonna negatively impact demand. I think the demand picture in both Western Europe and Southern Europe as well as North America, is more a function of the obvious macro environmental issues that are happening.
In terms of price increases going forward, we are in discussions with our customers and have communicated that a potential, another increase around mid-year, June and July. That will be more selective in nature than the more broader, across the board increases. Although they'll touch every product, they'll be more selective. I think we'll get that done more as a fine-tuning than another big structural increase.
Okay. Okay, David?
Yes.
Okay. Thank you.
Y es, go ahead.
Next question.
Our next question comes from Mr. Christer Magnergård from DNB. Please go ahead.
Hello, Christer.
Good afternoon. I have a question to Tomas Eliasson. Firstly, I would say I'm very happy to see you on Electrolux, and I congratulate Keith for the recruitment as well. I know that you have gone to work for two months now, but I still want to hear your thoughts. What do you think about where you see improvements in Electrolux on your side? At the time of the subway, we, for instance, saw that you addressed the tax rate, which is now lower, for instance. Can we expect something similar at Electrolux, or do you see any other potential?
Well, it's only two months, so it's really early days here now, but what of course, is the most important thing for us is profitable growth. We need to grow, and we need to do it in a profitable way. That's where I devote my resources and my work right now because it is number one for us. I think the first quarter here showed that we are delivering on that. Then we have to deal with the tax rate later.
Okay, good.
Are you happy with that, Christer?
Sure.
Okay. Thank you, Christer. Next question, please.
Our next question is from Andreas Lundberg from ABG Sundal Collier. Please go ahead.
Andreas.
Hello, guys. Good afternoon. Hello. Just if you could, you know, you mentioned tough comps in the U.S. market or North American markets in the first quarter. Could you give some more color on, you know, what's behind the, you know, weaker than expected market there? Thank you.
As I mentioned, you know, we expected, and as we communicated, I think previously with Q4, that we anticipated that Q1 would be negative and so it was. You know, we weren't thinking 8.7% negative. You know, we were thinking 3%-5%, so it was worse than most people anticipated. If you peel that apart, the big downturn from a category standpoint, which, of course, is the largest category in the appliance industry, is the laundry category.
There was substantial decline in the category for the quarter. Also March, if you look at January, February, March, it actually was March that was down very substantially. I can't give you kind of an exact why did this happen by month, but I can tell you that we know where it was, and we know when it was. I do think, you know, the overhang of what's happening in the U.S. and consumer confidence and the macro environment obviously has had a negative impact. I will tell you, we'll talk about it more probably with additional questions, but we're seeing some positive signs.
An obvious question, so I'll talk about it now, since you teed it up, is how can we still maintain a 0%-2% outlook for North America, given a -9% in Q1? As I mentioned in my remarks, given that -9%, for sure, it's gonna trend now at best to the lower end of that range. Since we've only got 1 quarter underway, and we do expect Q2 to be negative, but a lot less negative, and we actually expect Q3 and Q4 to be positive in market demand, that we should keep the estimate where it is and that we see that it could get back to flat for the year, although obviously we need a good Q2 and Q3 and Q4 to make that happen. Thank you.
Okay, yes, thank you. Next question, please.
Our next question comes from Mr. Kenneth Toll Johansson from Carnegie. Please go ahead.
Yeah. Hi, it's Kenneth here. Sorry, hi. Sorry, to get back to North America again, but one risk I see might be that if you had planned for some better volumes, and the industry have also planned for some better volumes, is there a risk that inventories among manufacturers are really high? In that's if I remember right, that was what triggered a lot of pricing promotions in 2010 after the Cash for Appliances program. Do you see a risk now that you have been fighting so hard to get those prices to stick that some of the players or one or two players sort of get very nervous and start the price promotion behavior again?
Yeah, that's a good question in terms of people's behavior, which, of course, is hard to predict. I will tell you that I don't think anybody's gonna initiate a price, aggressive price behavior based on inventory buildup. I really don't believe that. I think we've all worked through this pretty significant down cycle over the last few years and have become much more intelligent about managing our inventories. I say that both at the manufacturer level and at the retail level. I don't believe we, any of us, will allow a huge buildup of inventory that can't be moderated, you know, with intelligence going forward. I don't think any forward-looking, you know, pricing activity on the negative side will be stimulated by an inventory bubble.
Having said that, you know, I can't predict, you know, if the U.S. market doesn't turn positive in the second half at all, you know, will people get aggressive? You know, this is a promotional business. It will remain promotional and part of that promotional activity, as you pointed out, gets more aggressive when the demand is weaker.
that was-
Let's just see. I don't think it'll be caused from an inventory issue.
wasn't that the case in the second half of 2010, after the Cash for Appliances program proved not to drive as much volumes, so some manufacturers had too high inventories, and that wasn't too long ago. I mean, that was after the big decline after the housing bubble burst and so on, or am I wrong?
Well, you know, again, I think actually, if you wanna get underneath what happened in the U.S. pricing structure in end of 2010- 2011, it was less about inventory buildup, and it was more about some competitors who felt like in a slowing demand market, that it was better for them to run their facilities at higher utilization rates, and that somehow the rest of the industry would sit down and let that happen. It particularly happened initially in the laundry segment. For those that follow the industry closely, you know exactly who I'm talking about. It was less driven by an inventory buildup and more about a strategic competitor's decision, two competitors, to run at fuller rates than the demand allowed.
That's what happened to price structure in North America.
Okay, little risk for the for the coming quarter, at least.
Yeah, it's not gonna be triggered by inventory. That I'm highly confident in.
Okay, thank you.
Yeah.
Okay. Thank you, Kenneth. Next question.
Our next question comes from Mr. Ben Maslen from Merrill Lynch. Please go ahead.
Hi, Ben.
Hi, hi there. It's... Hi, everyone. Hi, Keith. Hi, Tomas. A couple of questions, please. Firstly, on Europe, Keith, the launch of the Electrolux products that you've got coming, I guess that's gonna be positive for pricing, mix, and demand, but probably negative for marketing costs. When you look at Q2, which one of those effects do you think initially has a bigger effect? Would you think margins go down on the marketing side of things, or do you think you can kind of manage the two effects against each other? That's the first question. Just secondly, on the, I think you had a SEK 75 million kind of currency hedging gain, I guess, for the quarter.
Should we treat that as a one-off, or is this kind of just the natural benefit you get from the way that you hedge your currency flows around the world? Thank you.
Yep. Okay. I think, Tomas, I'll take the first one, and then you can be the currency expert going forward here. Yeah, Q2 Europe new launch, to answer your question, without all the flower around it, will be a negative impact to margin because the cost, the marketing cost, will be heavier than the benefit of the sales and the mix from the improved products.
Okay.
Tomas, can you speak a little bit to the hedging impact and the carry forward from the hedging impact and what we can expect going forward from a currency standpoint?
Yeah. Yes. Hello, Ben.
Hi.
Yes. Well, I mean, this is from the current hedging contracts that we had during the first quarter. I mean, we don't know what the hedging portfolio will look like going forward during the year. You can basically treat it as a one-off. It's not normal that it's this big as it was in this quarter. All that we know now is that it's gonna sort of fade out, and for the rest of the year, well, we don't know.
Okay. Thanks.
Yeah.
Sorry, Keith, if I can just follow up on the European margin, I mean, just so that we.
... ourselves up next quarter. Do you mean a kind of negative margin impact relative to Q1 or relative to last year?
Yeah, the year-over-year.
Okay, thanks so much.
Thank you.
Thank you, Ben. Next question, please.
Our next question come from Mr. Anders Trapp from SEB Enskilda. Please go ahead.
Hi there, Anders.
Yes, hi there. I'll stick to one question.
Yes, thank you.
I wonder if you could, if you could develop your idea, thoughts a little bit about the product launches that's coming up. You spoke a little bit about the European one, but maybe you can talk a little bit more about, you know, how big a part of the market you are targeting, et cetera, in that launch. I noticed that you know, talking about upcoming product launches also in Asia-Pacific and small appliances and possibly also in some other area.
Yes. Anders, let me make sure I answer your question, or I'll try to answer it, and if I didn't get it all, just please come back to me. Let me start with just re-summarizing Europe. Europe, major appliances, it's rock and roll time, right? We launched AEG last year. We are, and we're communicating to you, of course, that it took us a while to get the placement, to get the displays out there, to get it in retail. We are seeing and reading about the positive impact of that premium launch in AEG, in the built-in segment. We are launching, as we speak, a similar premium line. It'll be a broader line, but also more premium for Electrolux, called the Inspiration range.
This launch, to be fair, will go through most of the year, so it's not that we're launching every single product this month. We got, you know, refrigerators will come this month, and then hobs, and then cookers, and then dishwashers. It will be throughout the year, but the marketing investment and the brand investment will begin strongly in Q2. The second or third rather, leg to that stool, is we have redone and redesigned the entire Zanussi range of products for more of the mass segment in Europe. Now we have the entire portfolio and the entire market, essentially new in Europe, where there's consistent design, consistent positioning.
As you know, we've talked about before, this is an important initiative for us strategically, so we get a more cogent global brand architecture, and if, you know, if it's not cogent in Europe, it can't be cogent around the world. It's a very, very important initiative, both from a product standpoint, but also from a brand standpoint, both in Europe and globally. One. Two, as you mentioned, in small appliances, there are several new products being launched there. We have a, the AirSpeed product, which is the new higher price point, upright vacuum cleaner in the U.S., which is getting very good reception, and is essentially a 2x the average price point of what we sell. That's a positive contributor for us.
We also have a significant launch that has begun now in Asia, called an ErgoThree, which essentially combines the performance benefits of the UltraOne, with the noise benefits of the UltraSilencer and filtration capability that particularly plays well in the Japanese market. That is also a big launch for us. As we've shown and talked about, there are several small domestic appliance launches that are underway. There's a couple of other big launches that I can't give you a lot of details on yet, 'cause part of it is we wanna, you know, we wanna surprise the market, or we wanna have a big bang in the marketplace. They will be related to our professional business, and they will be related to China, and they'll be related to the U.S.
Are you happy with all those launches, Anders?
Yes. It sounds like you have a higher pace of the product launches now than you normally have. That should be positive for future sales and earnings.
Exactly right. Profitable growth, Anders.
Very good. Thank you.
Thank you.
Thank you, Anders. Next question, please.
Our next question comes from Mr. James Moore from Redburn. Please go ahead.
Hi there, James.
Yeah, hi there, everyone. Hi, Keith, and welcome back, Tomas. Some questions on market share. Some great share take in EMEA, and obviously, that's predominantly of AEG. As we go forward, do you think that it's going to be more 2013 before you get a share take from Zanussi and Electrolux Inspiration, or do you think that could start to overlap as the AEG share take rolls off? If you get me on that. In the U.S., it looks like you've done a better job on volumes than the market, so some share take there. Is that just laundry, or is there something like to like in certain segments going on in the U.S.? With respect to Latin America, on the volume there, you've obviously seen the benefit from the tax boost.
Should we worry about the reversal of that into the second half and the first half of next year?
I guess the first question, James, was about market share in Europe, right?
Yes, and specifically, at what point do you think, given the delays we saw in AEG, before you started to get share take there, do you think we'd get similar delays from Electrolux and Zanussi launches feeding into some share take? Or do you think we could start to see those sooner?
Yeah. I think, James, I'll go around the world, as you've asked. I think in Europe, we will gradually, this positive momentum in Europe is kind of a short version, and my expectation is, with all these new launches, we will gradually continue to increase our market position, call that market share, going forward. That doesn't mean each and every quarter will go up and down, but directionally, I think we'll increase. I don't think there'll be the long lag, that delay for Electrolux and for AEG, I mean, for Zanussi rather, like we had with AEG, because as you know, the big delay with AEG was, an important part of that was a limited distribution strategy, which required essentially rewriting and re-signing our contractual agreements with retailers.
That's not taking place with the Zanussi or the Electrolux launch, so I don't expect that to be a hold up for us. Having said that, I think, you know, as I've mentioned, we're gonna roll this out throughout most of the year, we won't see the big impact until 2013. I think that's a fair comment. Moving over to the U.S., yes, there's some gain in share there, a little bit is in front-load laundry, it's also in our strong categories in cooking. A little bit in certain types, typologies of refrigeration. It was not 100% every single category, it was across more than one or two.
It was a good movement, I think a very good balance, because if you say, prices are up and market share is up, to me, that's a good day of work by the management team in North America to make that happen. Coming to Latin America, and particularly in Brazil, James, yeah, I think, I don't think we're gonna keep having 17% organic growth in Brazil, right? I think, we think it'll come back down to where we had talked about. We think the more sustainable rate is in that 4%-6% range. When these government incentives come off, now it looks like by the end of the summer, beginning of Q3, you know, will we see that reset a little bit? I think we will, to be fair.
I mean, I think there'll be a little bit of a pause, particularly if we have another quarter of double-digit growth in Brazil, I think there will be a little bit of a pause, but we expect that to get back to a stable position of 4%-6%.
Great stuff. Thanks.
Thank you.
Thank you, James. Next question, please.
Our next question comes from Mr. Stefan Schneider from Deutsche Bank. Please go ahead.
Hi, Stefan.
Follow up on the sort of impact from the relaunch of the Electrolux products. Firstly, if you can help us to understand sort of the volume and price impact here in Q1, and secondly, if you've now cleared most of the old products, or if we should expect similar impact in the second quarter?
Yeah, I think there'll be a continued impact in Q2. I think it's gonna take us most of the first half of the year to clean out the old products and do most of the work to get the new products on the floor. That's one question, the first question was related to.
The volume-
Price
The price impact here in the first quarter from this. Is this a major driver of the volume uptick in Europe?
Yeah, well, no, I think the volume was actually a combination of not just the launch, but also the penetration of AEG. It wasn't just the launch that impacted the volume. I think it was also just the expanded penetration and honestly, market share growth in some key products and certainly the AEG brand around that. It was a combination of both the launch as well as. Honestly, in Q1, you know, we haven't shipped that much of the new product, so it was less about the new product as I think about it. It's more about, you know, just getting better penetration rate in some key categories, and the biggest one in the quarter was the AEG penetration.
Okay.
The major launch date, as Keith mentioned in the presentation, was basically last week in Milan.
Yeah.
With the products to stay.
Sorry for interrupting, I was more interested in sort of, if you've cleared a lot of products in Q1 of the old, that could then have been a big volume driver, but it seems like you're suggesting that AEG is the biggest impact here in the first quarter.
Yeah. No, okay. I'm sorry. I thought you were talking about the new products coming in. No, you're right. You're right, you're absolutely right. It was both AEG, but also, you know, we were moving out the old products, which helped stimulate some volume. No, you were correct. I thought you were asking specifically about the new products driving demand, but the reduction in the, and the activity around running out of the old products did have a positive impact on volume in Q1, and will have a positive impact in Q2. It won't be as much yet on the, in Q1, certainly on the new products going to the floor. You're right.
Okay, thank you.
We also have seen a pretty good development, or for example, for the IKEA account, as an example, in the built-in area.
Yeah, that's right.
Year in the quarter as well.
Okay, thank you.
Thank you, Stefan. Next question, please.
Our next question come from Mr. Björn Enarson from Danske Bank. Please go ahead.
Hi, Björn.
Hi, thank you. On source products, how concerned should we be there for the ongoing cost inflation that we have seen for some time? We also see your guidance here for the full year. Is it easier to hike prices for these categories than for core appliances, for instance?
... Not really. Yeah, I mean, let me answer your question. With the source products, as you know, and as we talked about last year, you know, we got whacked, particularly beginning in Q2 of 2011, with significant price hikes on our source products. That's for floor care business, that's for the air conditioning business, that's for the microwave business, that's for the humidifier businesses. And we carried that, and, you know, carried that burden all year, Q2, three, and four last year. Now we're lapping into this year, now we've got an exposed quarter, right? Now we have that continuation of those increases, but that we didn't have it a year ago in Q1. That had a substantial effect in the quarter in 2012.
As we've communicated previously, you know, we think that numbers, our best guess, best estimate is, you know, that's in the SEK 600 million range, for the year.
Yeah, are you able to offset the headwinds from price hikes going forward? Is that easier for source products?
Yeah, yeah, it's hard for me to say that getting prices up is easy. It's just hard for me to say those two words in the same sentence because they never are, you know. Is it a little bit easier? I don't know. I mean, in one hand, it's more difficult because it, in some cases, what you do is you contract, for example, for this really seasonal business, like the air con business, you know, those contracts are done. All right, in terms of the retailers.
Yeah, sure.
If we get an increased cost to us on our source product, on those, our ability to pass them through is zero in this year. We'll have to wait till the fall when we negotiate the following year. In some cases, it's actually more difficult on these big seasonal businesses.
What I'm really trying to get at is that the air con that has historically been a very high margin business, and now more in line with other products, I guess, will that come back eventually?
Yeah, I think it's gonna have to come back, honestly, with innovation. I think we're gonna have to bring more innovation to those products that have been compressed through this cycle of rising costs. Yeah, I think they can come back, but I don't think it just happens by wishing it. I think we're gonna have to work hard to get them back.
Yeah, okay. Change sourcing is not an option?
We do that every, yeah, we do that every day.
Okay, thanks.
Yeah, thank you.
Thank you, Björn. Next question, please.
Next question comes from Mr. Rasmus Engberg from Handelsbanken. Please go ahead.
Hi, Rasmus.
Hi there. I wanted to ask you about your price mix effect in Q1 and on EBIT and how we should think about that for Q2.
We had a positive price mix effect in Q1, as you'd expect. Of course, you know, a big lever, as we talked about, was some of the price increases we got in professional in Latin America and in U.S. in particular. Actually, Europe price was a little bit on a negative, was on a negative side, year-over-year, sequentially better, but negative. Of course, there was positive price effect, mix effects in Latin America, in small appliances, in parts of Europe. Positive in Europe. The trick with Europe, of course, is we had positive product mix continued to be partially offset by negative country mix, right?
We continue to see, as you saw, Eastern Europe growing at 5%, which is more of a mass market category. Italy down 17%, which, as you know, we've got significant built-in market shares in Italy. All in all, though, it was positive price mix in Q1, and we expect that to continue into Q2.
I think roughly, could you set some sort of figure on it for Q1? I was interested in whether or not You think it would be realistic to assume more or less in Q2?
Yeah, I think for now, we'd say that's a SEK couple of hundred million positive for sure in Q1, and we would expect that would be a similar, roughly similar amount in Q2.
Yeah. Okay, thanks.
Thank you.
Thank you, Rasmus. Next question, please.
Our next question comes from Mr. Johan Dahl from Erik Penser Bank. Please go ahead.
Hi there, Johan.
Hello there. I'm just trying to get my head around this, the market share gains in Europe. If I understood you correctly, you referred to, you know, AEG and IKEA, good traction in the first quarter, and Zanussi and Electrolux gaining traction first in 2013. If you focus a bit more on the low end, the freestanding side of your business, how is that performing at the moment? Also, looking into next year, do you see, you know, substantial improvements potentially from the global operations program, being able to be more competitive in the low end? I'm just trying to get the math right with regards to the share gains.
You have it, you have it essentially right. We actually have gained some share in some of the more mass-oriented products as well, on specific platforms, specific items. We are, and anticipate, and we have work underway, that substantially lowers our cost per unit, in the key items in the mass market that we expect to be able to leverage through global operations going forward. I think yes, and yes. I think part of the share gain included, some share gain in the mass market, as well as I think the opportunity is even bigger going forward, as we leverage our global platforms and lower our unit cost, on key platforms for the mass segment going forward.
Keith, what's your visibility? I mean, it's a difficult question to answer, but, in your view, you know, how predictable are this share performance?
It's not usually predictable, but it's, you know, it's about momentum, right? At least my experience is market share trends are all about momentum, and what I see, and I feel, and can sense talking to our customers and our organization and the trade, is there's positive momentum in Electrolux Europe.
Yes, it's not just easy comps. I mean, it was pretty weak last year in this period.
Exactly. Yeah, that's right. It's not just easy comps. There is positive momentum in the business.
Thanks.
Thank you.
Thanks Johan . Next question, please.
Our next question comes from Mr. Ben Maslen from Merrill Lynch. Please go ahead.
Hi there again, Ben.
Hi there. Just a couple of follow-ups, if I can. Firstly, you kept the same guidance for raw material costs and for transport and source products, I think, for the year. Maybe you could just say what the impact was of both of those in Q1, firstly.
Yeah. Of the raw materials, and Tomas, correct me, but I think of the total SEK 500 million, we've got about SEK 200 million in Q1. I think that's right.
Yes, that's correct.
Okay. Then the other was, on the source product?
Yeah. Thanks. Yeah, the SEK 600 million you talked about for the year.
Yeah. In total, including transportation, of that SEK 600 million, we got about SEK 200 million in Q1.
Yeah, it's 200 million-
Okay. Great, thank you.
It's pretty substantial, as we talked about, because of that quarter-over-quarter room air hit.
Okay, thanks. Then on, on the Asian Pacific business, you talk about price pressure and the strong Aussie dollar and a weaker market. I mean, do you think you've seen the full effects of that in your margin or are the trends still deteriorating as you look at it through the rest of this year?
Yeah, that's another good question. I mean, you know, our Australian business, as you know, is and has been historically quite strong. Strong margin, strong market share, blah, blah. Of course, competitors see that and they're coming after it, and the Aussie dollar helps those imports come in. It's under attack. You know, we're gonna have to fight it, and we are fighting it. I actually met with our team, our Australian team. They were in Milan last week with me as well. We gotta play the whole keyboard, which means we've gotta make sure we get our costs down, so where we need to fight with price, we can, without diluting margins. We've got to bring more innovation, better branding, better marketing, better merchandising to the marketplace.
It's a battle. It's a fight, a fight that I'm confident we're gonna win. I think Australia is gonna be a little bit under pressure here, particularly in the first half. My answer to your question would be, for transparency's sake, is I think it'll take us most of the first half to get. We talked about momentum. You know, the momentum in Australia at the moment is negative.
Yeah.
We'll fight that back, and I'm pretty confident we'll have it back positive again by the second half, but I don't think it'll be Q2, to be fair.
Great. Okay, thanks, Keith.
Thank you.
Thanks, Ben. Next question, please.
Our next question comes from Mr. Anders Trapp from SEB Enskilda. Please go ahead.
Yes.
Hi, Anders. I guess you have the honor actually, to conclude this Q&A session. You're the last one actually lining up here, so please, Anders.
Okay, very good. I have a question regarding all these new products that you're launching, how you have tied that to the global operations project? i.e., if they are already on board with having parts and components that are supposed to be global, or not?
Yes, good question, Anders, and the vast majority is yes. You know, I don't want to say 100% because there's probably a few that were earlier in the pipeline in terms of development than when the modularization work actually hit them. There's some that aren't 100% in compliance, but I would say the majority, for sure are, and we know which ones aren't. We know which ones are and which ones aren't, and how we'll get cycled through that. For sure, the majority are leveraged through the global operations work.
You should have a feel for if you are able to live up to your expectations on the savings that you hope to achieve in the global operations. Now, you have come a bit on the way.
Yes, we feel confident we will live up to our and your expectations.
Excellent. Thank you.
Thank you.
Thank you, Anders, and I think we have had all the questions here now, so, maybe, Keith, you can have some closing remarks here on today's call.
Yeah. Okay. Let me just sum it up here. Again, first, thanks, everyone, for participating. To summarize kind of Q1, obviously, we're pleased with the Q1 performance, you know, with sales up 10% and earnings up 35%. You know, it reflects favorably on the organization and the great work that all the people and all the operating units are doing. I think to Tomas's point earlier, you know, I think it reflects favorably on our profitable growth strategy and the execution of that profitable growth strategy. There was good, very good operating discipline in the quarter. Price management, plant productivity, market share gains, and again, record levels of working capital productivity. All of that driving and continuing to drive through the global operations, operational excellence initiatives.
All that's happening from an operating standpoint, and of course, it's happening while we're continuing to invest in the future. We talked about, and you had lots of questions about, which I'm very happy about, questions about new products. We're continuing to invest substantially in new products, because that's the fuel to the engine. That's what allows growth, that's what allows price, that's what allows margin. We're continuing to invest in the future, in new products, in new state-of-the-art facilities. Tomas mentioned a plant in Thailand and a world-class, state-of-the-art cooking plant in Memphis, Tennessee. We are investing to further integrate and expand the acquired companies that we that took place last year, and to liberate the synergies from that work. As we talked about, continuing to invest in R&D, technology, brand, and design.
I just would close and say that we are, and continue to be, in obviously a volatile and uncertain global marketplace. Having said that, as I mentioned, there is a good positive drumbeat of momentum in this company right now, and within the operating units, and our intention, of course, is to build on that momentum. Thanks very much for your time, and for your interest in this, great company, Electrolux. Have a good day.