Well, good afternoon, everyone, and welcome to this Q4 conference call. As always, we will start with a presentation from our CEO, Keith McLoughlin. That will take about an hour, and then we will have a Q&A sessions after that. As the always, we will try to have one question at each, and then you can sort of line up again if you have further questions. By those instruction, I would like to leave the word to you, Keith.
Okay, Peter, thank you. Good afternoon, good morning to everyone. One small comment there, I don't think my presentation is gonna be an hour. I think we'll get the whole call done within an hour, including questions. No, no need to fret there. Welcome to the presentation discussion of the fourth quarter and 2011 full year results for Electrolux. With me today, as you've heard, is our Head of IR, Peter Nyquist, and also I have with me our Acting CFO, Per Carlsson. As you know, we've announced Tomas Eliasson as an incoming CFO, and as information, he'll begin his work at Electrolux on February 13th. Let's go ahead and jump into the presentation. If I can steer you to page two.
We'll start with some comments on the full year, 2011. In 2011, we saw raw material prices increase while selling prices dropped. This had a negative impact on our results in 2011, with more than SEK 3 billion. In this tough environment, we were able to generate an underlying operating income of approximately SEK 4 billion, which is above the level achieved in previous years under similar conditions as 2011. During the year, we continued to generate strong underlying cash flow, which helped us maintain a healthy balance sheet. Actions in 2011, including initiating and implementing a number of key activities. We have finalized two acquisitions, the Egyptian appliance company, Olympic Group, and the Chilean appliance company, CTI.
As a result of these acquisitions, combined with strong organic growth, pro forma sales and growth markets accounted for approximately 35% of total sales for the group. Additional decisions and actions were taken to further adapt our production capacity in both North America and Western Europe, and to reduce overhead costs in line with the current business environment. We are continuing our efforts to enhance efficiency and reduce costs by capitalizing on our shared global strength and scope through our global operations work, and these efforts will generate a positive impact at an escalating pace. We have finalized our management team and are investing in our marketing, R&D, and design organizations. Now, let's look into the result in more detail. Q4 highlights.
The results for the fourth quarter were impacted by non-recurring items, including costs for overhead reductions and WEEE related costs, amounting to a total of SEK 825 million. Excluding these items, our operating income amounted to SEK 1.4 billion. Demand continued to be soft in North America. In addition to the weak market, our results in North America were adversely impacted by higher costs for raw materials. Operations in the rest of the group showed quite solid results in a difficult environment. Our sales prices in the quarter were lower than a year ago. In the US, however, our prices increases generated higher prices sequentially and compared to the fourth quarter of 2010. Raw material prices are still at a higher level than a year ago. Year-on-year, higher raw material costs had an adverse impact of around SEK 300 million.
In addition, costs for source product and transportation were higher compared to the fourth quarter of 2010. The Olympic Group in Egypt and the Chilean appliance company, CTI, are consolidated in Electrolux, which has contributed to higher sales in the quarter. In the fourth quarter of 2011, we had a slightly negative contribution from the acquired units due to acquisition-related adjustments. We expect earnings contribution to be positive in 2012 for the acquired companies. Our underlying cash flow, excluding payments for the shares of CTI, is solid, mainly as a result of improved working capital productivity. I'd like to give some clarity around the non-recurring items in the quarter. If you flip to the next page. As previously communicated, in order to improve our operational efficiency, we are reducing overhead costs in all of our regions.
Activities to reduce staffing levels were initiated in the fourth quarter of 2011 and will continue in early 2012. Costs for these activities amount to SEK 635 million and are mostly concentrated to our European operations. Savings from these measures will amount to SEK 680 million annually. A non-recurring double-WEEE related cost in Hungary, amounted to SEK 190 million, has been charged to operating income, impacting our European operations. This charge relates back to a 2005 to 2007 documentation issue that had been resolved with the previous administration. Let's turn the page and talk about our cash flow in the fourth quarter.
Our operating cash flow amounted to minus SEK 2.9 billion in the fourth quarter, excluding the impact from acquisitions and divestments, mainly referring to the payment of the shares in CTI. Our operating cash flow amounted to approximately SEK 300 million. The trend for cash flow and working capital in the fourth quarter reflects a normal seasonal pattern with increased sales and declining inventories. We continue to see structural improvement in our working capital. To optimize and improve our manufacturing footprint, we will close one production line of dishwashers at the plant in Kinston, North Carolina, in the U.S. The cost for these activities amounted to approximately SEK 100 million, and were booked in the fourth quarter as items affecting comparability.
Let's turn to the next slide and talk about our operations in Europe, Africa. During the fourth quarter, Electrolux sales, excluding acquisitions, decreased mainly as a result of lower prices. Operating income, excluding non-recurring items of SEK 690 million, amounted to SEK 500 million. This improvement compared to the fourth quarter of last year is driven by an improved product mix and cost savings. Compared to last year's corresponding period, lower prices had a negative impact on our sales and operating income. Our fourth quarter results were also negatively impacted by higher costs for raw materials and a negative country mix. Our newly launched AEG products gained market shares in the fourth quarter of 2011. Higher sales of AEG premium products generated a positive mix contribution in the quarter.
On a year-over-year basis, we have lost some market share in Europe, importantly, captured market share in the fourth quarter compared to the previous quarter in 2011. Let's turn the page and talk about the market development in Europe. You can see, the European market turned slightly positive in the fourth quarter. Industry shipments in total Europe increased by 1%, while the markets in Southern Europe continued to be weak. Industry shipments in Eastern Europe increased by 9%, which is a slight improvement compared to what we saw in the third quarter. In 2011, there was essentially no growth in total Europe. For 2012, we estimate growth in total Europe to be flat to down by 2%. Let's turn to the next slide and talk about North America.
The results for our operations in North America were weak. First, lower volumes had an adverse impact on our earnings. During Black Friday, which is the most intensive promotion day of the year, Electrolux focused on contribution and margins and therefore stayed out of most of the competitive activity. As a result of the lower volumes, we had lower absorption in production, which had a negative impact on results. Secondly, cost of raw materials were higher compared to the same period of last year. Thirdly, our results were also negatively impacted by higher transportation costs and higher costs for sourced goods. We have been able to increase prices in North America. Our sales prices were higher, both compared to the previous quarter, but also to the fourth quarter of 2010. The positive effect has also partly been eaten up by promotional activities.
We will continue to raise prices. We are implementing a new round of prices as we speak. Let's turn to the next slide and talk about the market development in North America. The market development in North America continues to be weak. Market demand for appliances in North America declined by 4% in the fourth quarter and for the full year of 2011. We expect 2012 to be slightly better, flat to up to 2%. Let's turn to the next slide and talk about Latin America. Market demand for appliances in Brazil is estimated to have increased compared to the fourth quarter of last year. We saw an increase of demand in December as a consequence of the government incentive program that started in the month.
We had expected a bit more, and hopefully the positive effect from the program will be more visible as it continues during the first quarter of 2012. Our net sales exceeded the market growth, and we continued to gain market share. The markets outside Brazil also showed solid growth. Our operating income rose in the fourth quarter. Higher volumes contributed positively to our earnings. Retail consolidation among the largest retailers in Brazilian market had an adverse impact on our customer mix, but to a lesser extent than in previous quarters. The newly acquired company, CTI, contributed positively to the income for the quarter. Let's turn the slide and talk about our operations in Asia Pacific. Our underlying operating margin in Asia Pacific amounted to almost 11% in the fourth quarter. This is a good achievement.
In Australia, the market grew slightly compared to the corresponding period of last year. Our operating income in Australia declined due to price pressure in the market and higher costs for raw materials. The price pressure is mainly driven by the continued strong Australian dollar, which makes imported volumes more competitive. The markets in Southeast Asia and China continued growing considerably in the fourth quarter. In addition to the high market growth, we were able to gain market share. Our operating income in the fourth quarter was also adversely impacted by development costs of new products in the entire region. Our operations in Southeast Asia continue to show very good profitability. Now let's talk about our small appliance business. After a tough start to the year, small appliances improved considerably as the year passed by and showed a very solid fourth quarter.
Market demand for vacuum cleaners in Europe and North America declined in the quarter compared to the same period of last year. Group sales rose in the fourth quarter compared to a year ago. This is a result of higher sales volumes and improved product mix. The acquisition of CTI's subsidiary, Somela, a small appliance manufacturer in Chile, made a positive contribution to sales. Sales volumes of small domestic appliances grew strongly in the fourth quarter. Our underlying operating income improved in the fourth quarter, thanks to higher volumes and a positive product mix. Let's talk about our professional products business. Operating income for our professional operations amounted to approximately SEK 190 million, which is lower than for the comparable period of 2010. Sales for our food service operations declined, primarily as a result of weak market demand in Italy.
Operating income for our food service operation declined in the fourth quarter compared to the same period of last year. Lower volumes and higher raw material costs were partly offset by price increases that were instituted. Operating income for our professional laundry business for the fourth quarter declined due to lower volumes. Let's turn the page and talk about the development of raw materials. Let's start with steel. After some sharp increases at the beginning of 2011, market prices for steel dropped in the latter part of 2011. As we started our negotiations for 2012, at the end of 2011, we currently have in contract and hedged most of our 2012 steel purchases. We estimate purchase 2012 steel prices to be roughly in line with the previous year.
Therefore, we expect neither a tailwind nor a headwind from steel going forward. Let's turn the slide and talk about our petrochemicals. The market for plastics and petrochemicals had a very volatile development in 2011, as you can see. This means that the comparable figures will vary between the quarters. Currently, we do expect some headwind in 2012, as plastics prices and petrochemical prices right now are trending upwards. Contract prices for plastic, different than for steel, are only valid for one quarter at a time or three months, which means that our total hedging levels are low. The impact in 2012 will therefore be highly dependent on the spot price development throughout the year. Let's turn the slide and conclude this presentation by looking ahead into the first quarter and full year of 2012.
Looking ahead into the first quarter and full year, we expect market volumes for the first quarter to be slightly negative. With the tough comps in North America, we'll probably see a slight decline in demand in Q1. The European market continues to be weak. For the full year of 2012, we expect to see some growth in North America, flat to up 2%, while we expect Europe will most likely show a flat to down market to 2%. We expect a positive impact from price in the first quarter. Based on previously implemented price increases in North America, we will see a positive year-over-year effect. In Europe, we expect prices to move in the first quarter, we will still have a negative year-over-year effect as prices have come down during and throughout 2011.
We expect both North America and Europe to have a positive impact on full year earnings when it comes to price and mix in 2012. As we now find ourselves in a more favorable commodity market, we do not anticipate costs from raw materials to exceed the 2011 level by more than SEK 500 million, with the full impact from the beginning of the year. We are continuing to launch new products, and the AEG launch is an important factor. Also during 2012, we will also have significant relaunch of high-end Electrolux products into our European market. This will be supported by increased cost for product development and marketing. Our acquired units will give us a positive contribution of around SEK 400 million compared to 2011.
As there is great uncertainty in the Egyptian market, we see a weaker performance from Olympic at the beginning of the year, with some recovery by the end of the year. The Chilean CTI group, on the other hand, is delivering quite strongly and according to plan. We will also see results from our cost saving program initiated at the end of 2011, and in combination with already implemented actions, we expect overall cost savings in 2012 to amount to around 1 billion SEK. Finally, in the second half of 2011, we were negatively impacted by increased cost for source products, especially from Asia, which we will carry with us into the first part of 2012. Peter, by that, I conclude my remarks, and we can open it up for questions.
Thank you, Keith. Before we start, I ask again, we repeat the instructions that we should try to keep one question at each session, and then you can line up again for a second one if you have further questions. We should try to conclude the presentation or the Q&A session around 4:00. Okay, by that, operator, we are open for questions.
If you have a question, please press 01 on your telephone keypad. Our first question comes from Mr. Andreas Willi from JP Morgan. Please go ahead.
Good afternoon, gentlemen. My question is, relating your exposure to a potential recovery in the U.S., housing market. Maybe if you could share with us what percentage of the current U.S., sales you're doing are directly in the builders channel, and what you would expect, if you really U.S., housing starts start to improve materially, how much of a benefit that would have in terms of the market, in terms of upside to your relatively cautious volume guidance in the U.S? Thank you.
Yes, our participation in the housing market, the direct new construction market in the U.S., is about 8% of our total business and share of that market. It's growing.
As we talk about the housing market, we see, like everybody sees, the beginning of the housing market starting to cycle up. I would just be a little bit cautious about the timing of that. We expect it will get better, but it's a relative game here. As you know, as housing starts improve from 400,000 starts to 600,000 starts and goes a little bit higher, that's good news. You know, though, that we're coming from a peak of over 2 million. We think it will still take a couple of years for housing to fully recover, but we do expect that it is on a recovery mode. The other important comment relative to the housing market is the domino effect.
Part of it is how much of the new construction do you participate in, but how much of it is the relocation that starts to get triggered by new houses and people moving? Actually, as the new construction increases, the relocation of houses, of existing homes, the turnover, what we find out is when people move into a new home, even if it's an existing home, they remodel their kitchen in the first 6-12 months. That triggers appliance demand as well.
We have Andreas?
I was just a bit surprised about the relatively cautious volume assumption for the U.S. market, given that we had five years of decline and a reasonable economy out there.
Yeah, I guess the question is, definition of reasonable economy. Our projection is the U.S., GDP will be about 1.8%. As you know, that's okay, but that's not what we would call robust. Unemployment, although trending down a bit, is still quite high. Housing starts, as we talked about, although trending up, are still quite low. Consumer confidence, which is the third key variable that correlates mostly to appliance demand, again, is starting to improve, but it's still pretty low relative to history. We actually don't have the view that the U.S., economy is booming. We think it's turning, but we think we need to be cautious about how fast it's turning.
Thank you.
Thank you.
Thank you, Andreas. Next question, please.
Our next question comes from Mr. Ben Maslen from Bank of America. Please go ahead.
Hi, Ben.
Yeah, hi there. Hi, Keith. Just one question on the pension note that you put in your quarterly report. I think it says an extra maybe three and a half billion SEK liability that you'll incur on the change of accounting standards. I know it's, you know, it is just that, it's an accounting change, there's no immediate cash impact. Can you say how you view it? Are you happy to have a six billion SEK liability on the balance sheet and it moving around every quarter with the mark to market? Will you try and kind of pay money into it and pay it down, as Electrolux has done previously, to reduce the liability? Thank you.
Yeah, thanks for that question, and maybe I'll turn it over to Per Carlsson, our CFO here. I can tell you, the first question I had when I learned about this accounting implication was, "What's the impact on our cash flow?" What Per and our finance team has told us is none. I said, "Fine, you know, do what you gotta do here." Per, maybe you can give a little more color and flavor to this pension accounting change.
Yeah, I will, as you have said, that there is no cash flow impact, which is a positive thing. This is a change in reporting and accounting standards that will be in place in 2013 as the proposal. Most likely it will happen. What it will bring, though, is less volatility in the operating result because we are moving away from the corridor method then. As you say, we will record the liability on the balance sheet, and we'll have a one-time impact then, also on our equity. We have, talking about the filling up and reducing the exposure, I think during the last years, we have done quite a lot of funding on the pension liability.
Yeah
for the moment, we are relatively comfortable with the funding level. As you also know, the discount rates have worked in this perspective against us.
Yeah.
For the moment, no.
Okay. Okay, thanks. If I could maybe just to follow up on Keith, on the marketing and R&D increase that you flagged for 2012, can you quantify what kind of cost increase that will be? Is it a fixed number that you have in your mind, or is it kind of, you know, flexible, depending on how your results come in, basically?
Right now, we're planning to increase, as you know, and as we've talked about and communicated, an increase in both marketing, R&D, and to round that out, and to be transparent, also design. You know, that's about, our plan comprehends about a 600 million SEK increase. As you know, you know, that's the plan, and, you know, if the market turns upside down and, you know, Europe collapses, then, you know, we'll adjust. You know, so we'll be nimble. That's what we have comprehended in our plan right now.
Great. Very clear. Thank you.
Thank you.
Our next question comes from Mr. Christer Magnergård, DNB. Please go ahead.
Hello, Christer.
Hi, Christer Magnergård. Yes, a question on the Brazilian market. When does the incentive program end, and what do you expect after the incentive program? Do you expect volumes to go away then?
Yeah, let me actually ask Peter. I think he's up to date on when that program actually ends. Are you familiar with that, Peter?
Yeah, I guess as it looks right now, it's supposed to continue on to March, end March. We don't know what actually, last time you had it in 2009, it actually was prolonged two times, and it might happen again. As it looks right now, it's gonna be December, January, February, and March.
Okay.
Just a short follow-up on the same thing as we talked about earlier on the guidance about R&D and marketing costs. I was wondering about component costs and sourcing costs. How much extra will that add in 2012?
Yeah. We talked about from the raw material side, you know, that we expect essentially half of what we had previously communicated. We went from SEK 2 billion to less than SEK 1 billion, to now, as we're obviously into it now, to less than half a billion SEK. When we talk about then, of course, going from.
Sourcing.
Sourcing products, sourced goods, we expect that impact for the full year to be about SEK 600 million.
Good. Thank you.
Thank you.
Our next question comes from Mr. James Moore from Redburn London. Please go ahead.
Go, James.
Hello, everybody. I was wondering if I could understand a bit more the marketing and R&D and the transport cost and source products. You put a couple of numbers on 2012, and it's really helpful. Are those exceptional items in the sense that as we move into 2013, we will go back to a normal marketing run rate? Over time, you've gone from one and a quarter to two and a half % of sales. Is this a new higher run rate than that, or do we drop back? Why are transport costs and source products lifting so much? I got the sense that with a flat oil price, a lot of transport costs are basically oil related and are not increasing that much.
Hi, James. Yeah, a couple comments here. One is, we actually, relative to the source product, we actually have a Q1 or first half really comp issue, which is the, our source products that we sourced from Asia, began to tick up fairly strongly beginning in the second quarter and throughout the rest of the year in 2011. Those prices are now higher, and now we're comping against a Q1 that didn't have those increases, Q1 and part of Q2. That's the biggest difference. You're correct. Actually, ocean freight is going positively, but landed truck movement, diesel fuel is still quite high.
Okay. Just on the marketing spend?
Yeah. Yeah. Yeah, we expect that on a, on a going rate right now, our plan, as we've talked about, is to have marketing and R&D running about 2% of sales. We'll cycle a little bit over and above that, on a, on an ongoing projection standpoint, that's what's in our business plan.
Sorry, and how much will it be in 2012? Is it well above that?
No, not well above that, no.
Okay. Thanks a lot.
Yep. Thank you.
Thanks, James. Next question, please.
Our next question comes from Mr. Rob Virdee from Espirito Santo. Please go ahead.
Hello, Rob.
Hello, good afternoon, everyone. I was just looking at your inventories, and I see your year-end inventories are up to 11.8% of sales. I was just wondering what steps you're taking, if any, to bring this down, or if we'd expect capacity utilization would be weaker going forward to correct that?
Yeah. Actually, let me talk about working capital in total and inventory in particular, to your point. Another actually very, very good year by the team in terms of working capital productivity, as you know, liberated, you know, more than SEK 2 billion off the balance sheet from productivity. To your point, though, inventory was a little bit of a rollercoaster for us. In the first half of the year, inventory went up, and in particular, because of the very soft selling season in Latin America for air conditioners in the summer, we had a run up in inventory. We obviously had to bring that down, and manage that quite well throughout the rest of the year.
We actually got it so low that there was a couple of instances where we were getting tight on our service capabilities with our customers in a couple of markets. We had to bring it back a little bit. The other thing, just to be careful with the numbers, actual Q4 includes now inventory from OG, Olympic Group and CTI. You got to be a little careful with the comparison because now that's in there. They've run a much higher working capital as a % of sales history than we do, and of course, that's an opportunity.
Okay, fantastic. Thank you very much.
Thank you.
Thanks, Rob. Next question?
Our next question comes from Mr. Anders Trapp from SEB. Please go ahead.
Hi, Anders.
Yes, hi there. I just wonder if you could talk a little bit more about what you see happening in Brazil or Latin America, both in terms of, you know, market demand for 2012, but also your own initiatives and eventual success in expanding outside Brazil?
Yeah, good. Hi, Anders. Good question. Brazil, actually, we obviously have in our plan that it continues to grow. As we talked about previously, we have been experiencing quite significant growth rates in Brazil, and the market has generally been pretty strong as well. We're expecting that in 2012 to temper somewhat. Our plan suggests that the market demand is, you know, is closer to that 4%-6% range, you know, and maybe on the lower end of that 4%-5% range in 2012, just because, you know, it's connected to the rest of the world, even though they try not to be in many cases. We think it slows down a little bit, but still positive 4%-5% growth in Brazil.
We're experiencing growth above that rate, as you know, as we continue to gain market share. That's mostly because of, and will continue to be, a great pipeline of innovation and products that continue to roll out in that market. I've already reviewed the plan for 2012, and it's quite healthy, so we expect to continue to gain position in Brazil. Outside of Brazil and rest of Latin America, as you know, we've had significant growth there as well. With the acquisition of CTI, you know, we now have a very strong foothold in both the Chilean and Argentinian market.
Now if you say that, you know, Brazil is about 55% of the Latin American market, and Chile is about 5%, and Argentina is about 10%, you know, we've got about 1/3 of that business from a market share standpoint, and growing. We're. I will tell you, and you probably heard me say previously, we are very pleased with our team there in CTI and an addition to Electrolux from a management standpoint, from an organization standpoint, from a culture standpoint, from a value standpoint, from a pipeline standpoint, and we're gonna help them, and they're gonna help us.
Could you say the split of sales in Latin America again, in the different, big, countries?
If you say that, if you think about the total Latin American market, roughly, call it Latin America's markets, roughly, and Peter, correct me if I don't have this exactly right, but roughly SEK 100 billion in appliance sales, total market. About 55% of that is Brazil. About 20% or so is Mexico, about 10% in Argentina, about 5% in Chile. That's how I'm giving you the overall market perspective. Is that about right, Peter?
Yes. Yeah, we have, I mean, after the acquisition, now about 20% of the total Latin American market, actually, right now.
Yeah, we have SEK 20 billion of the SEK 100 billion, Anders.
Yep. Very good.
Thank you.
Okay, next question, please.
Our next question comes from Mr. Johan Dahl from Danske Bank. Please go ahead.
Hello, Johan.
Hi, hello there. I had a question regarding prices and price and mix. If you could elaborate a bit on your outlook for 2012. I mean, you refer on the slide here to a positive effect for the full year. I mean, I presume that's price and mix taken altogether, but, I mean, prices, it seems as they've been quite difficult to move up in U.S. lately, and is it the third or the fourth price cycle you're carrying out now? What's giving you the confidence actually to put out this statement? Could you elaborate a bit on that and perhaps go down on the geographies as well, where you see the prices coming from?
Yes. As you know, and as we've talked about, you know, we've spent most of 2011 trying to get through the material cost increases and work them through the value chain. As we've talked several times, you know, that's easier said than done. I think the reason for our confidence going forward is we are now in Q4, actually reading about it on our income statement. We're seeing a net price increase both sequentially and year-over-year in our U.S. business. We have already raised prices in January and a little bit more in February. That's what gives us confidence that we will see year-over-year positive price effect in the U.S., because it's happening now.
Europe's a little trickier, to be fair. I mean, we're still pushing those price increases. We've got more confidence. We're getting stickier in the stronger part of the market, so Northern Europe and Eastern Europe. It's a little more challenging, candidly, when, you know, when you're in Italy and the market's dropping by 9%, to jam through those increases. The team is committed, and they're working through it. We will communicate more clearly exactly what that looks like as we get the net effect of that into Q1.
If I understand you correctly, if, you know, if you look on Q1 with positive prices in North America and negative prices in Q1 in Europe, year-over-year, I mean, that has to improve then in Q2 and Q3, you should see a group positive price effect, I presume. Is that correctly interpreted?
Yes, I think Yeah, that's right. The issue with Europe, of course, is, you know, they're gonna improve sequentially, but we've got a year-over-year negative relationship to your point.
If you could look in North America, you get basically the full effect in the first quarter a little bit because you had very low prices in the first quarter last year. The year-over-year effect is bigger than sequentially comes down a bit as you wander into the second, third, and fourth quarter.
Great. Thanks for that clarification.
Thank you.
Our next question comes from Mr. Stefan Lycke from Deutsche Bank. Please go ahead.
Hi, guys.
Hi, Stefan.
I appreciate that you can't really talk for Whirlpool, but I was just wondering, if you look at your performance in North America, it's been somewhat disappointing against what we saw from Whirlpool yesterday and also their comments on price. My question is whether or not that is related to potentially product segments, that there is, you know, difference within the market, or if you could elaborate on that a bit?
Yeah, of course, to your point, I, you know, I can't speak for anybody other than ourselves. I can tell you, though, your hypothesis around product mix changes is probably a good lead, particularly in terms of what's happening in the laundry business in the U.S. in the fourth quarter, which you know we're a relatively small player in.
Yeah, which has been impacted before by heavy discounting and promotions, right?
Yeah. I'll leave you-
Okay.
to your own conclusion. Yeah.
Okay, wonderful. Thank you.
Thank you.
Thank you, Tom. Next question, please.
Our next question comes from Mr. Patrick Hughes from Citigroup. Please go ahead.
Hi, Patrick.
Hi. Just on your forthcoming maturities, obviously, you did quite a bit of funding last year in terms of SEK bonds and the terming out of your EUR RCF. Just wonder whether you are happy to draw down bank facilities, or will you be coming back to the capital markets? If you are, would you be looking at anything other than SEK-denominated funding? Thank you.
Yep. Okay, Per, I'm gonna turn that one over to you. I think we're in relatively good shape, but let me ask you.
Yeah
respond to that.
Yeah, yes, we are. The maturity profile we have is looking quite good, actually. What we have coming in for 2012 is refunding of approximately SEK 2 billion towards the end of the year. I don't know if that answers your question or.
I mean, you've obviously got liquid resources. Are you gonna utilize them, or are you gonna actually, term out in the bond market? Or is it too early to say?
No, no, I think that would be too early to say.
Yeah, probably too early to anticipate, yeah.
Okay.
Okay, thank you, Patrick. Next question.
Our next question comes from Ms. Karen from Karen Capital. Please go ahead.
Yes, this is Karen Te-
Hello.
Hi there. Thank you. It's Karen Capital. I just I've noted that your leverage levels, so net debt to equity and net borrowings to EBITDA have trended back to what looks to be close to the 2008 levels. Could you give us some comments on management's targeted capital structure, leverage levels in context of the current cyclical pressure you're facing? It appears to be further potential cyclical downside.
Yeah. Okay, good. Sure. Let me start with our view on our capital structure requirements, and I'll turn it over to Per for more specifics. As you've noted, you know, you make 2 big acquisitions, and your ratios start to change. We're now, you know, still comfortably within our BBB+ bond rating hurdle relative to net debt to EBITDA and net debt to equity. To me, it's a fantastic testament to the group and the ability to liberate cash off the balance sheet to do 2 significant acquisitions and still maintain a healthy capital structure.
My view, going forward, as you'd expect, is there will be a cash generation from EBITDA performance, and that will trend back down to a very comfortable A-minus level. You know, we're feeling that's part of the reason why the board is recommending the dividend they are, is we don't have any concerns at all relative to the health of the company and the balance sheet. I don't know, Per, if you've got additional comments on that.
No, I can confirm what he's saying, and also that we had reconfirmation of the rating quite recently, actually, with a stable outlook. Of course, we are, I mean, bumping against the BBB+ now with the acquisitions, but as Keith mentioned, we expect to come back to a level well below that. Okay, Renee, you happy with that?
Yeah. Thank you.
Thank you.
Our follow-up question comes from Andreas Willi from JP Morgan. Please go ahead.
Hi, Andreas, again.
Yeah, good afternoon. 2 questions on kind of interest and tax. Q4 showed a relatively high interest level. Should we take that times 4, roughly for 2012, or at least before free cash flow generation? On tax, with the U.S. tax credits finished now by the end of 2011, should we expect the tax rate in general to increase, or basically, what should we use for the tax rate for 2012? Thank you.
Okay, Per, you want to take that?
Yeah, no, that's correct, that we are, of course, now with the higher net debt, we are running at a higher finance net. We're, yeah, more negative than what we have done before. As an indication, I think you can use, yeah, close to SEK 550 for the full year of 2012. When it comes to the tax rate, I don't see any reason to deviate from the indication of 25% that we had used before.
Thank you.
Okay, thanks, Andreas.
Our next question comes from Mr. James Moore from Redburn London. Please go ahead.
Hi there, Ian. Yeah, hi there. Just a couple of follow-ups. I note that the corporate elimination line seemed quite high in the quarter. Was there anything that's sustainable in that, or does it drop back? Perhaps a bigger picture question on U.S., and European margins. I'm just trying to get my head around the weak U.S., margin, given the strong pricing. I know you listed helpfully the headwinds there, but as we go forward into a slightly improving volume, have you got visibility on the U.S., margin that you can help us with improving? Equally, that's a very good European margin, given the pricing pressures. I get the sense that that must be AEG mix related.
Is that something that you think can sustain itself, given the pressures in Europe?
... Yeah, let me help a little bit, James. In the U.S., you know, it's 3 big things, right? It's the volume and the absorption, negative impact of that. It's again, the raw materials that were higher year-over-year. It's the cost for the sourced product. We also had about a SEK 50 million negative currency impact between the U.S., and Canadian dollar.
Mm.
That's kind of the U.S., Q4 story. As we've talked about, given where we think the market's going, given where commodities are going, and given what we're doing in prices, we expect the U.S., performance to improve, clearly. In terms of Europe, you know, actually, a lot of the performance in Europe is in addition to the mix effect, it was quite good, efficiency improvements, productivity improvements. We had warranty improvements. We had a slight positive currency in the quarter for Europe, 50 million SEK. I think Europe, Canada, we're quite pleased, particularly when we saw other results recently, where I think our European operation is doing a good job in a tough market, and we get a little bit of price. You know, that'll help.
Do you think it can hold there, or is that at risk? I'm trying to get the balance of the two, I suppose.
Yeah, yeah. Well, I mean, you know, James, you tell me what's gonna happen to the Euro and all that. Our premise is that it, you know, we muddle through, and it gets solved, and we have a slight negative GDP for the region for the year, but not no draconian falloff. That's our premise. You know, if that changes, you know, we'll talk to you, but we don't ... You know, that's our assumption anyway.
Okay. The corporate line?
It's correct that we are a little bit high here in the fourth quarter. One explanation there is, of course, the charge we've taken for the cost-saving program, which also have been executed here at the corporate level. We will not be running at that level going into 2012. However, though, we will see somewhat slightly higher running cost on corporate level, due some of this marketing and our lease spend will be on corporate level. I think you can estimate somewhere between SEK 100 million, let's say, SEK 175 million, somewhere around there per quarter then.
That's all very helpful. Thank you. Thanks, guys.
Yep. Thanks, James. Next question, please.
We have a follow-up question from Mr. Anders Trapp from SEB. Please go ahead.
Yes. Hi. I just have sort of a detailed question really, or trying to understand the huge volatility or seasonality, perhaps, in small appliances that we've seen through the year. It's sort of a new business area, this account, as well as you do now. I'm trying to understand or if the seasonality we saw now in 2011 is typical for what to expect in the future, or is it, was it something else?
Yeah. Let me start, Anders, overall. Seasonality for the group, we expect to be similar to historical levels, so kind of low first quarter and building sequentially throughout the year. You should expect that to be the same. Specifically within small appliances, as you know, you know, they came out of the blocks weak, right? They come out of the blocks with huge increases. You know that we source a significant portion of that business. It's vacuum cleaners and coffee makers and irons and all the small domestic appliances that are manufactured in China, and we source 80% of that. Particularly all, you know, virtually all of it coming into the U.S. is sourced.
We had a big headwind of sourced product cost that took us a while to get through to the marketplace in terms of price increases. The other is, we were investing heavily in small domestics and in the instant-clean category, which is the Ergorapido category. The good news is, and sometimes it pays to be patient, the team was confident that they would get traction in those investments, and they did. You saw a fairly significant sequential improvement in that business and in that category, culminating, to your point, in the, I think, best ever fourth quarter earnings results for that group.
Yeah, I would say, you know, Tale of Two Cities, a little bit weak in the middle, early middle part of the year, and then very strong performance as we entered the year. Per, you used to be the CFO for that business. From a seasonality standpoint, is there a clear seasonality? I would think Q4 would be the strongest season by far.
Yes, absolutely. That you will continue to see that, and especially also if we are growing small appliances outside floor care, which are even more seasonality with Christmas sales and all that.
Yes, I understand, especially in 2011, the second quarter was, you know, almost no profit at all. Was that really due to that sourcing, increase hit you at the worst, in that quarter?
Actually, the second quarter is also, by seasonality, a very weak quarter in that business. I think that is quite partly linked to the retail pattern, where they are promoting other categories than small appliances in the second quarter, for instance, outdoor.
If we put on a year-over-year basis, you know, the, you know, that's where we took the big chunk of that pent-up along and all that.
Yeah. Definitely.
Yeah. I think the answer to your question is yes, Anders.
All right. Very good. Thank you.
Thank you.
Our next question comes from Mr. David MacGregor from Longbow. Please go ahead.
Hi, David.
Yes, good afternoon, everyone. Keith, you talked about gaining share in Brazil. I'm just wondering, are you gaining share on existing sales floors, or are you developing new distribution? I realize there's a lot going on in terms of consolidation of retail down there, but can you just help us understand the nature of the share gains?
Yeah, I think it's, I think it's real estate, so I think we're getting more positions on existing floor. I think we're getting some new positions, particularly further up north in Brazil, where we're gaining some business. I think there's a positive shift in segment as we bring more higher design premium products, adding to our offering, that we're getting a better representation of that. I think it's just that, you know, the day in, day out, getting more real estate on the retail floors because it's selling better.
Okay. Well, congratulations on that. With respect to the stimulus that they're running down there, is that really just influencing opening price point product, or are you seeing it impact some of that premium product you just mentioned?
You know, I think it impacts all the products. I will say, though, Peter mentioned it earlier, you know, last time they did this, we saw a significant immediate lift. We're seeing a little bit, but it's not as dramatic as we'd seen it previously. You know, I think the Brazilian consumers are, you know, not reacting as immediately and as strongly as they had previously. Don't get me wrong, it's positive, but it's not that huge spike up that we had seen previously, which is probably okay, because a little bit of that steals business from the future, as you know.
Right, just to draw forward. Is it comping single digit?
Yes.
Okay. Thanks very much.
Thank you.
Thank you, David.
Our next question goes to Mr. Björn Enarson from Danske Bank. Please go ahead.
Well, Björn, I guess you have the honor to actually ask the last question here, as it looks like. Björn, go ahead.
Yes, thank you. Thank you for that. I have a question on inventories, and if you can help me with the number of days that you are now having on inventory in Europe and North America, and if you could relate those figures, if you have those handy, to the normal levels of days in inventory. Thanks.
Yeah. Yeah. I don't know that we give out specific by sector inventory day supply. I will tell, I know for sure that the U.S. inventory is quite low and quite healthy. They did a fantastic job throughout the year on working capital, and particularly in inventory as well, in the second half. Europe actually hit a trough, a very low level at the end of Q3. Transparently, they got a little bit into some service problems, so they asked for, and of course, we supported their ambition to get a little bit more inventory built back up, so we didn't have any service problems and delivery problems with our customers.
Trend wise, they're quarter sequentially, they're up a little bit, Europe is, and sequentially, U.S., is down, which is seasonally normal for them. Is that about right, Per?
Yeah. No, I think that. Yeah, that's right. Please keep in mind also, when you look at the inventory numbers, that we have all Olympic and CTI in there on total group level, actually.
Yeah.
Yeah, sure. I just, primarily looking at the Europe and North America there, where could you say that you are below what you normally have in number of days? Is that?
No, I think we're at a normal level for seasonal level. No, I don't think we're dramatically off, up or down.
Do you have a view on the retail side as well?
Yeah, that's a good question. I think, you know, as you know, some of the big retailers in the U.S., have different year ends, so, you know, one big one's December, another one's January, another one's February. So they'll clean, you know, they'll clean out their inventories, obviously, to meet their year-end objectives and cash goals. That's normally what happens. You know, Black Friday, as you know, for appliances, was not as strong as people wanted or expected, so that probably let some inventory build up. Again, that was November, so by now, that's probably mostly bled through. We don't see a big inventory bubble, sitting at retail, either in the U.S., or in Europe, for that matter.
Okay, thanks. Helpful.
Thank you.
Thank you. Okay, by that, I would like to close this session by giving the last word to Keith. Please, Keith.
Okay. Thank you. Thank you all for calling in. Maybe just if you can give me maybe a minute, allow me to try and summarize 2011 from Electrolux point of view and give you our summary view of 2012. I'd say 2011, you step back and you look at all three income levers: volume, price, and cost, all moving in the wrong direction simultaneously. You know, perhaps the best thing I can say about 2011 is that it's behind us.
Another view could be of 2011, for Electrolux, that with over SEK 4 billion of headwinds, when you combine the impact of volume, price, and total cost, our earnings declined from SEK 6 billion to SEK 4 billion, which means that there was a heck of a lot of productivity and mixed-led earnings growth that had to happen in order to offset that total of more than SEK 4 billion. As we talked about similarly on the balance sheet, there was over SEK 2 billion of cash liberated through working capital productivity that enabled us to acquire two companies and still stay within our BBB+ investment-grade bond ratio. We're able to do that and materially advance the strategic priorities of the enterprise.
by prioritizing growth geographically and in new product categories, by investing in innovation, in design, in brand, in R&D, and by driving operational excellence in our manufacturing, purchasing, and modularization work. That's kind of my view of 2011. 2012, as you probably can tell from our remarks and our information, we're cautiously optimistic. Yes, there's lots of uncertainty out there, and there's lots of volatility. You know, whether it's currency fluctuations or what's gonna happen with the Euro or North American demand, you know, a fair amount of uncertainty, but we feel pretty good about some of the trends that are happening. We're gonna have a positive net price mix effect year-over-year. That's very different than what we experienced in 2011.
Commodities, while up, will be a fraction of what we experienced in 2011. As we talked about, we have a lot of new product launches, a lot of new exciting product launches that are happening in 2012 in every region and in every sector. We are continuing to get traction and gain momentum in our global operation and modularization work, and we're communicating some of the benefits that we're seeing earlier than we had originally anticipated. In 2012, we'll also have a full year of two new parts of the family here, and the two acquired companies, and get both their top and bottom line effect to that.
Lastly, I'd say at the risk of, obviously being biased, I think with some of the additions we've made and changes we've made, you know, I consider the management team of Electrolux that we have in place now, to be the best in the industry. To me, that's a big part of running a, running a business, is, can you get the right talent and the best talent? You've, you've heard and read, hopefully, of some of our announcements, and we've got some horsepower. That's kind of what I want to conclude. Thanks again for calling in. Thanks for your continued support, and we look forward to talking to you soon. Thanks. Have a good day.