Good morning, and warm welcome to Electrolux Second Quarter 2021 Results Presentation. My name is Jonas Amorsand. With me today, we have our CFO, Therese Friberg, our Head of Investor Relations, Sophie Arnius. I'd like to mention that this session is recorded and will be available on our website as an on demand version. Let's look at our performance in the Q2 of 2021.
Demand remains strong across our main markets, though with some signs of consumer spending patterns normalizing around midyear. Retailers' inventory levels have now partly been replenished depending on the region, but with imbalances in terms of product mix. In North America, we assess that the level is still on the low side, while Australia and Southeast Asia seem to have rather high levels of inventory. In Brazil, we see retail inventories normalizing with the European picture more mixed with imbalances, but on average on normal levels. We had significant organic sales growth of 39.1% in the quarter.
The growth was primarily driven by increased volumes compared to a quarter last year that was severely impacted by the pandemic, but it was also 16% above Q2 2019. Positive price development across all business areas more than compensated for cost headwinds. Mix continued to develop favorably, driven by innovative products and our focus brands. And our aftermarket sales had another quarter of double digit growth. Operating income amounted to SEK 2,000,000,000 with an operating margin of 6.5%.
This resulted in a rolling 12 month EBIT margin close to 8%. Therese will now walk us through the main drivers behind the strong improvement in operating income.
We had a significant contribution from volume, price and mix in the quarter, even though logistics and supply constraints impacted both product availability and mix as we worked intensively with production planning. Volumes increased on continued strong markets but also compared to a quarter last year that was heavily impacted by the pandemic. We continued to have very good price execution from list price increases implemented earlier this year and in the second quarter as well as carryover effects from increases in 2020. We also still see a very low level of promotional we further strengthened the position of our premium brands. In addition, we continued to grow our aftermarket sales.
We increased investments in consumer experience innovation and marketing to support our profitable growth, but also as a result of the Son. Significant reduction we made last year to respond to the severe market conditions. Cost efficiency was positive. This was a result of continuous cost improvements and progress in the manufacturing consolidation in North America. But due to the supply shortages, we do still manufacturing inefficiencies across the group due to low production planning visibility and increased logistics and sourcing costs also impacted negatively.
The increase in logistic cost as well as the headwinds from external factors, predominantly from raw material, We're fully offset by price in the quarter. And let's now take a deeper look at price and mix development. The EBIT margin accretion for the group from price and mix in the quarter was 5 percentage points, coming from both a strong price momentum, product mix improvements and growth in aftermarket sales. In Europe, we had a favorable mix driven by our premium brands and across our innovation areas, taste, care and well-being. We also had a positive price development as price increases implemented during the first half of the year gained in effect, although not yet at full effect in the Son.
In North America, price developed positively from price increases implemented earlier in the year as well as continued very low promotional discount levels as a result of the product availability constraints in the market. Product mix was also favorable as sales of high margin products increased, such as the multi door refrigerators, front control cookers as well as built in ovens. And in Latin America, net price was significantly higher through carryover effects from price increases in 2020, price increases implemented early this year as well as some impact from the new round of price Son. And in addition, we continue to have unusually low promotional activity level, with product availability still being a limiting factor. And mix was positive, especially in Refrigeration, but also from product launches in our innovation areas, Care and Well-being.
In Asia Pacific and Middle East and Africa, we saw positive mix from strong launch Son. As an example, in Australia, the built in products and multi door refrigerators contributed to a large extent. And we also had very good performance of several product launches in Egypt as well as in Northeast Asia. Price was positive from selective price increases implemented in the beginning of the year as well as some contribution from additional increases during the Q2 across the market, although not yet with the full effect. We also had some carryover effects from last year and the low promotional levels seen in the previous quarters remained.
And driving positive mix through sustainable consumer experience innovation is a central part of our strategy, and Jonas will now give you some concrete examples What we do.
Yes. Thank you, Therese. We thought it would be useful to give some specific example of how we're driving favorable mix and productivity. And I think most of you know that our refrigeration facility in Curitiba, Brazil was one of the large facilities that we included in our SEK 8,000,000,000 reengineering program. That facility is now fully up and running with fantastic new products.
The main product segment is top freezers, non frost top freezers, which where we're now market leaders in Brazil. These products have fantastic consumer value proposition in terms of sealed drawers for extended food preservation, etcetera. Also very importantly, The products have a 45% lower energy consumption than the local energy standards. The facility has implemented low cost automated manufacturing, and the automation level has gone from 4% before the transformation to now 23%. And please refer to Page 10 in the report to see more details on this fantastic transformation program.
Our recently launched Zanussi top load washing machine in Egypt targets consumers who find it expensive to buy a front load washing machine. But the concern that consumers have around top loader washing machines is that wear and tear of clothes compared to front loaders. We saw this opportunity to enter the market, adopting the latest technology of cyclonic care, taking care of that concern. The launch campaign in Q1 was conducted within targeted consumer channels with a reach of 5,000,000 people and was very well received. We're only in the Q1 of sales, but so far have seized about 4% of volume share in this category over the quarter, so very promising initial results.
Another successful launch is our new Air Purifier series launched in March 2021 in Europe, completing our existing Air Care range. It strengthens our position in the air purification mono segment, where we gained 9 points of value market share in Q1 2021 versus Q1 2020. From the early reviews, we can already see a promising 4.9 Consumer Star rating, which is above our current rating for air purifiers of 4.37. There are several factors behind this success, but let me highlight the combination of the 5 step air filtration technique paired with a highly designed product using sustainable materials. That's a nice addition to the home decoration.
These were some examples of how we drive profitable growth.
Yes. If we then take a look at our cash flow for the quarter, the operating cash flow amounted to SEK 1,500,000,000, which is a result of our strong operating income. We had a somewhat unfavorable impact from working capital, mainly an effect of increased inventory levels impacting cash flow negatively. And during recent years, Electrolux has generated strong cash flow through improved profitability and high capital efficiency. And as communicated earlier, the board has conducted a thorough review of Electrolux strategic plans and current capital structure.
The first prioritization is to maintain a high level of capacity for value creating organic investments and selective acquisitions. But since the group's financial position currently is very strong, the board has decided to distribute a larger part of the value created to our shareholders. And as stated in a press release yesterday evening, the board has decided to adjust the dividend policy from the current target of a dividend corresponding to at least 30% of the annual income to approximately 50% of the annual income. They also decided to propose an automatic share redemption of SEK 0.17 per share, equal to approximately SEK 4,900,000,000 to be resolved in an extra general meeting on August 27. And in combination with the ordinary dividend that was already decided at the AGM this spring, this would mean a total cash distribution of SEK 0.25 per share to be paid out in 2021.
And the board also has the intention to propose share buybacks with subsequent share cancellations to the shareholders meeting over several years to reduce Electrolux's share capital. And as a first step, the board intends exercise the authorization from the AGM in 2021 to buy back shares. And details regarding the size and duration of the intended buyback programs will be communicated as and when decided. The board's objective is to maintain a solid investment grade rating as defined by leading rating institutes, meaning that over time, the group's net debt should not exceed 2x EBITDA.
Let's now go into our business areas performance in Q2, starting with Europe. Organic sales growth was 37.3%, and product mix continued to improve across categories and main markets. Consumer star ratings remained high with an average of 4.6 out of 5 in the 2nd quarter. The focus areas of built in kitchen and laundry further strengthened their market position and the price mix increased. Electrolux gained value market share overall, driven by our premium brands, AEG and Electrolux, and price developed favorably in the quarter.
Higher volumes was the main growth driver as last year was heavily impacted by the pandemic. And we continue to grow in the Strategic Aftermarket Business, especially in spare parts. EBIT was SEK 1,000,000,000 with a margin of 8.6%. The strong organic contribution from volume, price and mix was the largest contributor. We had continuous cost improvements offsetting higher logistics cost and headwinds from external factors accelerated, driven by raw material.
And we're currently in the midst of implementing further price increases. Increased investments in innovation and marketing were compared to a very low level last year. Let's look at the European market. In the Q2, overall market demand in Europe continued to be strong compared to a weak quarter last year. And the demand increased by 31% year over year split by Western Europe at 32% and Eastern Europe at 30%.
Consumers continue to spend on home improvement, and demand remained solid throughout the quarter as lockdowns were gradually eased. In addition, we saw a continued replenishment in retailer inventories that are now on average at fairly normal levels, although there are shortages in some categories. Now let's look at this area in North America. Here, organic sales grew by 33.7% with contributions from all three levers: volume, price and mix. Improved product mix contributed, and aftermarket sales continued to grow.
We have continued favorable price development as a result of price increases and significantly lower sales promotions. We also announced additional increases during the second quarter to be implemented in the Q3. EBIT amounted to SEK558 1,000,000 with a margin of 5.5%. We had significant organic growth contribution even though the global electronic component shortage impacted production. It affected all factories, but mainly premium products.
We also experienced constraints related to logistics impacting the sourcing of finished products. The supply chain related constraints also resulted in higher cost logistics and sourcing, while cost efficiency improved as the manufacturing consolidation in Anderson progressed, and our confidence to achieve our productivity and product The improvement targets remains very high. Headwinds from external factors, mainly raw material, were fully offset by price, and increased investments in marketing, mainly brand building activities, improved from low levels in the prior year. Now let's look at the U. S.
Market. During the Q2, industry shipments of core appliances in the U. S. Increased by 25%, and market demand for all major appliances, including microwave ovens and home comfort products, increased by 24%. The strong market development was driven by consumer demand, supported by the economic stimulus programs.
Growth numbers were positively impacted by the fact that Q2 last year was impacted by pandemic restrictions, mainly on the supply side. Retailers' inventory levels are estimated to still be on the low side as demand remains elevated, coupled with the constrained supply chain. And housing indicators continue to be positioned to drive further growth in North America. Let's move on to Latin America. The business area had very high organic growth of 90.4%.
We have to bear in mind, however, the volumes in Q2 last year were heavily affected by the pandemic. Thus, we saw volumes increasing significantly. We continue to execute on price and have also announced new price increases to be implemented during Q3, offsetting sharp increases in currency and demand driven cost inflation. Positive product mix development also contributed to the sales growth, and we continue to grow significantly in the aftermarket, driven by accessories and services. Looking at the market, consumer demand for the ABC region as a whole is estimated to be positive.
In Brazil, physical stores reopened, increasing consumer demand. In Argentina and Chile, consumer demand increased significantly with government stimulus packages continuing to support demand mainly in Chile. However, the region is still significantly impacted by the pandemic as well as macroeconomic turbulence. EBIT reached $327,000,000 with a margin of 6.8%, with strong organic contributions from higher volumes, pricing and better mix. Price offset the headwinds from external factors, mainly raw material.
The main currencies developed favorably during the quarter, resulting in a limited headwind from currency year over year. Investments in brand strengthening initiatives increased, supporting the significant product launches that we have in the region. Finally, turning to Asia Pacific, Middle East and Africa. Market demand overall in the region is estimated to have increased. Southeast Asia grew for the Q2 in a row, although increased restrictions impacted market demand towards the end of the quarter.
The comparison quarter last year was also heavily impacted by pandemic restrictions. Our largest market, Australia, continued to have a robust demand and improved sequentially, though declining compared to a strong Q2 last year. Organic sales growth was 16.3%, driven by higher volumes across all markets. Positive mix with successful product launches both this year and last year, with aftermarket sales continuing to grow mainly from accessories as well as services where auto warranty repairs increased across countries. And also here we had favorable price development.
The operating income was SEK 312,000,000 with a margin of 8.5%, with strong organic contribution and price increases offsetting headwinds from external factors. Higher logistic costs continued to impact earnings negatively, however. We increased investment in innovation and marketing also here with campaigns to support launches in 2021, such as the AEG campaign in Australia, but also in comparison to very low levels last year given the market situation. So now let's go into our market and business outlook. Market demand is expected to begin to normalize during the second half of twenty twenty one, but with significant regional variances driven by pandemic developments and impacts from stimulus programs.
It is still difficult to predict at what pace consumer spending patterns will normalize as we see new virus resurgences in various countries. As it is likely that many people will continue to work extensively from home, We expect that the normalized demand levels will still be above previous trend going forward in many markets, especially those where significant continuous stimulus programs boost overall consumer spending and confidence as well as supporting the housing markets. However, the global supply challenges experienced in the first half are expected to have a higher impact in the second half of the year. Specifically, electronic components with semiconductors are in very tight supply globally, which means that we are we and other actors in the industry struggle to meet the changing consumer demand mix and in some cases incur outright shortages. The same can be said about ocean freight, where shortages of containers and vessels in the right places at the right time result in varying and intermittent supply.
This means that retail inventories are unbalanced in many markets, making it even harder to accurately interpret and meet demand signals. Looking at the specific regions, we maintain our 2021 full year market view. European market shipments are expected to be positive for the full year with growth across the key markets. We see a supportive trend from the replacement market and on consumer confidence. Consumer demand is expected to further normalize during the second Somerson, as household budgets are allocated more to services than during the height of the pandemic.
Retail inventories are now more replenished but with a suboptimal mix. In North America, demand is estimated to be positive for the full year, partly driven by very strong housing markets and a favorable replacement cycle. Government Stimulation program should further support the economy and consumer sentiment, leading to a favorable demand outlook for the year as well as for the second half of the year. Also here, supply shortages have a significant market impact. In Latin America, we still expect consumer demand to be neutral for 2021, even though we see positive signs in Chile relating to various stimulus programs compared to a quarter as well as potential upside in Brazil, although with high politically driven volatility.
We expect market normalizing in second half as a result of moderation of disposable income growth with the reduction of government aids combined with still weak labor market and rising currency based And finally, we estimate market demand in the Asia Pacific, Middle East and Africa region to be positive for the 2021 full year. This is mainly driven by Southeast Asia that's expected to rebound but still below 2019 levels due to lower consumer purchasing power. Many countries in Southeast Asia are heavily dependent on tourism, which has been negatively impacted by the pandemic. We have a recent surge in Coronavirus cases leading to new restrictions, which is impacted to which is expected to impact consumer spending negatively. However, We have a strong recovery in China that's also supporting Southeast Asia.
For Australia, which is our other large market this business area, we anticipate a slight decline in 2021 full year demand compared to a strong 2020, especially in the second half of the year. Let's turn to the business outlook. For 2021 full year, We expect a continued positive organic contribution from volume, price and mix, driven by favorable market demand and higher prices, compensating for headwinds from increased cost inflation. Demand and mix are assumed to be positively impacted by increases in innovation and marketing investments, including a step up in digitalization of consumer interactions. Volume and mix growth could in the second half of twenty twenty one be constrained by the global electronic component shortages.
So far, we have successfully addressed this through my colleagues' hard work and tight collaboration with our suppliers. However, the availability of electronic components is expected to be somewhat more constrained in the Q3 as supply lines have become increasingly stretched, and hence, we anticipate challenges to fully meet the market's product mix requirement. We continue to have a close dialogue with our suppliers to mitigate these supply challenges as we expect the situation to remain uncertain for an extended period of time. Turning to price. In addition to the price increases implemented in Q1 2021, we have announced and started implementing additional price increases to compensate for the increased inflationary cost pressures taking effect gradually throughout the rest of the year.
In terms of Promotion levels, which currently are very low, we do not expect them to normalize during 2021, even though this may vary between regions, products and price points.
And we are increasing our innovation and marketing investments, including strengthening our capabilities within aftermarket and e commerce. During the past 3 years, mix improvements from innovation, brand and aftermarket sales growth has having total contributed by more than SEK 3,000,000,000 sector operating income, realizing a very favorable return on investment. We also know that strengthening of our brands, Electrolux, AG and Frigidaire are paying off. These brands accounted for approximately 80% of group net sales in 2020 compared to just over 70% 3 years Son. And the more tactical marketing investments will be sized and targeted based on market opportunities as well as product availability.
So this can act as partial P and L counterbalance against any supply issues, which has also been practiced in the previous yes, previously as well. And we still estimate that cost efficiency, excluding innovation and marketing investments, will be positive for 2021, even if we see further cost pressure on logistics and sourcing of electronic components and finished goods. And the main cost drivers in 2021 are continuous cost improvements and execution of our reengineering program, particularly improved productivity and output from our new refrigeration facility in Andreson in the U. S. And all in all, as we plan to accelerate innovation and marketing And the total net cost in 2021 is expected to increase.
As a global appliance company, we are exposed to various such as raw materials, tariffs, currency and excess labor inflation. For 2021, we revised the estimated negative headwinds from external factors to SEK 3,000,000,000 to SEK3.5 billion from previous estimate of SEK2.4 billion to SEK2.8 billion. This is in light of price increases on raw materials such as steel, plastics, packaging materials and base metals as a consequence of the unusually high global demand. We expect to offset the headwind from external factors as well as higher costs for logistics electronics with price, just as we did in the first half of the year and have done in the past 2 years. As mentioned, we're already executing on price increases, will come into effect gradually throughout the rest of the year.
Total capital expenditures are revised to be between SEK 6,000,000,000 and SEK 7,000,000,000 in 20 21, with the range being due to the timing at year end. Our reengineering investments program is progressing well and is crucial to strengthening our cost competitiveness and drive profitable growth through increased modernization and automation in the Americas and in Europe. So to sum up the quarter and the strategic drivers we've delivered on, I'm very proud on how we have delivered in a strong market demand, however, impacted by global supply shortages, delivering strong profitable growth in the quarter. It's truly a team effort and through close dialogue with suppliers and retailers. Elektra's financial position and balance sheet are very strong.
I'm therefore pleased that the Board has decided that we can combine continued ambitious growth investments with increased distribution of the value created to our shareholders. And with that, I leave the word to Sveed.
Thank you, Jonas. So we will now open up for questions. And to allow that as many of you can ask Thank you. Our first question comes from the line of Lucie Carrier from Morgan Stanley. Please go ahead.
Good morning and thanks for taking my question. I appreciate you said that you would give us a little bit more details regarding the buyback Going forward, but I just wanted to clarify the press release you published yesterday when you were kind of suggested that potentially A 3% of share could be bought back in 2021 based on your existing authorization, but there's no mention of that this morning. So can you maybe help us to understand what's reflected around the buyback here, please?
Yes, the Board as we said in the press release, the Board intends to make those decisions later on. And the indication is we will start with the buybacks following the completion of the redemption program in October. So that's an indication at this point because there's it's a very formalized process where you need a specific board approval to activate the AGM authorization. But it's right, it's an additional 3% that's currently Possible, then after the additional 3%, we would have reached 10% of the total shares outstanding. And according to the Swedish Regulation, we then have to have an AGM that cancels those shares, and then we can restart the program up 10% again and the Canada process continues.
That's the particular Swedish regulation.
Okay. So the 3% this year is possible even though not guaranteed perhaps?
As nothing is guaranteed until the board approves it, but they announced their intention to do it.
And it is within the current mandate that we have from this year.
Okay. Thank you for the clarification. If I can just ask a follow-up regarding the pricing dynamics You are seeing how do you
Sorry here. There are so many that wants to answer questions. So please Dial back in again. Sure. I'll follow-up on the same theme, so we are clear on that.
Sorry for being yes, I want as many as possible so that you can ask questions. So we have, I think, a new question from Andreas Willey at JPMorgan. Yes, please go ahead, Andreas.
Yes, good morning. Thanks for the time. I have a question on the right to Per, the legislation that's been discussed in the U. S, I think in the U. K, there's been legislation coming Son.
In July this year, there's discussions in Europe to make it easier for consumers to repair and get spare parts for appliances and other Products they buy rather than to throw things away and buy a new one. How would that or how is that impacting your business at all And your strategy on the push in aftermarket opportunity versus risks from that? Thank you very much.
No, I think that properly formulated, that's good regulation. We already have, as a practice, to, of course, have products that are easy to repair, and we keep components in stock for 10 years or more. So this would not have a significant impact on us. In fact, we think it's good that consumers are informed about the repairability of the product and so on. We think that's an advantage.
So you wouldn't expect this to result in for example, sometimes we see like a spare part cost almost as much New appliance and then the consumer is almost forced to buy a new appliance. I think the legislation is targeting to get rid of some of these practices.
Yes, obviously, the cost of first
of all, I would say that's generally not the case.
But secondly, I would That, of course, there's a high cost related to keeping a large number of components in stock for an extended period of time, and we need to charge for that. So I think we have a good balance there. Thank you. Sure.
And the next question comes from the line of Alexander Voeghoe from Bank of America. Please go ahead.
Good morning. Yes, thanks very much for taking my question. I guess it's a question on your comments around mix. And I'm guessing it's a clarification as well as thinking about the future. You commented particularly around The fact that higher or sorry, constraints on electronic components affect the ability to produce higher end equipment.
And I'm just thinking about how that's played through in the context of your comments around positive mix and forward looking forward how that plays into positive mix given those Constraints are going to get stronger. I think if you could clarify that, it would be great. Thank you.
That's exactly Right in terms of obviously, our most advanced products generally contain more microchips in displays and around that and various controls. So that can be more heavily impacted. And in particular, that has an impact on the production planning and mix of that, right? So we need more chips to show up at the right time, let's say, to produce a high end product and a low end product. So that's where, Son.
Generally speaking, we end up receiving the chips. It's just that it's impacted the production output and planning in a specific time period. So yes, that can have a negative impact on mix and did have it to some extent in North America in the quarter, not massively, but there is an impact and certainly more disruption towards in the higher end of the product ranges.
Okay. Thank you. I'll get back in
line. Thanks.
The next question comes from the line of Gustaf Haagios from SEB. Please go ahead.
Thanks. Good morning, guys. I have a question on the reengineering program. Firstly, if you can confirm that I'm right that versus 2020 base, you assume to materialize EUR 4,000,000,000 in savings up until 2024, of which EUR 1,000,000,000 versus the 2020 Levels should materialize this year. And then sort of second to that, if any of that impact has been shown already in H 1 or if that full impact should materialize now in H2?
Thanks.
That's coming in gradually over time. I think as we're ramping up the Anderson facility that starts to show up. And plus, we as I mentioned, we have the Curitiba facility that is up and running and delivering really good results. So we just to clarify on the longer term outlook, We've guided for a EUR 3,500,000,000 productivity based on a normalized 2019 baseline. But other than that, you're right in your statements.
So we're continuing to deliver, ramping up the Anderson facility. As I mentioned, all of our facilities have been impacted by higher logistics costs, The component disruptions and so on, so that impacted Anderson as well, but I don't see that as an impact on the reengineering program As such, it's more of a general supply challenge that we have around the world. But we have very good progress on the progress.
But just to clarify, is the majority of the €1,000,000,000 savings that you guided for versus 2020 still to come this year? Or Have you already executed on that level as we've seen on Q2?
No, I mean, look, it's a year over year game and we had very significant supply challenges, The same Q1 2020, of course, the fact that we had better supply in Q1 2020 means that we had a big favorable. And then and you kind of year over year that continues to improve and as it did in 2020. So it becomes a little bit of a running game of year over year comparison. So there's no significant loading to 1 quarter or another in that.
Okay. Thanks. Sure.
And the next question comes from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead.
Yes. Continuing along this line, there's obviously another big step up in the reengineering program benefit. Next I think we are talking about SEK 2,000,000,000. Now how are you thinking? I mean the investments in marketing and things went up Dramatically this year because there was a low last year, obviously.
But looking into next year, do you think those investments versus this massive cost efficiency From the reengineering program, should be positive or negative?
Yes. So look, first of all, we don't Honestly, don't really look at it that way. It's not that we're reinvesting our savings from the reengineering programs in marketing and in innovation. It's kind of the other way around that we invest the money in marketing innovation to drive mix and profitable growth. And then Son.
We in our industry, as we've said many times, we need to continue to drive productivity to Stay ahead of the game and stay in the game. Now we're making a step change with the big reengineering program. Son. And so that's kind of lifting us from what used to be a very sort of unproductive.
The moderator has been notified of your request. Somoson.
And the same to some extent in Brazil. And that's really the point here, right? So North America in particular, Latin America to a significant extent as well, kind of lifting the base of their productivity level to a very, very competitive Somerson. Innovation and marketing to strengthen our brands, improve our mix, to gain to profitably again, net sales growth. So those are that's kind of the equation that we're driving, and it's less about, yes, how we're reinvesting our savings.
Having said that, we intend to continue to increase our investments in innovation and marketing because we see a very good return on investment there. But it's not really per se related to the engineering savings.
But you would expect, Though you don't look at it this way, but the net should turn positive next year versus the negative you have this year.
Yes, we haven't done our budget for next year yet, so I'll have to come back on that one.
Okay. Thanks.
Sure.
And the next question comes from the line of David MacGregor from Longbow Research. Please go ahead.
Yes. Good morning, everyone. I guess my question really is with respect to the strength you're seeing in unit volumes. And if you can just talk about Replacement demand versus discretionary demand and particularly with respect to the North American market and the European markets, but just are you seeing kind of an acceleration of replacement it's contributing to the strength or is this largely just a fairly consistent replacement demand by the surge in discretionary spending? If you could help us sort through that, I'd appreciate it.
Yes. We don't have a detailed view on it, but I think there's a couple of different things. Son. When we talked about the sources of demand, right? So we have forced replacement, we have discretionary replacement and we have new construction.
At this point, we see positive demand from all of those. And I think it's important to note that it's not just pandemic driven, it's also the We have a favorable replacement cycle right now as people are replacing the products that were bought in the up turning market post the financial crisis right now. So we kind of have a replacement cycle that's favorable to overall demand. Then we definitely see and hear from consumers and the service that we're making that People are increasing the replacement of sort of late life products, if you know what I mean, right? So products that are starting to age.
They're showing their age and maybe are not really meeting the needs of the consumers as they use them more heavily in their homes. And we expect that to continue as people spend continue to spend a lot of time at home and working from home, both using their appliances more intensively, which increases the wear repair and things like that. And consumers wanting to have a nice environment, so they're replacing their Son. Kitchens, remodeling their kitchens and so on. So when we look at the drivers there, we look at things like House prices, because, of course, with high housing values, people feel that they have room to reinvest in their homes with our home equity, so that's a favorable driver that we see contributing a lot.
And then of course, new housing construction, which is also A little bit constrained by availability of materials and things like that, but with the underlying demand being really, really strong and probably continuing for quite some time. Son. So those are all the reasons why we think that as the pandemic sort of demand surge, which we've seen It starts to normalize, which it will, it will normalize at fairly good levels compared to historical trend. Okay. Thank you.
Sure.
And the next question comes from the line of James Moore from Redburn. Please go ahead.
Yes. Good morning, everyone. Hi, Jonas Therese. Your comments on FY 2021 pricing and raw mats is pretty clear to me actually, but I think the real story is now turning to next year, 2022, and I doubt you're going to want to quantify things at this stage as we're pre budget. But My work points to €4,000,000,000 €5,000,000,000 of further raw material headwind next year.
My question is a conceptual one. You've done a great job on pricing in the last 2 to 3 years. I think you've surprised a lot of people, but is there an elastic limit? Is there a point at which a 3% hike, a 4% hike, a 6% hike, at some point, It gets difficult to pass it through mechanically or will you just continue to look to pass through regardless of the amount at the cost of volume?
Look, I don't think there is a point. I think there is price elasticity in the market, of course. Son, and I think it's related not just to appliances per se, but to the overall cost inflation that we're seeing on So we're scurables right now. So far that has been offset by higher household income and housing values and so on, as I talked about. And I think that's more or less the case.
I mean, we're talking about price increases in the low single digit percent. Generally speaking, Son. Even if you even if we talk about SEK 3,000,000,000 or so headwinds as we're talking about, that's less than 3% of our net debt, right? So we're not talking about required price increases that result in massive sticker shocks, certainly not in in a situation where employment and incomes are and home equity are rising. But that's not to say that there's no price elasticity, of course, there is.
We just think that the other factors are stronger. And when it comes to passing on cost increases. We've been super clear, I think, the last, I don't know, 5 years at least, that we are passing on cost increases that we get. There's just no other option. And The only challenge in that has been the time lag between announcing price increases and actually getting them passed through in the market.
And That time lag has decreased during the pandemic, I think partially because the Demand has been high, and we're able to just sort of flush the price increases through our inventory at a faster sort of pace. So there's always these sort of impacts of, yes, there's is there a lag, how long is that lag? But that's the question, not if we're able to pass it on.
And we're very
confident we will continue to do that. Thank you, sorry.
The next question comes from the line of Andre Kukhnin from Credit Suisse. Please go ahead.
Good morning. Thanks so much for taking my question. I wanted, Jonas, to maybe talk a bit more about The expectation of no normalization of promotional activity during this year, could you share with us where that confidence comes Son. What kind of things are you monitoring, especially given that your initial remarks were talking about normalization of the inventory levels in the system? Thank you.
Yes. So I think there's a couple of things. First of all, in the most promotional market in the world It's the U. S. Or North America generally.
And there, we don't see normalization Of inventories, right? So typically, the fall here is the really high promotional period of the year, particularly with Black November and so on. And at this point, we don't really see high promotional intensity there. And just in general, sort of Black Friday type deals globally, we don't expect to be very aggressive, certainly not from us. And I think there's a couple of reasons for that.
One is that We still have these sort of supply imbalances and low inventories in North America, but also the fact that cost increases are impacting all of us, logistics, Supply constraints, all these electronics issues. We certainly see don't see a big point in promoting things that we're struggling to supply and where the costs are going up. So we see us and I think the industry kind of addressing these We're kind of addressing these cost headwinds, both to list price increases and managing the promotional intensity. So those are the reasons.
Thank you.
Sure.
And the next question comes from the line of Martin Wilkie from Citi. Please go ahead.
Thank you. Good morning. It's Martin from Citi. Just wanted to come back to the use of your balance sheet and you've obviously talked about The share redemption this morning. But you also mentioned the potential for selective M and A.
Given that your CapEx has also come down relative Previous guidance. I mean, is M and A going to be an increasing focus this year? Or given component shortages and so forth, Do you have enough on your plate in terms of managing existing constraints to think about acquisitions in the short run? Just in terms of what we should think in terms of timing for Some of these bolt on acquisitions. Thank you.
Yes. Thank you. Look, I think when it comes to M and A, we're we have a fairly consistent Approach is less driven by, let's say, the short term balance sheet or earnings issues and so on. It's more driven by availability of suitable targets that fit with our strategic growth intent. So we've been clear, we're focusing accelerating growth in emerging markets by finding new market access opportunities through M and A.
We're looking at selectively adding adjacent categories to our portfolio, and we're looking to accelerate our transformation in terms of Ownership Solutions or aftermarket sales opportunities. Those are the 3 areas that we're focused on M and A, and that's not really changing over time. And I think the board was very clear that they want to make sure that we have enough firepower to continue to drive that strategy. Then the other reality is that there are not that many targets available at any given point in time. So we have to be patient and talk to potential candidates over time.
And then when time is right, We will then stand ready to execute. Okay. Thank you.
And the next question comes from Will Turner from Goldman Sachs. Please go ahead.
Hi, everyone. Thanks for taking my question. I I can remember during 2020, you announced that you were going to delay some of the consolidation of your U. S. Facilities.
I think it was the Memphis plant in particular, but I might be wrong, it might have been another facility. Can you update us on whether that facility is still Up and running, given the high demand you've had. And do you still expect to How about consolidation? And is there a potential risk of there being some operational disruption similar to what I I believe there was in like 4Q 2019, if you have to continue bringing 2 plants open Rather than just the one that you've originally planned for.
Yes. So maybe to go back on that one because I think it's important that everybody up to speed on the progress. So in the first large transformation program that we executed in North America Was the consolidation of 2 refrigeration facilities, 1 in St. Cloud, Minnesota, into a new that was adjacent to our old factory in Anderson, South Carolina. And that was in conjunction with the complete reengineering of our product offering.
That was the timing of that was partially driven by new Department of Energy regulations and particularly environmental regulation related to certain refrigerants that we had to phase out, which is a good thing. The implementation of that led to a too early closure, frankly, of our Cloud Facility, the freezer factory in Minnesota. And we were not successful in ramping up the new facility fast enough to absorb those volumes. That was the challenge that we had in Q4 2019 that also impacted us into 2020. Now we're that the new facility in Annalcer is operating well.
We have very high demand, and we also have, as mentioned, still supply issues related to electronics and other things. So we've decided to keep the old facility there next door to the new facility in Anderson operating At a limited capacity, limited output throughout the end of the year to make sure that we supply as many units as we possibly can while We're finalizing the ramp up of that facility in the new facility in Anderson. That's all progressing well, not according to the initial plan, but the outcome will be Really, really good. The products are fantastic. Now turning to the other big consolidation, which is our Memphis factory, which is mainly producing ovens, built in ovens that we're consolidating into a new factory in Springfield.
That's adjacent to our old factory in Springfield making cookers. Also here, we have a completely new product architecture. But what's different is that we do not have any regulatory hurdles or regulatory timing. So here, we've been able to plan for a completely different Phaseover of production from the old platforms to the new ones. The first phase over will be for the products that are currently produced in Memphis, so our ovens.
That production is starting up in here in the Q3 initially. Big volumes of those products won't reach the market until the very end of the year, beginning of next year. But there, we're seeing very good progress. These are Relatively lower volume product categories, the built in ovens compared to the freestanding cookers. So the impact of any slippage there is not going to be significant, and we'll be able to keep the Memphis factory open for an extended period of time if we need to.
And then we step by step, product typology by typology, move the cookers from the old facility in Springfield to the new one. We have no again, no deadlines. We're doing it in a way that ensures quality and ramp up and cost productivity. So we are very confident that we'll be able to execute on that without any disruptions that would impact the market in a significant way. So that's a quite different scenario, and the product there is looking just absolutely amazing.
So we're really confident in the progress of that program.
Great. Thanks. That was very clear.
And we have a follow-up question from Andreas Willi from JPMorgan, please go ahead.
Thank you very much. I wanted to follow-up on the capital allocation framework, the capital return framework. You changed the dividend Payout ratio to 50%, very kind of already more or less was in terms of the consensus expectations going forward. But maybe you could elaborate a bit between kind of the choice to stick with the payout ratio, even though now higher, relative to A progressive dividend to give more stability for the ordinary dividend.
Yes, no, I think to your point, we've actually been at around 50% payout ratio for a long period of time. So So we thought it was just made sense to formalize that. And especially since we're now combining an ordinary dividend with the intention to I have an ongoing buyback program. That gives the market, I would say, a little bit more clarity on, okay, what can I expect in terms of ordinary dividend? And then on top of that, what can I expect as ongoing buybacks?
We just thought that was more clarity for the market. It's not that real change in intention to your point. But then the redemption program of SEK 17 that we also announced is, of course, intended to quickly now Slightly reshaped our capital structure given the very, very strong liquidity position we're in right now. So that's the reason for the mix of the various activities.
And then in terms of sticking to the 50%, so if you have a very good year like this year And then you go to a normal year, would you quite strictly apply that payout ratio? Or would there be a bit more of a smoothing of dividend tailings?
Most likely, there will be a bit of smoothing, and I think we've used the word approximately here, right, to some extent account for that,
And we have another follow-up from Alexander Vogel from Bank of America. Please go ahead.
Yes. Thanks very much for taking the follow-up. So just I wanted to come back a little bit to the operating leverage in Business. I think consensus was expecting a much higher level, probably closer to 50% than what you actually delivered. And I don't want to detract from what Clearly, a very strong quarter and not for any performance, particularly on the pricing side of things.
But I'm just trying to understand what it is we appear to have missed In the context of the margin, given the strength of the volumes and given your commentary on positive price sorry, positive mix as well.
Yes. Yes. Well, I think maybe one thing to highlight, we don't usually talk much about our group common cost. But if you look at Q1 versus Q2, we have substantially higher group common cost in Q2. That's just timing between the 2 quarters.
On a year to date, it's more or less a run rate that we're looking at. So that was actually a noticeable swing in the total and also as we look at what analysts were expecting in terms of group common costs. So that's one thing Son, and nothing to really pay attention to, frankly. The second thing is certainly, we're not fully happy with particularly the product mix and to some extent the volume we were able to ship in North America. Here, we had, as mentioned, an impact on the component availability impacting our higher end mix, such as the top end refrigerators and top end washers, for example, in particular.
So our most Profitable products were the ones that were in the most tight supply, unfortunately. But those are the two things I would point out. Beyond that, I think we're As mentioned, we are impacted by supply disruptions and high logistic costs, which, of course, has an impact on both cost and mix to some extent. So across the business, that has an impact. But I think that's more or less as expected certainly from our perspective.
Okay. Thank you.
Sure.
And the last question will be from Kerry Winter from Handelsbanken. Please go ahead.
Yes, thank you very much. I was Wondering if when it comes to your hedging and your sourcing and pretty much the way you run your business, Thus has the pandemic and the current challenges that you're facing, are they sort of are you planning, implementing any changes when it comes to your strategy when it comes to raw materials, hedging and sourcing. So are there some levers at your discretion that You can sort of implement in order to sort of maybe mitigate some of
these pressures for 20 20 Absolutely. And so first of all, when it comes to the piece that it's actually The most important to manage, which is the electronic supply, we're working extremely closely with our not just Tier 1, but also Tier 2 suppliers of semiconductors to give them high visibility on which components we will need over time and how that we expect that to develop. So we've definitely become much more long term in our approach to supplier management and commitment. So that's one important thing. I think we're doing a very good job there.
And then when it comes to raw materials, Son. There are different, let's say, opportunities in different parts of the market. So as we've talked about extensively, plastics, for example, most plastics, It's impossible to hedge for longer periods of time. It's usually, on average, quarterly contract. Whereas steel, it's more in most markets, we have the option of negotiating either a fixed price full year contract, a full year contract with some pricing mechanism or shorter term contracts.
And depending on the market Dynamics and what we see as the most beneficial outcome for us, we will use that flexibility as we go into next the next negotiation round here in the late fall. All right.
Thank you very much.
So that was the last question. Jonas, over to you.
All right. So thanks very much, everybody. Really good questions. And hopefully, we've been able to shed some light on what's going on. Overall, I'm very pleased with the execution in the quarter.
We're delivering truly strong profitable growth. And as the pandemic continues, we're ready to respond in an agile manner. I'm confident that our strategy ensures we remain well