AB Electrolux (publ) (ELUXB) Earnings Call Transcript & Summary

Good morning, and a warm welcome to the second quarter 2024 results presentation. My name is Jonas Samuelson; and with me today, I have Therese Friberg, our CFO; and Oscar Stjerngren from Investor Relations. Before I continue, I'd like to mention that this session is recorded and will be available on our website as an on-demand version. In the second quarter, group sales grew 7% organically, with volume growth in all business areas. Market demand was mixed with strong growth in Brazil, some catch-up in North America from the weak sell-in in Q1 and continued negative development in Europe. Mix continued to be positive, supported by our strong product offering in mid- and premium segments despite the negative market demand mix pressure. Pricing continues to be quite negative year-over-year but was sequentially relatively stable in most markets. We're happy to report that EBIT improved sequentially by more than SEK 1 billion to SEK 419 million, mainly driven by significantly reduced losses in North America and a strong result in Latin America. The strong Lat Am results mean that we are now at 7% EBIT margin for the last 12 months reflecting our strong and updated product offer, combined with market recovery from the previously depressed levels in Latin America. The organic contribution year-on-year was negative due to the significantly lower net prices but was, to a substantial degree, offset by the positive product mix and volume development. This was accelerated by increased go-to-market investments in the quarter. Cost efficiency contributed positively, but as guided previously, the main impact is anticipated in the second half of the year. We also announced yesterday that we have concluded the divestment of our water heater business in South Africa as part of our strategic focus and simplification, and we are progressing on our other divestments. Therese will now walk us through the results for the quarter.

Despite having an organic sales growth in the quarter, we had a negative organic contributions to earnings. This was driven by a negative effect from price and mix combined of 2.8 percentage points in the quarter, with negative price mainly in Europe and in North America. We generally saw the first quarter price levels in North America stabilize into this quarter while there was a somewhat higher promotional activity in Europe with a large part of the market volume that was sold under replacement sales. Mix continued to be positive across the group based on a strong product portfolio and high consumer star ratings. This was also supported by an increase in innovation and marketing investment in the quarter. Volume grew in all business areas but mainly on the back of strong growth in Latin America. Cost efficiency was positive by SEK 0.3 billion. The cost reduction program is on track for the first half. And Jonas will go into some more details on the next page. External factors was positive in the first quarter, driven by positive raw material. This was offsetting currency headwinds and headwinds related to labor inflation. And similar to last quarter, the external factors is including both the negative effect from currency and inflation as well as the positive price effect related to Argentina and Egypt. Jonas will now give an update on the progress of the cost reduction.

We have updated our cost efficiency target from SEK 4 billion to SEK 5 billion to approximately SEK 4 billion in 2024 versus 2023. This is as headwinds from logistics costs are affecting our ability to fully reach our previous target. We will achieve these efficiencies through organizational simplification with headcount reductions of approximately 3,800. We will finalize the Springfield ramp-up, and we are increasing sourcing from low-cost countries and continue the consolidation of our supplier base and number of components. We delivered SEK 0.8 billion in cost efficiency in H1 2024. And the new organization has been successfully implemented. Notification of staff affected by the savings program is proceeding according to plan, with about 70% of affected staff notified at this point. As a consequence of the lead times involved in both product and staff costs, the incremental savings from cost reduction activities are mainly weighted to the second half of 2024 as guided previously. And inside the second half, most -- more will come in Q4. Going forward, we will drive to achieve annual product cost reductions midterm at a similar rate as in 2023 and 2024. This will be achieved by driving low-cost country sourcing and supplier consolidation as a continuous process. We're stepping up cost engineering activities structurally in material and components reviews on existing products. And we are further accelerating modernization and reduce complexity to leverage scale. Let's have a look at our cash flow and liquidity. Therese?

Cash flow after investments for the first half was negative SEK 1.5 billion compared to negative SEK 2 billion last year. Both the second quarter cash flow of positive SEK 1.2 billion and the first half is reflecting what could be considered to be a normal seasonal cash flow. As you know, we were, during last year, optimizing operating working capital, and we are now SEK 3.5 billion below last year's level and at 5.1% of annualized sales by the end of the second quarter compared to 7.5% last year. And looking at our liquidity and maturity profile. From a balance sheet perspective, we have a solid liquidity of SEK 32.8 billion, including revolving credit facilities as of the end of June. And in the second quarter, a total of SEK 2.3 billion of new long-term debt was issued. And in June, we also signed an 8-year sustainability-linked loan facility of $150 million with the Nordic Investment Bank. We have a well-balanced maturity profile, and we have no financial covenant, and the focus remains to deliver on the cost reduction program in 2024 and beyond as well as divesting the previously communicated noncore assets over the coming years to maintain a solid investment grade rating. Jonas now go into the business areas performance in Q2, starting with Europe, Asia-Pacific, Middle East and Africa.

Low residential construction and remodeling activity is impacting the important built-in kitchen category and led to an overall market decline of 3% in the quarter. The replacement segment has stabilized but with high promotional intensity leading to negative price in the quarter. Given these negative drivers, it's encouraging that we continue to deliver a positive mix and also slight volume growth outperforming the weak market. EBIT decreased organically due to the negative contribution from price but mitigated by volume and positive mix. Positive external factors were driven by lower raw material costs, and we also had a slightly positive impact from cost efficiency. Let's have a look at the European market. Market demand in Europe declined in the quarter and was down 3% year-over-year. Demand declined 3% in Western Europe and was largely unchanged in Eastern Europe. Compared to the second quarter of 2019, demand in Europe decreased by 11%, a similar decline as seen in recent quarters compared to 2019. In Asia-Pacific, consumer demand is estimated to have increased slightly year-over-year. In Europe, consumer confidence levels, while slightly improved, remained low, negatively impacted by the cumulative effects of inflationary pressure, higher interest rates and geopolitical tensions. Subdued purchasing power continued to result in consumers shifting to lower price points and postponing purchases in discretionary categories. Weak residential construction and remodeling activity continued to have a significant negative impact on demand within the European built-in kitchen category. Let's continue with business area in North America. Organic sales growth was primarily driven by higher volumes outpacing the market. We continue to be impacted by negative price as promotional activity remains at high but stable levels sequentially. Market price levels were largely unchanged at the lower levels established in the latter part of 2023. The lower market price levels have been enabled by cost discrepancies between North America and certain parts of Asia, particularly in refrigeration. Positive mix was driven by the strong reception by retailers and consumers of our new product lineup, which also resulted in record-high consumer star ratings at 4.6 on a 5-point scale. We're happy to report that the operating loss reduced by SEK 0.8 billion sequentially due to volume, mix and cost performance. However, year-on-year, we still had a substantial negative organic contribution from price. The positive mix and higher volumes were supported by increased investment in marketing. Positive external factors were mainly driven by lower raw material costs. And finally, productivity in the Springfield factory improved sequentially. Now we'll take a look at the U.S. market. Market demand for core appliances in the U.S. decreased by 1% in terms of units for the first half of the year, a relatively stable development overall, but with variations between quarters. In the second quarter, market demand increased by 4% in terms of sell-in. The cumulative effect of high inflationary pressure and high interest rates continued to negatively impact consumer sentiment although purchasing power of the U.S. consumer remains relatively resilient. Let's move on to Latin America. In Latin America, we had high organic growth, primarily from volume growth, driven by increased consumer demand and warm weather in Brazil and our strong product offering. Price was slightly negative, and mix was slightly positive. Strong aftermarket sales growth also contributed. As a consequence, we saw a significant increase in EBIT, with the strong organic growth driven by Brazil. We also had positive contribution from cost efficiency and slightly positive external factors, including negative currency effects. Rolling 12-month EBIT is now at a solid 7%. Now let's switch over to our market outlook for 2024. In general, inflation has been somewhat more sticky than anticipated, slowing the expected pace of interest rate cuts, which, in turn, has slightly delayed the anticipated improvement in demand, particularly in Europe. Housing construction and kitchen remodeling in Europe remain at very subdued levels, while replacement market demand has stabilized with high promotional intensity. Demand in North America has been stable year-to-date, supported by the aggressive pricing environment despite weak housing markets. Recent data points indicate that inflationary pressure continues to subside and interest rates are expected to slowly come down. With this backdrop, we have not changed our view that we expect demand in major markets to stabilize. Lower interest rates are positive for remodeling and new construction, which are key drivers for client demand in mature markets like Europe and North America. However, there's always a lag before this shows in demand. In Latin America, the strength of the Brazilian market seen in the start of the year has continued during the second quarter and was supported by warm weather in the first half of 2024. On back of this, we maintain a regional outlook of relatively neutral market demand for appliances in North America in 2024 full year compared to '23. For Latin America, we revised our outlook from neutral/positive to positive. For Europe and Asia-Pacific, we revise our outlook from neutral to negative as a consequence of the weak start of the year and a subsequent slight delay in recovery of market demand. Let's have a look at the business outlook. We've made some adjustments to the business outlook for full year 2024, provided in the first quarter '24 interim report. Guidance on organic contribution from volume, price and mix combined for the group is unchanged and is expected to be negative for 2024 full year, driven by negative price. As expected, price was negative during the first half of '24, with price pressure in North America and high promotional activity in Europe. As previously communicated, we expect price to be negative for full year 2024, also impacting the second half negatively. We anticipate the promotional intensity in North America to continue to stabilize sequentially throughout the year while, in Europe, we expect a replacement-driven promotional intensity to continue. For the full year, the negative price is anticipated to be partially offset by growth in our focus categories, such as premium laundry and kitchen products under our main brands, Electrolux, AEG and Frigidaire. The recent investment in new product architectures provide us with great platforms to drive growth in these focus categories going forward even though the challenging macro environment is a limiting factor. Our new products are very well received by consumers, and we have a favorable mix in the first half of '24 even though disposable incomes have been under pressure. We anticipate to continue delivering a positive mix during the remainder of the year and to accelerate this further as consumer sentiment recovers and new housing and renovations take a larger share of sales. We expect external factors to be positive for the year, mainly driven by lower raw material costs. The positive effect to external factors from raw material is, however, expected to be largely offset by a negative currency effect, mainly related to countries with high inflation experiencing varying degrees of depreciation in their respective currencies. It has to be emphasized, however, that the impacts of currency are very unpredictable. Increased investment in marketing to capitalize on the momentum of our attractive product offerings are yielding good returns. As in the second quarter, we project to increase investments in innovation and marketing in the second half of '24 compared to the second half of 2023. We continue to execute on the cost reduction activities, with significant cost benefits expected to impact the second half of the year. However, ocean freight rates have increased recently, and taking this headwind from logistics costs into account, we are now targeting cost savings of approximately SEK 4 billion in 2024, excluding investment in innovation and marketing. Investments to strengthen our competitiveness through innovation, digitalization, automation and modularization continue in 2024, and total capital expenditures are estimated to be around SEK 5 billion to SEK 6 billion. I wanted to give a heads-up regarding the divestment of our water heater business in South Africa. We currently see that out of the SEK 0.6 billion loss on sale that we anticipate, about SEK 0.4 billion will be booked in Q3 and the rest at closing, most likely in Q4. So to sum up the quarter and the strategic drivers we've delivered on. As mentioned, we saw sequentially improved operating profit by over SEK 1 billion in the quarter. This is driven by good traction of our new products and industry-leading consumer star ratings in main categories. This volume growth and positive mix was delivered in a continued challenging market. And with that then, please, Oscar.

Thank you, Jonas and Therese, for those remarks. We will now start the Q&A session. [Operator Instructions] So Sonia, can you please facilitate the Q&A session for us?

[Operator Instructions] And the first question comes from the line of Björn Enarson from Danske Bank.

May I start with one question then on the ongoing petition with Department of Commerce in U.S. on price dumping? Could you update us a little bit on the process? What is happening? And what should we expect next?

Yes. Thank you, Björn. Yes, this is a relatively, let's say, specific issue related to what we consider to be dumping of refrigerators produced in Thailand. So it's a process that will take several months. Commerce department has initiated an antidumping review that can take 5 to 7 months. It's -- we consider it important that we have a level playing field, but this is not a major category for us in North America. It's one subcategory of refrigeration.

And the next question comes from the line of Martin Wilkie from Citi.

It's Martin from Citi. I just had a question on your market outlook in Europe. The change that you were expecting for the year, does that largely reflect what we've seen in the year so far? Or are there signs that things will get incrementally worse into the second half? And particularly, with interest rates having peaked and so forth, there might be some hopes that housing-related markets could begin to find a bottom or even recover. So just trying to understand what drove that change.

No. So I guess our fundamental view is exactly what you said. We do expect that the housing market has or is bottoming out and interest rates will come down. So that will have a positive impact on demand. I think though, the change in guidance reflects that we see that kind of pushed forward a bit. We saw the continued weakness in built-in kitchen in Q2. And this really is a built-in kitchen issue. The replacement market is -- has recovered. It's quite normalized, let's say, even though, as always, the replacement market is quite promotionally driven. But new housing and demand related to remodeling is still quite subdued, and we expect that recovery to be pushed out a bit.

And the next question comes from the line of Gustav Hagéus from SEB.

My question regards the U.S. volumes, and you state, if I'm not mistaken, that you take some share in Q2, and there is -- the ramp-up of the Springfield facility is doing well. To what extent are those connected that you are now able to supply your main customers from that plant? And to what extent does it relate to competitive -- other competitive reasons? And if you look into H2, what do you expect with that dynamic?

Yes. No, for sure, it's Springfield being more stable and producing a more predictable output, which again is the normal situation when you ramp up a major factory. That is a positive for us in the quarter. I would say the big story, though, is that with a lot of effort and a lot of new products and factories, we now have a really competitive offering. And that's reflected in the very strong consumer star ratings, as I mentioned. And we expect that the fact that we now have a balanced strong comprehensive offering will continue to be a positive factor for us going forward. This, of course, was -- is the main thrust of our efforts in North America. Still have work to do to fully ramp up Springfield. We still have a lot of work to do to reduce costs. So we're not taking a break there. It's a lot of hard work still. And as mentioned, we still have this significant cost discrepancy between production in North America and in Asia that we have to compensate for. So a lot of hard work, but our products are fantastic.

And the next question comes from the line of Alexander Virgo from Bank of America.

I wondered if you could talk a little bit about 2 things for me, please. The first thing, in terms of Latin America and profitability there, I just want to make sure I understand that this is down to operating leverage and not down to big pricing tailwinds in Argentina or even the broader pricing developments that you're taking in response to the FX weakness. That would be the first sort of, I guess, small question. Second question, bigger picture. Just thinking about the various moving parts into the second half, you've obviously got increased innovation. You've got increased costs in Europe that you're talking about, increased costs, i.e., promotional activity, increased costs to help exploit the new product launches. The logistics costs, you talked about taking a haircut to the efficiency savings. I guess I'm just trying to get a feel for how strong your H2 EBIT could end up being ultimately. Are we seeing sort of performance in terms of tailwinds from your own cost actions actually now starting to decline, and therefore, the headwinds that you're flagging are going to start to offset? I guess that's the big-picture question.

All right. Starting with Latin America. This is largely driven by the strong performance in Brazil. Argentina is a headwind for us. So pricing in Argentina is barely offsetting the negative currency development, and the market is massively down. So this is really driven by Brazil. And I would not consider it to be strong demand. It's a recovering demand from what has been quite subdued levels for quite some time. So good recovery in demand, and we've been able to capitalize on that through our very, very strong product offering. We've done, as we talked about, a similar kind of refresh of our product offering as we've done in North America, in Latin America. And it's gone a bit smoother, and we're really able to capitalize on that demand recovery. So very, very good execution in a bit more favorable market. Then if we talk about the outlook for the rest of the year, I want to make sure that we're clear in our communication there. So in terms of the cost efficiency, which we're guiding for SEK 4 billion net savings in cost efficiency, excluding the innovation and marketing, of that, we've achieved SEK 0.8 billion year-to-date. And hence, the rest is yet to come in the second half, with a bigger impact of that in Q4 than in Q3 but still favorable effect in Q3 and Q4 and the rest of the year. The investments that we're doing to support our products in the market, the go-to-market investment, we increased those in Q2 a bit very selectively to fuel the good market reception that we have of our new products really in all of our BAs. And we expect to continue to do that but, for sure, not at levels commensurate with the cost savings that we're seeing in cost efficiency. So that's a significantly smaller number. So we're still -- net-net-net, we still have significant cost reductions in the second half of the year, also including these go-to-market investments. Now -- and then, as we look into the second half, we also want to highlight that the market remains soft in Europe. We're not seeing a significant recovery there. And we -- and as the market in Europe, in particular, is very sort of replacement demand driven, that is a very promotionally intense part of the market. So we continue to see that headwind in pricing also in the second half of the year in Europe. And just to kind of be clear on it also for North America, we mentioned that this new price level was established towards the end of 2023. So even though sequentially we see stabilization of the net price level in North America, that still means that we have negative year-over-year net price in North America. So we kind of have to put all that together to understand the outlook for the second half.

And maybe one comment to add on the cost efficiency. So previously, you know that we guided for SEK 4 billion to SEK 5 billion, and we have now taken that down then to around SEK 4 billion. And the main reason for that is the effect of ocean logistics that has gone up lately. And it's not related to that we are delayed in our restructuring program or our efforts on kind of pure cost productivity.

And the next question comes from the line of Johan Eliason from Kepler Cheuvreux.

I was just curious about the Kwikot divestment you did and managing to sell it. It seems like you have actually been growing that business quite nicely since you acquired it, but to sell it for around SEK 600 million less than you bought for it back in 2017, 2016. And also, I mean, the sales multiples, the multiple looks much lower today. Is there a significant reason? Is the margin much worse than it used to be in Kwikot? Or is it just that it's difficult to achieve good price levels today? And obviously, what does that imply for the remaining businesses you aim to sell in Egypt and the Zanussi brand?

Yes. So the profitability in the water heater business in South Africa has been -- is still very good but has been under some pressure by higher competitiveness in the market. And of course, the overall, let's say, country outlook for South Africa has, of course, been under some pressure in recent years. So -- and that also has resulted in a weaker currency. So we see a fairly significant part of this anticipated loss on sale is the weaker currency. This combination of margin pressure, still good, but less than it used to be and kind of country [ related ]. So I don't think there's a very strong read across against the other divestments, although, of course, as we have said, Egypt is impacted by its own, let's say, geopolitically driven challenges, as we said, impacting a bit the timing on that process.

As there are no further questions, I would like to hand back to Jonas Friberg (sic) [ Jonas Samuelson ] for closing remarks.

All right. Thank you very much, operator. So thanks so much for your questions. We -- as mentioned, we are really pleased by the sequential improvement in our operating profit by over SEK 1 billion in the quarter, reflecting the good traction that we have on our new products and also reflected in the industry-leading consumer star ratings that we have in main categories. And this volume and mix improvement is delivered in a very challenging market. So with that, we have good confidence. A lot of hard work remaining to get back to our target profitability, but really taking stock in the good performance that we saw in the second quarter and with confidence looking out at the rest of the year. Thank you very much. Enjoy your summer, and talk to you soon again.

This concludes today's conference call. Thank you for participating. You may now disconnect.