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Executives

Keith McLoughlin – President and CEO

Tomas Eliasson – CFO

Catarina Ihre – Head, IR

Analysts

Andreas Willi – JP Morgan

Aaron Ibbotson – Goldman Sachs

Andre Kukhnin – Credit Suisse

Christer Magnergard – DNB

Johan Eliason – Kepler Cheuvreux

James Moore – Redburn

Dan Cunliffe – Nomura Holdings

Ben Maslen – Bank of America

Anders Trapp – SEB

Martin Wilkie – Deutsche Bank

Domenico Ghilotti – Equita

Kenneth Toll Johansson – Carnegie

AB Electrolux (OTC:ELUXF) Q4 2013 Earnings Call January 31, 2014 3:00 AM ET

Keith McLoughlin

Good morning, and welcome everyone to this presentation and discussion of Fourth Quarter and Full-Year 2013 Results for Electrolux. With me today, I have our CFO Tomas Eliasson. And I would like to also take the opportunity to present to you our new Head of IR, Catarina Ihre, who will also be our moderator during the Q&A session.

So now let’s begin our presentation. Let’s start with the summary of 2013, a year with both, strategic and operational achievements along with some significant headwinds. Total sales amounted to SEK 109 billion. The organic growth for the year was 4.5% and currency effects were a negative 5.3%.

This is the second year in a row of achieving our growth targets. Including acquisitions, the total growth in local currencies in the past two years [ph] was 14%. This means we are delivering on our strategy and continued profitable growth is critical for our capability to continue to deliver economic value going forward to all of our shareholders.

North America which accounts for 30% of the sales showed strong sales and earnings growth, based on continued positive volume trend and improved price and mix throughout the entire year. All businesses in Europe suffered from weak consumer demand during the year, with declining volumes and negative price effects. In a challenging [Technical Difficulty] currency impacts, we were able to generate an underlying operating income of SEK 4 billion.

[Technical Difficulty] in Europe, we continued to focus on our strategy and increase the pace of new product offerings. We invested in profitable growth in marketing, R&D and design and implemented efficiency enhancements in production. In 2013, we announced the updated manufacturing footprint program as well as a decision to reduce our overhead costs.

The total estimated charge is SEK 3.4 billion for savings of SEK 1.8 billion. The savings will be fully realized by the end of 2016. In 2013, we charged SEK 1.5 billion and remaining charge will be taken during 2014. The Board’s proposal of a dividend of SEK 6.5 per share reflects Electrolux’s healthy balance sheet and maintains flexibility to expand our operations in a profitable way, both organically and through acquisitions.

And now let’s look into the fourth quarter. In fourth quarter, we had positive organic growth in all of our business areas, every operating unit, but particularly healthy growth in North America, Asia Pacific, Small Appliances and Professional. Volumes and mix were the primary drivers. In the fourth quarter, currency fluctuations continued to be a headwind. In total, this had a negative impact on earnings of slightly less than SEK 450 million.

Demand continued to slow in Latin America, mainly as a result of the slowdown in Brazil. In addition to the weak market, our results in Latin America were negatively impacted by the currency movements. Despite positive volume growth and mix, earnings in all of our European businesses continue to be negatively impacted by the continued weak market conditions and price pressures. The savings programs have been initiated and will deliver a significant impact later in the year.

Operations in the other business areas showed solid underlying results. Our cash flow was solid in the quarter, mainly as a result of improved working capital productivity. And now, I would like to give you some more market highlights before we get into the business area results.

On the next page, if we go back to the middle of 2012, you’ll recall that we began the first launch of the Electrolux Inspiration Range in selected countries as part of our profitable growth strategy to strengthen our position in Europe. During this year, we have successfully completed the full launch of Electrolux Inspiration Range across all markets in Europe. And by that, together with renewals of the other two main brands in Europe, AEG and Zanussi, we have now completely renewed 80% of the product portfolio in that region.

In Small Appliances including Floor Care, we have completed the new vacuum cleaner line-up and have gained good momentum in our key growth markets around the world. One of the most important launches was initiated in the second half of the year with the brand new premium products being launched in China. The launch is progressing well. We are repositioning the Electrolux brand, and will over the next several years strengthen our foothold in the Chinese premium appliance market.

And now let’s switch the slide and take a look at our sales development in the various geographical regions. North America continued to grow at a steady pace, as did Australia, New Zealand. Both these markets are very profitable and therefore important to the Group. Although growth remains positive in Latin America, there has been a slowdown in pace particularly in the second half.

Europe moved more or less sideways and ended up slightly positive for the quarter. Our growth in Asia continued and was up 17% in the quarter.

If we move to the next slide, it’s interesting to just look back a little bit. And this slide shows the company sales growth in local currencies over the past few years. And we can see clearly that the organic growth and sales in on the rise. Sales have been fueled both in addition to organic by acquisitions that we made at the end of 2011. Combined with the acquired growth, Electrolux has in total generated 14% growth in the last two years, well above our strategic growth target of 4% annually.

And now let’s go through the business areas starting with Europe, Middle East, Africa. Major Appliances EMEA continued to face a challenging market environment. However, Electrolux achieved higher volumes compared to the same period last year. Our organic sales were slightly positive, mainly driven by improvements in mix like the key Electrolux Inspiration Range just mentioned previously.

Despite lower demand in Western Europe, Electrolux was able to gain volumes in key product categories. Prices continued to decline in the fourth quarter, while mix continued to improve due to the [indiscernible] plus the higher margin branded products [ph].

In the quarter, results were impacted by SEK 104 million of unfavorable gross currency movements as the euro and the US dollar strengthened in relation to some European currencies. We are taking major actions to reduce costs in Europe. We will complete the next stage of our manufacturing footprint and reduce overhead costs over the next three years.

And now let’s talk about the market development in Europe. On the next slide, you can see that the European market declined by about 1.3% in the fourth quarter. The markets in Southern Europe remained weak. In France, demand fell by 3%, in Italy by 2.6% and in Spain by just under 3%. Sequentially however, these markets are not getting worse but rather going sideways.

The market conditions in Central and Northern Europe had been stable during the quarter. The Market in Eastern Europe started to slowdown, mainly as a result of some weakening that we saw in Russia. Most of the markets in that region were unchanged. Looking ahead into full-year 2014, we estimate that the market for appliances in Europe will be flat to slightly positive.

And now let’s take a look at North America. Major Appliances North America grew 7.6% organically, driven by strong volume growth in most core categories. During Black Friday, which is the most intensive promotion period of the year, Electrolux chose to focus more on contribution of margins and therefore stayed out of some of the most competitive amount [ph] of categories.

With significant inventory reduction during the quarter to generate cash which negatively impacted earnings which led to under absorption. Earnings were also impacted by customer and product mix that had a negative impact. Please note [ph], the quarter was affected by a pension gain of SEK 130 million. On an underlying basis in local currencies, operating income improved slightly compared with last year. We have recently implemented a series of price increases in the U.S. market which we expect to have an effect already in Q1.

And now let’s turn to the next slide and talk about the market development in the U.S. And as you can see on the next chart, in the last quarter of 2013, market demand for core appliances in North America increased by 10%. Consumer confidence continues to improve and is at a higher level than a year ago and we continue to see housing data improving.

For the full-year of 2013, the North American market increased by approximately 9%. Currently we estimate that North American market will increase again in 2014 by plus 4%.

And now let’s go to Latin America. Market demand for core appliances declined in the fourth quarter. The ending of the Brazilian government’s tax incentives for white goods had a negative impact on market volumes. Also the macroeconomic environment has weakened somewhat. Our earnings were negatively impacted by the lower demand in Brazil, as well as volume losses related to the fire in a warehouse in Curitiba in that country.

Higher price mix and cost savings had a positive contribution to earnings, but were more than offset by the negative impact of currency headwinds. Actions including cost reductions have been taken to compensate for the weaker market environment and the currency headwinds.

Price increases have been implemented in the Brazilian market and will contribute positively to our earnings. New innovative products will also help further improve our price mix.

And now let’s turn to the next slide and talk about our operations in Asia Pacific. Our operating margins in Asia Pacific declined compared to the fourth quarter of last year. The lower profitability was mainly due to country mix effects between Australia, New Zealand and Asia, but also to costs associated with the product launches in China and Southeast Asia.

Market demand in Australia continued to show greater recovery. Our sales growth of 5% was mainly driven by price increases and better mix. The operating margin in Australia improved and remains at double-digit levels. Implemented price increases in the third quarter have begun to show effect and unfavorable currency did have a negative impact on earnings in Australia.

The markets in Southeast Asia and China continued to show growth in the fourth quarter. In Southeast Asia, volume growth had a positive contribution to earnings. In China, volumes were lower as we shifted focus from low margin volumes to capture growth in the higher end newly launched product segment. Positive product mix shift contributed positively to earnings.

Negative currency movements combined with launch costs in China and ramp-up costs in the plant in Rayong, Thailand affected operating income negatively in the quarter.

And now let’s continue with Small Appliances. Organic growth in Small Appliances was a positive 4.8% in the quarter. Sales increased in all regions and were positively driven by both, price and by mix. Sales volumes for vacuum cleaners and small domestic appliances were particularly strong in the Asia Pacific region.

Operating income improved in the quarter supported by favorable price mix. Continued headwind from unfavorable currency movements however had a negative impact on earnings, particularly for our Small Appliance operations in Latin America. The strengthening of the US dollar against the Brazilian reals has led to increased cost for the source products in this business unit.

We have intensified marketing activities for the new product launches in Asia Pacific and North America and this also had a negative impact on earnings in the quarter.

And now let’s turn the slide and talk about our Professional business. Market demand for Professional products continued to improve in our strategic growth markets during the fourth quarter. The organic growth rate was above 10% in the quarter. Growth in the U.S. which accounts for 15% of the Professional business is increasing, and sales in emerging markets grew as well.

Operating income and margins improved in the quarter primarily as a result of higher volumes, but also due to price increases.

And now, I’d like Tomas to give his thoughts about our financials, and also to talk about our cash flow in the fourth quarter and the full-year. So please, Tomas.

Tomas Eliasson

All right, thank you, Keith. And let’s as usual start with an overview of the financial results for the fourth quarter and the full-year 2013.

So if we start with the sales. Organic growth was 3.6% in the quarter, and for the full-year, organic growth was 4.5%. However, currency in the quarter was minus 4.6%. Minus SEK 1.3 billion on the top line, and for the full-year, net currency effect on the top line was minus SEK 5.8 billion, meaning minus 5.3%. So all in all, net sales was down 1% in the quarter and minus 0.8% for the full-year.

Earnings ended at SEK 1.2 billion in the quarter corresponding to a margin of 4.2%. The cash flow was steady, good cash conversation, SEK 1.2 billion. We’ll get into more of those details in a minute. And earnings per share ended at SEK 3.8 compared to SEK 3.94 a year ago. And all these numbers are excluding items affecting comparability.

So if we move to the next slide and take a look at the sales and EBIT bridge for the quarter, split in organic growth and currency effects. Let’s start with organic growth of 3.6%. That added SEK 1,050 million to the sales. The EBIT’s impact was SEK 75 million, meaning an accretion of 7.1%.

Now currency effects in all took off as mentioned SEK 1.3 billion from the top line, minus 4.6% and the EBIT effect on the currency effects was SEK 442 million, split in SEK 117 million in translation effects and SEK 325 million in transaction effects. So all in all, this meant that the margin went from 5.4% to 4.2% in the quarter.

If we then move to the next slide, we can dive a little bit into the currency effects of the EBIT line. And here you see all the four quarters and the full-year for the major currencies. And the negative currency – the negative transaction effect in the quarter was SEK 325 million. This is SEK 375 million in gross transaction effect and then a positive SEK 50 million in hedging contract effects. The translation effect was SEK 117 million. So all in all, SEK 442 million.

And you can see in the table that about one-third of the negative impact was from Latin American currencies, while these currencies continue to weaken against the US dollar and the euro. And the general development for us is that the US dollar and the euro are strengthening against important currency pairs for us. Also the Australian dollar and the Egyptian pounds and not mentioned here, the South African rand as well and Russian rubels.

So if we then move to the next slide, we can take an overview of the restructuring charges that we took in Q4, but first let’s go back to Q3 and just recall what we announced in October, in the Q3 report. At that point, we said that we would take a restructuring charge of SEK 3.4 billion and we would do an impairment of SEK 1 billion, total of SEK 4.4 billion. And those charges would be taken in Q4, 2013, as well as in 2014 as the various projects are starting. So what we did in Q4, 2013 was to take a charge of SEK 1.5 billion for the restructuring, that is about a SEK 1 billion for overhead cost restructuring reduction and about SEK 500 million for manufacturing footprint. And then we did the impairment of an ERP platform and that ended up at SEK 900 million. So all in all, SEK 2.4 billion that affects the earnings in the fourth quarter, recorded as items affecting comparability.

In 2014, we will take the remaining charge of SEK 2 billion, in Q1, and possibly later on in Q2 and Q3 as well. So all in all, we expect the total charge to be SEK 4.4 billion for 2013 and 2014 together.

Okay. So if we leave the P&L then and move over to the cash flow. Cash flow in the quarter was SEK 1.2 billion, lower than a year ago, but good cash conversion. And of course earnings are down in 2013 compared to 2012, and that of course affects the cash flow as well. However operating assets and liabilities in the quarter were up. We had good affects from inventory reductions. We also had some pension fund payments into the company as well. CapEx was slightly above last year.

With that, I would like to hand back to Keith again for conclusions and outlook.

Keith McLoughlin

Okay, Tomas, thank you. And if you flip to the outlook page, we try to summarize what we see in Q1, 2014 and the full-year. We believe that 2014 will be another year of growth for Electrolux and the appliance industry. We expect market demand in Europe to be flat to slightly positive, and that will impact all of our businesses in that region.

We anticipate continued growth in North America in 2014, supported by the continued gradual recovery in the housing market. We also continue to see solid growth in our emerging markets, with the Brazilian growth numbers however slowing.

In terms of price and mix, we expect to see a positive impact from prices in both North America and Latin America beginning in Q1. As the year continues, the year-over-year effect will diminish. Prices continue to be under pressure in Europe while the negative country mix will be offset by better product mix.

We expect raw material cost to be close to flat in the first quarter as steel prices remain stable, while we have some oncosts for plastics. For the full-year of 2014, the net impact of raw materials is likely to be flat, plus or minus SEK 100 million for the full year.

In line with our strategy, 2014 will be a year of product launches requiring our investments in marketing and product development. We will utilize the positive momentum we have in North America in Small Appliances to increase our investments in brand building in those markets and regions.

We are, as we speak, having a major product launch in China and will continue to support that in 2014 to establish Electrolux in that important market. We will continue to reduce costs in 2014 and take further measures to structurally reduce our cost base, particularly in Europe Major Appliances. As previously communicated, there will be some temporary cost increases as a result of consolidating our production of cooking products in North America through about mid-year.

And if you turn the page, I’d like to finally close and summarize just the fourth quarter. We continued to deliver on a strategy and grew organically in all business areas in Q4. What has affected us during the period is continued headwinds from currencies and the weak European business. North America showed strong growth with results on a high level, even though under absorption and negative customer and product mix affected the leverage.

We saw a promising growth and profit development in Small Appliances and our Professional businesses. In Latin America, the weak market development continued and affected volumes negatively. In addition, the warehouse fire previously communicated in Brazil caused some volume losses, which impacted profitability during this quarter.

In Europe, the market continued to be weak, but we increased our market share on the back of volume growth. We have a strong focus going forward to restore profitability in this important business in the company.

So by that, we’re open for questions. And I’ll ask our Head of IR, Catarina, to take over and handle the moderation. So please, Catarina.

Question-and-Answer Session

Catarina Ihre

Well, good morning everyone. We will now, as Keith said, open up for Q&A session. And I would just like to remind you all that please take one question a time. Please operator.

Operator

Our first question comes from Mr. Andreas Willi from JP Morgan. Please go ahead.

Andreas Willi – JP Morgan

Yes. Good morning, everybody. My question is on the U.S. and mix impact. If you could maybe give us some more explanation for that because at least my expectation was that, if you have positioned your brands high, you have Home Depots build this channel and you didn’t participate aggressively in some of the promotions. Why do you see the negative mix impact which is quite material in the quarter? And maybe, if you also could quantify, the impact of de-stocking on the profitability in Q4 in the U.S.? Thank you.

Keith McLoughlin

Yes. So as you mentioned, there was a negative impact on mix in the quarter, both from a product standpoint and a customer standpoint. And it was mostly just about the choices that the team made there in how to participate during that promotional period. So which customers and which product categories – as you stated, even though we weren’t overly aggressive broadly, of course that we had to participate, but it was the choices they made relative to the customers and the products were we did participate, that had a net lower average margin for us. So again, just operational decisions during the period impacted by the mix from customer and product.

In terms of the under absorption, I don’t think we would give a specific number on that, but honestly, Tomas, and I have been pushing North America to say, look we like what you’re doing there, but we want better cash conversion, and they got the message. And they brought their rhythm [ph] into our way down which of course helped the strength of the cash in the quarter when you do that. And unfortunately they had to do it a lot in one quarter.

They had significant under absorption at the factories. So good for cash, not so good for earnings in the quarter, no fundamental issue with the business. We see North America continuing to grow top and bottom line. So a couple of acute things in the quarter, but no fundamental issues.

Andreas Willi – JP Morgan

So the de-stocking is done in that sense for you in the U.S.?

Keith McLoughlin

Yes, that’s correct.

Andreas Willi – JP Morgan

Thank you.

Catarina Ihre

All right. Could we have the next question please?

Operator

Our next question comes from Mr. Aaron Ibbotson from Goldman Sachs. Please go ahead.

Aaron Ibbotson – Goldman Sachs

Yes, hi there. Good morning. Thank you for taking my question. I just had one quite simple question. And that was, given the sort of material recent FX moves, and Tomas, you have sort of very good knowledge of how FX tend to impact your businesses. At current state, i.e., end of month, rather than end of year, what are you foreseeing that the sort of full-year number could potentially look like when we’re ending this year assuming that nothing changes from here, do you have any feel at all? Thank you.

Tomas Eliasson

Yes. Well, we have a feeling for the first quarter. And I think we’re refrained from talking about the full-year. But for the first quarter, if we look at the current rate or let’s say the rates as they were the day before yesterday or three days ago actually and just sort of extrapolate that into the first quarter, it’s worse in the first quarter than if we had in the fourth quarter of 2013.

And this is because these important currencies like the reals for example have continued to depreciate during January. So the rates are much worse now than the average rate in the fourth quarter of 2013. So we’re looking at a transactional effect that will go above the SEK 325 million that we had in the fourth quarter. It could be as much as somewhere between SEK 450 million and SEK 500 million in the first quarter, given the rates that we have today.

But also let me say again here that when we talk about currency, we’re talking about gross currency effects, we don’t include in that number any mitigating effect. Of course we increase prices, of course we take other actions to mitigate as much as we can, but there is a time lag on this of course as always. So the currency effect in the first quarter will be more than we have in the fourth quarter.

Aaron Ibbotson – Goldman Sachs

Okay. Thank you.

Catarina Ihre

Could we have our next question please?

Operator

Our next question comes from Mr. Andre Kukhnin from Credit Suisse. Please go ahead.

Andre Kukhnin – Credit Suisse

Good morning. Thanks for taking our question. Could you just run us through the magnitude and the timing of your price increases in Brazil and North America during the start of this year and when you raised prices in 2013? Just trying to get sort of to what annualized effect we can expect for 2014, and also could you quantify the magnitude of price declines in Europe?

Keith McLoughlin

Yes, so let me start with the last question first, and then I’ll come back to first. So Europe, the deflation has been around 1.5%. That’s kind of where it’s been. It was – actually a year ago, it was closer to 2%. So it’s gotten actually a little bit better grown overtime, but it’s still deflationary. So that’s probably the most realistic number to anticipate. We don’t see that changing dramatically until we see the market coming back much stronger. So that’s Europe.

For North America, I think as we’ve communicated previously, we would expect that the net – when you get – do it all net-net, you’re in the low single-digits net price effect after all the work.

Brazil. It’s hard – I’d rather not try to quantify that right now because we’re trying to obviously offset significant currency headwinds and it’s probably a little bit premature until we see how much of that sticks to give you an exact number. But let us get through Q1 and we’ll have a better idea on what’s sticking in the marketplace there, but of course we’re looking in a significant way, mitigate or go against those currency headwinds.

Andre Kukhnin – Credit Suisse

Got it, thank you. And then finally, just a quick follow-up from the previous question on FX. Thanks for guidance to Q1. Can you give any projections on how that would look for the full-year if the currencies stay where they are? And simply how the table on Slide 18 would look if these rates prevail [ph]?

Keith McLoughlin

I don’t think [Technical Difficulty].

Andre Kukhnin – Credit Suisse

Okay. Thanks.

Catarina Ihre

Thank you. Could we move to our next question please?

Operator

Our next question comes from Christer Magnergard from DNB. Please go ahead.

Christer Magnergard – DNB

Yes, good morning, and Catarina, welcome.

Catarina Ihre

Thank you.

Christer Magnergard – DNB

Just a question on the lower inventories in U.S. I happen to just understand this. The demand has been extremely strong in 2013. Why have your inventories been so high? Basically that’s my first question. And then secondly, have you enjoyed over absorption so to say, in June ‘13 [ph] and earlier in North America?

Keith McLoughlin

Yes. I mean actually essentially what happened was the U.S. started the year with high inventories and they stayed at high levels through most of the year. So they – actually it was a Q1 issue that they didn’t actually take care of until the end of the year, let me just to be very transparent. And of course there is two sides to it, right. So I mean if we get under absorption, you have over absorption during a period of time, but that was mostly during the Q4 of the previous year, it got carried into Q1 of 2013. So that’s what happened.

Christer Magnergard – DNB

So if we look at 2013 as more an average in profitability-wise, that gives a better picture than Q4 or of Q1?

Keith McLoughlin

Yes, I think that’s right. I think that’s fair.

Christer Magnergard – DNB

Secondly, just a quick update on the Italy production facilities that you – there was some noise in the media about the wage cuts, and that Italian Prime Minister complaining. Can you give us some update on that?

Keith McLoughlin

Yes. So as you know, part of the manufacturing footprint program includes a study of our Italian footprint in Major Appliances. So there are four major – four big sites serving the Major Appliance businesses in Italy, where we have been through and are going through a thorough analysis and investigation.

We’ve completed that analysis on our own, and have engaged now in the last week or so with all the respective stakeholders, including union officials, employees and politicians and that’s the noise that you’re hearing is the reaction to that engagement process with the key stakeholders.

So again it’s probably not appropriate to guestimate or to speculate on what’s going to come out of those discussions, but we’ve begun the engagement process with those key stakeholders and we will – we expect to have it all worked through with final decisions by April.

Christer Magnergard – DNB

Okay. Thanks.

Catarina Ihre

Okay. Should we then move onto our next question please?

Operator

Our next question is from Mr. Johan Eliason from Kepler Cheuvreux. Please go ahead.

Johan Eliason – Kepler Cheuvreux

Yes, hi. This is Johan. Just a few questions on Asia Pacific. You talked about the extra costs for the new refrigerator plant in Thailand. Could you quantify that somehow in the quarter, and also on this China marketing, any quantification there would help as well for the marketing costs in this quarter? Thank you.

Keith McLoughlin

Yes. So let me – I think the last one we can do which is kind of the marketing expenses, little over SEK 100 million in the quarter for the China C5 launch. And that’s continuation of the beginning of that that started in Q3. So that’s that, but we actually haven’t broken out what our plant costs are. I’d rather just leave that alone, but there was an impact and has been, as we ramp that new plant up through most of the year. But to answer your question, a little over a SEK 100 million in Q4 for the C5 launch.

Johan Eliason – Kepler Cheuvreux

And is that the sort of level you expect now as you said, the China launch, when you continue or are you spending even more going forward?

Keith McLoughlin

Yes. I would expect that in 2014 given that we’ll have a couple of more quarters, that’d be between SEK 50 million and SEK 100 million net increase year-over-year from ‘13 to ‘14.

Johan Eliason – Kepler Cheuvreux

On a full-year basis?

Keith McLoughlin

Yes.

Johan Eliason – Kepler Cheuvreux

Okay. Thank you.

Tomas Eliasson

Well, maybe we could – to just add a few things here to understand the EBIT margin in Asia Pacific. You see the EBIT margin – as you can see here the numbers, the EBIT margin was 4.5% in the fourth quarter this year, and it was 9.3% a year ago. But the big chunk in this is the mix developments here where we have not so much growth in Australia and New Zealand, which is a high margin market for us and very good and very high growth in China which doesn’t have a very high margin at all.

Johan Eliason – Kepler Cheuvreux

Yes.

Tomas Eliasson

And so that’s the two big chunks, geographical mix and the launch costs in China. And then a little bit as well from the ramp-up of the factory in Southeast Asia. So that would be three parts that explains it.

Johan Eliason – Kepler Cheuvreux

But just is – you say low margins in China can’t get obviously because of the marketing. But they all do talk about premium products in China. So eventually, we should expect it maybe not to be as good as in Australia in that market but it should be good margins on the Chinese business, if I’m correct?

Tomas Eliasson

Yes, over time of course there would be much better margins in China, but we are not at all at this point in time on that volume that we need to have. And we need to grow couple of years here before we reach the margin levels, but I mean at least it’s positive. If you recall not so many years ago, this was a bleeding home profit-wise, now at least positive, but we need to do some work for another couple of years if we want to get good margins in China.

Johan Eliason – Kepler Cheuvreux

Okay. Thank you.

Catarina Ihre

Thank you. Should we move onto the next question please?

Catarina Ihre

Our next question comes from Mr. James Moore from Redburn. Please go ahead.

James Moore – Redburn

Yes, hi everyone. Hi Keith, Tomas, Catarina. I’ve seen some data that suggests European appliance pricing pressure got a bit worse in the fourth quarter. And I wonder if you could just talk a bit broadly about what’s going on in the market at the moment because the Turkish lira has weakened, and we have a player there who could use that. I wondered if that’s what’s happening? We’ve seen the Fagor insolvency. How is that affecting Europe? There is a talk about consolidation with Indesit and other assets in play. There is a lot of flux in Europe, over and above what’s been a difficult volume market. And I just wondered if you could give us a sense of what you are actually seeing on the ground on with respect to pricing?

Keith McLoughlin

Yes. No, that’s fair, James. I mean actually the pricing in Q4 was a tidbit worse than it was in Q3, in fact 20 basis points. So it’s hard to really say that’s changed materially, but actually it was a little bit worse, so about 1.7% versus 1.5%. So that’s about – that’s actually – you’re reading it about right. I don’t that as we’ve got a new trend happening in Europe in pricing. I still think it’s in 1.5% range, but it’s a pretty competitive market for sure, given all the things you talked about and the fact that there is still double-digit unemployment in the Eurozone.

Having said that, most economists are forecasting a positive GDP, right. That will be the first year in the last three years for that to happen. And we’re forecasting for the first time that actually we could see some net positive appliance demand in the Europe. But it’s a tough market for sure.

James Moore – Redburn

And maybe, I could just follow-up that the consensus is about SEK 5.5 billion for this year, and I wonder whether you could just help us a bit with the many moving parts that are going on, as to what you think the points that aren’t that well reflected in the consensus? You have obviously talked about the currency, and I suppose we can guess there might be some hangover in 2Q, maybe even in 3Q there, but are there other big moving parts that you think we need to think about?

Keith McLoughlin

Yes, James, as you know, we don’t forecast that. So I don’t want to give – directly respond to the consensus. I mean you guys are reading the marketplace and I think we’re trying to be as clear as we can, but we think the volumes are going to be flat to up slightly. We think we’re going to have a positive mix effect. We think we’ll have continued price pressure. And as we’ve communicated, we’re going to take out a lot of cost.

James Moore – Redburn

Okay. Thanks.

Catarina Ihre

Thank you. Let’s take our next question please?

Operator

Our next question is from Mr. Dan Cunliffe from Nomura. Please go ahead.

Dan Cunliffe – Nomura Holdings

Hi, thanks for taking my question. Just coming back to the U.S., can you quantify the size of this sort of inventory reduction that we’ve seen? I guess that’s question number one. And then secondly, can you just confirm that there are no further, sort of expected inventory cuts as we head into 2014? And then finally, if you can just give us a size – try and quantify of the – sort of the margin boost that you had to 2013 from overproduction. You said that was largely in Q1. But if you could just give us a magnitude of how much that sort of artificially inflated your margins last year in the U.S.? That would be helpful. Thank you.

Keith McLoughlin

Yes. I wouldn’t know I really read into inflated margins from last year. To me it’s just – it’s about a 14 million, 15 million reduction in inventory. It’s done.

Tomas Eliasson

US dollars.

Keith McLoughlin

US dollars, I’m sorry, yes. That’s right. Get the right currency. That happened in Q4 in terms of inventory reduction. And to answer your question, no, that’s done. So we’re now coming into 2014 where we need to be.

Dan Cunliffe – Nomura Holdings

All right. Okay. That’s very useful. Thank you very much

Catarina Ihre

Okay. Let’s move onto our next question please?

Operator

Our next question comes from Mr. Ben Maslen from Bank of America. Please go ahead.

Ben Maslen – Bank of America

Thank you. Good morning, Keith. Good morning, Thomas. Two on the U.S. Firstly, just the AHAM data, which has been pretty volatile in the last few months around the holidays. Just what your expectations are for January? And then secondly, just more generally on the pricing environment in the States. As you said, there were more negative promotional activity in Q4, and we see a negative trend in the PPI data. Why does industry pricing come under pressure at a time when volumes are just so much stronger, I would have thought it be the other way around? Thank you.

Keith McLoughlin

Yes. Welcome to the appliance industry. Don’t look for logic all the time. But let me answer your first question, which is January is going to be affected I think negatively by the weather pattern in the U.S., right. I mean it’s just been – honestly, it’s been colder in North Carolina than it’s been in Stockholm, right. I mean that’s kind of crazy, right.

Ben Maslen – Bank of America

Yes.

Keith McLoughlin

So I expect actually I am not – I don’t expect too much honestly in January given the weather patterns and all the challenges happened in the U.S. I don’t think it’s a sign of anything fundamental other than really, really cold bad weather. So I think that’s what’s happening there.

In terms of pricing discipline or lack thereof, I think there was Q4, which it normally was a promotional environment. I mean the appliance industry is promotional in general as you know, but Q4 in particular is a heavily promotional environment. So kind of the bad joke in the U.S. at the moment is Black Friday has turned into Black November, right.

Ben Maslen – Bank of America

Right.

Keith McLoughlin

And that’s about what’s happening. But I don’t think that says, hey, that means that people aren’t looking to make money, they just think – people say, well, it’s going to be a promotional week or month and I got to get my fair share, and if I don’t, I’m going to lose out, so I better be aggressive. And I don’t know, it’s whacky, but fundamentally we think the U.S. market ended – when you put it all together, it’s growing. We’ll continue to grow based on both GDP and housing recovery. And it will be – it will still be the appliance industry.

Ben Maslen – Bank of America

Good, okay. And maybe a follow-up, Keith. There is a story in the Wall Street Journal today that Whirlpool are complaining about more Asian product coming to the U.S. Do you actually see that happening or is that kind of posturing ahead of trade case and more noise?

Keith McLoughlin

No, I think there is Asian product that is coming into the U.S. I wouldn’t disagree with that. And I think there is the Chinese and the Korean players are targeting the U.S. There is an opportunity, so we see that. That’s not a new data point, but I wouldn’t disagree with that statement.

Ben Maslen – Bank of America

Okay. Thanks very much.

Keith McLoughlin

Yes.

Catarina Ihre

Thank you. Could we take our next question please?

Operator

Our next question comes from Mr. Anders Trapp from SEB. Please go ahead.

Anders Trapp – SEB

Yes, hi there. I have a question really on, how to think about the choices between growth and the margins. I mean on the Group level, you have sort of been trying to educate the investor and analyst community that, there is sort of a choice between those two, when you are at a certain margin level, it’s better to go for growth, because that adds most value to the stakeholders of the company. I’m just wondering, if we should think like that also when it comes on sort of business area level namely – or mainly that U.S., that we should rather look for that you will try to grow the business quicker and not really expect chance for getting after double-digit margins or so. If that’s the way we should think about – the way you go about your business?

Keith McLoughlin

Yes, that’s a good question, Anders. I mean the way we think about it including at the operating unit level is we start with a return calculation, right. So what’s the return on invested capital, and is that sufficiently not north of our WAC [ph]. So that it makes sense to grow the business. So that’s hurdle number one, which as you know is a combination of the margin and the asset velocity.

And then we say, okay, once we get – make sure we get that, where we need to go then, let’s put the fuel to the fire and get it growing. So in the U.S., just to answer your question in particular, they are very clear that they have to manage both, the income statement and the balance sheet, the margins and the assets, and to do both, right, to get that return. And as you know, if you do the quick math on the ROIC for the U.S. business, it’s quite significant and well, well, well above the cost of capital.

And they are looking to participate, but it’s a fine line as you know. If you get too froggy on growth and market share, you got to – as we’ve talked before, it’s a four or five to one ratio, right. I mean, you need four to five times the volumes to mitigate a price decline. So they get that, they understand the math. So it’s a balance. But I would answer your question clearly. We first make sure that we see a path to positive value creation in ROIC and then say, okay, now the maximizing equation for economic value is to grow there.

Anders Trapp – SEB

Sort of a bit of a follow-up there. Looking at the total U.S. market for appliances. We know what you make, we know what the Whirlpool are making, etcetera. We know that you at least turn your capital 4x on the Group level, probably faster than that in the U.S. markets, so you must have very, very high return on invested capital or return on capital employed in the U.S. Same for Whirlpool. I assume same for GE. So, it looks like right now it’s a very, very, sort of excess profitability in the U.S. market, and therefore, sort of open for trying to grow the business from competitors. Have you seen any increased effort from the competitors, the smaller ones that really wants to grow in the U.S. against this backdrop?

Keith McLoughlin

Yes. I think your assessment is correct and that is with the U.S, market growing again and the return calculation is attractive. So it’s attractive for us, it’s attractive for our competitors, both, the domestic competitors, and to your point, for the foreign competitors.

So, do I think that in particular Asian competitors are targeting the U.S. market as an opportunity? Yes. Do I think that’s a new phenomenon? No.

So I don’t think it’s something that we’re seeing acutely in the last few months, it’s been in the last five, six, seven – actually since I’ve been here almost really eight, nine years. And so I would…

Anders Trapp – SEB

Yes. I clearly understand, but to put my question is, really with the profitability must be much higher in industry today than it was five years ago. And therefore [indiscernible] the return rates and therefore that had an impact on the competitive environment or not?

Keith McLoughlin

I don’t see a dramatic change in the competitive environment, I don’t.

Anders Trapp – SEB

All right, thank you.

Catarina Ihre

Does it answer your question?

Anders Trapp – SEB

Yes. Thanks.

Catarina Ihre

Good. Thank you. Should we then move on? I think we have room for another say three questions before we have to wrap up. So next question please?

Operator

Our next question comes from Mr. Martin Wilkie from Deutsche Bank. Please go ahead.

Martin Wilkie – Deutsche Bank

Yes, good morning. It’s Martin from Deutsche Bank. Just a question on some of the other investment costs that you have been making in 2013, and what we should expect into ‘14. You mentioned China continues over. You also had the dual running of your Memphis facility. I think you mentioned earlier that does continue into next year, if you could just perhaps quantify that, but also some of the investments you would be making in the channels in North America, the Home Depot and places like that. Are those investments incrementally now done or are they still going to be something of a drag in the first half of ‘14? Thanks.

Keith McLoughlin

Yes. So let me try to address each one of those. We talked about the China. So another SEK 50 million to SEK 100 million, I would comprehend year-over-year. Memphis is going to run somewhere into summer, right. So it’s early summer or late summer. As we talked about last year, this is about SEK 300 million for the year. So half to 50%, 60% of that probably is a fair calculation.

And then Home Depots, the team has done its good job there and doing what we said, which was they crossed the breakeven, and as now positive territory. So there is no added incremental costs going forward in ‘14.

Martin Wilkie – Deutsche Bank

And do you think then that margins can increase in North America in 2014? Obviously you’ve talked earlier about some of the production differences and things like that, but with some of these costs rolling away and if you do get the positive volumes, should we be expecting margins to improve in 2014 in North America?

Keith McLoughlin

Our objective in North America – and all the businesses, but in North America in particular is to grow the top line, then have margin expansion.

Martin Wilkie – Deutsche Bank

Okay. Thank you.

Catarina Ihre

Thank you. Could we have our next question please?

Operator

Our next question comes from Mr. Domenico Ghilotti from Equita. Please go ahead.

Domenico Ghilotti – Equita

Good morning. I have a question on the price environment in Europe. You said that in general it’s a deflationary, but have you been able to – or are you raising prices in some selective markets where you have currency headwinds?

Keith McLoughlin

Yes. I think the team is trying to case-by-case, country-by-country basis do that, but to be fair I think more of the net average price increases in Europe are coming from mix improvement. It’s a hard market. It’s a difficult market to get structural price increases even with some of the currency movements right now, but I don’t – I can’t with any confidence say to you that we expect structural price increases in Europe in the current environment.

Domenico Ghilotti – Equita

Not even in – really in markets that are facing quite aggressive devaluation?

Keith McLoughlin

Maybe here and there, but I don’t think you will see it.

Domenico Ghilotti – Equita

Okay. And on the Latin America, just to have the mood on what’s going on there and particularly in Brazil. Should we expect a decline in the market demand in the first half? Should we read your statement on the tough early 2014 as a decline on the overall market?

Keith McLoughlin

It could be. We’re hoping for the first half to be flat and then modest low single-digits 2%, 3%, 4% in the second half. That’s kind of my best guess of what is going to happen. Could Q1 be negative and Q2 be flat and then 2% and 4%? It could be like that but…

Domenico Ghilotti – Equita

Okay.

Keith McLoughlin

Yes.

Domenico Ghilotti – Equita

Thank you.

Catarina Ihre

Thank you. Could we now have our last question please for the call?

Operator

Our last question comes from Mr. Kenneth Toll Johansson from Carnegie. Please go ahead.

Kenneth Toll Johansson – Carnegie

Yes, thank you. I have strategic question on Europe then. As was mentioned before, there were a lot of assets that might be for sale in Europe in your industry, and how important is it for you to protect Europe from other entrants into this markets, and I am thinking a little bit about the situation when Maytag was for sale many years ago and Whirlpool bought it and it was a rumor that there were Chinese players interested in those assets and so on. So how would – when you think about M&A going forward, how do you balance the European situation with your will to expand into emerging markets?

Keith McLoughlin

Yes, that’s a good question. And so I’ll talk about a little bit and Tomas jump in if you have additional thoughts as well. But number one of course, Europe is still 30% of this company, right. And so it’s a very, very important part of this company and will be for a long, long time. So we’re paying attention if I can use that expression, right. So we understand and we’re engaged in all of the asset conversations and opportunities and challenges in Europe at the moment.

In some cases, it’s a very difficult equation to solve, because part of it is – to your point, make sense to protect – and has some interesting parts of the portfolio that is attractive, whether that’s in Eastern Europe or key markets where we’re underrepresented.

Unfortunately there is also big parts of several of these assets that we don’t – we just talked – somebody asked me earlier, we don’t need more assets in Italy, right.

So it’s a hard equation to make work for us, but we also understand that you got to big mindful strategically of the competitive environment. So I’m probably not going to answer your question specifically obviously, but you should be confident that we’re awake and we’re evaluating, analyzing and you got to make good business judgments on what makes sense, short, medium and long-term to create and sustain economic and therefore shareholder value.

I don’t know – Tomas, do you have anything to add to that?

Tomas Eliasson

Well, it’s a tricky question of course, but of course as Keith says we have to be engaged. It’s a big asset that is on the market, of course. But on the other hand, we – just to repeat that, we are only going to do good acquisition, acquisitions which are accretive pretty quickly to the shareholders and to all our stakeholders. And of course then some of these assets, they are of course on the market for a reason. And the reason is that it doesn’t work. So how do you get that equation to work? So yes, it’s tricky.

Kenneth Toll Johansson – Carnegie

Thank you very much.

Catarina Ihre

Thank you. That’s the last question on the quarterly call. It was interesting to discuss a bit more on long-term strategies. So by that, I leave the word over to Keith again.

Keith McLoughlin

Okay. And just a quick summary, because I think we’ve summarized a few times here. But I’d say for 2013, good top line growth in what obviously has been a relatively tough macro environment, particularly given Europe in longest recession since World War II. So I think pretty happy with growing the company well above our 4% goals here again.

Bottom line at SEK 4 billion, as you know very well, includes that European macro environment as well as the SEK 1.5 billion headwinds in currency. I’d say the fundamentals of the company are quite strong.

Going into 2014, as was asked previously, our expectations are that earnings will increase, cash flows will increase as well, and that will come from aggressive actions to improve the profitability in Europe, primarily through cost reductions. And then executing our strategy, which is growing in the emerging markets, participating as was asked previously in what is very attractive U.S. appliance market at the moment. And continuing to invest in product innovation which will drive mix, and continuing to do what we have been doing for decades, which is being operationally efficient enterprise.

And so I think straight ahead, if we go into and even with all the currency movements and everything happening in emerging markets, we’re cautiously optimistic about a good 2014. So thanks again for joining us and for your relationship and connection with Electrolux. Have a good day.

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