Electrolux' (ELUXF) CEO Jonas Samuelson on Q2 2016 Results - Earnings Call Transcript

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Electrolux AB (OTCPK:ELUXF) Q2 2016 Earnings Conference Call July 20, 2016 3:00 AM ET

Executives

Jonas Samuelson - President & CEO

Anna Ohlsson-Leijon - CFO

Catarina Ihre - Head, IR

Analysts

Andreas Willi - JPMorgan

Lucie Carrier - Morgan Stanley

Matthew Spurr - Royal Bank of Canada

James Moore - Redburn Partners

Martin Wilkie - Citi

Anders Trapp - SEB Equities

Olof Cederholm - ABG Sundal Collier

Andre Kukhnin - Credit Suisse

Erik Gunnarsson - UBS

Natalie Falkman - Carnegie

Johan Eliason - Kepler Cheuvreux

Christer Magnergard - DNB Markets

Jonas Samuelson

Welcome everyone to the presentation and discussion of the Second Quarter of 2016. With me here today, I have our new CFO, Anna Ohlsson-Leijon and our Head of IR, Catarina Ihre.

So let's begin and turn to our presentation. Performance improved across most business areas during the second quarter portfolio and price promotion management contributing positively. Our operating income increased to SEK1.564 million and four of our six business areas achieved an operating income above our 6% EBIT target. In Europe we continue to show good organic growth and gain market share. The market trend in most European markets was positive. In North America product cost and the operational efficiency gains combined with positive contribution from raw materials and effective price promotion management were the most important factors for the significant improvement.

In Latin American the Brazilian market continued to decline which in combination with a weakening trend in Argentina and Chile affected our topline and earnings negatively. Currencies continue to have a negative impact on earnings. However this was to some part mitigated by price mix. All-in-all earnings improved in all business areas versus last year except for Latin American.

Let's look into some of our market activities during the quarter. These highlights demonstrate our strategic initiatives that will drive growth in our markets. I would like to start with a new Electrolux laundry collection that won the Best in Show awards at the KBIS Launch in North America. This launch adds to the momentum of a core branded business, a collection comprised of first of its kind Electrolux washer with a smart boost technology that improves cleaning performance while keeping colors vibrant for longer. It's an all-digital campaign but we partnered with fashion and style bloggers to highlight. It covers our 360 degree consumer journey concept.

In the quarter Electrolux also launched the world's most silent vacuum cleaner, the UltraSilencer Zen. The product is specially designed for our key strategic markets in Europe and our high growth markets in Asia. The Zen is made from 55% recycled plastic; it's silent and combines features to save energy and cleans with impeccable results. Finishing with our recent acquisition in Australia of Vintec, in June we announced an agreement to acquire the leading wine cabinet company in Asia Pacific. Through the acquisition, we're strengthening our position in the region and create synergies with the Company's core business. Vintec is expected to be consolidated in the third quarter of 2016.

Let's turn slide. Let's look at our sales development in local currencies. In the second quarter we had a slight slowdown in the organic growth which was down 0.9%. This is due to our focus on profitability and portfolio management activities in certain products and regions, as well as volume decline in Latin America. There was a slight contribution from acquired growth in the quarter. Over the last couple of years we've achieved a cumulative average growth rate of 3% in net sales.

Let us now go through to the business areas and start with looking at the development in EMEA. Major appliances EMEA continued to show positive sales growth in the second quarter, achieving an organic growth of 5.2%. This was driven by positive volume and improved mix. Demand for appliances continued to increase in most Western European countries and demand in Eastern Europe was also good in the quarter.

Electrolux sales volumes grew in most European markets and we continue to gain market share. Products mix improved due to the strategic focus on premium branded products in built-in kitchen and laundry. Prices continue to be under pressure in Europe but we compensated for this by better mix and efficiency gains. Operating income increased versus previous year and our EBIT margin reached 6.4%, surpassing 6.5% in the past 12-month period. Higher sales volumes, improved mix and benefits from cost efficiency and raw materials all contributed positively to earnings.

Let's turn page and talk about the market developments in Europe. The European market continued to be positive in the second quarter; total unit shipments increased by 4.4% including Russia and Ukraine. Demand in Western Europe increased by 4.5% and has now increased for ten consecutive quarters. Growth was particularly strong in the Nordics, UK, Germany, Benelux and the Iberian countries. Following the Brexit referendum the outlook for demand in the UK is, however, uncertain. Demand in Eastern Europe was up by 4%, most markets in the region showed positive growth.

We expect the European market to continue to grow in 2016 and therefore increase our outlook to 2% to 4% growth for the year from 2% to 3%, reflecting the good trend but also an increased uncertainty in the UK. Our operations in North America continued to show progress in the second quarter. In the quarter the North American market grew by 3% and as previously indicated, we continue to see some price pressure in the U.S. market. Electrolux remain disciplined in our price and promotion management which impacted organic growth slightly. However, sales grew in our branded business while declining somewhat in private labels.

As previously communicated, we're making progress in efficiency in the cooking plant in Memphis. This work will continue into the second half of 2016. Earnings in North America were strong compared to last year and sequentially, achieving an operating margin of 6.5%. The higher profitability was a result of solid price promotion management and our focus on product cost and efficiency gain. Raw material savings also contributed positively.

Let's turn to the next slide and talk about the market development in North America. Market demand for core appliances in North America moderated somewhat in the second quarter as anticipated and increased by 3.4% in the quarter. With good first-half growth, the market for appliances in North America remains healthy and we continue to see consumer confidence in the macro environment to be favorable for the appliance industry. We expect the full-year market growth in North America to remain solid and grow in the range of 4% to 5%.

Let's move to Latin America. Market demand for appliances in the region deteriorated in the quarter and the macroeconomic outlook continues to be weak. The challenging market conditions affected our sales negatively in the second quarter. Volumes in Brazil, Argentina and Chile all declined while demand in other Latin American countries were mixed. To compensate for the weak markets, our team has taken actions to reduce costs. In the quarter we implemented price increases to compensate for currency headwinds and inflation. And the measures, in combination with cost reduction activities have, to a large extent, compensated for the negative currency but not fully the sharp fall in volume and mix, particularly in Argentina and Chile. We expect the Latin American market to remain weak also in the second half of 2016.

Let's turn slide and talk about our operations in Asia Pacific. Market demand in all three sub-regions in Asia Pacific is estimated to have been positive in the second quarter. In Southeast Asia, growth was strong in Vietnam, Thailand, Singapore, but it was weak in Malaysia. Our sales in Australia, New Zealand and Southeast Asia continue to show positive development. New product launches and better product mix contributed positively. Sales in China declined in the quarter as a result of proactively reduced business activity in unprofitable segments and channels.

Earnings in Asia Pacific increased year over year and margins reached 6% in the second quarter and in the last 12 months, both Australia and Southeast Asia performed well and contributed positively. The operational repositioning in China is on track and we're continuing to cut costs. The transition to the new factory in Rayong, Thailand is also successfully completed now. Going forward, we will continue to launch new products and support premium brands that will drive profitable growth in our key markets in the region.

Let's continue with small appliances. Market demand for our small appliances in North America and Latin America declined in the second quarter. Our volumes in Western Europe, however, continue to increase. Premium products within floor care improved the mix in the region. Total sales was negative due to the exit from certain product categories and markets, particularly in North America and China. The small appliances business continued to be exposed to currency headwinds in the quarter which impacted the EBIT negatively. In these market conditions we have taken price actions to offset parts of the negative impact. We're refocusing our business on profitable categories through active product portfolio management and our cost reduction program is in progress.

Now, let's turn to our professional business. Professional products continued to show a good performance in Q2 and benefited from positive growth in its key markets. Sales growth was positive in Western Europe and North America, while the trend in emerging markets was down. During the quarter we increased our investments to support profitable growth in new segments and markets. Our professional business achieved an EBIT margin of 13%.

And now, I would like Anna to dive into the numbers and go through our financials and our cash flow in the second quarter. Please, Anna?

Anna Ohlsson-Leijon

Thank you, Jonas. Okay, let's start with the financial overview. Organic sales was down 0.9% in the quarter mainly due to lower volumes in Latin America and the repositioning in small appliances, in combination with lower private label sales in North America. Acquired growth was 0.1% positive due to contribution from our acquisition of Veetsan last year. The currency impact was negative 3.6% and this resulted in reported sales of negative 4.4%. Total gross operating income which is defined as net sales minus cost of goods sold, was up 8% versus Q2 last year which translated into an improved gross margin by almost 3 percentage points, up from 18.7% last year to 21.2% this year.

Earnings were significantly up compared to last year, driven by continued good performance in our two largest business areas, EMEA and North America, as well as in professional. Earnings also increased within small appliances in Asia Pacific, although the Group benefited from volume price mix and cost improvements. As a result, our EBIT margin increased to 5.2%. Cash flow was strong in the quarter and increased by 38% to SEK4.1 billion. Cash flow in the second quarter is normally strong and reflects the seasonal pattern. Home comfort, including air conditioners, contributed positively, reported earnings per share was SEK3.75 for the quarter.

Let's move to the sales and earnings bridge on the next slide. Let's start with the organic growth number which comprises of price, mix and volume. If you first look at the organic column in the bridge, it contributed with SEK176 million to operating income. Price mix was the main part and contributed positively on the EBIT level, thanks to product portfolio and price promotion management. The volume part was also positive although it was impacted by volume decline in Latin America and the repositioning of operations in small appliances. The organic total, as you can see, was short of the total negative currency effect of SEK478 million, mainly related to Latin America.

Moving to the net cost efficiency, this shows the net impact from product cost improvements of in total, SEK761 million. This included cost savings from raw materials which was about SEK250 million in the quarter and the impact of other productivity work and efficiencies throughout the Group. In total we had a margin accretion of 0.6% from the organic part and a 2.5% in contribution from cost efficiencies. This means the underlying leverage in the business continued to be good. The SEK182 million in the other column reflects the positive delta from the GE cost taken in the EBIT in Q2 2015.

So let's go to the cash flow and move slide. Cash flow in the second quarter amounted to SEK4.1 billion which is strong compared to historic levels. Our EBIT number is up strongly year over year which generated a positive contribution from operations of about SEK1.5 billion which is approximately SEK600 million higher than in Q2 2015. Our net operating working capital, measured as inventories, trade receivables and accounts payable on a 12-month rolling basis, is now below 6% on net sales. The CapEx level was lower but the run rate is not decreasing; this is just a quarterly timing issue. The cap on CapEx will continue to be around SEK4 billion.

The strong cash conversion rate in 2014 and 2015 leaves us with a strong balance sheet which means that we have the funds and the firepower to continue with our investments as well as look at further acquisitions. Finally, let's take a longer perspective on the cash flow. Here you can see that the Q2 cash flow is always the strongest quarter in the year, followed by a third quarter which is historically always lower.

Back to you, Jonas, for the summary and conclusion.

Jonas Samuelson

Thank you very much. Let's move on and summarize the presentation with the outlook for Q3 and full year 2016. Looking ahead into the third quarter and the full year, we believe consumer demand will continue to drive growth in the appliance industry. We expect the positive growth trend in Western Europe to continue in most markets but with the Brexit uncertainty. In Eastern Europe we have seen Russia stabilizing and expect the region as a whole to show growth going forward. We anticipate demand in North America to remain positive in 2016, supported by a solid macroeconomic environment and good consumer confidence. Latin America continues to be weak with low visibility.

We expect demand in Brazil, Argentina and Chile to deteriorate further before stabilizing. Demand in East Asia shows a mixed pattern with an overall positive outlook. Australia has shown positive growth for several quarters now but we estimate the market will turn flat to slightly negative going forward. Now to our business outlook, in terms of the organic part, volume/price/mix, we expect a slight positive net impact in EMEA and Asia Pacific in the next quarter. In North America we're likely to see some price pressure in a growing market. Part of this is increased holiday promotion activities. We expect to continue our work to increase efficiency and reduce structural cost. This will further strengthen and benefit our operations going forward.

We expect raw material cost to have a positive net impact in the third quarter and for the full year. Spot prices on commodities have risen in 2016 and if the current price levels remain during the rest of the year, this positive effect will gradually fade away into next year. Due to recent fluctuations in the currency market and with the strengthening of the Brazilian real, we currently see a less negative impact on currencies in 2016 than we communicated in connection with our Q1 result. At current rates we expect a transactional effect of minus SEK125 million for Q3 and minus SEK1.1 billion for the full year. Our CapEx outlook remains stable, in the range of SEK4 billion.

With that I would like to pass it to Catarina to open up for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from the line of Andreas Willi from JPMorgan. Please go ahead. Your line is open.

Andreas Willi

A couple of questions, please. If I could start with the U.S. and the private label decline you've seen. Is this a conscious decision to manage risks, also maybe potentially related to some concerns around Sears? Maybe you could give us some more information on the background for this. Secondly, on the UK, you had a good quarter but you say you have seen increased risks. What have you seen over the last three, four weeks in the market in terms of demand? And, thirdly, just on pricing in Latin America. Do you see continued sequential price improvements despite the easing of the currency?

Jonas Samuelson

Let's see if I can remember all those, but good questions. So, first of all, the private label. Of course we're actively managing our product portfolio for profitability. However, the private label sales decline in the quarter was more, let's say organic organically driven. When it comes to the UK risks, of course we're impacted by the weaker British pound. The pound is 10% or so weaker versus the euro year over year. So that of course has an impact on us, to some extent directly but of course more over time as the hedges roll off and so on. In terms of demand, we have seen mainly the construction industry signaling that they will be more cautious going forward.

We do expect that to have an impact on demand. We're a major player in the UK construction industry. In terms of regular retail demand, we're not seeing as much of a negative impact at this stage. With Latin America, you're right, the currency has sequentially strengthened. The Brazilian real has strengthened and we do expect that it will be harder to get price increases through in the market.

However, we still do need to get some more price also in the second half of the year. But the requirements will be less than what we originally had forecasted which is a good thing because, of course, the underlying demand is very weak in the market and it's very much a positive if we don't have to increase prices by as much.

Operator

Our next question comes from Lucie Carrier from Morgan Stanley. Please go ahead. Your line is open.

Lucie Carrier

A couple of questions follow-up from my side. The first one a follow-up on the UK. Can you maybe clarify what's the profitability level in the UK versus the rest of the European business, whether this is a more accretive or not accretive geography from a profitability standpoint? So that's question number one. The second question was also related to price mix. It seems to be weaker in this quarter compared to what we've seen over the previous quarters. So just wanted to have a sense whether it's more difficult for you to push those efforts you've done either on the mix or pushing the prices. And then finally was a question on capital allocation. Your leverage now is becoming extremely low. What is the plan with the cash you have now on hand?

Jonas Samuelson

So the UK profitability, we don't break out individual market profitabilities but as of right now, all our markets in Europe are profitable and the UK as well. So it has been and is a good market for us and we intend to of course protect it also going forward, despite the weaker currency development, but it is a profitable market for us. Price mix, it's a little bit of a mixed picture. We have more price pressure in North America, as indicated.

We have very weak mix in Latin America and I think this is important to note. This is not just volumes that are weakening but also mix. So consumer demand is shifting towards lower-priced product and price is partially offsetting that but not fully. In Europe I wouldn't say -- the combination of price and mix is more or less following the pattern that we've seen in recent quarters. Capital allocation, we're not really -- no new statements there.

Of course we're very happy about the fantastic cash flow that we had in the quarter and that we've had really for the last two-and-a-half years now. And of course the balance sheet is stronger than we need it to be and I expect the Board will make sure that we have a plan to have an appropriate balance sheet strength going forward but not over-capitalized and of course that includes M&A and possible cash distribution.

Operator

Our next question comes from Matthew Spurr from Royal Bank of Canada. Please go ahead. Your line is open.

Matthew Spurr

I had a couple although one at a time if it's easier. In North America, where you've referenced your price pressure again in some segments, can you give us any more detail on that? I think last quarter you said it was raw material driven and that you didn't want to emphasize it but I would say you've raised it a bit more prominently this quarter and tied that into your comments on raw material impact starting to slow. I just wonder whether you had any further thoughts you could share on that.

Jonas Samuelson

Right. So I would say that if you perceive a change in tonality from what we said in Q1 that's unintended. We did indicate in Q1 that we saw increased promotional pressure connected to the promotional holidays that we have in the U.S.. We're seeing that and that's continuing, not dramatic but for sure more than last year which is what we indicated at the Q1 release. So we're managing very carefully here to optimize our total gross margin and this is really our focus, as we've been pretty clear about that.

We're managing our business to improve our gross margin and our EBIT margin, our profitability. That is our absolute key priority in the quarter and also going forward. And hence we're making some trade-offs in terms of to what extent we participate in the big promotional holidays in the U.S. in particular, but nothing new, nothing remarkably different there. Actually just to comment, I think we've actually managed that exceptionally well in the quarter as obviously evidenced by the very significant margin improvement that we've seen.

Matthew Spurr

I had one on small appliances as well. The progress for -- Q1 made good progress sequentially and year on year with the restructuring benefits and it seems to have -- the progress seems to have gone backwards a little bit in Q2. Is that just a function of lower volumes or is there anything else that's contributed to that?

Jonas Samuelson

No. I think we were pretty clear in Q1 that this was not the underlying trend. The improvement that we saw in Q1 was more -- not one-off but not reflecting the underlying trend in small appliances. We still have a lot of work to do there to -- in terms of portfolio management, in terms of cost reduction, to get back to profitability. What I would say though is that we're making very good progress on cost, particularly in Europe we're developing very positively. Asia as well; outside of China we're developing very positively.

The big challenges that we have are the exit or significant reduction in China as well as in North America where we're doing some significant repositioning and shrinking of the unprofitable parts of the business. And still a lot of work to do over the coming quarters on that. Nothing new there, it was more Q1 that was honestly better than expected.

Matthew Spurr

Okay. And I had one final quick one on Europe. Just on the market share gain comments. I could be accused of being a bit pedantic here, but if the market growth looks like it's around 5% and you did organic of 5% and did you have a positive price mix or was it just positive mix? I know one's volume and one's organic but how do you say that you've taken market share with that?

Jonas Samuelson

Yes and I guess to be pedantic back, we're gaining market share in our branded products and built-in kitchen and laundry. That's what we're focusing on. And there we're gaining some substantial shares. The piece that we're focusing less on, in terms of market share, is the freestanding kitchens business. But also overall we're gaining a little bit of share, but not significant.

Matthew Spurr

Okay, fine. And over one quarter it's too short a period as well, I guess.

Jonas Samuelson

Yes.

Operator

Our next question comes from James Moore from Redburn. Please go ahead. Your line is open.

James Moore

I'll take them one at a time if that's what you mean. Raw material, you've talked about the impact for this year which I guess is quite contracted, quite hedged. You're probably going to answer this by saying it's too early to give the raw material picture for next year. But just conceptually, given the big steel rises, can you help us think at all about the impact from raw material next year on the EBIT line?

And really my question is more about your pricing appetite, given what happened to profits in 2009, last time we saw this sort of picture, was quite corrosive. But I sense the organization has a different ambition with respect to prices. So would you put prices up in a market environment where they just aren't going up, if that's what you need to do to pass it through?

Jonas Samuelson

Right, so obviously it's a good and fair question and the reality is exactly as you said, it is too early to say where we will end up in terms of raw materials for next year. Because it's been quite volatile and actually recently a lot of the key raw materials have started to come down a bit compared to the peaks that we had in the spring. However, if we remain on the current levels, there will be a headwind next year. We have to put that together though with currency, because I think the key point here is to what extent do our input costs change and of course currency and raw material are two big factors driving our input cost changes.

Those impacts are by and large impacting industry in similar orders of magnitude and as you know, we've had positive tailwind from raw materials in the last year-and-a-half or so. At the same time we face very material headwinds on currency, they're actually substantially bigger than the tailwinds we've had on raw material and I think we've been able to manage through that quite well, through price, through mix and through cost.

At current levels I'm not particularly concerned about the combination of currency and raw materials being worse than what we've been able to handle over the last couple of years. The current levels, it would not be worse than what we've been handling quite effectively over the last few years. So a long answer to your question and of course we cannot give specifics at this stage because we just don't know, but we're not in a situation that I would call concerning, with the combination of currency and raw material cost development.

James Moore

Can I follow up on Memphis? You mentioned it's stabilized and one of the challenges from the outside is -- we know it was very negative in the first-half of last year, so I'm trying to understand what the sequential picture is. And really, I guess you won't want to put hard numbers on this, but how far are we away from a full running rate decent profit as to where you think is a credible target to get to?

Jonas Samuelson

Yes, I think we're now at the stage where the, how should I say, the emergency measures are done. I think we can say that. It is not our most efficient factory; however, it is not a huge factory either. So I would say it's probably time to declare the Memphis situation under control and will not be a major driver of our performance going forward, unless something very unexpected happens. So it's size-wise a manageable size of factory; it's not the most efficient one and we still have work to do over the coming six months and even longer to get it to be a top performer, but I don't see it as a major drag for us going forward.

James Moore

Sorry, just on that, if we go back, cooking was once virtually all of the core white profit. Is it that you think that it's just now structurally going to be lower because of the impacts that we've seen from that move or can we go back to where we were in the next few years?

Jonas Samuelson

Yes, no -- well I think, as I mentioned, it's not one of our more efficient factories so there is a drag from that. However, I think the other drag is that we're -- overall, our volumes are a little bit lower in cooking than they were at the peak which is also impacting the overall profitability side negatively.

Operator

Next question comes from Martin Wilkie from Citi. Please go ahead. Your line is open.

Martin Wilkie

Just a question on the cost efficiency, you mentioned that the SEK761 million includes some raw material, but even if we back that out, it still looks like the cost efficiencies were higher in the quarter. But obviously, you had some plans that have been in place for a few years, the manufacturing savings and so forth which I guess have a bit of a run rate effect. And my understanding is with those coming to an end, I just want to get some sort of sense as to whether we should expect those cost savings to actually taper quite quickly as the benefits of those manufacturing cost savings fall away. And I know you're no longer detailing big plans and so forth, but are there other things that are backfilling for the end of those large restructuring plans?

Jonas Samuelson

That's a good question. And the answer is yes, we have shifted our focus very much away from this long-running program, as you indicated, of moving factories to more in-factory efficiency improvements, very much driven by modernization, automation and ongoing continuous improvement. So we do not expect a significant reduction in our cost efficiency performance going forward. But the nature of the source of that will shift more from restructuring to continuous improvement.

Martin Wilkie

And if I could just have a follow-up on small appliances and I know you've touched on it already. But I think you've mentioned in the past that there's a very, very wide range of profitability inside small appliances. Obviously a big decline in the organic growth rate as you stepped away from some unprofitable lines, but it still suggests that there must be some businesses that are still in there that are deeply loss-making. I don't know whether you can give us some more detail as to what scope of small appliances you'd see as structurally unattractive versus how much you think you could fix perhaps.

Jonas Samuelson

Yes, so overall our small domestic appliances, meaning the small -- many of the small kitchen appliances are relatively unprofitable. It's a big range also inside of that but there we're making some portfolio changes. And then we have some lines in floor care in North America that are very unprofitable that we're also addressing. Those are the big negative drivers that we're addressing aggressively. Outside of that, we have the opportunity to have a very healthy and profitable core business.

Operator

Our next question comes from Anders Trapp from SEB. Please go ahead. Your line is open.

Anders Trapp

I have one question. I had a bit of a bad connection on the line here so I apologize if this question has been asked already. But I'm really curious about the, call it product pruning or the focus on premium products or profitable products over less profitable products. How far have you come in this development? How broad-based is it? Is it mainly Europe still or is it much more to do?

Jonas Samuelson

Yes, I think that's really the core, as we just discussed in the small appliances turnaround. Portfolio management and cost efficiencies are the core ingredients of the small appliances turnaround that we're driving. Also in North America, we're in major appliances North America. We will drive a harder portfolio management approach going forward. Asia Pacific, the turnaround or let's say the improvements that we're driving there are also to some extent portfolio management which is that we're pulling back from China and we're investing to grow in Southeast Asia which is a more profitable market opportunity for us. So portfolio management doesn't just mean product; it also means market presence and customers. So that's an overall approach that we're driving really across the business going forward as well. A lot more work to do.

Operator

Our next question comes from Olof Cederholm from ABG. Please go ahead. Your line is open.

Olof Cederholm

Just a question on the professional segment, you've had a fantastic margin story there for a number of quarters but the improvements seem to have stalled somewhat in Q2. Was there anything specific going on there? Or are you still targeting to drive a further expansion of profitability there?

Jonas Samuelson

Right, so I think we're at historical high margin levels with 13% in the second quarter which is not the strongest quarter for the business, so I'm very happy about the result. However, last year we had some big projects in Middle East and North Africa for professional that were big volume drivers and those were not reoccurring this year.

So the growth numbers were a little bit negatively impacted by the absence of those projects. The core underlying business is continuing to develop well. We're investing more in growing particularly our chains business and that is driving a little bit higher SG&A costs in the quarter. And that will continue to drive a little bit higher costs, but we do expect to have a solid payback on that with higher sales to chains going forward.

So we expect to have continued growth and continued margin expansion in professional, but, of course, at a slower rate, given the rapid improvements we've already had in the sector.

Olof Cederholm

And also, one small thing on China, you've been shrinking your position there for quite some time, when should we expect this to be done?

Jonas Samuelson

By the end of this year.

Operator

Our next question comes from Andre Kukhnin from Credit Suisse. Please go ahead. Your line is open.

Andre Kukhnin

A couple of questions, please. Firstly, on private label, because of the same technical issues, I may have missed it, but could you quantify how substantial that was in the quarter for you, that move?

Jonas Samuelson

No, we don't give the exact numbers for brand, channel and so on. What I could say is that our branded business grew in the quarter, not by much, but it grew; and our private label then shrank, obviously, creating that negative. So I'll leave you to estimate how much it is. Sorry about that.

Andre Kukhnin

Okay. No worries. Thank you. And on North America weather impact, I know it was quite relevant in the past this time of the year, could you just walk us through how that impacted the aircon year on year? And whether there is, now that actually I think there was a heating up, is there a chance for a catch-up there?

Jonas Samuelson

We had a solid development of air care in the first half of the year, both Q1 and Q2. So, yes, hard to predict what's going to happen going forward, it goes up and down. But I think we're happy with our air care season, absolutely.

Andre Kukhnin

Okay. And finally, on cash, it sounds like the message is for us not to get too excited about having generated already 70% of last year.

Jonas Samuelson

No, I think you should be very excited about that.

Andre Kukhnin

Okay. So if there is a catch-up in CapEx in the second half, could you give us an idea on what that SEK2.5 billion is going into?

Jonas Samuelson

Yes, sure. Overall, our budget for SEK4 billion remains intact and there is timing differences. The two main areas that we're spending money on are productivity investment, so automation; and, of course, new product innovation. So that takes up the vast majority, plus some of course, regular maintenance, but we have not really changed our plans at all when it comes to our investment plan.

Operator

Our next question comes from Erik Gunnarsson from UBS. Please go ahead. Your line is open.

Erik Gunnarsson

I have one question and that is regarding the Haier acquisition of GE. Now it's been some time since the announcement and I wonder if you have gathered your impressions. And what do you expect this will have on the American market for you?

Jonas Samuelson

Yes. We haven't, honestly, seen any change in behavior that is notable at this stage. So in that sense, it's hard to make any different assessment than what we have which is we actually don't expect, in the very short term, major changes in terms of the market behavior, given the cost structure and the offer structure that they have is what it is. Of course, we do expect and Haier have stated publically, that they want to use GE as a global premium brand and that they want to grow. And I think we should take them on their word for that, that they want to drive it as a premium brand that they want to grow. I don't think we have anything more original than that to say.

Erik Gunnarsson

All right. So I take it as you haven't taken any measurements for this acquisition, basically?

Jonas Samuelson

Taking any, sorry?

Erik Gunnarsson

Taking any -- you haven't done anything, basically, to prepare for when this acquisition is to be finalized?

Jonas Samuelson

Well, look, I think the U.S. market is very, very competitive and we're taking a lot of very, very aggressive measures to improve our cost efficiency in North America and you see that in the quarter, right? We're working extremely hard to protect and improve our margins by driving costs aggressively and by protecting and driving mix in the market. So no, we're not doing anything specifically for GE Haier, but we're taking very, very aggressive actions to protect our profitability in North America.

Erik Gunnarsson

Great. One more question. In terms of acquisitions, would you guide what geographical area you would be -- you find most interesting?

Jonas Samuelson

Absolutely. We basically indicated two main areas, one is professional, our professional business and that's really global, but we [Technical Difficulty] and then emerging markets and there I think both Asia, Middle East Africa and Latin America are interesting for us.

Operator

Our next question comes from Natalie Falkman from Carnegie. Please go ahead. Your line is open.

Natalie Falkman

I have three questions and actually, all of them on North America. You said that private label volumes were down and I would expect that that's not a one-off for Q2, so we could, might be expecting to continue a decline there. Would you expect to substitute these volume falls through your branded products or it is something that will wait on your sales and volumes going forward, at least this year?

Jonas Samuelson

Yes. I do think that we will continue to see -- it's fair to assume I think that we will continue to see negative development on our private labels. We're, of course, pushing to offset that through branded products but of course that will still, net-net, be a negative contributor compared to what otherwise would have been the case. But we do plan to offset the decline through branded products.

Natalie Falkman

And then a question on the branded products. It feels like you underperformed somewhat on the core home appliances and you mentioned that you're not really participating as aggressively in the promotions. Is this also something that we should expect going forward, that you accept lower volumes below what you said, the market is expected to grow, 4% to 5%, due to more focus on profitability and mix now?

Jonas Samuelson

Yes. Let's say, on balance our first priority is margin, to, as a Group, hit our 6% EBIT margin target. That is the top priority that we've set and, of course, that does mean a trade-off. And when we see that promotional activity is not contributing to the bottom line, then we would be more restrictive on that also going forward. But of course we participate and we participate aggressively in the promotional holidays in North America, but we're making sure that we do it in a way that's accretive to our profitability.

Natalie Falkman

And just a last question, North American margin was very strong and you mentioned that the aircon sales were good. How much of the margin contribution this quarter came from this seasonally stronger category?

Jonas Samuelson

Yes. We don't break out the detailed category profitability, but Q2 and Q1 are the air care quarters in North America and always contributive, are always contributive in the first and second quarter. And this year they -- it's happening as well; a little bit better than last year but it's still a relatively small portion of our overall sales. So it's not one of the absolute key drivers of our profitability, no.

Operator

Our next question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.

Johan Eliason

I was just wondering a bit about the North American situation. Now it's the second quarter, you talk about some price pressure and we're obviously seeing what's happening with the raw material cost. Aren't you worried that next year will be another 2011 when profitability totally imploded in the North American business, where you had negative pricing and the raw material cost going up as the Koreans were pushing into the wet segment? Isn't the situation right now that they are pushing into your core segment, the hot products?

Jonas Samuelson

Yes. Look, we have -- first, the answer is no, I'm not concerned that we will have a similar situation in, as 2011. However, of course, it's a very competitive market. There's nothing new there and I don't see a very significant increase in the overall competitiveness in the market. It's more around, on the ground, as we mentioned, these highly promotional holidays, like July 4 and Black Friday type of events. So that tends to go up and down a little bit over the years, how aggressive players get in those promotional seasons.

So I'm not particularly concerned that we will have any repeat of that. Of course, we have to be extremely on top of our productivity, our cost and that's something that we're driving very, very aggressively. Our focus is very much on the margin and ensuring that we continue to support and improve our margin, our operating margin, further in North America and across the Group. So if we have to make trade-offs, we will make those trade-offs with the focus on maintaining and improving our operating margin.

Johan Eliason

And on the hot products, you talked about the volumes not being as high as they have been previously. Are you losing share there? It's mainly due to this private label issue?

Jonas Samuelson

Yes. So we lost a little bit of share last year for -- actually, because of availability and we also see some declines in hot in our private label business. Not major but it is a negative impact.

Johan Eliason

But I guess you lost the share last year because of availability, but that should be fixed this year. Should you regain market share on that with that then?

Jonas Samuelson

Yes, but that's a battle that's store by store, that's an effort that we're working on.

Operator

Our next question comes from Martin Wilkie from Citi. Please go ahead. Your line is open.

Martin Wilkie

Just a follow-up, you had a question earlier about professional and you mentioned the North American business. If we think of your professional business, there's obviously laundry and the cookware. My understanding is that on the cooking side it's relatively high end compared to some of your peers. But when we think of the North America market, obviously, fast food, things like that, are enormous areas.

When you're thinking about the North American market for expansion, is it essentially still in the same areas that you are just now or would you broaden your definition of what you could supply into professional markets? Just to get some sort of sense as to why you're selecting North America as perhaps an area for expansion? Thanks.

Jonas Samuelson

Yes. So first of all North America is the largest professional kitchen equipment market in the world, so it's interesting from that perspective. The other thing that is an issue for us specifically is that of course a lot of the global chains are headquartered in North America and we're relatively weak in the North American market which means that we have a lower chance than we otherwise would have of being a key supplier to some of these chains. So that is one of our key strategic priorities, to make sure that we build the presence in North America so that we can become a true global supplier. I think we see a lot of opportunities there.

Martin Wilkie

That is essentially still -- if I think of your product range, it's essentially going to those key accounts in North America with your existing offering because obviously when we think of fast food and things like that, the market definition could be a lot, lot bigger.

Jonas Samuelson

Yes, but we do include the chains, quick food chains in our market definition, absolutely. And we do serve those segments today and we have good products for it. What we don't have is the proper market coverage in North America.

Operator

Our next question comes from Andre Kukhnin from Credit Suisse. Please go ahead. Your line is open.

Andre Kukhnin

Can I just ask on North America branded versus private label, you said branded grew, would it be fair to say that it grew in line with the market overall?

Jonas Samuelson

Slightly less.

Andre Kukhnin

And just on North America pricing, could I just venture a little bit into -- if I suggested that in effect the pricing itself, say year to date, has not been too different to what you've been seeing but there are some signs and you want to consciously put a message out there to the whole industry that you will not be aggressive in promotion seasons and you're very margin conscious, would that be going in the right direction with that?

Jonas Samuelson

No, we're not signaling to the industry at all. We're just stating what's happening in the market in the second quarter and how we intend to set our priorities going forward, meaning that we focus on profitability.

Andre Kukhnin

So it wouldn't be fair to say that you have some concerns in terms of what may be coming up in the end-of-the-year promotional period, given what you've seen on July 4?

Jonas Samuelson

No.

Operator

Our last question comes from Christer Magnergard from DNB Markets. Please go ahead. Your line is open.

Christer Magnergard

I continue here on the North American drag, a lot of questions on that today. But we can start with cost efficiency that you showed, of which SEK250 million was raw materials. I guess that Memphis is included in that number and if so, can you roughly give an idea of how much that benefited you year over year?

Jonas Samuelson

No, we don't break out individual factories or anything like that. But for sure we're seeing continued year-over-year benefits, more in the first quarter than in the second quarter and it will be less in the third quarter just as the year-over-year effects abate. It's a factor; it's not one of the absolute top factors but it's a positive.

Christer Magnergard

When you continue with this continuous improvement program and efficiency works you have in the factories, what is the run rate on the net cost efficiency rates we should expect going forward excluding Memphis and excluding raw materials etc.?

Jonas Samuelson

Yes, so excluding Memphis and raw materials, we expect to continue more or less at the pace we've been over the last few years. But the source of the improvements are shifting a little bit from -- and this is now a global comment, from manufacturing relocation to in footprint restructuring and continuous improvement initiatives expected to stay more or less where it is.

Christer Magnergard

And finally just on the Electrolux brand in North America, how does that fit into your portfolio thinking going forward and have you changed your strategy now after the failed GE deal?

Jonas Samuelson

It's an important brand for us, it's a very premium position that we have in North America. So the bulk of our branded business is the Frigidaire brand family and our focus going forward will very much be on the Frigidaire family of brands where we see a lot of opportunities to invest and further define and refine our approach to the market with Frigidaire. Electrolux will be important, but it's a relatively small part of total offering in North America.

Christer Magnergard

Great, thank you much.

Catarina Ihre

Thank you, Christer. And with that let us hand back to Jonas for a quick summary of the second quarter before we go on summer holidays.

Jonas Samuelson

Sure, thanks everybody for very good questions and thanks for joining us. So let us summarize some of the important highlights from the second quarter. First of all, the Group showed good overall performance driven by EMEA and North America also professional. Four of our six business areas achieved an EBIT margin above 6%. We benefited from higher volumes and price mix improvements thanks to our focus on active product portfolio management as well as continued favorable impact from cost efficiencies and raw materials.

Our European operation showed strong performance with higher earnings and margins and a sustainably lower cost structure. Profitability in North America was good driven by improved mix and cost efficiency and raw materials. The team in Latin America continued to focus on cost execution and to increase prices despite challenging market conditions in the region. Actions in small appliances are been taken and are on track, even though a full turnaround of the business will take some time. And finally cash flow generation in Q2 was strong and at historically high levels.

With that thank you very much and I wish you a great summer. Talk to you soon.

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