Electrolux's (ELUXF) CEO Jonas Samuelson on Q1 2017 Results - Earnings Call Transcript

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Electrolux AB (OTC:ELUXF) Q1 2017 Earnings Conference Call April 28, 2017 3:00 AM ET

Executives

Jonas Samuelson - CEO, President and Director

Anna Ohlsson-Leijon - CFO

Merton Kaplan - IR

Analysts

Andreas Willi - JPMorgan Chase & Co

Christer Magnergård - DNB Markets

James Moore - Redburn

Martin Wilkie - Citigroup

Andre Kukhnin - Credit Suisse AG

Olof Larshammar - SEB

Matthew Spurr - RBC Capital Markets

David MacGregor - Longbow Research

Jack O'Brien - Goldman Sachs Group

Olof Cederholm - ABG

Karri Rinta - Handelsbanken Capital Markets

Johan Eliason - Kepler Cheuvreux

Agnieszka Vilela - Carnegie Investment Bank AB

Lucie Carrier - Morgan Stanley

Erik Gunnarsson - UBS Investment Bank

Jonas Samuelson

Welcome, everyone, to the presentation and discussion of the first quarter of 2017. With me here today, I have our CFO Anna Ohlsson-Leijon and Merton Kaplan from Investor Relations. Let's begin the presentation. We started the year with good earnings performance across our business areas supported by a continued focus on active portfolio management, driving sales of higher-margin product and strong efficiency gain. The operating income increased versus last year to SEK1.5 billion and all business areas achieved earnings improvement. The operating margin for the group landed at 5.3% for the quarter and was 5.4% for the last 12 months, rolling.

EMEA had good contribution from product mix in the quarter. Sales declined somewhat compared to the strong previous year, however, we continue to gain market share within our strategic premium brands. In North America, good operational efficiency offset the competitive price pressure continued private label volume declines and higher raw material costs. The professional business showed strong performance with 8% net sales growth and operating margin expansion. Also, our Asia/Pacific business had an organic growth of 8% and maintained a good profitability level. Our operations in Latin America achieved volume growth combined with stronger recovery in earnings. This development was supported by growth in Argentina and Chile and the restructuring of the business in Brazil.

Similarly, operations in Home Care and SDA showed very good earnings recovery. Let's go through some of the key market highlights during the quarter. In December, Electrolux announced the agreement to acquire a leading water heater company, Kwikot Group, in South Africa. As of March 1, this acquisition has been completed. We look forward to strengthening our position in Africa and to drive profitable growth in the home care category. Moving to the U.S., we recently announced the agreement to acquire the leading manufacturers of beverage equipment, Grindmaster-Cecilware. The deal has been completed as of February 28 and we brought in Electrolux offering in the professional food service business in the U.S.

During the quarter, we also announced the deal to acquire San Francisco-based Anova, a smart kitchen appliance company with a direct-to-consumer business model. Their innovative connected sous vide precision cooker provides a strong contribution to our Home Care and SDA business. The acquisition was completed on April 4.

Finally, a few words about our product launch in the professional business. We introduced the first connected high-speed grill, SpeeDelight, during the quarter. We're very excited about this product which offers high-quality preparation of paninis, pizzas and sandwiches in a second. SpeeDelight will strengthen our chain business and will be commercially launched in the U.S., Europe and other selected markets in the first half of 2017.

Major Appliances EMEA showed a slight decline in sales during the quarter. This was mainly driven by lower volumes in Middle East Africa and some European markets and price pressure partly offset by strong mix development. Demand for appliances was slightly negative in Western Europe, mainly driven by the U.K. Demand in Eastern Europe increase somewhat in the quarter. Markets in Middle East and Africa, however, remained weak. Electrolux sales volumes were lower in the some European markets due to active focus on the most profitable products and brands.

Overall, Electrolux gained share in premium brands and improved the product mix in the quarter. Operating income was in line with our previous year while our EBIT margin increased 6.3% reaching 6.9% in the past 12 months period. This is an all-time high.

Strong mix and benefits on cost efficiency contributed to the development and more than offset the negative impact from currency and raw materials in the quarter. As mentioned earlier, the acquisition of Kwikot has now been completed and consolidated into statements as of March. Let's turn the page and talk about the market development in Europe.

European market was stable with total unit shipments flat in the quarter. Demand in Western Europe was down 0.8% with volumes being lower in the U.K., Italy and Germany. The outlook for demand in the U.K. still remains uncertain, particularly since higher prices aren't affected in the market. Demand in Eastern Europe was up by 3.2% and most markets in the region grew. We expect the European market to continue to be healthy in 2017 and remain with our forecast for about the 1% growth for the full year. This reflects a stable demand trend but also some weakness in the U.K.

In the first quarter, our operations in North America continued to grow -- to show operational improvement. The North American market showed positive grow during the quarter, however, we benefited relatively less from the market growth due to strategic priorities to focus on more profitable products and segments. Our sales continue to be impacted by lower volumes in the private label and the competitive price pressure. Earnings in North America increased versus last year achieving an operating margin of 6.1% in the quarter, an improvement of 1.1 point. The 12-month rolling operating margin is now at 6.4%. The improvement in the quarter was a result of our strong focus on portfolio management and product cost improvements combined with structural cost efficiencies which more than offset the higher raw material costs, lower volumes and the price pressure.

Let's turn to the next slide and talk about the market development in North America.

Market demand for core appliances in North America started the year healthy and grew 2.5% in the first quarter of 2017. With 4 consecutive quarters of strong growth, we believe the market for appliances in North America will remain positive and we expect to see economic fundamentals supporting growth in the industry.

For the full year 2017, we confirmed the outlook of the North American market growing in the range of 2% to 3%. Let's move to Latin America. Demand for appliances in the region started a slow recovery in the quarter. Market volumes in Argentina and Chile improved, while demand in Brazil continue to decline due to the weak macro environment but at a substantially lower pace. Electrolux volumes improved in several markets and had a positive contribution to the top line. However organic growth was negatively impacted by price pressure which is closely related to the favorable currency trend in the market. In the quarter, our operations in Latin America showed strong earnings recovery due mainly to continued cost-saving initiatives, but also due to the ongoing business repositioning. We expect the important Brazilian market to recover slowly during 2017.

Let's turn the slide and talk about our operations in Asia/Pacific. The market demand for appliances in Australia and China increased in the quarter, while demand in East Asia shows a mixed pattern. Our organic sales growth of 8% was driven by strong volume growth in China and Southeast Asia. New products rollouts and better mix in strategic markets also contributed. Moreover, the acquisition of Vintec had a positive impact of 1.3%. All in all, EBIT in Asia Pacific increased somewhat and margins remained stable at 4.7% in the quarter and 6.7% for the last -- rolling 12 months.

Strong contributions from sales volumes, favorable mix development and increased cost efficiency contributed to earnings. After the quarter closed, we signed an agreement to establish a joint venture with Midea to promote and distribute the AEG brand in China. We're combining our premium products and brand expertise with a strong distribution network in EMEA. This will, in the long term, enable us to drive profitable growth in the premium segment of the Chinese market.

Let's continue with Home Care and SDA. During the quarter, the Home Care and SDA business continued to execute on active portfolio management. Our volumes in Europe and Asia continue to grow and the Eureka brand in the U.S. has now been divested. In total, our organic sales declined by 3.3%. Our operations showed a recovery in profitability in Q1 and the EBIT margin increased to 3.9% from 2.3% the previous year. We continue to execute on the cost-reduction program and the repositioning of our business to profitable categories through active portfolio management. As of April, the acquisition of the U.S.-based smart kitchen appliance company, Anova, was completed.

Now let's turn to our professional business. Professional Products continued to show good performance in Q1 and benefited from strong profitable growth in its strategic market. Sales growth was positive in Western Europe, North America and Japan, while the trend in emerging markets were stabilized. Our professional business grew about 8% in the quarter and all regions contributed positively. The 2 product lines, food service and laundry equipment, both showed growth in the quarter. All in all, our professional business achieved an EBIT margin of above 14% in the quarter, driven by higher sales volumes and improved price mix. The investments continued in innovative products and new channels to further support the profitable growth agenda. And now, I would like Anna to go into the numbers and go through our financials and cash flow in the first quarter. Please, Anna?

Anna Ohlsson-Leijon

Thank you, Jonas. Let's start with the financial overview. Organic sales growth was down 2.8% in the quarter. This was due to continued price pressure in several markets, lower volumes in EMEA and private label in North America in combination with the ongoing effort of exiting less profitable products in Home Care and SDA. The currency translation impact was positive 5.9% and acquisitions and divestments combined at a negative impact of 0.4%. This resulted in reported sales growth of 2.7%. Total gross operating income which is defined as net sales minus cost of goods sold, increased versus Q1 last year and translated into a gross margin of 20.8%. Earnings were up compared to last year, driven by continued good performance and cost improvement across our business areas. EBIT increased by 21% versus last year and the margin in the quarter increased to 5.3% compared to 4.5% last year, an increase of 0.8 points.

Cash flow was slightly lower than in the first quarter of last year despite the earnings improvement. This was mainly related to the negative change in operating assets and liabilities year-over-year. Earnings per share showed an increase from SEK3.04, to SEK3.77 for the quarter. Let's move to the sales and earnings bridge on the next slide.

Let's start with organic growth. Volume price/mix resulted in a negative impact of SEK359 million in operating income in the first quarter. Price was a key negative driver due to continued pressure in North America, Europe and Latin America. Volumes were negatively impacted by Europe's -- decline in private label volumes in North America and the portfolio management activities throughout the group. These effects were partly offset by positive contribution from mix in EMEA. The impact from raw materials was SEK200 million negative.

Moving to the net cost efficiency. This shows an improvement of slightly more than SEK800 million. This was related to positive impact of efficiencies related to product costs and structural costs throughout the group. In total, we had a margin dilution of 1.2 points from the organic part and 0.7 point dilution from raw materials which was offset by 2.9 points in positive contribution from net cost efficiencies. In addition, we had a slight positive contribution from the net of acquisitions and divestments. The negative effect from transactional currency came mainly from the Egyptian pound and the British pound. The translation effect in the quarter was positive.

Let's look into the drivers of the net cost efficiency on the next slide. As you have seen in the EBIT bridge, we achieved a significant contribution from net cost efficiency of SEK800 million in the quarter. This was mainly driven by improvement actions in North America and Latin America. The key drivers in the structure -- in the cost efficiency can be broken up into two parts, the variable and the structural cost. About SEK550 million was achieved in variable cost improvements comprising of purchasing savings, improved production efficiencies in terms of labor and overhead and contributions from logistics and warranty.

Efficiencies linked to structural cost takeout amounted to a net of about SEK250 million. This was mainly related to operational improvements within fixed factory overhead, warehousing and sales and admin areas. This improvement is showed net of any investments in marketing and R&D. To summarize this, we're well on track related to delivering on our cost efficiency targets. In fact, with the uncertainties in the beginning of the quarter around the total negative impact of raw materials, increased focus was put on early delivery of cost efficiency activities. And discretionary spending was put on under very tight control. This resulted in a high net cost efficiency contribution already in the first quarter.

Let's go to next slide and the cash flow. Cash flow after investments but before acquisitions ended at a negative SEK958 million. Q1 is normally low and reflects a seasonal pattern with buildup of inventories. As we have seen, the improvement in earnings contributed positively, while changes in operating assets and liability had a negative impact. This is mainly explained by a year-over-year change in the other operating items such as provisions.

Our net operating working capital, measured as inventories, trade receivables and accounts payable, continue to improve despite the impact of the acquisitions of Kwikot and Grindmaster-Cecilware. The average net operating working capital in relation to average net sales for the quarter came down to 4.9%, an improvement from 5.9% last year.

Acquisitions in the quarter impacted the group's cash flow with SEK2.4 billion. Now let's take a longer perspective on the cash flow. Similar to the historical trends, Q1 is the weak quarter in the year. For the reasons explained before, the current quarter reflected a seasonal pattern in terms of cash flow. The strong cash conversion rate we've had in the past 2 years has given us a strong balance sheet and means that we're financially well positioned to continue to invest in our business in our strategic growth areas. And with that, I would like to hand back to you, Jonas, for a summary and conclusion.

Jonas Samuelson

Let's move on and summarize this presentation with the outlook for Q2 and the full year. Looking ahead into the second quarter of 2017, we expect consumer demand to continue to drive growth in the appliance industry. We expect a stable market trend in Western Europe to continue in most markets. However, the outlook for U.K. combined with a political environment in some markets remain uncertain. In Eastern Europe, we expect the region as a whole to show growth. We anticipate demand in North America to be positive for 2017, driven by good development in new housing starts and favorable consumer confidence. Although growth is expected to remain positive, it's likely to be at a lower level than we have seen in the past few years.

Latin America has shown a slow recovery and we expect demand in Brazil to remain slightly negative but with some signs of market stabilization in the region in the second half of the year. Demand in East Asia shows a mixed pattern with an overall positive outlook. The Australian market has continued to show positive growth for several quarters and we estimate the market to be slightly positive supported by stronger-than-expected commodity markets. Now to our business outlook.

In terms of overall sales volumes, we foresee a decline mainly related to private label business in North America. For EMEA, uncertainties in demand related mainly to the U.K. and Middle East Africa remains. We expect Asia/Pacific and professional to continue the positive momentum in Q2. And Latin America, we expect to see slight year-over-year volume improve. In terms of price/mix, we expect price pressure to continue in several of our regions, driven by intense promotional activities, although to some extent, offset by improved mix. We're seeing higher negative impact from raw material cost with the rest of the year and therefore adjust the net impact of previously communicated SEK900 million to SEK1.4 billion for the full year 2017.

This is mostly related to increase prices for steel. Further, we have accelerated our cost efficiency efforts and now, expect to deliver net cost efficiency of SEK2.2 billion for the full year 2017. With the strengthening of the Brazilian real, we see less impact from other currencies in Latin America. In EMEA, the depreciation of the British pound and the Egyptian pound, however, still remains a headwind for the year. Our intention is to mitigate this through price increase. At current rates, we expect a net negative currency effect of SEK15 million for Q2 and net positive of SEK125 million for the year.

With that, I'd like to pass it to Merton to open up for Q&A.

Merton Kaplan

Thank you very much and good morning, everyone. We're now ready to open up the Q&A session. [Operator Instructions]. And with that, I leave the word to the operator to moderate. May take the first question, please?

Question-and-Answer Session

Operator

[Operator Instructions]. And the first question comes from Andreas Willi from JPMorgan.

Andreas Willi

It's Andreas from JPMorgan here. My question is on the cost savings that you upgraded, if could help us to understand a bit better. You also mentioned you've cut back on discretionary spending early in the quarter. So maybe the SEK2.2 billion, how does that break down into, in that sense, goods cost savings that don't have an impact on the commercial activity or market success and some of the more discretionary spending you have taken that could impact market demand or -- not market demand, demand for your products and promotional activity? And if you look at the cost savings that you are getting historically, you always needed to take restructuring charges, it took some time and so before you recovered an impact from raw material, a weaker demand.

Now you seem to be able to be much more flexible, much quicker in getting savings up when something goes against you like raw materials. What has changed? Is it just regions because this is more U.S. and Latin America versus Europe, where it's more expensive? Maybe you can give a bit of a flavor what's different to the past in terms of where you get these cost savings without having to invest in restructuring as much as in the past?

Jonas Samuelson

Very good. I'll start and see if Anna has something to add. I think yes, first of all -- I think I'll combine sort of the answer to both questions. And yes. First of all, you're right. More of the savings -- much more of the savings are now coming from North America and Latin America. And to your point, the cost of executing those savings are substantially lower in those regions than they are in Europe and require shorter lead time, right? So that's one thing. And as we indicated during last year, we see a lot of continued potential in those 2 main regions, where maybe we haven't put as much focus on cost efficiency, historically, as we have in the EMEA region.

So we do see more, let's say -- I will say bigger impact in general, of our cost focus because I think we have a broader and more structured approach, both, let's say, short term and long term continuous improvement divisions, so on. Then I think the -- if you compare, let's say, restructuring savings versus what we're doing now, previously, more of our savings came from consolidating our manifesting footprint, moving to lower-cost forces. Whereas now, it's more driven by modernization, automation, cost efficiency in our existing footprint which, inherently, costs less in terms of restructuring.

If we then look at the outlook for the year and the split between structural savings -- structural cost saving, the SG&A savings and variable cost, I think we will see more or less the same split. We're accelerating our, let's say, our continuous improvement program, focus on our operational structural costs. So we -- the mix will actually further increase a little bit from structural piece versus the variable piece. But that's not driven by reducing marketing or anything like that. And it's more driven by continuous improvement activity.

And finally, my final point on discretionary spending and marketing and so, those reductions have also mainly been in North America and Latin America which is connected to our portfolio management focus, where we're focusing our efforts on our most profitable product categories and hence getting efficiencies also in our go-to-market spend. I don't know if there's too much to add to that.

Operator

Our next question comes from Christer Magnergard from DNB.

Christer Magnergard

Well, I kind of have a follow-up question on the cost synergies program. You have quite big savings in Q1, SEK800 million. In the coming quarters, according to your guidance, about SEK450 million or so by quarter. And when I listen to you, it doesn't really feel like -- it seems like this -- what you do next quarters will -- do you have any other pipe than what you're doing now in Q1. So why lower savings rate next quarters? And also, maybe if you can comment on what kind of rate we should expect from 2018, '19, not like a number but more gut feeling, what we should expect?

Jonas Samuelson

Right. So in terms of the pace, there's 2 effects. One is that year-over-year, we kind of accelerated. Lastly, we kind of accelerate our cost-reduction activities over the course of the year, so you get a little bit more of a year-over-year effect here in Q1. That's one factor. And also, we have been, let's say, pairing back our plans -- spending plans in the first quarter than in response to these higher raw material headwinds. And we expect to use less of that tool going forward as we manage our portfolio mix and price going forward. So we see, let's say, a more balanced approach for the rest of the year. In terms of longer term guiding -- guidance, I think that we see a lot of continued opportunities to drive continuous improvement, both in our product costs driven by modernization, automation and continued structural cost, continuous improvement program, specially lean management of our structural cost. So I'm not ready at this point to give guidance for 2018 and beyond, but we have good confidence that we'll continue to be able to drive good cost in the coming year.

Christer Magnergard

That's good. A very short follow-up. The SEK40 million transaction cost you mentioned, is that in Q1? And if so, in which division?

Anna Ohlsson-Leijon

Yes. Yes, this is in Q1 and it is in EMEA and professional.

Operator

The next question comes from James Moore from Redburn.

James Moore

I wonder if could ask a little bit about the selectivity program, ask about the savings. It feels like mix is the other story going on here. And selectivity was mentioned a few years ago in Europe. You've continued to mention it for the U.S., Europe, Small Appliance, more than the other areas. How far are we through the journey? Is there any way you can help us quantify that we had 15% of sales in these regions that we thought we needed to get out of? We're now half way through that, 80% of the way through that. Where are we in the journey of selectivity, please?

Jonas Samuelson

Yes. I guess we use the word portfolio management, but yes, I think it's a good question. Basically, what we have done for all our business areas is that we have done traditional, not revolutionary kind of bust the matrix thing, right? What subcategories do we have in fixed or exit mode. Where do we mill, where do we grow profitably, where do we accelerate growth. And we've done that in a, as you know, in a structured way in EMEA for several years. And we've done the same now for all our business areas.

And I would say we made good progress in '16. We expect to continue to make good progress in '17. Look, there's -- I don't think there's an end to that type of work. There's always going to be categories where we'll make more money that we can invest more in and categories where we'll make less money where we need to change our approach and potentially invest less money or invest a lot of money to make it more profitable. So I think that's just a management approach that we will continue to drive.

In terms of the pace of change, I think that we're kind of at an accelerated pace of change right now in -- certainly in Small Appliance -- sorry, Home Care and SDA and in Latin America, where that's kind of at a high pace now and that would probably moderate overtime. Whereas, in North America, we have a lot more to do from that.

James Moore

If I could just follow up quickly on raw materials. U.S. peer mentioned resin. You mentioned steel. Just interested in the difference there as to what you're seeing.

Jonas Samuelson

Yes. I think it's fair to say that we have seen a lot of volatility and market disruption in resin. And we're seeing headwinds there as well. But that was, to some extent, already a big part of the forecast that we had in the SEK900 million that we release in December. And we see that moving up as well. But in just in kroner terms SEK1.4 billion guidance versus our SEK900 billion, a good chunk of that is steel. And also, a relatively high part of that is EMEA, both steel and resin.

Operator

Our next question comes from Martin Wilkie from Citi.

Martin Wilkie

It's Martin from Citi. Just going back to the North American business. Obviously saw some very impressive margin expansion despite the organic growth. I was -- I wondered if you could go into a bit more detail on the slide label, in terms of how you're adjusting for essentially fixed cost and volumes, given the apparent level of decline inside that part of the business. And as that business presumably continues to get smaller, if it's very easy for you to reset, lower the fixed costs or -- to that low level of volume. And a related question to it is if you could just talk about whether the big mix differential on white label versus the rest of your own branding in North America in terms of the average margin for those 2 categories of products?

Jonas Samuelson

All right. So internally, what we really drive here, the program, if you will, is Frigidaire first. So we're really focusing our efforts on driving the Frigidaire brand friendly, both short term and long term. That's already today, well over 70% of our sales and we're growing that. And that allows us to reduce cost on everything else. So -- in private labels and other activity. So this is a big vehicle for cost efficiency for us. Then of course, in terms of adjusting our fixed cost structure to then potentially lower private label sales, I think it's a combination, of course, of being very, very focused and determined to increase cost efficiency across the board. And at the same time, investing to grow our distribution capabilities in alternative channels. So it's about managing that balance very, very carefully. But I think it's obvious we've been able to show and we have more to come that there are real benefits from this portfolio and brand focus that we're driving now in North America that allows us to take out a lot of costs and we will continue to do so.

Operator

The next question comes from Andre Kukhnin from Credit Suisse.

Andre Kukhnin

Can you talk about M&A? Clearly, there's been a step up in activity. And could you help us, firstly, with just how much you've acquired in terms of sales for 2017, '18 already? And then more interestingly, how should we treat that going forward? Is this the sort of the pace that you've set? Or is this any trend that should accelerate from here with increased M&A activity?

Jonas Samuelson

Yes. I think I'll pass that to Anna and then I can fill in.

Andre Kukhnin

Yes. In terms of net sales for the year, we expect the contribution of around SEK1.9 billion in net sales. And of course, in terms of the activity, we have not an M&A strategy but we have a growth strategy. So we're constantly, of course, evaluating potential acquisitions that fit our strategy. And the timing of that is difficult to say. But we have a focus, high focus, I would say, on M&A.

Jonas Samuelson

You know it, right? It's impossible to give guidance on a quarter-by quarter or even year-by-year basis on the pace of M&A. However, I think it's fair to say that we have a clear strategy of where we want to grow, where we want to strengthen our position. And we see opportunities in those places. But we expect to continue that and giving guidance on the when and how and how much, that's much harder.

Andre Kukhnin

I wasn't so much about guidance, instead by quarter. Of course, I understand, it's just more of you've acquired close to 2% of sales. And can we think about Electrolux now as a continuous acquirer of sort of a certain amount of small deals yielding something like that or thereabout? Or has there just been sort of the refocus on growth and within that M&A and that's resulted into kind of split of deals and from here, it's quiet highly uncertain? I guess how full is the funnel?

Jonas Samuelson

I would say it's more towards your first point, right, that, yes, we can expect a continued sort of flow of small to medium-size deals which is, obviously, very, very hard to predict the timing, an exact one. But yes.

Operator

The next question comes from Olof Cederholm from ABG.

Olof Cederholm

It's Olof from ABG. I have a question about the Asia/Pacific division and especially maybe the JV. Could you talk a little bit more about that? What time plan is? And what you think can be done through that JV?

Jonas Samuelson

So as we talk about many times, the Chinese market is extremely competitive with very strong local players in that. So it's been difficult for us, as you're aware, to grow profitably in China. We have had a very sort of deep review of our strategy in China and we see a dual path going forward. One is that we continue to drive our Electrolux brand in-house with a more premium focus, focus on the construction business and seeing the opportunity to drive that profitably. Then we have this opportunity with our premium Germanic AEG brand.

It's previously in not really existing in China, but we do expect that it has a very good fit with premium Chinese consumers. And there, we can leverage together with Midea their enormous distribution sale in China and build -- and this is something that they need as well to establish more of a premium position and it fits our needs for high scale and capability and distribution. So we will start at a modest pace, I would say, because I mean this is really a premium launch.

We're going to start mainly with European sourced AEG product. And then overtime, we will develop a broader portfolio with Chinese sourced, Midea sourced premium AEG products for the Chinese market locally. So this is China-only strategic initiatives, it's important to mention. We think this is a good mix for us going forward and will allow us to participate in the huge Chinese market in a profitable way and with a manageable level of investment.

Operator

The next question comes from Matthew Spurr from Royal Bank of Canada.

Matthew Spurr

I had a question on the North America retail environment. Just in terms of [indiscernible] of retail for traffic declines [indiscernible] is a big shot at the moment. How do you think this will affect the appliance industry going forward, particularly prices, if there's a channel shift involved? And second part, that was -- in terms of the overall Sears exposure, can you remind us again what the private label percentages for your own brand exposure is to Sears as well?

Jonas Samuelson

Yes. So the private label, to exposure to Sears is a little bit more in 7 -- 15%. And then we have a little bit of our own label as well, but that's a smaller part. Yes, the shift in retail patterns that's happening globally, I think, yes, is it does -- when it happens, it causes a bit of, of course, of disruption for everybody involved, but it doesn't fundamentally change the possibility to be profitable in a market. I can take the example of the U.K., where something like 45% of the major appliance sales are online today through pure players and through click-and-mortar.

And we see no real difference in margins and profitability in the U.K. versus, let's say, the rest of Continental Europe where the online mix is substantially lower. So I think this requires a lot of focus and attention from us and our retail partners to really meet consumers where they want to shop and how they want to shop. So it's a big effort, but it's not necessarily it will manage a significant impact on our ability to act profitably in the market. I'm not sure if that answers your question.

Matthew Spurr

Where do you think we're in sort of the change in channel shift in North America? Or is it sort of still very early stages for the appliance industry there having been going on for sort of sometime and we're at sort of a steady pace?

Jonas Samuelson

Yes. I think we're still in the early stages. I think around 12%, 13% of the U.S. market is online, either -- and very little of that is pure-play and most of it is what we call click-and-motor. Whereas in Europe, it's more like 20% now. And again, the U.K. is between around 40%, 45%. I think it will continue. However, that doesn't necessarily mean that we're selling through new partners. That's one of the things that we're seeing in Europe is that our traditional retail partners are massively increasing their investment in online and of course, they have strong brands that consumers trust. So it is a revolution in terms of how consumers shop, but it's not necessarily a revolution in terms of who we sell to, if you know what I mean.

Operator

Our next question comes from David MacGregor from Longbow Research.

David MacGregor

My question was more with regard to North America and the private label business and if you think about some of the share loss at Sears with their Kenmore brand, I'm just wondering how you're positioning the Frigidaire brand to try and pick up some of that volume. And how much volume you think you can pick up with your branded product that maybe you're losing on the private label?

Jonas Samuelson

Right. So it's a little bit of a category by category perspective, right, for us. I think you're aware that in cooking, we have a very high share of the Kenmore business and it's, relatively speaking, more difficult to pick up an equal share of that in Frigidaire. Whereas in our other categories, it's more of a set of -- more even spread. So we have a good opportunity to pick that up in other channels. And that's something we're really paying a lot of focus and attention to growing our, how should I say, our distribution network and retail partners outside of Sears throughout the U.S. It's a high focus area for us now. So overall, I feel relative confident in our ability and -- but the biggest challenge is in cooking.

Operator

And our next comes from Jack O'Brien from Goldman Sachs.

Jack O'Brien

We haven't touched very much on Latin America yet, so just interested in your thoughts about where margins could get to this year in light of cost savings in a slightly negative market. And the second question was just on the structural cost-savings you're hoping to take out of the business. How should we be thinking about your footprint, obviously, over the last decade or so? Your footprint has changed quite materially. You had a push to low-cost countries, but where can that get you from here?

Jonas Samuelson

So in Latin America, I think we're -- look, as we've always said, we have a very, very strong operation, primarily in Brazil, but also in Argentina and Chile. And with a little bit more stability in the market, a little bit more stability in the currency, the very aggressive actions we're taking both on a cost side and on portfolio management right now, I think it's really on track to bring this back to our historical profitably levels, right? And historically, we've been around 6%, I think it's a too far strategy to get closer to that this year. Obviously, this takes a bit of time to really adjust and our entire operation to this new sort of market demand reality. But we expect to continue to improve during the year and over the coming years to come back to our historical profitability level. I lost your second question.

Jack O'Brien

And just on the sort of structural cost savings, I was wondering about the footprint changes?

Jonas Samuelson

Exactly. The footprint -- I think that, as we said, the big transformation in our manufacturing enforcing footprint is done. From here on, it's more around scale and efficiency and modernization, automation. I mean that's what we're really focusing on. I'm not saying that, that will eliminate any footprint changes going forward. I think we're always looking at our -- an optimal manufacturing footprint. But the big program, for sure, is over.

And then the question is more, all right, when we talk about modernized product in highly automated digital factories, if you will, what is the optimal scale of that and how do you kind of organized your manufacturing to take advantage of that scale. And that's where our focus is going forward, high scale, highly automated factories assembling modernized products. And we're making good progress on that journey. But I have a say that there's a lot left, a lot of opportunities on that for the coming 5 years.

Operator

And our next comes from Olof Larshammar from SEB.

Olof Larshammar

One question regarding pricing, given that we're assuming that raw material prices are increasing quite significantly. What do you see in terms of pricing onwards? And in general -- but it would also be interesting to hear your thoughts on the U.S. market where we have seen quite intense price competition during the latter part of 2016 and also beginning of 2017.

Jonas Samuelson

Yes. I think we're projecting a bit of a moderation of our -- of the price pressure in our key markets going forward. I don't think we'll turn to price positive. For sure not. There's always an underlying effect. Price down, mix up pressure in our Western markets, both Europe and North America. And we expect that to continue as we continue to introduce new innovative product at higher price points. The older products then go down in price.

So that's the best structure. And we expect that to continue for the foreseeable future. If you think more about the promotionally driven price pressures, that really accelerated specifically in North America in the second quarter of last year, year-over-year, we expect that to moderate a bit and if not looking like it's to going to accelerate further from where it is right now. So a little bit more of a moderate pace, but continued underlying, let's say, price pressure and mix up, that's kind of the story.

Olof Larshammar

And do you see potential given higher raw material costs and that you or your competitors are trying to offset a part of that by raising prices?

Jonas Samuelson

Yes. So resin prices, but that only sort of moderates the negative pricing environment as opposed to turning into profit because we're -- the way we saw price and I guess the industry practice is that maybe just to say that what we see -- what we call price is the product that's been in the market for one -- for at least one year. What was the price of that product a year-ago, what's the price of that product this year. And then everything else sort of newly introduced products and even innovations, we put under mix.

So that kind of means that there is this natural ongoing price pressure in the market which we then have to offset and hopefully more than offset by introducing new and innovative products that are more desirable at a higher price points. And that's what we've been, I would say, very successful in doing in EMEA over the last several years and we're accelerating that effort in North America right now with a more focused portfolio.

Operator

Our next question comes from Karri Rinta from SHB.

Karri Rinta

Karri Rinta, Handelsbanken. A quick follow-up on that topic in terms of pricing and more broadly on volume price/mix. You guide for continued negative volume price/mix in the second quarter. But yet, for the full year, you guide for flat. So I'm curious which levers do you intend to pull in the second half to get to the flat volume price/mix, especially since given based, on your guidance, it would seem that the input cost headwinds are intensifying. And therefore, the volume lever can be a bit tricky one. So that's my first -- not a real question but a follow-up question to the previous question.

Jonas Samuelson

So if you think about sort of the year-over-year effect, we had stronger volumes in the first half of last year versus the second half. So that's the year-over-year effect that has a positive impact in the second half versus the first half. Then the second part, I think, is that if you think about EMEA, we expect the first half of it -- and from the start, we expected the first half this year to be a little bit impacted by a lot of the political headlines and a lot of important markets. And then as that settles down, we see continued growth in Europe and Western Europe. And similarly, for Middle East, Africa, lot of turbulence right now. Egypt, we talked about. And then we see a moderation of that going forward.

Third fact is Latin America, we expect to continue overall negative net volume affect, market demand effect in the first half of the year turning to a positive in the second half, as these positive macro factors that are prevailing in the market now start to translate into consumer demand in the second half. If you put all that together then you get a slight negative in the first half and the slight positive in the second.

Karri Rinta

Okay. And just to clarify, it's mostly volume that you are incurring?

Jonas Samuelson

Volume and a little bit less year-over-year net price. And good mix from the product launches that we're driving mainly AEG in Europe that's ramping up over the course of the year and new launches on the Frigidaire in North America. So that's the main story here in the second quarter.

Karri Rinta

Perfect. And then very quickly on FX. Positive 6% impact on sales and hardly any impact on EBIT. You used to provide a sort of EBIT or FX Bridge on earnings, in your conference call slides. You don't do that anymore. So maybe a few comments on why the translation impact on EBIT was essentially 0?

Jonas Samuelson

It's positive, but maybe -- I don't know, Anna, if you have anything on that?

Anna Ohlsson-Leijon

Yes. I think it's -- this is mainly related to the different, let's just say, [indiscernible] how they affect kind of the bottom line versus the top line.

Jonas Samuelson

In fact, we feel a very strong improvement in Brazilian reals, but there, of course, our margin -- actually margin is not very high, right?

Anna Ohlsson-Leijon

So it's a mix that really inflates this a little bit unusual pattern in the quarter.

Jonas Samuelson

But it's mainly, I would say, the real. I haven't bumped into it but [indiscernible].

Anna Ohlsson-Leijon

Yes, it's reals and the pound, exactly. And then the effect on, of course, the total translation effect in relation to that.

Jonas Samuelson

Yes. So if you think about the Brazilian real, significant strengthening at low margin whereas the British pound, significant weakening at higher margins.

Operator

Our next question comes from Johan Eliason from Kepler Cheuvreux.

Johan Eliason

This Johan Eliason, Kepler Cheuvreux. I just had a quick question, a bit related to your cash flow. You, once again, managed to improve sort of your networking capital ratio to sales, I understand, in the quarter. I think you sort of alluded to that this is expected to sort of flatten out going forward and improved cash pressures should mainly come from improved profitability. Can you say anything about the trend for the net operating capital going forward?

Jonas Samuelson

It's not the right path but Anna?

Anna Ohlsson-Leijon

Yes. I think that is correct, that we have seen for quite many years now a very good development in our net operating working capital. And we continue to drive our -- some focus on these programs across all sectors. What you see in the quarter is that we have added the acquisitions of Kwikot and Grindmaster-Cecilware on the working capital but not on the net sales here in the measurement. So that's a little bit of a temporary effect there that you see mainly in inventory. But we plan to continue to focus on working capital, but the improvement going forward will not be at these levels that we have seen historically. It will more flatten out.

Merton Kaplan

Operator, we have room to take 3 more questions and then we have to close.

Operator

The next question comes from Agnieszka Vilela from Carnegie.

Agnieszka Vilela

I have just a follow-up question on the effect on raw materials and net cost efficiency savings. If I sum them up for Q1, I guess, that you achieved a net positive effect of SEK600 million. And then looking at your guidance means that these 2 effects will average then some SEK70 million positive per quarter. Could you just help us out and tell us about the profile quarter-by quarter for both the savings and raw material impact?

Jonas Samuelson

Yes. It's relatively evenly spread, so there's no major deviation. Maybe we're still very focused in Q2 here. But overall, it's relatively evenly spread. Yes.

Operator

The next question comes from Lucie Carrier from Morgan Stanley.

Lucie Carrier

Just a follow-up question on the U.S. information, please. I was just wondering how you're managing. I wanted to understand the dynamics between, on one hand, strong decline in your private label and your choice also to kind of favor higher margin businesses or your choice around selectivity and the capacity utilization of your plans and just specifically, I'm thinking about Memphis and maybe you're concerned that at some point, you could have also -- there could be a tipping point where that selectivity, the decline at the private label would also impact the absorption of costs. So just wanted to understand the dynamics here, please?

Jonas Samuelson

Yes. As I said, the biggest impact we have from decline in private label is on cooking. So indeed that is a pressure and we're working very aggressively to address that. However, what I would say is that -- I mean the vast majority of our cooking business comes from our Springfield facility. And actually that facility has been running 3 shift on Saturdays. So actually as the volumes comes down a bit there, that's not necessarily much a huge pressure. The Memphis operation is more specialty project -- product, lower volumes and higher values. We're less impacted in Memphis than in Springfield.

Operator

The final question comes from Erik Gunnarsson from UBS.

Erik Gunnarsson

Well, I just had one question and that is related to the Brazilian U.S.D relation again. How much are we seeing in Q1 of the sharp decrease and how much are we expected to see sequentially in Q2?

Anna Ohlsson-Leijon

We can say that in Q1, it's around SEK100 million. And in Q2, we expect around SEK40 million, you can say.

Jonas Samuelson

Very good. Thank you very much for those very good questions. And let us then summarize the highlights from Q1. The group achieved good operational performance driven by all business areas and this resulted in an increase in our EBIT margin to 5.3%. As mentioned, we're focused on active portfolio management and to drive cost efficiencies as well as mitigating increased cost from raw materials.

We're doing this very successfully. Professional delivered good profitable growth in the quarter and our Latin American operation showed a recovery with improved earnings despite weak macro economy in the REIT. Actions that we saw profitability in Home Care and SDA is continuing to make progress. And in the quarter, we also closed 3 acquisitions within strategic areas of future growth for the Electrolux group. To summarize, Electrolux has continued to execute on the path to create sustainable profitability in our business with a strong financial performance.

Jonas Samuelson

With that, I'll also like to highlight that we have announced the save the date for our Capital Markets Day that will be held in Stockholm on November 16. I hope to see you there and thank you for listening to the presentation. Thank you very much and have a good weekend.

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