Electrolux AB

Good morning, and a warm welcome to Electra's second quarter 2020 results presentation. With me today, I have our CFO, Therese Fredberg, and our Head of Investor Relations, Sophie Arnius. I'd also like to mention that this session is recorded and will be available on our website as an on-demand version. Let me begin by updating you on the Q2 impact of the coronavirus pandemic. During April and May, we experienced significant volume drops across most of our regions, due to the strict countermeasures initiated by local authorities. As restrictions were eased or removed, demand picked up in June, even if the pace of recovery varies greatly between regions. In some markets, such as most of Europe, the recovery pace in the latter part of the quarter has been faster than predicted. It was therefore encouraging that the whole group had an organic growth of 3% in June, compared to the 30% decline we experienced in April. All in all, the organic sales in the quarter declined by 17%. As for production, in April we produced at an average rate of 40% compared to our normal run rate. Towards the end of April and continuing into May, we could slowly reopen the vast majority of the factories previously closed. This means that in June we were more or less back to normal run rate, with the exception of Mexico. Looking closer at our business areas, for three of our four business areas, the impact has primarily been on the demand side So we've been able to start up production to meet demand, albeit with some backlog. For North America, on the other hand, where we have production and sourcing in Mexico, we had major production constraints from our two factories, as these were mandated to be closed for a large part of the quarter. End of June, all factories are open again, including also our laundry factory in Mexico. Our U.S. factories were also impacted by constraints in supplies for Mexican suppliers. Looking specifically at our financials in Q2, organic sales decreased by 17% as a result of lower volumes across all business areas due to the shutdown in the markets following lockdowns and restrictions to limit the spread of the virus. In North America, volumes were also impacted by production constraints. As I previously mentioned, the market situation overall improved during the quarter, resulting in an organic growth in June. I'm very pleased that despite these very challenging conditions, we improved our mix also this quarter. Price also impacted positively, primarily related to Latin America and Australia, where we increased prices to mitigate significant currency headwinds. To reduce the large volume impact on earnings, we executed on comprehensive cost-cutting measures that were initiated towards the end of the first quarter, including reduced discretionary spending and furloughs of employees. It is primarily on marketing, travel, and consulting that we had the highest traction in the quarter, but we also had a lower impact from manufacturing inefficiencies than forecasted. I'm very proud of how well we have delivered on these mitigation actions, well above our expectations. The ongoing consolidation of manufacturing in North America, however, continued to have a negative impact on operating income as we were running two factories in parallel. Despite the strong cost reduction execution in the quarter, it was not possible to offset the large sales drop, and the quarter was likely loss-making. the coronavirus has quickly changed many things in the world, including how we all act as consumers, and we see some new trends in the market. First, as we spend more time at home, we realize how crucial appliances are in our daily life, and how important it is to have the right, really useful features for the best experience. It's the everyday experience the user really cares about, preserving freshness of groceries in the fridge, or washing the favorite clothes in a way that makes them last longer. Secondly, consumers pay more attention to health and hygiene, meaning that there is an increasing need for products that can boost personal resilience and physical well-being. Hence, we see a clear demand for vacuum cleaners and for air and water purifiers, but also for dishwashers and washing machines. Finally, consumers are becoming more digital, which shows a significant growth in online purchases. The development we have seen in the last three months is what we had expected to happen in the coming several years. We're therefore accelerating our e-commerce capabilities, including how we drive sales conversion, do our marketing, and managing our supply chain flexibility. These trends in consumer behavior makes our strategy even more relevant, and we keep accelerating innovation also going forward. Let me give you some current examples. Our dishwasher quick select supports our commitment to sustainability with its user interface that intuitively indicates how you can save energy and water. This has been highly appreciated, achieving 4.7 in consumer star ratings by the end of 2019. These dishwashers have driven a gain of 0.9 points of value market share since 2018. With a potential market of over 6 billion consumers, emerging markets are essential to the long-term success of Electrodox. Our experience of entering new markets was used when we entered Morocco in 2017. We built on previous experience in emerging markets to develop a range of products well suited to meet the needs of local consumers and achieving double-digit market share in 2019. So, looking at our business areas performance in Q2, starting with Europe, organic sales declined as volumes dropped significantly in the quarter, reflecting the restrictions imposed in the markets across Europe. However, we saw a strong rebound in sales in June. In the quarter, we were particularly impacted by the decline of our important kitchen retailer channel, as they were not able to offset their sales drop with e-commerce to the same extent as electrical retailers were. We significantly cut our marketing spend in the quarter to meet the drop in demand. Going forward, however, if we see market demand continuing to pick up, we will scale up our marketing activities again. Furloughing of employees also contributed and mitigated the production inefficiencies that were triggered by the lower volumes. I'm very pleased to see that our strong cost-cutting measures, together with the continued mix improvements, offset a significant part of the impact of the large volume drop. In this challenging environment, our premium brands AEG and Electrodox continue to gain value market share. In the second quarter, we saw a significant drop in demand, heavily driven by the most locked down countries such as France, Italy, Spain and the UK. Overall market demand in Europe declined by 13% year over year, where Western Europe declined by 17% and Eastern Europe by 3%. As restrictions eased or were removed, demand picked up. Market demand recovered at a faster pace in the northern part of Europe than in countries with strict lockdowns. In June, the recovery pace we experienced was faster than we had predicted, primarily driven by strong pent-up demand. This confirms that household appliances are essential for our daily lives, and about 60 plus percent of the market demand is driven by replacement of product. However, markets in the UK and Russia are still challenging and uncertain. In our North American business area, organic sales declined in the quarter as a result of a significant volume drop. As I commented on earlier, this was primarily due to production constraints. The restrictions in Mexico to limit the corona pandemic not only restricted us from operating our two factories in Mexico for a large part of the quarter, but also resulted in a shortage of component supply to our US factories. It was not until the end of June that we were able to open up our laundry factory in Mexico, as restrictions were particularly severe in the Mexican state where this factory is located. The U.S. factories were also constrained by absenteeism and confirmed COVID-19 cases that forced us to pause production to allow us to sanitize facility to ensure safe working environment before starting up production again. We were also in a lower inventory position going into the quarter, especially in refrigeration, as a consequence of the previous capacity constraints related to the ongoing manufacturing consolidation in Anderson. Due to this situation, we could not fully meet the high demand for our products which is unfortunate as we are well positioned in the current market with our offering. We reported loss of 173 million SEC in the quarter, and this was mainly a result of the lower volumes, but also increased costs related to the manufacturing consolidation in Anderson, where we're running two facilities in parallel. Comprehensive cost-cutting measures partly mitigated the severe drop in volumes and the mentioned production inefficiencies, despite the absence of government furlough assistance. Slight price increases contributed to earnings, while tariffs had a negative impact. During the quarter, market demand for core appliances in the U.S. decreased by 6% year over year. Demand in June was better than the rest of the quarter, on the back of reopening of the economy across many states. The housing market began to rebound more quickly, and people were called back to work. The reopening of the Mexican facilities that serve the U.S. appliance industry also contributed. Overall, in Q2, we estimate that sell-out, i.e. consumer demand, to be higher than sell-in to retailers. Market demand for all major appliances, including microwave ovens and home comfort products, declined by 7%. Let's move on to Latin America, which in a way has been the epicenter of the pandemic during the quarter. In our largest market, Brazil, consumer demand for core appliances dropped in the quarter, However, demand recovered as restrictions were eased and stores reopened, and the month of June showed growth. In Argentina and Chile, demand declined significantly in the quarter, driven by political instability as well as coronavirus quarantine procedures, even if we saw some recovery in June. In this challenging market situation, our organic sales in Latin America declined by 24.2%. With price increases and mix improvements, we managed to partly offset the sharp decline in sales volumes. Strong growth in our e-commerce sales mitigated partly for lower volumes in the traditional channels. We reported a loss of 183 million sec in the quarter. We continued to implement comprehensive cost-cutting measures to mitigate lower volumes and the related inefficiencies in production. Our factories were to a large extent closed in April, either mandated or demand-driven, and were reopened gradually in May. We're also working constantly with pricing and managed partly to offset the significant currency headwind we faced in the quarter. Mixed improvements driven by product launches, primarily in Brazil, impacted earnings positively. And finally, turning to Asia-Pacific, Middle East, and Africa, consumer demand is estimated to have declined in the quarter due to the coronavirus situation, particularly in Southeast Asia and Middle East Africa. In June, we saw market recovery in Southeast Asia and Northeast Asia is now more or less back to normal. Market demand in Middle East and Africa, however, is still weak. In Australia, which have imposed fewer restrictions and kept stores open, market demand was strong throughout the quarter and improved further in June. Key drivers are that people spend increasing time at home and focusing more on cooking and cleaning, but also government stimulus packages, giving allowances and grants for renovations. Unfortunately, we've seen that authorities in Australia in early July imposed new restrictions on parts of the country. Our organic sales declined due to lower sales volumes, although sales increased in June year over year. We had strong growth in our important Australian market, not just volume-driven, but also price increases and mix improvements contributed. I'm very pleased to see that the launch we made in Q2 of cooking products under the Westinghouse brand in Australia gained good traction and contributed to improved product mix. Our Electrox branded products launched last year are also performing very well. Operating income declined somewhat year over year. Strong execution on cost savings measures partly offset the impact on earnings from lower volumes. Price increases compensated to a large extent for currency headwinds related to a weaker Australian dollar against imports denominated in U.S. dollars from China and Thai baht from Thailand. And with that, I hand over to the rest.

Thank you, Jonas. Looking at our financial overview, I would like to comment on a few items. Organically, sales declined by 16.6% in the quarter due to significantly lower volumes. All business areas were impacted by the coronavirus pandemic and lower demand, although we saw volumes picking up in June as market demand started to recover. In North America specifically, supply constraints impacted volumes negatively. The gross operating income, defined as net sales minus cost of goods sold, declined compared to last year. The gross operating margin of 14.3% for the second quarter this year decreased 4.3 percentage points compared to the second quarter last year. Operating income declined significantly. As Jonas said previously, we continued to cut costs in the quarter, and the result was well above our expectations, but we could not compensate for the significant volume declines. So now let's look at the drivers behind this year-over-year change. The sharp decline in volumes was partly mitigated by mixed improvements across most business areas, as well as price increases, mainly in Latin America. The combined impact from raw materials and trade tariffs was slightly positive, despite that tariffs still had a negative impact year-over-year. Currency had a negative impact on EBIT and was to a large extent indirectly related to the coronavirus impact on the global economy, and I will come back to that later in the presentation. Net cost efficiency was positive, driven by the temporary cost mitigation actions initiated in March. We significantly reduced discretionary spend, primarily in marketing, but also travel, hire, consultancy freeze, and social tools, including furlough, contributed in the second quarter. However, the ongoing manufacturing consolidation in North America continued to result in higher cost year-over-year, and in several countries there are no government support for closed-down factories. If we then take a deeper look at the price and mix development, the EBIT margin accretion from the group from price and mix was 1.3 percentage points in the quarter. In Europe, we had a favorable product mix driven by growth of premium brands, while price decreased slightly compared to last year. In North America, price increased slightly, while production constraints resulted in a negative mix. This was a consequence of lower production in Mexico, where we are producing our more premium products. In Latin America, we had a good contribution to earnings from price as we continued to implement price increases, and we also had a positive mix development. In APAC and MEA, price impacted positively, and I'm also very pleased to see that the product launches we have done lately in Australia have been very well received by consumers, and we see this impacting earnings positively through an improved mix. As highlighted in the EBIT Bridge, currency had a negative impact of 364 million SEC on our earnings in the second quarter, and this is linked to the corona pandemic impact on the global economy. Overall, the major negative impacts in the quarter year-over-year are related to weaker currencies in Latin America, but we also had movements impacting our operations in Europe and in Asia-Pacific. Towards the end of the quarter, some of our important currencies, such as the Brazilian REI and the Australian dollar, strengthened somewhat. And looking ahead, we calculate the third quarter to have a negative year-over-year impact from currency related to Latin America of approximately 200 million SEK. For the group, we expect around 1.4 billion SEC in currency headwinds in 2020. And these calculations are built on current exchange rates as per July 10th and our forecasted future flows, which remains very uncertain. And then looking at our operating cash flow. Operating cash flow for the quarter was slightly better than last year. EBITDA was significantly lower due to the pandemic, but was offset by a more favorable development of working capital. partly supported by suspended payments of taxes and VAT, but also reduced investments. Within working capital, we had some significant movements due to the lower sales and production. Looking ahead, under these conditions, with rapid shifts and high volatility in sales and production, this will continue to create large swings in our working capital. And during the first quarter, we took measures to further strengthen our liquidity buffer, and these activities continued in the second quarter, and transactions were also executed to extend the maturity profile. We issued bond loans of approximately 5.5 billion SEC, and further in July, a new credit facility was signed of 10 billion SEC. In addition to this new credit facility, we also have two unused committed backup revolving credit facilities of approximately 14 billion SEC. In the second quarter, long-term borrowings in the amount of 1.8 billion SEK were amortized, including loan repurchases. During the remaining part of 2020, long-term borrowings only amounting to approximately 0.2 billion SEK will mature. And we continue to have a strong balance sheet and liquidity position in this challenging environment. And with that, I hand back to Jonas for the outlook.

Thank you, Therese. As we earlier communicated, the coronavirus situation has also impacted our investments in the re-engineering programs, and so far forced us to delay some of them, such as the one in our US Springfield cooking factory and the projects in San Carlos, Brazil, with up to half a year. This, as the restrictions around travel and work, have made it impossible for our suppliers in Europe and Asia to produce the equipment and assemble it on site according to our original timetable. The pandemic has also affected the ramp-up of our new Anderson facility, where we are now in the phase of adding shifts to increase production. But with higher absentee levels than normal, social distancing measures, as well as COVID-19 cases, ramp-up pace is of course impacted negatively. We have therefore decided to keep our legacy Anderson factory until mid-2021 instead of Q3 2020 to avoid potential capacity constraints. fine-tuning to reach full benefits in terms of cost savings always necessary in such a project will also be attained somewhat later than previously planned on a positive note i'm very pleased that the technical bottlenecks we encountered earlier are now worked through with that said we may run into new bottlenecks when pressure testing the equipment at a higher pace but that's part of a normal ramp up so all in all the actions we've taken due to the pandemic mean that cost savings from parts of the investment programs are pushed forward near term. Most importantly, the Anderson savings will mainly materialize in 2022 and Springfield in 2023. Our re-engineering activities in Curitiba, Brazil, and in Europe, as well as our streamlining measures, are progressing well and with limited impact from the coronavirus situation. Despite the delays due to the corona pandemic, we're still expecting our re-engineering and streamlining initiatives to generate approximately 3.5 billion sec of annual cost savings with full effect from 2024. These savings are net of expected ramp-up costs and transition costs through 2020 to 2024. I would also like to emphasize that these investments are far from only about cost savings, but also about fantastic new products delivering relevant innovation to consumers and driving positive mix. Looking at our view on market demand, it's important to consider that the demand drivers for appliances mean that 60 plus percent of the demand is replacement driven in mature markets. And for most consumers, appliances are essential to daily life in their homes. Long term, based on our experience, the more discretionary demand is mainly impacted by consumer confidence and interest rates, as these factors impact willingness and funding costs for refurbishments and new construction. Short term, the store closures and restrictions on movement we've had in the March to May period have driven demand below the natural replacement level, despite large increases in online sales. But that should tend to recover as restrictions are gradually lifted. This is what we are currently experiencing. Demand picked up as restrictions were lifted, and in June, sales in several markets was driven by pent-up demand. As I'm sure we're all aware, the pandemic development remains fluid, creating an extraordinary degree of uncertainty over what the full global impact on demand will be for the second half of the year. In the near term, however, we see good demand in most European countries, as well as Brazil and Australia, partially driven by pent-up demand from April and May, as well as the strong stimulus programs implemented. In North America, the disposable income in the first half of the year was strongly supported by government incentives, and it's uncertain how this will play out as these social programs now start to lapse. Macro indicators such as GDP, unemployment rate, and consumer confidence indicate a risk of a year-over-year demand decline for the second half, although shipments currently remain solid. Overall, our visibility when it comes to Q4 is limited, as demand is impacted by several factors such as virus resurgences, extent of additional restrictive measures, and the duration and effectiveness of the massive stimulus packages on consumer confidence. Given the very weak market development in H1, we expect market demand for the full year 2020 in most of our main markets to be on balance negative. Turning then to our business outlook, in Q3, we anticipate a favorable organic contribution driven by price increases already implemented and announced, as well as by our positive view on short-term market demand and mix. We see volumes picking up due to good retail demand near-term in several of our main markets. At this stage, it's hard to see how this will play out since some of our markets still are impacted by the pandemic. We might also continue to experience production constraints and we're entering Q3 and the high season at a lower inventory level than the normal as our production rate in Q2 was impacted by the pandemic. We continue to expect unfavorable organic contribution for the full year 2020, driven by lower demand and supply constraints from the coronavirus pandemic. primarily as a result of the first half-year development. Q4 is still very uncertain, as mentioned. For the full year, lower volumes are expected to be partially offset by price increases, and the aim is to continue to drive favorable mix. In 2020, we estimate that the positive year-over-year impact from raw materials to more than offset the negative year-over-year impact from tariffs, as well as the indirect currency headwinds, primarily impacting Latin America. The raw material improvements are mainly due to more favorable pricing for steel, but also on chemicals and plastics. We continue to expect a favorable impact on net cost efficiency for the full year, driven by the temporary cost actions that we've implemented to mitigate the impact on earnings and cash flow from this exceptional market situation. These actions include significantly reduced discretionary spending, such as marketing, travel, and consulting. In Q3, we also assume a favorable net cost efficiency, even though the savings we achieve in Q2, specifically from lower marketing spend and furloughs, will be at a lower level in Q3. This is as we will increase marketing in markets where demand is picking up, and the contribution from furloughs and social tools will be neglectable. The impact on the coronavirus situation not only shows in the organic contribution, but also indirectly through a significant currency headwind of approximately $1.4 billion for the full year 2020. And finally, we still expect CapEx investment for the full year to be approximately $5 billion back. So as mentioned, even though we're heavily impacted by this unprecedented market situation, it truly is unprecedented. We conclude that we're well positioned to execute on our strategy and to create value. We're continuing to realize mixed improvements driven by our new great product launches and driving our premium brands. We're continuing to work to consolidate our U.S. fridge and freezer production, and we're continuing to be agile and flexible short-term while we keep our focus on the long-term value creation. And as mentioned, the accelerated consumer trends that we've seen are right in line with our strategic focus. And before we open for Q&A, I'd like to mention that we are going to hold a virtual cap and markets update on November 17th. And I'm looking forward to all of you participating in that. We'll now open for questions. Sofie?