Electrolux AB

Good morning, and a warm welcome to Electra's third quarter 2020 results presentation. With me today, I have our CFO, Therese Fryberg, and our Head of Investor Relations, Sophie Arnius. Before we start, I'd like to mention that this session is recorded and will be available on our website as an on-demand version. This has been an unprecedented year with great uncertainty where markets and operations have been strongly affected by the pandemic. But after a weak first half with significant downturn in market demand across most regions, we now have experienced a third quarter with strong recoveries in most markets. Let's look at our performance in the third quarter. We had strong volume growth across BAs, resulting in organic growth of 15.2%. The strong demand in all main markets in the quarter was to a large extent a result of pent-up demand after previous store closures and restrictions, as well as government stimulus programs. Due to pandemic restrictions during the first half of the year, we entered the quarter with unusually low inventory levels, which have remained throughout the quarter despite high production levels, somewhat impacting our ability to keep up with the strong demand across all regions. For most consumers, appliances are essential to daily life. The increased time spent at home during the pandemic has resulted in more intensive use of appliances and higher share of household budgets allocated to home improvements. This has resulted in a category spending shift toward more premium appliances, driving favorable product mix and sales volumes. We had good traction from our premium brands on several markets. That price realization was quite favorable, as there were less promotions and discounts in several markets. We also actively raised prices, mainly in Latin America. For similar reasons, we also saw strong growth in aftermarket sales across all business areas. I'm very pleased with the result in the quarter. We reached a record high EBIT of 3.2 billion SEC and a margin above 10%. Strongly driven by the volume growth, but also by higher prices and mix improvements. Raw materials and currency combined had a slightly negative impact year over year. And the record high operating income translated into a strong operating cash flow after investments of 6 billion SEC. Also this quarter, our high pace of innovation boosted earnings. showing the importance of attractive products built on deep insights in consumer needs and opportunities. And let me give you some examples of how we're driving sustainable consumer experience innovation. So first of all, we know that consumers are very concerned about food waste and also from a sustainability perspective, we know that over a third of all food produced gets wasted. And we are driving innovation to help consumers to reduce food waste and particularly Our multi-door refrigerators that we're launching around the world now offer very innovative solutions to prolong the life of fish, meat, produce, and dairy products. And we have a strong ambition to grow the value market share of multi-door refrigerators, driving the extremely good benefits in terms of reducing food waste. Another key initiative for us is to grow in aftermarkets. As we mentioned before, our objective is to double our aftermarket share of sales to 10% by 2025. And one key initiative for us is to increase our penetration in aftermarket sales done by our own or authorized service technicians. And one way to do that is by offering fixed-price repair services, which we've done in Europe since 2017. This gives consumers more certainty, more peace of mind, and a stronger reason to choose our authorized service technicians over independent agents. So looking at our business area's performance in Q3, starting with Europe, we saw strong organic sales growth of close to 16%, mainly driven by pent-up demand and resulting in higher volumes across all categories. Mix continued to develop favorably, primarily from built-in kitchen and laundry products. The premium brands, Electrox and AEG, gained value market share and aftermarket sales increased as well. Our sales to the important kitchen retailer channel, which was heavily impacted by the pandemic in Q2, increased in the quarter. The electrical retail channel grew even faster as this channel mainly supplies replacement products and was able to shift more of the sales online. Sales of air care products and cordless vacuum cleaners increased substantially in the quarter as well. I'm very pleased with the earnings performance in the quarter. We reached an EBIT of 1.5 billion SEC and a margin of 12.4%. The organic contribution in the quarter was strong and will continue to improve mix through our premium brands. A slight currency tailwind and lower cost for raw materials also had a positive impact in the quarter. Let's have a look at the European market. In the third quarter, overall market demand in Europe increased by 13% year-over-year. In Western Europe, demand increased by 14% and in Eastern Europe by 11%. Oil markets increased, with many recovering strongly after the lockdowns in Q2 resulted in demand decline below the natural replacement levels. Both pent-up demand and stimulus programs impacted the recovery pace. This confirms that household appliances are essential for our daily lives, and as we've said before, over 60% of the market demand is driven by product replacements. In September, the European market continued to report a positive development, although at a somewhat slower pace. Now, let's look at our business area in North America. Organic sales increased by 8.6%, supported by volume growth. We could, however, not fully meet the high demand due to previous quarter's production and supply constraints, resulting in low inventory levels as we entered the quarter. These production challenges were substantially mitigated in Q3, although inventories have remained constrained. Promotion activity in the market was low, which had a positive impact on net price realisation. Aftermarket sales grew significantly, driven by a favourable demand trend, as well as our own strategic growth initiatives. Operating income increased significantly to 990 million sec, corresponding to a margin of 9%. This was the result of the positive price development, higher volumes and mix improvements, combined with good cost control. We've seen good traction from our star product focus, improving the product mix. One great example is the Frigidaire Gallery air fry cooker that has recently received a 2020 Innovation Award across all categories at the Home Depot. The air fry cooker delivers a significantly higher gross margin compared to traditional cookers, so growth within air fry cookers really means profitable growth. As expected, the pandemic continued to somewhat impact the progress of our ongoing manufacturing consolidations in Anderson as well as Springfield. Lower material costs more than offset higher tariff costs from increased source product volumes. Now, let's look at the U.S. market. During the quarter, industry shipments of core appliances in the U.S. increased by 9% year-over-year, and previous industry supply constraints were reduced, resulting in a catch-up effect, and government stimulus programs, which ended during the quarter, impacted positively. The market has also been supported by improving macro indicators. The unemployment rate has decreased for five consecutive months since the peak in April, and we've seen a pickup in consumer confidence, and the housing market is currently very strong. Market demand for all major appliances, including microwave ovens and home comfort products, increased by 14%. Let's move on to Latin America. In our largest market, Brazil, Demand picked up strongly in the quarter, driven by government incentives, low interest rates, and pent-up demand. Demand in Argentina declined, affected by quarantine measures and product shortages, while demand in Chile increased, supported by government stimulus programs. The organic sales growth in Latin America was 37.8%, to a large extent driven by strong sales volumes mixed in price in Brazil. Mix improved as a result of increased sales of high-end products such as multi-door refrigerators. We continued to increase prices to offset the significant currency devaluations across the region. Lower promotion activity also contributed. Online sales continued to grow to record levels in all main markets. An EBIT improved significantly to 440 million SEC and the margin reached 9.2% driven by the strong organic contributions. Increased currency headwinds as well as raw material cost increases in the quarter driven by FX were fully offset by the price increases. Finally, turning to Asia Pacific, Middle East, and Africa. During the quarter, Australia, our largest market in the region, continued to grow, supported by government incentives and increased home improvement spending. South Africa and Egypt recovered after a decline in the second quarter, while Southeast Asia and the Middle East continue to be affected by recessions and lockdowns due to the coronavirus. We reported an organic sales growth of 9.7%, mainly driven by the good development in Australia, while sales in Southeast Asia continue to decline. The increased sales in Australia were mainly driven by good traction from newly launched products and the repositioned Westinghouse brand, driving favorable volume, price, and mix. I'm pleased that also in APAC-MEA, aftermarket sales increased double digits. Operating income improved to 459 billion SEK, corresponding to a margin of 11.7%. This was mainly a result of the strong performance in Australia. Lower costs for raw materials also contributed positively. With that, I hand over to Therese.

Thank you, Jonas. Looking at our financial overview, I would like to comment on a few items. We reported a strong organic growth of 15.2% in the quarter. Volumes were significantly higher in all four business areas as markets recovered strongly after lockdowns were lifted, driven mainly by pent-up demand as well as government stimulus programs. Positive price development and mixed improvements also contributed to the sales growth. The gross operating income, defined as net sales minus cost of goods sold, improved compared to last year. The gross operating margin of 22.6% for the third quarter this year increased by 7.4 percentage points year-over-year. Operating income increased significantly. The strong organic growth with increased volumes as well as positive price and mix was the main driver for the higher earnings. So now let's look at the drivers behind this year-over-year change. The volume price mix contribution was strong in the quarter. We saw volume growth and mix improvements in all business areas. Price also increased across most business areas. In Latin America, we raised prices to offset currency headwinds and cost inflation. And in North America, price developed positively as promotional discounts were low. The combined impact from raw materials and trade tariffs was slightly positive. This was a result of that lower steel and plastic cost was offsetting tariff cost increase in North America, as well as negative indirect currency impact in Latin America. Tariffs had a negative year-over-year impact as we sourced a larger amount of products from China to North America to meet the high market demand. Currency continued to have a negative impact on EBIT, and I will come back to that later in the presentation. Net cost efficiency was negative compared to our initial expectation of a favorable contribution. This was mainly driven by higher logistics costs, where express freight increased due to the supply constraints. And we also decided during the third quarter to retroactively implement wage increases from July, as our visibility for the remainder of the year improved. Production inefficiencies related to the pandemic also had a negative impact in the quarter. And if we then take a deeper look at the price and mix development. The EBIT margin for the group from price and mix was 3.2 percentage points in the quarter, mainly coming from price but also mix improvements. In Europe, we had a favorable mix driven by growth in the built-in kitchen and laundry products in our premium brands, while prices declined slightly. In North America, price developed positively as promotional discounts were low, but we also had a positive mix related to increased sales of premium products. In Latin America, we had a good contribution to earnings from price as we continued to implement price increases and also benefited from lower promotional activity. Mix developed positively from increase of higher-end products. In APAC and MEA, price impacted positively, mainly related to Australia but also to Middle East Africa. I'm also very pleased to see that our product launches in Australia continues to have good traction, resulting in an improved mix. And now, let's look at the currency sector. As highlighted in the EBIT bridge, currency had a negative impact of 248 million SEC on our earnings in the third quarter. Overall, the major negative effects in the quarter year-over-year are related to weaker currencies in Latin America. And then looking ahead, we calculate the fourth quarter to have a negative year-over-year impact from currency, mainly related to Latin America, of approximately 400 million SEC, but also headwinds in Europe of 100 million SEC due to weakening Russian ruble and British pounds. And for the full year 2020, we expect around 1.7 billion SEC in currency headwinds for the total group. And these calculations are based on current exchange rates as per October 15. And then looking at operating cash flow. Operating cash flow for the quarter was very strong and amounted to 6 billion SEC. This was mainly driven by the strong earnings development in the quarter, but also favorable development of working capital. We had some significant movements in working capital due to the strong recovery in the quarter with higher sales and production. And as we could not fully meet the high demand, we built less inventory than what we normally do in a third quarter. A lower level of investments also contributed positively to cash flow. And with that, I hand back over to you.

Thank you, Trist. Looking into the fourth quarter, visibility remains limited as demand is affected by several opposing drivers. especially as the pandemic is still very much a factor. However, we currently anticipate that consumer demand will normalize gradually going forward. Considering this and the catch-up effect during the third quarter, we have revised our market outlook for the full year 2020 upwards. We anticipate that the European market shipments will be slightly positive for the full year, retail inventories are in general low, and so currently shipments remain solid. However, more countries are again imposing restrictions triggered by the pandemic, which adds uncertainty for the end of the year. In North America, demand is anticipated to be slightly positive to positive for the full year. Disposable incomes have been strongly supported by the now-ended government stimulus programs. And a second stimulus package is under negotiation, but with the presidential election just around the corner, this adds to the uncertainty of the outcome of the size and timing of such a package. However, macro indicators such as GDP, unemployment rate, housing starts, and consumer confidence indicate a positive near-term trend, and industry shipments currently remain solid as retail inventories still are low. Demand in Latin America is expected to be positive for the full year, driven by Brazil. In Chile, we look for a relatively flat development, while Argentina suffers an overall market reduction due to the pandemic and economic turbulence. We still expect overall demand in our main markets in Asia Pacific, Middle East, and Africa to be negative for 2020. This is mainly driven by Southeast Asia and Middle East that are impacted by the pandemic and recessions. However, demand in Australia has so far been strong, and we expect this to be the case also for the full year, supported by government incentives. Turning to the business outlook. In the fourth quarter, we anticipate favorable organic contributions. As mentioned, we enter the quarter with low inventory levels, and that is in general also the case for our retail customers. This, in combination with a continued solid consumer demand for the time being, is the main driver for our favorable view and impacts both volume and price. The main question is how consumer demand, as well as production and supply chains, will be impacted by the development of the pandemic and related restrictions and government actions. If stimulus programs are not prolonged, consumer demand sensitivity to the underlying economic development increases as we go forward. We also expect lower impact from pent-up demand in the fourth quarter compared to the third quarter. Additionally, we need to bear in mind that the fourth quarter is normally a promotional season, primarily in North and Latin America. This year, we're looking at less promotional intensity, which on the margin impacts consumer demand negatively, but it's beneficial for net price realizations. we have a continued positive view on our mix also for the fourth quarter. Net cost efficiency for the fourth quarter is expected to be unfavorable, and this is due mainly to three areas. First, higher brand marketing investments in line with our favorable demand view. Secondly, we have a catch-up in strategic initiatives to strengthen our presence in, among others, e-commerce and aftermarket. These activities were put on hold during the first half of the year due to the pandemic. Lastly, just as we saw in the third quarter, we expect production inefficiencies and higher logistics costs related to the pandemic to impact also the fourth quarter. Looking at the full year 2020, we revised our organic contribution outlook to favorable, given the strong recovery in the third quarter and the favorable outlook for the fourth quarter. Strong recovery in the third quarter and the favorable outlook for the fourth quarter. We now expect net cost efficiency for the full year to be unfavorable as we start investing more in marketing and strategic initiatives to improve our brand strength. Supply chain strains related to the pandemic and increased costs for the ongoing manufacturing consolidation are only partially anticipated to be offset by the cost mitigation activities in the first half and continued productivity improvements. We estimate the positive year-over-year impact from raw materials and trade tariffs to be approximately 0.3 billion in 2020, compared to the previous estimate of approximately 0.3 to 0.6 billion. This as we now expect a larger indirect currency headwind in Latin America, as well as an increase in tariffs due to a higher volume of source products. Currency headwind of 1.7 billion for 2020 is based on currency rate per the 15th of October, compared to the 1.4 billion that we saw a quarter ago. Our business outlook for the full year 2021 will be presented in the Q4 report. So in summary, we're well positioned to create value. We continue to execute on our strategic drivers in Q3. We saw mixed improvements driven by our product innovations and the strength of our premium brands with very solid contribution. We saw strong aftermarket sales growth with very high profitability. We continued our consolidation of the US fridge and freezer production and are increasingly stabilizing and increase the output from our Anderson facility. and will remain agile and flexible short-term while keeping a strong focus on long-term value creation. Before we open for Q&A, I want to take the chance to invite you to our Virtual Capital Markets Update on November 17. The event will focus on how we're driving profitable growth through innovation, where design and brands are key pillars. We will showcase how Electro-X has strengthened its premium position in Europe through deep consumer insights, specifically in the built-in kitchen area, and how this has boosted earnings. I recommend that you register well ahead of the meeting to avoid any IT-related issues. With that, we will now open for questions. Sophie?