AB Electrolux (publ)

Good morning and warm welcome to Electrop's second quarter 2021 result presentation. My name is Jonas Samuelsson. With me today, we have our CFO, Therese Rydberg, our head of investor relations at ER News. I'd like to mention that this session is recorded and will be available on our website as an on-demand version. Let's look at our performance in the second quarter of 2021. Demand remains strong across our main markets, though with some signs of consumer spending patterns normalizing around mid-year. Retailers' inventory levels have now partly been replenished, depending on the region, but with imbalances in terms of product mix. In North America, we assess that the level is still on the low side, while Australia and Southeast Asia seem to have rather high levels of inventory. In Brazil, we see retail inventories normalizing, with the European picture more mixed with imbalances, but on average on normal levels. We had significant organic sales growth of 39.1% in the quarter. The growth was primarily driven by increased volumes compared to a quarter last year that was severely impacted by the pandemic. But it was also 16% above second quarter 2019. Positive price development across all industries business areas more than compensated for cost headwinds. Mix continued to develop favorably, driven by innovative products and our focus brands, and our aftermarket sales had another quarter of double digital growth. Operating income amounted to $2 billion with an operating margin of 6.5%. This resulted in a rolling 12-month EBIT margin close to 8%. Therese will now walk us through the main drivers behind the strong improvement in operating income.

We had a significant contribution from volume price and mix in the quarter, even though logistics and supply constraints impacted both product availability and mix as we worked intensively with production planning. Volumes increased on continued strong markets, but also compared to quarter last year that was heavily impacted by the pandemic. We continued to have very good price execution from list price increases implemented earlier this year and in the second quarter. as well as carryover effects from increases in 2020. We also still see a very low level of promotional discounts, reflecting the remaining constraints in product availability. Our innovative high-margin products performed well in the quarter, and we further strengthened the position of our premium brands. In addition, we continued to grow our aftermarket sales. We increased investments in consumer experience innovation and marketing to support our profitable growth. but also as a result of the significant reduction we made last year to respond to the severe market conditions. Cost efficiency was positive. This was the result of continuous cost improvements and progress in the manufacturing consolidation in North America. But due to the supply shortages, we do still experience manufacturing inefficiencies across the group due to low production planning visibility. And increased logistics and sourcing costs also impacted negatively. The increase in logistic cost as well as the headwinds from external factors, predominantly from raw material, were fully assessed by price in the quarter. And let's now take a deeper look at price and mix developments. The EBIT margin accretion for the group from price and mix in the quarter was 5 percentage points, coming from both a strong price momentum, product mix improvements and growth in aftermarket sales. In Europe, we had a favorable mix driven by our premium brands and across our innovation areas, taste, care, and well-being. We also had a positive price development as price increases implemented during the first half of the year gained in effect, although not yet at full effect in the second quarter. In North America, price developed positively from price increases implemented earlier in the year, as well as continued very low promotional discount levels. as a result of the product availability constraints in the market. Product mix was also favorable as sales of high-margin products increased, such as the multi-door refrigerators, front-control cookers, as well as built-in ovens. And in Latin America, nest price was significantly higher through carryover effects from price increases in 2020, price increases implemented early this year, as well as some impact from the new round of price increases announced during the second quarter this year. And in addition, we continue to have unusually low promotional activity level, with product availability still being a limiting factor. And mix was positive, especially in refrigeration, but also from product launches in our innovation areas, care and well-being. In Asia-Pacific and Middle Eastern Africa, we saw positive mix from strong launch execution. As an example, in Australia, the built-in products and multi-door refrigerators contributed to a large extent. and we also had very good performance of several product launches in Egypt as well as in Northeast Asia. Price was positive, from selective price increases implemented in the beginning of the year, as well as some contribution from additional increases during the second quarter across the markets, although not yet with the full effect. We also had some carryover effects from last year, and the low promotional level seen in the previous quarters remained. And driving positive mix through sustainable consumer experience innovation is a central part of our strategy. And Jonas will now give you some concrete examples on what we do.

Thank you, Therese. We thought it would be useful to give some specific example of how we're driving favorable mix and productivity. And I think most of you know that our refrigeration facility in Curitiba, Brazil, was one of the large facilities that we included in our 8 billion kroner re-engineering program. That facility is now fully up and running with fantastic new products. The main product segment is top freezers, non-frost top freezers, where we're now market leaders in Brazil. These products have fantastic consumer value proposition in terms of sealed drawers for extended food preservation, etc. Also, very importantly, the products have a 45% lower energy consumption than the local energy standards. The facility has implemented low-cost automated manufacturing, and the automation level has gone from 4% before the transformation to now 23%. And please refer to page 10 in the report to see more details on this fantastic transformation program. Our recently launched Sanusi top-load washing machine in Egypt targets consumers who find it expensive to buy a front-load washing machine. But the concern that consumers have around top-loader washing machines is that wear and tear of clothes compared to front-loaders. We saw this opportunity to enter the market, adopting the latest technology of cyclonic care, taking care of that concern. The launch campaign in Q1 was conducted within targeted consumer channels with a reach of 5 million people and was very well received. We're only in the first quarter of sales, but so far have seized about 4% of volume share in this category over the quarter, so very promising initial results. Another successful launch is our new air purifier series launched in March 2021 in Europe, completing our existing air care range. It strengthens our position in the air purification mono segment, where we gained nine points of value market share in first quarter 21 versus first quarter 2020. From the early reviews, we can already see a promising 4.9 consumer star rating, which is above our current rating for air purifiers of 4.37. There are several factors behind this success. But let me highlight the combination of the five-step air filtration technique paired with a highly designed product using sustainable materials. That's a nice addition to the home decoration. These were some examples of how we drive profitable growth.

Yes. If we then take a look at our cash flow for the quarter, the operating cash flow amounted to 1.5 billion SEK, which is a result of our strong operating income. We had A somewhat unfavourable impact from working capital, mainly an effect of increased inventory levels during the quarter, which was partially a result from the supply and demand mismatches that we see. Investments were at a slightly higher level compared to last year, impacting cash flow negatively. And during recent years, Electrolux has generated strong cash flow through improved profitability and high capital efficiency. And as communicated earlier, the board has conducted a thorough review of Electrolux strategic plans and current capital structure. The first prioritization is to maintain a high level of capacity for value-creating organic investments and selective acquisitions. But since the group's financial position currently is very strong, the board has decided to distribute a larger part of the value created to our shareholders. And as stated in a press release yesterday evening, the board has decided to adjust the dividend policy from the current target of a dividend corresponding to at least 30% of the annual income to approximately 50% of the annual income. They also decided to propose an automatic share redemption of 17 SEC per share, equal to approximately 4.9 billion SEC, to be resolved in an extra general meeting on August 27th. And in combination with the ordinary dividend that was already decided at the AGM this spring, this would mean a total cash distribution of 25 SEC per share to be paid out in 2021. And the board also has the intention to propose share buybacks with subsequent share cancellations to the shareholders meeting over several years to reduce electrolyte share capital. And as a first step, the board intends to exercise the authorization from the AGM in 2021 to buy-back shares, and details regarding the size and duration of the intended buy-back programs will be communicated as and when decided. The Board's objective is to maintain a solid investment grade rating as defined by leading rating institutes, meaning that over time the group's next steps should not exceed two times EBITDA.

Let's now go into our business areas performance in Q2, starting with Europe. Organic sales growth was 37.3%, and product mix continued to improve across categories and main markets. Consumer star ratings remained high, with an average of 4.6 out of 5 in the second quarter. The focus areas of built-in kitchen and laundry further strengthened their market position, and the price mix increased. Electros gained value market share overall, driven by our premium brands AEG and Electrodox, and price developed favorably in the quarter. Higher volumes was the main growth driver, as last year was heavily impacted by the pandemic. And we continue to grow in the strategic aftermarket business, especially in spare parts. EBIT was 1 billion SEC with a margin of 8.6%. The strong organic contribution from volume, price, and mix was the largest contributor. We had continuous cost improvements, offsetting high logistics costs, and headwinds from external factors accelerated driven by raw material, and we're currently in the midst of implementing further price increases. Increased investments in innovation and marketing were compared to a very low level last year. Let's look at the European market. In the second quarter, overall market demand in Europe continued to be strong compared to a weak quarter last year. The demand increased by 31% year-over-year, split by Western Europe at 32% and Eastern Europe at 30%. Consumers continued to spend on home improvement, and demand remained solid throughout the quarter as lockdowns were gradually eased. In addition, we saw continued replenishment in retail inventories that are now on average at fairly normal levels, although there are shortages in some categories. Now, let us look at the business area in North America. Here, organic sales grew by 33.7%, with contributions from all three levers, volume, price, and mix. Improved product mix contributed, and aftermarket sales continued to grow. We had continued favorable price development as a result of price increases and significantly lower sales promotions. We also announced additional increases during the second quarter to be implemented in the third quarter. EBIT amounted to 558 million SEK with a margin of 5.5%. We had significant organic growth contribution even though the global electronic component shortage impacted production. It affected all factories but mainly premium products. We also experienced constraints related to logistics impacting the sourcing of finished products. The supply chain-related constraints also resulted in higher costs for logistics and sourcing, while cost efficiency improved as the manufacturing consolidation in Anderson progressed, and our confidence to achieve our productivity and product profitability improvement targets remains very high. Headwinds from external factors, mainly raw material, were fully offset by price, and increased investments in marketing, mainly brand-building activities, improved from low levels in the prior year. Now let's look at the U.S. markets. During the second quarter, industry shipments of core appliances in the U.S. increased by 25%, and market demand for all major appliances, including microwave ovens and home comfort products, increased by 24%. A strong market development was driven by consumer demand, supported by the economic stimulus programs. Growth numbers were positively impacted by the fact that Q2 last year was impacted by pandemic restrictions, mainly on the supply side. Retailers' inventory levels are estimated to still be on the low side, as demand remains elevated, coupled with the constrained supply chain. And housing indicators continue to be positioned to drive further growth in North America. Let's move on to Latin America. The business area had very high organic growth of 90.4%. We have to bear in mind, however, that volumes in Q2 last year were heavily affected by the pandemic. Thus, we saw volumes increasing significantly. We continue to execute on price, and have also announced new price increases to be implemented during Q3, offsetting sharp increases in currency and demand-driven cost inflation. Positive product mix development also contributed to the sales growth, and we continue to grow significantly in the aftermarket, driven by accessories and services. Looking at the market, consumer demand for the ABC region as a whole is estimated to be in positive. In Brazil, physical stores reopened, increasing consumer demand. In Argentina and Chile, consumer demand increased significantly, with government stimulus packages continuing to support demand mainly in Chile. However, the region is still significantly impacted by the pandemic, as well as macroeconomic turbulence. Airbids reached 327 million, with a margin of 6.8%, with strong organic contributions from higher volumes, pricing, and better mix. Price offset the headwinds from external factors, mainly raw materials. The main currencies developed favorably during the quarter, resulting in a limited headwind from currency year over year. Investments in brand strengthening initiatives increased, supporting the significant product launches that we have in the region. Finally, turning to Asia Pacific, Middle East, and Africa, market demand overall in the region is estimated to have increased. Southeast Asia grew for the second quarter in a row, although increased restrictions impacted market demand towards the end of the quarter. The comparison quarter last year was also heavily impacted by pandemic restrictions. Our largest market, Australia, continued to have a robust demand and improved sequentially, though declining compared to a strong second quarter last year. Organic sales growth was 16.3%, driven by higher volumes across all markets. Positive mix with successful product launches both this year and last year, with aftermarket sales continuing to grow, mainly from accessories as well as services, where auto warranty repairs increased across countries. And also here we had favorable price development. The operating income was 312 million SEK, with a margin of 8.5%, with strong organic contribution and price increases offsetting headwinds from external factors. Higher logistic costs continue to impact earnings negatively, however. We increased investment in innovation and marketing also here with campaigns to support launches in 2021, such as the AEG campaign in Australia, but also in comparison to very low levels last year, given the market situation. So now let's go into our market and business outlook. Market demand is expected to begin to normalize during the second half of 2021, but with significant regional variances driven by pandemic developments and impacts from stimulus programs. it is still difficult to predict at what pace consumer spending patterns will normalize as we see new virus resurgences in various countries. As it is likely that many people will continue to work extensively from home, we expect that the normalized demand levels will still be above previous trend going forward in many markets, especially those where significant continuous stimulus programs boost overall consumer spending and confidence, as well as supporting the housing markets. However, The global supply challenges experienced in the first half are expected to have a higher impact in the second half of the year. Specifically, electronic components with semiconductors are in very tight supply globally, which means that we and other actors in the industry struggle to meet the changing consumer demand mix and in some cases incur outright shortages. The same can be said about ocean freight, where shortages of containers and vessels in the right places at the right time result in varying and intermittent supplies. This means that retail inventories are unbalanced in many markets, making it even harder to accurately interpret and meet demand signals. Looking at the specific regions, we maintain our 2021 full-year market view. European market shipments are expected to be positive for the full year, with growth across the key markets. We see a supportive trend from the replacement market and on consumer confidence. Consumer demand is expected to further normalize during the second half of the year, as household budgets are allocated more to services than during the height of the pandemic. Retail inventories are now more replenished, but with a suboptimal mix. In North America, demand is estimated to be positive for the full year, partly driven by very strong housing markets and a favorable replacement cycle. Government stimuli programs should further support the economy and consumer sentiment, leading to a favorable demand outlook for the year, as well as for the second half of the year. Also here, supply shortages have a significant market impact. In Latin America, we still expect consumer demand to be neutral for 2021, even though we see positive signs in Chile relating to various stimulus programs compared to a quarter ago, as well as potential upside in Brazil, although with high politically driven volatility. We expect market normalizing in the second half as a result of moderation of disposable income growth with a reduction of government aid, combined with still weak labor market and rising currency-based inflation. And finally, we estimate market demand in the Asia-Pacific, Middle East and Africa region to be positive for the 21 full year. This is mainly driven by Southeast Asia that's expected to rebound, but still below 2019 levels due to lower consumer purchasing power. Many countries in Southeast Asia are heavily dependent on tourism, which has been negatively impacted by the pandemic. We have a recent surge in coronavirus cases leading to new restrictions. which is expected to impact consumer spending negatively. However, we have a strong recovery in China that's also supporting Southeast Asia. For Australia, which is our other large market in this business area, we anticipate a slight decline in 21 full-year demand compared to a strong 2020, especially in the second half of the year. Let's turn to the business outlook. For 2021 full year, we expect a continued positive organic contribution from volume, price, and mix driven by favorable market demand and higher prices compensating for headwinds from increased cost inflation. Demand and mix are assumed to be positively impacted by increases in innovation and marketing investments, including a step up in digitalization of consumer interactions. Volume and mix growth could in the second half of 2021 be constrained by the global electronic component shortages So far, we have successfully addressed this through my colleagues' hard work and tight collaboration with our suppliers. However, the availability of electronic components is expected to be somewhat more constrained in the third quarter, as supply lines have become increasingly stretched, and hence we anticipate challenges to fully meet the market's product mix requirements. We continue to have a close dialogue with our suppliers to mitigate these supply challenges, as we expect the situation to remain uncertain for an extended period of time. Turning to price, in addition to the price increases implemented in Q1 2021, we have announced and started implementing additional price increases to compensate for the increase in inflationary cost pressures, taking effect gradually throughout the rest of the year. In terms of promotion levels, which currently are very low, we do not expect them to normalize during 2021, even though this may vary between regions, product, and price points.

And we are increasing our innovation and marketing investments. including strengthening our capabilities within aftermarket and e-commerce. During the past three years, mixed improvements from innovation, brand, and aftermarket sales growth have in total contributed by more than 3 billion sector operating income, realizing a very favorable return on investment. We also know that strengthening of our brands, Electrolux AG and Frigidaire, are paying off. These brands accounted for approximately 80% of group net sales in 2020, compared to just over 70% three years ago. And the more tactical marketing investments will be sized and targeted based on market opportunities as well as product availability. So this can act as partial P&L counterbalance against any supply issues, which has also been practiced previously as well. And we still estimate that cost efficiency, excluding innovation and marketing investments, will be positive for 2021, even if we see further cost pressure on logistics and sourcing of electronic components and finished goods. And the main cost drivers in 2021 are continuous cost improvements and execution of our reengineering program, particularly improved productivity and output from our new refrigeration facility in Anderson in the U.S. And all in all, as we plan to accelerate innovation and marketing investments, the total net cost in 2021 is expected to increase.

As a global appliance company, we are exposed to various external factors, such as raw materials, tariffs, currency, and excess labor inflation. For 2021, we revised the estimated negative headwinds from external factors to 3 to 3.5 billion SEC from a previous estimate of 2.4 to 2.8 billion SEC. This is in light of price increases on raw materials such as steel, plastics, packaging materials and base metals as a consequence of the unusually high global demand. We expect to offset the headwind from external factors as well as higher costs for logistics and electronics with price, just as we did in the first half of the year and have done in the past two years. As mentioned, we are already executing on price increases which will come into effect gradually throughout the rest of the year. Total capital expenditures are revised to be between 6 and 7 billion in 2021, with the range being due to the timing at the year end. Our reengineering investments program is progressing well and is crucial to strengthening our cost competitiveness and drive profitable growth through increased modernization and automation in the Americas and in Europe. So to sum up the quarter and the strategic drivers we've delivered on, I'm very proud on how we have delivered in a strong market demand however impacted by global supply shortages, delivering strong profitable growth in the quarter. It's truly a team effort and through close dialogue with suppliers and retailers. Elector's financial position and balance sheet are very strong. I'm therefore pleased that the Board has decided that we can combine continued ambitious growth investments with increased distribution of the value created to our shareholders. And with that, I leave the word to Suvis.

Thank you, Jonas. So we will now open up for questions. And to allow that as many of you can ask questions, we ask you to limit yourself to one question per person. And if there is time, you're, of course, more than welcome to dial back in again and ask an additional question. With that, moderator, please go ahead.

Thank you. And if you do wish to ask a question, please press 01 on your telephone keypad now. Our first question comes from the line of Lucy Carrier from Morgan Stanley. Please go ahead.

Good morning, and thanks for taking my question. I appreciate you said that you would give us a little bit more details regarding the buyback going forward, but I just wanted to clarify the press release you published yesterday when you were kind of suggested that potentially a 3% of share could be bought back in 2021 based on your existing authorization. But there's no mention of that this morning. So can you maybe help us to understand what's around the buyback here, please?

Yeah, the board, as we said in the press release, the board intends to make those decisions later on. And the indication is we will start with the buybacks following the completion of the redemption program in October. So that's an indication at this point, because it's a very formalized process where you need a specific board approval to activate the AGM authorization. But it's right. It's an additional 3% that's currently possible. Then after the additional 3%, we would have reached 10% of the total shares outstanding. And according to the Swedish regulation, we then have to have an AGM that cancels those shares, and then we can restart the program up to you know, 10% again, and the process continues. That's the particular Swedish regulation.

Okay, so the 3% this year is possible, even though not guaranteed, perhaps?

Nothing is guaranteed until the board approves it, but they announced their intention to do it.

And it is within the current mandate that we have from the EU.

Okay. Okay, thank you for the clarification. If I can just ask a follow-up regarding the pricing dynamics you are seeing. How do you... Sorry here.

There are so many that want to ask a question. So please dial back in again. Sure. Follow up on the same theme. We are clear on that. Sorry for being... Yeah, I want as many as possible that you can ask questions. So... We have, I think, a new question from Andreas Willi at JP Morgan.

Please go ahead, Andreas.

Yeah, good morning. Thanks for the time. I have a question on the right to repair, the legislation that's been discussed in the U.S., I think in the U.K. There's been legislation coming in in July this year, there's discussions in Europe to make it easier for consumers to repair and get spare parts for appliances and other products they buy rather than to throw things away and buy a new one. How is that impacting your business at all and your strategy on the push in aftermarket opportunity versus risks from that? Thank you very much.

No, I think that properly formulated, that's good regulation. We already have as a practice to, of course, have products that are easy to repair and we keep components in stock for 10 years or more. So this would not have a significant impact on us. In fact, we think it's good that consumers are informed about the repairability of the product and so on. We think that's an advantage.

So you wouldn't expect this to result in, for example, sometimes we see like a spare power cost almost as much as a new appliance, and then the consumer is almost forced to buy a new appliance. I think the legislation is targeting to get rid of some of these practices.

Yeah, obviously the cost, first of all, I would say that's generally not the case. But secondly, I would say that, of course, there's a high cost related to keeping a large number of components in stock for an extended period of time, and we need to charge for that. So I think we have a good balance there. Thank you.

And the next question comes from the line of Alexander Virgo from Bank of America. Please go ahead.

Good morning. Thanks very much for taking my question. I guess it's a question on your comments around mix. And I'm guessing it's a clarification as well as thinking about the future. You commented particularly around the fact that higher constraints on electronic components affect the ability to produce higher end equipment. And I'm just thinking about how that's played through in the context of your comments around positive mix and looking forward how that plays into positive mix given those constraints are going to get stronger. If you could clarify that, that would be great.

Thank you. That's exactly the right interpretation. Obviously, our most advanced products generally contain more microchips in displays and around that and various controls. So that can be more heavily impacted. In particular, that has an impact on The production planning and mix of that, right? So we need more chips to show up at the right time, let's say, to produce a high-end product than a low-end product. So that's where, generally speaking, we end up receiving the chips. It's just that it impacts the production output and planning in specific time periods. So, yes, that can have a negative impact on mix and did have it to some extent in North America in the quarter. Not massively, but there is an impact and certainly more disruption in the higher end of the product ranges.

Okay, thank you. I'll get back in line.

The next question comes from the line of Gustav Hagius from SCB. Please go ahead. Thank you.

Thanks. Good morning, guys. I have a question on the re-engineering program. First, if you can confirm that I'm right, that versus 2020 base, you assume to materialize $4 billion in savings up until 2024, of which $1 billion versus the 2020 level should materialize this year. And then, so the second to that, if any of that impact has been shown already in H1 or if that full impact should materialized now in H2. Thanks.

That's coming in gradually over time. I think as we're ramping up the Anderson facility, that starts to show up. And plus, as I mentioned, we have the Curitiba facility that is up and running and delivering really good results. So just to clarify on the longer-term outlook, we're guided for a $3.5 billion productivity based on a normalized 2019 baseline. But other than that, you know, you're right in your statements. So we're continuing to deliver, ramping up the Anderson facility. You know, as I mentioned, all of our facilities have been impacted by the higher logistics cost, the component disruptions and so on, so that impacted Anderson as well, but I don't see that as an impact on the re-engineering program as well. As such, it's more of a general supply challenge that we have around the world. But we have very good progress on the program.

But just to clarify, is the majority of the billion savings that you guided for versus 2020 still to come this year, or have you already executed on that level as we see now in Q2?

No, I mean, look, it's a year-over-year game, and we have very significant supply challenges to thank Q1 2020. Of course, the fact that we had better supply in Q1 2020 means that we had a big favorable. And then you kind of year over year, that continues to improve as it did in 2020. So it becomes a little bit of a running game of year over year comparison. So there's no significant loading to one quarter or another in that. Okay.

Thank you.

Sure.

And the next question comes from the line of Johan Eliasson from Kevlar Chevro. Please go ahead.

Yes, continuing along this line, there's obviously another big step up in the re-engineering program benefit. Next year, I think we're talking about two billions. Now, how are you thinking? I mean, the investment in marketing and things went up dramatically this year because there was a low last year, obviously. But looking into next year, Do you think those investments versus this massive cost efficiency from the reengineering program should be positive or negative?

Yeah, so look, first of all, we honestly don't really look at it that way. It's not that we're reinvesting our savings from the reengineering programs in marketing and innovation. It's kind of the other way around, that we invest the money in marketing innovation to drive mix and profitable growth. And then, you know, we in our industry, as we've said many times, we need to continue to drive productivity to stay ahead of the game and stay in the game. Now we're making a step change with the big reengineering program. And so that's kind of lifting us from what used to be a very sort of unproductive level, I would say, in North America to something that's really state of the art in North America. And the same to some extent in in Brazil. And that's really the point here, right? So North America in particular, Latin America to a significant extent as well, kind of lifting the base of their productivity level to a very, very competitive level. And at the same time, we're investing in innovation and marketing to strengthen our brands, improve our mix to gain, to profitably gain net sales growth. So that's kind of the equation that we're driving, and it's less about yeah, we're reinvesting our savings. Having said that, we intend to continue to increase our investment in innovation and marketing because we see a very good return on investment there. But it's not really per se related to the engineering savings.

But you would expect, though you don't look at it this way, but the net should turn positive next year versus the negative you have this year.

Yeah, we haven't done our budget for next year yet, so I'll have to come back on that one.

Okay, thanks.

Sure.

And the next question comes from the line of David McGregor from Longbow Research. Please go ahead.

Yes, good morning, everyone. I guess my question really is with respect to the strength you're seeing in unit volumes, and if you could just talk about replacement demand versus discretionary demand, and particularly with respect to the North American market and the European markets, but Are you seeing kind of an acceleration of replacement demand that's contributing to the strength, or is this largely just a fairly consistent replacement demand, but a surge in discretionary spending? If you could help us sort through that, I'd appreciate it.

Yeah, we don't have a detailed view on it, but I think there's a couple of different things. You know, when we talked about the sources of demand, right, so we have forced replacement, we have discretionary replacement, and we have new construction. At this point, we see positive demand from all of those. And I think it's important to note that it's not just pandemic driven. It's also the fact that we have a favorable replacement cycle right now. You know, as people are replacing the, you know, the products that were bought in the up-turning market post the financial crisis right now. So we kind of have a replacement cycle that's favorable to to overall demand. Then we definitely see and hear from consumers and the service that we're making that people are increasing the replacement of sort of late-life products, if you know what I mean, right? So products that are starting to age, they're showing their age and maybe are not really meeting the needs of the consumers as they use them more heavily in their homes. And we expect that to continue as people continue to spend a lot of time at home and working from home, both using their appliances more intensively, which increases the wear and tear and repair and things like that, and consumers wanting to have a nice environment. So they're replacing their kitchens, remodeling their kitchens, and so on. So when we look at the drivers there, we look at things like, House prices, you know, because, of course, with high housing values, people feel that they have room to reinvest in their homes with their home equity. So that's a favorable driver that we see contributing a lot. And then, of course, new housing construction, which is also a little bit constrained by availability of materials and things like that, but with the underlying demand being really, really strong and probably continuing for quite some time. So those are all the reasons why we think that as the pandemic sort of demand surge, which we've seen, starts to normalize, which it will, it will normalize at fairly good levels compared to historical trend. Okay, thank you. Sure.

And the next question comes from the line of James Moore from Redburn. Please go ahead.

Yeah, good morning, everyone. Hi, Janice, Therese. Your comments on FY21 pricing and raw maps are pretty clear to me, actually. But I think the real story is now turning to next year, 2022. And I doubt you're going to want to quantify things at this stage as we're pre-budget. But my work points to four or five billion of further raw material headwind next year. And my question is a conceptual one. You've done a great job on pricing in the last two to three years. I think you've surprised a lot of people. But is there an elastic limit? Is there a point at which a 3% hike, a 4% hike, a 6% hike at some point it gets difficult to pass it through mechanically? Or will you just continue to look to pass through regardless of the amount at the cost of volume?

Look, I don't think there is a point. I think there is price elasticity in the market, of course. And I think it's related not just to appliances per se, but to the overall cost inflation that we're seeing on consumer durables right now. you know, so far that has been offset by higher household income and housing values and so on, as I talked about. And I think that's more or less the case. I mean, we're talking about price increases in the, you know, low single-digit percent, generally speaking. You know, even if we talk about, you know, $3 billion or so headwinds, as we're talking about, that's, you know, that's less than 3% of our net sales, right? So we're not talking about required price increases that result in massive sticker shock, certainly not in a situation where employment and incomes and home equity are raising. But that's not to say that there's no price elasticity. Of course there is. We just think that the other factors are stronger. And when it comes to passing on cost increases, we've been super clear, I think, the last I don't know, say five years at least, that we are passing on cost increases that we get. There's just no other option. And the only challenge in that has been the time lag between announcing price increases and actually getting them passed through in the market. And that time lag has decreased during the pandemic. I think partially because the Demand has been high, and we're able to just sort of flush the price increases through our inventory at a faster sort of pace. So there's always these sort of impacts of, yeah, is there a lag? How long is that lag? But that's the question, not if we're able to pass it on. We feel very confident we will continue to do that. Thank you. Sorry. Go ahead.

The next question comes from the line of Andre Cuchning from Credit Suisse. Please go ahead.

Good morning. Thanks so much for taking my question. I wanted, Jonas, to talk a bit more about the expectation of no normalization of promotional activity during this year. Could you share with us where that confidence comes from, what kind of things you're monitoring, especially given that you're initial marks were talking about normalization of the inventory levels in the system. Thank you.

Yeah. Yeah. So, so, so I think there's a couple of things, you know, first of all, in, in the, the most promotional market in the world is, is the, is the U S or North America generally. And there we don't see normalization of, of inventories, right? So typically the, the fall here is as, you know, the really high promotional period of the year, particularly with Black November and so on. And at this point, we don't really see high promotional intensity there. And just in general, sort of Black Friday type deals globally, we don't expect to be very aggressive, certainly not from us. And And I think there's a couple of reasons for that. One is that we still have these sort of supply imbalances and low interest rates in North America, but also the fact that cost increases are impacting all of us, logistics, supply constraints, all these electronic issues. We certainly don't see a big point in promoting things that we're struggling to supply and where the costs are going up. You know, we see us and I think the industry kind of addressing these cost headwinds both to list price increases and managing the promotional intensity. So those are the reasons.

Thank you.

Sure.

And the next question comes from the line of Martin Wilkie from Citi. Please go ahead.

Thank you. Good morning. It's Martin from Citi. Just wanted to come back to the use of your balance sheet, and you've obviously talked about the share redemption this morning, but you also mentioned the potential for selective M&A. Given that your CapEx has also come down relative to previous guidance, I mean, is M&A... going to be an increasing focus this year or given component shortages and so forth, do you have enough on your plate in terms of managing existing constraints to think about acquisitions in the short run? Just in terms of what we should think in terms of timing for some of these bolt-on acquisitions. Thank you.

Yeah, thank you. Look, I think when it comes to M&A, we have a fairly consistent approach. It's less driven by by, let's say, the short-term balance sheet or earnings issues and so on. It's more driven by availability of suitable targets that fit with our strategic growth intent. So we've been clear we're focusing on accelerating growth in emerging markets by finding new market access opportunities through M&A. We're looking at selectively adding adjacent categories to our portfolio. And we're looking to accelerate our transformation in terms of ownership solutions or aftermarket sales opportunities. Those are the three areas that we're focused on at M&A, and that's not really changing over time. And I think the board was very clear that they want to make sure that we have enough firepower to continue to drive that strategy. Then the other reality is that there are not that many targets available at any given point in time. So we have to be patient and talk to potential candidates over time. And then when time is right, we then stand ready to execute.

Okay. Thank you.

And the next question comes from Will Turner from Goldman Sachs. Please go ahead.

Hi, everyone. Thanks for taking my question. I can remember during 2020, you announced that you were going to delay some of the consolidation of your U.S. facilities. I think it was the Memphis plant in particular, but I might be wrong. It might have been another facility. Can you update us on whether that facility is still up and running, given the high demand you've had? And do you still expect to have that consolidation? And is there a potential risk of there being... some operational disruption similar to what I believe there was in 4Q 2019, if you have to continue bringing two plants open rather than just the one that you originally planned for?

Yeah, so maybe to go back on that one, because I think it's important that everybody's up to speed on the progress. The first large transformation program that we executed in North America was the consolidation of two refrigeration facilities, one in St. Cloud, Minnesota, into a new factory that was adjacent to our old factory in Anderson, South Carolina. And that was in conjunction with a complete reengineering of our product offering. The timing of that was partially driven by a new department of... energy regulations, and particularly environmental regulation related to certain refrigerants that we had to phase out, which was a good thing. The implementation of that led to a too early closure, frankly, of our St. Cloud facility, the freezer factory in Minnesota. And we were not successful in ramping up the new facility fast enough to absorb those volumes. That was the challenge that we had in Q4 2019 that also impacted us into 2020. Now the new facility in Andersen is operating well. We have very high demand, and we also have, as mentioned, still supply issues related to electronics and other things. So we've decided to keep the old facility there next door to the new facility in Andersen operating well. at a limited capacity, limited output throughout the end of the year to make sure that we supply as many units as we possibly can while we're finalizing the ramp-up of that facility, the new facility in Andersson. That's all progressing well, not according to the initial plan, but the outcome will be really, really good. The products are fantastic. Now, turning to the other big consolidation, which is, our Memphis factory, which is mainly producing ovens, built-in ovens, that we're consolidating into a new factory in Springfield that's adjacent to our old factory in Springfield making cookers. Also here we have a completely new product architecture, but what's different is that we do not have any regulatory hurdles or regulatory driven timing. So here we've been able to plan for a completely different phase over of production from the old platforms to the new ones. The first phase over will be for the products that are currently produced in Memphis, so our ovens. Our production is starting up here in the third quarter initially. Big volumes of those products won't reach the market until the very end of the year, beginning of next year, but there we're seeing very good progress. These are relatively lower volume product categories, the built-in ovens, compared to the freestanding cookers. So the impact of any slippage there is not going to be significant, and we'll be able to keep the Memphis factory open for an extended period of time if we need to. And then with step-by-step, product typology by typology move the cookers from the old facility in Springfield to the new one. We have, again, no deadlines. We're doing it in a way that ensures quality and ramp-up and cost productivity. So we're very confident that we'll be able to execute on that without – without any disruptions that would impact the market in a significant way. So that's a quite different scenario, and the product there is looking just absolutely amazing. So we're really confident in the progress of that program.

Great. Thanks, Jose.

And we have a follow-up question from Andreas Willi from JP Morgan. Please go ahead.

Thank you very much. I wanted to follow up on the capital allocation framework, the capital return framework. You changed the dividend payout ratio to 50%, where it kind of already more or less was in terms of the consensus expectations going forward. But maybe you could elaborate a bit between kind of the choice to stick with a payout ratio, even though now higher, relative to paying a progressive dividend to give more stability for the ordinary dividend.

Yeah, no, I think to your point, we've actually been at around 50% payout ratio for a long period of time. So we thought it just made sense to formalize that. And especially since we're now combining an ordinary dividend with the intention to have an ongoing buyback program, that gives the market, I would say, a little bit more clarity on, okay, what can I expect in terms of ordinary dividend? And then on top of that, what can I expect as We just thought that was more clarity for the market. It's not the real change in intention, to your point. But then the redemption program of 17 kroner that we also announced is, of course, intended to quickly now slightly reshape our capital structure, given the very, very strong liquidity position we're in right now. So that's the reason for the mix of the various activities.

And in terms of sticking to the 50%, if you have a very good year like this year and then you go to a normal year, would you quite strictly apply that payout ratio, or would there be a bit more of a smoothing of dividend payments?

Most likely there would be a bit of smoothing, and I think we've used the word approximately here to some extent account for that. Thank you very much. Thank you.

And we have another follow-up from Alexander Virgo from Bank of America. Please go ahead.

Yeah, thanks very much for taking the follow-up. So just I wanted to come back a little bit to the operating leverage in the business. I think ConsenSys was expecting a much higher level, probably closer to 50% than what you actually delivered. And I don't want to detract from what is clearly a very strong quarter in an operating performance, particularly on the pricing side of things. But I'm just trying to understand what – what it is we appear to have missed in the context of the margin, given the strength of the volumes and given your commentary on positive price, sorry, positive mix as well.

Yeah. Well, I think maybe one thing to highlight, we don't usually talk much about our group common cost. But if you look at Q1 versus Q2, we had substantially higher group common cost in Q2, that's just timing between the two quarters. On a year-to-date, it's more or less the run rate that we're looking at. So that was actually a noticeable swing in the total, and also as we looked at what analysts were expecting in terms of group common costs. So that's one thing, and nothing to really pay attention to, frankly. The second thing is certainly we're not fully happy with particularly the product mix and to some extent the volume we were able to ship in North America. Here we had, as mentioned, an impact on the component availability impacting our higher end mix, such as the top end refrigerators and top end washers, for example, in particular. So our most profitable products were the ones that were in the most tight supply, unfortunately. But those are the two Things I would point out, beyond that, I think we're, you know, as mentioned, we are impacted by supply disruptions and high logistic costs, which of course has an impact on both cost and mix to some extent. So, you know, across the business, that has an impact. But I think that's more or less as expected, certainly from our perspective. Okay.

Thank you. Sure.

Sure.

And the last question will be from Kerry Winter from Handelsbanken. Please go ahead.

Yes, thank you very much. I was wondering if when it comes to your hedging and your sourcing and pretty much the way you run your business, does the pandemic and the current challenges that you're facing, are you planning implementing any changes when it comes to your strategy when it comes to raw materials hedging? and sourcing. So are there some levers at your discretion that you can sort of implement in order to sort of maybe mitigate some of these pressures for 2022?

Yeah, absolutely. So first of all, when it comes to the piece that it's actually the most important to manage, which is the electronic supply, we're working extremely closely with our not just tier one, but also tier two suppliers of semiconductors to give them high visibility on which components we will need over time and how we expect that to develop. We've definitely become much more long-term in our approach to supplier management and commitment. That's one important thing. I think we're doing a very good job there. When it comes to raw materials, there are different, let's say, opportunities in different parts of the market. So as we've talked about extensively, plastics, for example, most plastics, it's impossible to hedge for longer periods of time. It's usually, on average, quarterly contracts. Whereas steel, it's more, in most markets, we have the option of negotiating either a fixed-price full-year contract a full-year contract with some pricing mechanism or a shorter-term contract. And, you know, depending on the market dynamics and what we see as the most beneficial outcome for us, we will use that flexibility as we go into the next negotiation round here in the late fall. All right.

Thank you very much. Thank you.

No, that was the last question. Jonas, over to you.

All right. So thanks very much, everybody. Really good questions. And hopefully we've been able to shed some light on what's going on. Overall, I'm very pleased with the execution in the quarter. We're delivering truly strong, profitable growth. And as the pandemic continues, we're ready to respond in an agile manner. I'm confident that our strategy ensures we remain well positioned to deliver long-term shareholder value, even in a rapidly changing market condition. Thank you so much, and looking forward to seeing you all soon again. Bye-bye.