Electrolux AB

Good morning, and welcome to Electra's third quarter 2023 earnings presentation. With me this morning, I have Therese Fridberg, our CFO, Anna Olsson-Leon, Chief Commercial Officer, and Sofia Arnjus, Head of Investor Relations. I'd like to mention this session is recorded and will be available on our website as an on-demand version. Before we go into our performance in the third quarter, I'd like to take this opportunity to say a few words about the announcement we made earlier this morning. As we said in the Q2 call, we were evaluating further structural simplification and complexity reductions in order to execute our strategy with focus, speed, scale, and lower cost. This is even more vital in the current market situation. The weak market demand with consumers mixing down to lower price points has been accompanied by increasing price pressure in most markets globally, particularly impacting North America. This has been enabled by the resolution of post-pandemic supply chain constraints, significantly lower freight rates, a strong US dollar versus Asian currencies, and large cost inflation discrepancies between Europe and North America on one hand, and in certain parts of Asia on the other hand, resulting in high promotional activity with increased pressure on margins. To restore margins, with the objective to achieve an operating margin of at least 6% mid-term, We're both stepping up cost reductions and driving an even more targeted portfolio management. If we start with cost reductions, here we're accelerating structural cost reduction and execution of product cost measures. This is the ongoing substantial cost reduction progress while ahead of plan is not sufficient to restore margins given the price pressure from input cost discrepancies as I mentioned. The cost reduction target for 2024 versus 2022 is increased to 10 to 11 billion Swedish krona in net savings from cost efficiency and investments in innovation and marketing combined. This compared to the previous target of over 7 billion SEK, of which additional savings in 2024 then was a gross number. Now we're talking about net 10 to 11 billion. Already in 2023, we target to deliver approximately 6 billion SEK of these net cost savings, which is an increase compared to the previous target of at least 5 billion SEK. In addition to these targeted cost savings, we will continue to annually reduce product cost at a similar rate as during the period 2023-2024. This will be to to be able to achieve an operating margin of at least 6% mid-term under current market conditions. The other key factor in regaining profitability and delivering on this margin target is to drive commercial growth in selected mid- and premium categories and under our main brands, Electrox, AEG, and Frigidaire. This also means that we will reduce focus on and divest tactical brands and categories, which are not core to us anymore and do not have sufficiently strong synergies with our core strategy to warrant a required focus and investment from us as a group. The ongoing strategic divestment initiatives of non-core brands, including Zanussi and the water heater operations in Egypt and South Africa that we announced in July, is an example of the increased strategic focus. A new simplified organization is a key enabler to execute successfully both in terms of the cost actions and accelerating targeted commercial growth. We will therefore reorganize into three regional business areas and two global product lines, all reporting to me, leveraging the group's global scale with fewer layers, resulting in increased focus and reduced costs. The two product lines, Taste and Care, will have the global end-to-end responsibility to prioritize the growing and profitable product categories where we will focus our business and investments, and leveraging global scale with speed and lower cost. To further leverage product and brand synergies between Europe and Asia-Pacific, Middle East, and Africa, and to adapt the organization to the upcoming divestment of the operations in Egypt and South Africa, the current two business areas in the region will form one business area. The other two business areas, North America and Latin America, remain as is. The new organizational setup is expected to affect approximately 3,000 positions, resulting in a restructuring charge in Q4 2022 of 2 to 2.5 billion Swedish kronor, which will be reported as a non-recurring item. From the second quarter 2022 until the third quarter 2023, the average number of employees has reduced from approximately 53,000 employees to approximately 44,500. The announced actions are estimated to reduce headcount further to just over 40,000 by the end of 2024. The organizational changes impacting product lines will be effective as of November 1, and the BAs will be effective January 1, 2024. And we will report on the new business area structure in the interim report from the first quarter of 2024. Now, let's look at the performance in the third quarter. The market environment continued to be weak, with lower consumer purchasing power. As a result, our volumes dropped also this quarter, and our organic sales declined. The market continued to be particularly challenging in the built-in kitchen category, which is very important for us in Europe and Australia. In light of this, I'm pleased that that mix was positive, driven by our attractive offerings. As expected, price turned negative this quarter as the contribution from list price increases last year tapered off sequentially, while promotional activity remained high across our major markets. The underlying EBIT improved compared to last year, mainly as a result of the strong execution ahead of plan of our group-wide cost reduction and North America turnaround program. And I will later in our presentation come back to this in more detail. However, in our North America business area, despite these savings, The industry's high promotional activity negatively impacted primarily gross margin realization, but also sales volumes. This resulted in a loss in Q3, which is disappointing, despite the significant improvements year over year. Raw material costs turned positive year over year, but deteriorating currency and higher cost inflation from labor and energy resulted in a combined headwind from external factors also in Q3. EBIT included a non-recurring item of 294 million SEK related to the divestment of the manufacturing facility in Nerejasa, Hungary. Therese will now walk us through the main drivers behind the change in operating income.

We had a negative organic contribution to earnings in the quarter, driven by a significant volume decline year over year, as a result of large demand drop, especially in product categories that are important to us. The accretion on EBIT margin from price and mix combined was negative 0.9% in the quarter, with negative price and positive mix, despite that consumers in the market are mixing down. Cost was in total reduced by 2.4 billion Swedish krona as a result of the focused execution on the cost reduction program, which we will come back to the different components of. External factors remained negative in the third quarter, despite that raw material was positive. The main negative effect derived from currency headwinds, but also headwinds related to labor inflation and energy cost increases. The negative external factors year over year are sequentially reducing during the year. The group-wide cost reduction program and North America turnaround program is progressing well, and Jonas will now give an update on the progress.

Yes, so as mentioned, we're on track to deliver about $6 billion savings in 2023, which is above the previous target of over $5 billion. Year-to-date, we've delivered 4.4 billion of this, driven by product cost and structural cost. We've reduced premium freight and spot bias of components. We've negotiated new logistics rates, and we've significantly improved production line efficiency. This has enabled us to reduce 98% of the blue colors that we announced in the restructuring program. On structural cost, we've streamlined our factory organizational setup. We've reduced maintenance costs and scrap rates. We've also optimized marketing spend and implemented further efficiency in all of our SG&A functions. This has enabled us to reduce 92% of the announced white collar reductions. So as mentioned, we're now down to 44,600 employees in Q3. So we have upped our target as mentioned for 2024 to 10 to 11 billion versus 22. which then 4 to 5 billion will happen in 2024 versus 2023. And beyond that, we're continuing to target annual product cost reductions mid-term at a similar rate as we achieved in 2023-2024. This will come from increased sourcing from low-cost countries. We will continue to consolidate our supplier base and number of components by further leveraging our modularized product platforms. In the recent years, we've had a significant number of new product introductions, and as those are now in the market, we are able to step up our cost engineering initiatives, i.e. driving out material and component costs by reviewing our existing products in the market. Let's have a look at our cash flow and liquidity threat.