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Edited Transcript of ELUX B.ST earnings conference call or presentation 18-Jul-19 7:00am GMT

Q2 2019 Electrolux AB Earnings Call

Stockholm Jul 20, 2019 (Thomson StreetEvents) -- Edited Transcript of Electrolux AB earnings conference call or presentation Thursday, July 18, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jonas Samuelson

AB Electrolux (publ) - President, CEO & Director

* Sophie Arnius

AB Electrolux (publ) - Head of IR

* Therese Friberg

AB Electrolux (publ) - CFO

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Conference Call Participants

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* Andre Kukhnin

Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst

* Christer Magnergård

DNB Markets, Research Division - Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive

* David Sutherland MacGregor

Longbow Research LLC - CEO and Senior Analyst

* James Moore

Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research

* Johan Eliason

Kepler Cheuvreux, Research Division - Analyst

* Lucie Anne Lise Carrier

Morgan Stanley, Research Division - Executive Director

* Martin Wilkie

Citigroup Inc, Research Division - Director

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Presentation

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [1]

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Good morning, and welcome to the second quarter 2019 earnings discussion. With me today, I have Therese Friberg, our CFO; and Sophie Arnius, our Head of Investor Relations.

Let's go into the business overview, and start with the second quarter highlights. In the quarter, performance was solid with good price momentum and continued strong focus on innovation. Mix continue to be positive, driven by good traction of our innovative premium products in the market. Volumes declined mainly due to the private label business in North America. This resulted in a decline in our organic growth in this quarter.

Earnings were fairly in line with last year, despite the headwinds from raw material, trade tariffs, currency as well as the decline in volumes. A strong price momentum offset these headwinds. In the quarter, we increased investments in marketing for new product launches and innovation focused boost our earnings to improve mix. We started to incur some costs for the preparation of the professional spinoff. But overall, I'm quite pleased with the quarter and particularly the price/mix execution.

Turning to the next page. As I mentioned, our innovations are really helping our earnings performance and driving positive mix, and we choose to highlight 2 examples here and really what it is about is the power of consumer experience innovation to drive sales of our more premium and more highly featured products. We focused on taste, care and well-being innovation for the last several years and are now starting to see very tangible results in terms of mix contribution. So here we're highlighting 2 examples, the most recent is the -- the most recent example of this is new product that we're launching in North America, which is front-controlled freestanding range with Air Fry Technology integrated. So Air Fry is a more healthy way to fry french fries or chicken wings with less oil. So a significant taste benefit with health benefits, that's something that consumers really look for. And we are the first on the market to integrate this in affordable product. So that's just an example of how we look at taste experience as an innovation driver to provide attractive products.

An example that's been around a little bit longer is our care innovation in Europe under the AEG brand where the strong consumer insight that we have is that consumers are really concerned about how washing machines and tumble dryers might impact the -- how they clothes look and how long they last. And our innovations in terms of care really help consumers get more confidence in what products they -- what clothes they wash and dry. And this has resulted in an over 30% EBIT improvement of our AEG premium Laundry products. So really tangible results from deep consumer insights and solving real problems for consumers. And this is I think is very relevant as we're now doing a similar launch in Europe under the Electrolux brand. We started with the laundry products last year and are now coming with full range of built-in kitchen products driven by taste innovation. So strong earnings impact from consumer insight-driven innovation.

Turning to Europe. We had solid performance with positive organic growth, albeit at a slower pace than in the first quarter, where we had some pre-buys in the U.K. as well as the Easter effect on a year-over-year basis, shifting volumes a little bit between the first and the second quarter. We had positive price and continued strong product and brand mix development. Earnings were solid and we saw strong performance in our focus areas of built-in kitchen and laundry, as I just described. We continue to invest in marketing, mainly for our large built-in kitchen range launch under the Electrolux brand, which is currently reaching the market and ramping up in the third quarter. This new range has been very well received by retailers, and we have high hopes for the Electrolux brand in Europe. Overall, I'm very happy with the performance in our European business.

Turning to the market. The overall market remains supportive with a 1% year-over-year growth. This is entirely driven by Eastern Europe growing 4%, while Western Europe was relatively flat in the quarter.

Turning to our North American business, we saw a continued good price momentum and improved mix. The mix was partly driven by our new global multi-door refrigeration range as well as the front-controlled freestanding cookers that I highlighted earlier, they are getting top consumer reviews. This partly offset the volume decline that we saw in our overall declining markets, where core appliances -- the core appliance market was stable, while air conditioners and microwaves declined substantially in the market.

The negative volumes in the quarter were mainly caused by lower private label sales but also on ERP system go-live impact the volumes negatively. EBIT was fairly in line with the second quarter 2018, excluding the positive earn-out release that we had last year of about SEK 100 million.

The higher prices and mix improvements offset the higher costs from raw materials and trade tariffs, but not fully than the decline in volumes. Looking at the appliance market. Industry shipments for core appliances in the U.S. was stable in the quarter compared to a very weak quarter last year. However, demand for microwave ovens and air conditioners was down 20% and hence, the total major appliance market was down by 8% in the quarter. We estimate sell out to consumers to be fairly in line with the sell-in of core appliances in particular.

Turning to Latin America. We saw good execution in continued volatile environment. Our largest market, Brazil, continued to show solid recovery and demand is estimated to be quite strong in the quarter. The Argentinian market, however, continued to decline significantly, while Chile was only slightly down.

We saw strong organic growth and margin increase driven by continued positive prices and mix improvement and also on a year-over-year basis driven by last year's truck driver strike that impacted results last year. Mix was primarily driven by Brazil where, for example, sales of high-capacity washers and multi-door refrigerators contributed positively. And the cost-based price increases that we previously implemented fully offset currency and raw material headwinds.

Turning to Asia Pacific, Middle East and Africa. We saw demand growth continue in Southeast Asia and Middle East, even though the Southeast Asian region was somewhat softer than previously. Demand in Australia remained weak due to the slower housing market and also the weaker Australian dollar. Sales volumes in Australia declined as a result of the slow Australian market and the price increases we implemented to mitigate increased costs related to the currency headwinds. However, we did see positive mix also here, particularly the multi-door refrigeration platform that I mentioned previously as well as the launch of the -- what we call the E 100 built-in range under the Electrolux brand, particularly in Australia, but throughout Asia. And also we saw positive mix from our newly launched cordless vacuum cleaners, particularly the Pure F9.

Earnings declined, however, versus last year, mainly due to the continued impact from strong currency headwinds, but also lower volumes in Australia had a negative impact. And we continued to invest at elevated levels in marketing for the major product launches, such as the new built-in kitchen range in Australia, which of course, impacted our cost structure negatively.

Turning to Professional. We had solid performance with good organic growth on a slightly softer overall market. We saw strong growth in the beverage area, supported by a rollout for a chain customer in North America that we finalized in the second quarter. And we continued to see slightly positive price realization, leading to a very strong margin at 16%. This margin was heavily supported by the good contribution from the beverage rollout that finalized in the quarter, and we also had a positive earnings contribution from a pension plan settlement in Sweden related to the preparation of -- for the professional spinoff.

We had higher investment in marketing and innovation as well as product ramp-up cost -- production ramp-up cost, especially for the new Skyline cooking product and the new Line 6,000 laundry products, and these investments will continue during the remainder of the year to support these global launches.

On a separate note, the board reconfirmed our plans to propose the spinoff of professional products, and we currently aim for a listing in the first quarter of 2020 or at the latest in the second quarter.

Turning to the financial overview and Therese.

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Therese Friberg, AB Electrolux (publ) - CFO [2]

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Thank you, Jonas. In the quarter, we saw an organic decline of 2.6%. This was a result of higher prices, combined with mix improvements across the business areas, but this was not able to offset the volume decline, which was primarily driven by lower private label sales in North America. The total sales was up 1.1%, driven by positive translation currency impact of 3.8%. Gross profit improved on the basis of good contribution from price and mix and operating income was fairly in line with last year where the comparison period included a nonrecurring item of SEK 818 million. Price increases was fully offsetting headwinds from higher raw materials, tariffs and currency as well as the lower volumes in the quarter. Mix contributed positively, while higher marketing and R&D investments and costs related to the planned separation of professional impacted earnings negatively. And all in all, operating margin was 5.1% compared to 5.2% last year.

Earnings per share was SEK 3.94 in the quarter. If we then take a look at the EBIT bridge, we saw continued positive organic contribution, which was primarily driven by higher prices that was especially good in North and Latin America, but also in Europe. We also see increased earnings through improved mix by selling more high-margin products. And this was from an EBIT perspective more than offsetting the shortfall in the sales volumes primarily relating to the decline in North America.

We continue to have high headwinds from raw materials and tariffs, although on a lower level than what we saw in the first quarter. Currency had a slight negative impact on EBIT, despite a positive effect from translation currency. Net cost efficiency, as earlier indicated, was negative in the quarter. We have continued good traction from our underlying cost efficiencies but this was offset by increased investments in innovation and marketing. And in this quarter, we also started to incur costs in preparation of the professional spinoff. And we -- also, the release of the acquisition earn-out that we had last year was impacting the net cost efficiency negatively year-over-year.

Then let's take a deeper look into the organic contribution. EBIT margin accretion for the group from price and mix was very strong at 3.5% in the quarter. In Europe, we had a favorable mix fueled by growth in high-margin products and premium brands, driven by the strong performance in our focus areas as built-in kitchen and premium laundry and prices also improved last -- versus last year. In North America, we have good price traction with prices sequentially improving. This was a carryover effect from last year's price increases that are carried out through this year. But it's also partly related to lower promotional spend as last year's 100-year celebration campaign of the Frigidaire was not repeated this year.

In Latin America, we had good EBIT contribution from previously implemented price increases and this was coupled with mix improvements. In APAC and EMEA, we had a positive effect from price actions previously taken in Australia, while price for the total business area was flat. Mix remained positive, driven by growth in Refrigeration & Kitchen products as well as in cordless vacuum cleaners. And for professional products, we continue to benefit from the positive price in the quarter.

If we look at our cash flow after investments, but before acquisitions, it was SEK 384 million in the quarter, which was below the level of last year. This was mainly due to negative contribution from working capital due to timing effects, which was predominantly related to an ERP system go live in North America, which impacted by approximately SEK 1 billion. And this effect is temporary, and we expect it to be recovered in the third quarter. As we have announced, we also have a higher working -- higher capital expenditure level due to the ongoing investment projects in reengineering, and this we also saw continuing in the second quarter.

The average operating working capital in relation to rolling 12-month sales showed an increase to 4.6% versus last year's 4.0%. And as highlighted, the working capital efficiency we have achieved over the last 10 years are expected to flatten out and remain at this healthy level. First of 2 installments for 2018 dividend payment of SEK 8.5 per share was distributed to shareholders and the cash flow was impacted by SEK 1.2 billion in the quarter.

And with that, I want to hand back to Jonas for the outlook and summary.

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [3]

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Thank you, Therese. Turning to the market outlook, we reconfirm our market view for the full year 2019 with the exception of Southeast Asia. Current industry trend indicated somewhat softer market demand for Southeast Asia and hence, we expect the region to be slightly positive compared to our previous positive outlook. We continue to expect market demand for appliances in Europe to be slightly positive in 2019, driven by Eastern Europe. In North America, trade tariffs have triggered price increases, resulting in uncertainty and somewhat weaker demand. We've also seen consumer's sentiment moderate overall in a fundamentally solid demand environment. As a result, we continue to expect the industry volumes to be slightly negative. In Australia, a slower property market and a weaker currency are impacting demand, and we continue to expect market volumes to be slightly negative.

In the Latin market, the recovery in Brazil continues and the region as a whole is expected to be slightly positive.

Turning to the business outlook. We expect a favorable organic contribution for both the full year 2019 and Q3, driven mainly by the higher prices, especially in North America and in Latin America. Mix has contributed positively in the first half of the year, and we expect this to continue for the remainder of the year. In terms of volume, we expect private label sales in North America to continue to decline as was the case in the first half of the year. While the impact from the ERP system go-live that we had in Q2 should not impact volumes materially going forward.

We estimate the negative year-over-year impact from raw materials and trade tariffs to be approximately SEK 1.2 billion to SEK 1.4 billion in the full year compared to the previous estimate of approximately SEK 1.4 billion to SEK 1.6 billion. The improvement is related to that we've locked in more steel and chemical volumes as favorable rates and now have improved visibility for the year. The outlook is based on the current tariff levels. So that means that Section 301, List 3 is included at the current 25% rate. However, for clarity, these higher 25% tariffs on List 3 did not have a significant impact on the 2019 outlook since most of the seasonal purchases of air conditioner products took place before the tariff rate hike. In the first half of 2019, price has fully offset this headwind, and we expect that to be the case also for the third quarter and 2019 as a whole.

In terms of net cost efficiency, we keep our view that the full year net cost efficiency will be negative. If we zoom into Q3, we also expect net cost efficiency to be negative in the quarter and step up compared to the second quarter. This is due to 3 areas that we've communicated earlier about, and that should be well known. First, last year, we had positive one-offs in the third quarter of roughly SEK 250 million relating to a provision release in Latin America and a capital gain from a divestment in North America. Secondly, the manufacturing transition cost in North America that we've talked about before will start to kick in. As we have said, we will start production in our new Anderson facility during the third quarter, meaning that we will have extra costs in terms of higher inventory and run these -- and running these facilities in parallel to ensure smooth transition, which means that we will run 3 facilities for a period of time before going down to 1 towards the end of the year. So the third quarter is an important quarter for us in North America in terms of this manufacturing production ramp-up.

The new Anderson facility will result in significant cost efficiencies, and we expect to start to see this from 2020 when we go from these now 3 facilities down to 1 at the end of this year.

The final and third area is higher marketing spend to -- as I mentioned before to support the major product launches that we have in the second half of the year. Innovation is for me the key driver to improve margins in the long term. In the last quarter, we've proven that we are well capable of executing on innovative products and driving positive margin, and we'll continue to do that. In addition to these 3 areas, as indicated, given the board's confirmation on the intended professional spinoff, this will result in cost of roughly SEK 100 million relating to preparation work during the second half of the year.

Turning to currency. Our indicated headwinds of SEK 200 million for 2019 has been positively impacted by favorable translation effect and it's based on currency rates as per the 11th of July. We continue to execute on our reengineering program. And as I mentioned, we are about to start production in the new Anderson facility in the U.S. And hence, we keep our full year capital expenditure outlook of SEK 7 billion.

So our path to profitable growth is continuing. We're continuing to be strongly focused on executing on our strategy, and I'm really pleased that our price execution is sticking, and we're continuing to fully offset the headwinds. Most of the business areas showed continued improved both price and mix, which I think is a significant contributor going forward. We're continuing to invest in innovation and marketing to support the new product launches and cater for further growth in the future. We're enabling this to a continued strong focus on our balance sheet and with a healthy overall balance sheet situation.

So with that, I'd like to turn over to Q&A.

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Sophie Arnius, AB Electrolux (publ) - Head of IR [4]

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Yes. Thank you, Jonas and Therese. So we will now open up for questions. Moderator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And we have a question from the line of Johan Eliason of Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [2]

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I was wondering about this networking capital impact on the cash flow in the quarter, you mentioned this ERP system change. But then you also said that, okay, so the new plant in U.S. will start ramping in Q3. So there will be some inventory buildup also from that one. Does that imply that we shouldn't expect any release from this excessive inventory build from the ERP? And then the Anderson plant until maybe Q4 this year or how do you see that? And then also on this ERP, is it part of this new plant development in the U.S.? Did it have any costs associated impacting the EBIT in North America in the quarter?

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Therese Friberg, AB Electrolux (publ) - CFO [3]

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Yes. It is 2 slightly different questions. The ERP system is not related to the manufacturing go live, but is related to our financial processes. So from a cash flow perspective, you can -- this was related to lower collection of receivables, the cash flow impact. And this was a temporary thing where some of the collection fell over into July instead of June. So this will come back in the third quarter. And when it comes to the inventory buildup for the plant, that has been going on for a little while, and as we say, we will have 2 different factories. We don't see this as a major impact on our cash flow going forward. So essentially, you should see overall the drop that we saw in the cash flow in the second quarter coming back in the third quarter already.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [4]

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And it didn't have any impact on the EBIT in the quarter?

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Therese Friberg, AB Electrolux (publ) - CFO [5]

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No. As we have said, it didn't really have an impact on the group level at all. We saw a slightly lower net sales in North America, but it didn't really have an impact on EBIT, neither for North America in the quarter or for the group.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [6]

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Okay. And then just on the raw material headwind guidance. Obviously, very positive that you reduced it despite having the tariffs, but which we got explained by the tariffs, obviously, hitting the air cons mainly. Now does this imply that you have -- will have a more significant headwind next year on the back of this 25% tariffs on the air con?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [7]

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Yes. Assuming that they are same place. Yes. Absolutely. Yes.

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Operator [8]

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Our next question comes from the line of Andre Kukhnin of Crédit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [9]

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Can we talk about pricing first? You talked about pricing impact coming from already implemented price increases. I thought there was a dynamic there where you raised or announced price increases at the beginning of the year, then were discounting against them as the tariffs were delayed and then those discounts should have been eliminated as the tariffs demand were put on. So how should we think about the pricing impact on the bridge or in P&L for you for the second half? Does that run rate of what I think is about 2.5 points in H1, does that tick up? And also taking account, obviously, we start counting the last year price increases. So I just wonder if you could help us with where the pricing level is sequentially and then year-on-year for second half.

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [10]

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Yes. So your description is correct of the impact on, sort of, the tariff hikes on so on. But then, of course, because most of the air conditioners in the market, not just for us, but overall in the market, were purchased before the 25% rate, most of the volumes sold this year will be at that lower. Also going forward here will be sold at that lower price most likely. When it comes to the continued year-over-year, I think there's another sort of year-over-year impact that we have to keep in mind and that is that we had this significant promotional event in the second quarter last year related to the Frigidaire 100 year celebration that we didn't have this year. And so that year-over-year impact will not be there for the rest of the year because we didn't have a corresponding sort of promotional event last year in the second half. And then, of course, we started to raise prices, both in North America and in Latin America in the second half of the year. So when you kind of net all of that out, we will see less headwind sequentially from raw material and currency zone, but also less year-over-year pure price realization on a year-over-year comparison basis.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [11]

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Got it. That's very helpful. And just on the net cost efficiencies. So if we look at the SEK 265 million in Q2 and take out the SEK 100 million for reversal. So building that from SEK 165 million underlying. Should -- so we think about SEK 100 million for professional spread across the two? And then the higher Anderson costs and marketing spend, which I guess, is also actually comping comparably year-on-year because you're spending last year and I kind of see it stepping up, but not like -- not another SEK 100 million from the Q2 run rate. And second half, I can't see, sort of, expanding more than SEK 500 million. Is that sort of in the right ballpark or some of these items we're missing?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [12]

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Yes. You are missing a few things. So first of all, we're not going to give you exact number, of course. But yes, you started out with 2 relevant points. But then, of course, as I mentioned, last year in Q3, we had this approximately SEK 250 million positive one-offs that will reverse out in the third quarter. And then, we are stepping up the investments in marketing and launch spend everywhere in the third quarter. We have big launches in Europe, big launches in Professional, big launches in North America, as indicated, and that will result in a fairly significant step-up in spend going into the third quarter. So yes, I think we are definitely seeing more headwinds than I think you were looking at there.

Particularly in the third quarter. So for the full year, it's not the major, let's say, run rate increase for the -- for also the fourth quarter because we will see less of these sort of one-off year-over-year comparisons and so on, but the third quarter will be a spike.

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Operator [13]

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Our next question comes from the line of David MacGregor of Longbow Research.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [14]

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Just a question, I guess, very strong price/mix performance across the model in the quarter, but we're watching kind of lower metals prices starting to work their way into the marketplace. And I'm just wondering how confident you are in your ability to continue to hold pricing in the face of lower metals prices in the second half?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [15]

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Yes. No, I think this is the same answer that I always have on those types of questions. That is that these -- the market prices of input materials tend to translate into market prices for appliances over time, going up or going down. So there's always a little bit of lag, but it's a competitive market and the input costs tend to get translated into product costs over time.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [16]

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Do you feel like you've got a stronger price/mix position in one region or another? It seemed like you were talking about strength across the entire global model and price/mix. I'm just wondering, how maybe North America versus Europe would...

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [17]

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Yes, I think we have -- we do see strength in -- across-the-board. And I think in particular, what I'm -- again, I highlighted that in Q1, and I want to do the same here in Q2 that we saw both positive pure price and positive mix, meaning that, despite the price increases, meaning that a product has a higher price than did a year ago, we're still selling more of our more highly featured highly priced products. And that to me is a real sign of strength. It means that the innovations that we're bringing to market and the brands that we're carrying have strengthened in the market. And I think that's a fairly sort of consistent picture across the globe with exceptions in places like Argentina or so, where the inflationary pressures are very, very high. So to me, it's a really a strong validation of our strategy. Then to your point, and what -- as I just said, the input costs that impacts the industry sort of equally do tend to get translated into market pricing.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [18]

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Just a follow-up question on that. Relating to your observation on mix, you talked about the strength in built-in in Europe? Do you feel like maybe that is a function of having gained share in built-in in Europe? Or do you feel like the built-in category, in general, has just been growing very strongly?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [19]

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Yes. No, we're gaining share in built-in and particularly under our premium brands. So the focus for us, and you know that we've been focusing for the last 6 or 7 years or so, really on our built-in kitchen offering under Electrolux and AEG as well as our premium laundry offering under Electrolux and AEG and that very, very strong single-minded focus is really working, and we're gaining -- we've gained share consistently for several years in a row and are continuing on that path. And now we're launching, as I mentioned, a complete new Electrolux branded premium range in built-in kitchen that we have very high hopes for.

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Operator [20]

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Our next question comes from the line of James Moore of Redburn Partners.

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James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [21]

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Maybe I'll go one at a time, if I can. The first one is on the Professional division. Could you help us size the Professional -- sorry, the pension settlement gain in the division?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [22]

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Yes. I mean, it's big enough to be noticeable in the EBIT, but not big enough to be called out as a specific number. And basically, that's kind of how we -- we can't quantify all these sort of minor items because then it will be a very long list of little things hitting up and down. So we don't do that. But we call it out because it's noticeable in the Professional, specifically the Professional results.

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James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [23]

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Fair enough. And on the U.S. reengineering costs kicking-in in the third quarter. I'm wondering if you can help us with whether your -- the impact that you see coming from that is broadly in line with the plan or whether you see it pulling forward more into the third quarter than the fourth?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [24]

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Yes, it's broadly in line. I think the -- and there will be costs in both Q3 and Q4. But the Q3 aspect is, of course, as I kind of indicated that we, in fact, will have 3 factories running, right? So the old -- the St. Cloud factory, which we're closing towards the end of the year and then, sort of, the old Anderson facility and ramping up the new one. So we will have 3 factories going to 1 ultimately. And of course, that results in cost. There's no way around that. The end result will be dramatically more efficient and with massively better products, I think very important to say. But there are some fairly noticeable duplication costs and ramp-up costs associated with that.

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James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [25]

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And on the marketing and launch costs in the third quarter, you mentioned their ramping up or stepping up. I think, in the first quarter you mentioned they will be stepping up in the second quarter. And what I'm trying to understand is the cadence of the marketing spend, if you like, as a proportion of revenue in the U.S. but -- or around the world. But broadly, if you look at an annual number, what is the marketing spend? And how has that changed in the last few years? And are you seeing a particular spike against those normal running rates in the third quarter just because it's often mentioned that we have launches in those marketing costs? And it's just quite difficult to understand the impact.

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [26]

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No, the reality is that we are, I mean, obviously, the big investments that we're making in new product, when we put those -- bring those markets -- the products to market then we will spend the commensurate money to launch them. And that is a sort of an increasing trend, I would say, structurally over time. Our overall marketing spend is a little bit below 4% of net sales that has been increasing in recent years. And we expect -- we hope, honestly, to be able to increase that further as we go forward because that to me indicates that we're successful in driving favorable mix and overall higher profitability. So for me, this is the good -- this is good money. We're putting it in the same bucket as all the other efficiency work, because, of course, we need to -- we have the bridge to tie but this is money that I want to stand.

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James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [27]

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And lastly, just to clarify on Andre's question earlier on net cost efficiency against the SEK 265 million. You talked about the increase in the third quarter, but if we stripped away the SEK 100 million gain reversal and the SEK 250 million gain reversal to get back to sort of an underlying, are you saying that it spikes up in the third quarter quite meaningfully against that SEK 165 million? Or is it just a function of the reversal of the SEK 250 million?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [28]

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No, it's both. This is a combination of the 2.

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Operator [29]

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Our next question comes from the line of Martin Wilkie of Citi.

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Martin Wilkie, Citigroup Inc, Research Division - Director [30]

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Just a question on the raw material headwinds. You mentioned that you've locked in some favorable rates on raw materials. And also, we have seen steel pricing coming lower over the past few months. If you could just give us some sort of sense as to how much of that lower impact is locked in impact in 2019? Because you obviously said that the headwind is slightly less than it was beforehand, but presuming some of that sort of falls over into 2020 as well because of hedging and forward purchasing and so forth. So just to get some sort of sense is to how much of that locking in favorable rates is reflected in your '19 guidance and how much of it is still to come in 2020? Even just sort of directionally? And the second question was just on the ERP. As you mentioned that the working capital effect reverses as you sort of get those payments in July, but you also mentioned that the ERP hit volumes in the U.S. Maybe, could you just clarify us why that happened? And is that effectively market share lost? Or do we expect reversal, if you like, of that volume impact from the ERP in Q3 as well?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [31]

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Sure. So starting with the steel, yes. We have seen, as I think is visible to everybody, a quite substantial drop in the market prices for cold-rolled steel. And we have been able to secure good contracts as a result of that for the rest of the year. But of course, the first half of the year was mainly based on prevailing market conditions late in -- late last year when we signed those contracts. So while our actual pricing doesn't correspond perfectly with market prices because there are lots of other factors impacting that more locally and the variance and the grades and all those things, there's lots of factors here. For sure, we have seen a better pricing environment. What's going to happen going forward into 2020, I honestly don't know because -- and we haven't started those -- these negotiations with our suppliers. So I'm going to have to defer on that question.

When it comes to ERP, it's basically, what we did, we went live with our sort of finance and commercial ERP system that we've been rolling out globally over the last several years in the quarter in North America. And of course, that's a very, very big market and inevitably, there are some sort of slowdown in the go-live phase. That means that given that we have a very short order books, some orders were lost during that period. That's known and expected. That's a temporary factor. We don't necessarily expect to get back those volumes. But that's a very manageable and minor effect. And then, of course, there's the effect of, as you ramp-up the new system, you have to match credit notes to invoices and things like that. And that takes a little while to get that all sorted out, and hence, some payments to us, some collection got pushed over the quarter end. Again, these are all things that typically happen when you have an ERP go live. The only difference is that now, we did it in -- basically in markets reflecting 1/3 of our revenue. So that -- then, of course, the working capital impact suddenly becomes quite measurable.

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Operator [32]

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(Operator Instructions) And our next question comes from the line of Annabel Asquith of Morgan Stanley.

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Lucie Anne Lise Carrier, Morgan Stanley, Research Division - Executive Director [33]

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This is actually Lucie. I had actually 2 questions. The first one was on the European market, I mean, the sequential deterioration or deceleration, I would say, it's quite steep versus what we've seen in the first quarter. I appreciate the pre-buy effect from the U.K., but I was wondering if you could comment maybe a little bit on the Scandinavian market, specifically as one of your fellow Swedish company yesterday was mentioning some slowdown on the residential side. And if there is anything specific on any other European country that is maybe notable, if you kind of explain the drop? And then secondly, and apologies if you already mentioned that, but I had some issues with the line, but can you quantify maybe the impact of the decline in private labels in the U.S. and whether this is accelerating because the comps seem to have been really easy in the second quarter of the year. I mean, AHAM is flat, AHAM 6 is flat in the second quarter. And your organic decline seem quite more pronounced than what we've seen in previous quarters.

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [34]

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So yes, if we start with Europe. I would say that the underlying trend is relatively flat -- stable and flat in Europe, and I think that was honestly, the underlying trend also in Q1. And if you look at last year, it was basically flat in Western Europe as well. And there are minor ups and downs market by market, but the trend is very much flat in Western Europe. In Q1 versus Q2, we had the pre-buy in the U.K., where people were stocking up for an eventual hard Brexit on March 27th that didn't happen. So that reversed out in Q2. And then, of course, we had the Easter effect where Easter this year occurred in April and last year occurred in March and that has kind of a swing effect between the quarters, that if you sort of neutralize those effects, you basically see a flat quarter in West.

On Scandinavia, I honestly don't have anything significant to report. It's tugging along, I would say, not exciting, but not terrifying either. And switching then to North America, we had, of course, Q2 last year, we were -- I mean, you'll recall and it's well known that our private label business is mainly Sears and in the second quarter of last year and also the third, we were selling at sort of full speed to Sears. And then they declared their Chapter 11 in the fourth quarter. There was reorganization in the beginning of this year, but our sales volumes in private labels and mainly Sears are much, much lower now than they were in the prior year period. That's just an unfortunate reality.

And then on the branded side, last year we had this big 100-year celebrations that pushed volume, but at low margins. And this year, we were more watching the margins and saw some slightly lower volumes. I would say, that's not the trend effect, that's just a year-over-year promo versus no promo. And then importantly, and I didn't mention that, that core appliances were flat. But if you dig into it, you see actually the kitchen appliances were negative by something like close to 4%, and we are mainly a kitchen appliance company in terms of core appliances in North America. And then air care and microwaves were down 20% in the quarter and that's a relatively sizable business for us. So when you look at all of those factors, I would say it's not in, let's say, unexpected volume development overall for us in the quarter. And we're quite pleased, again as I mentioned, with both the price and the mix realization that we had. So we're able to really defend our bottom line almost completely on an underlying basis driven by that.

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Operator [35]

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Out next question comes from the line of James Moore of Redburn Partners.

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James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [36]

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Okay. Thanks for allowing a follow-up. I wanted to ask on the Latin American margin, which did pretty well. You mentioned the trucker strike impact dropping out. I was wondering, sort of, proportionately, how much of the increase year-on-year was trucker strike? And how much can we effectively carry over into the second half? And I wonder if you could peel the onion a little bit of Latin American profitability, whether it's all Brazil and the other 2 countries are going the other way? Or what?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [37]

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Yes. So yes, I mean, in the sort of May, June timeframe last year, we -- the market stood still for a while. So the year-over-year effect, I mean, that impacted last year heavily, right? We lost money in the second quarter last year. And of course, the fact that we didn't have that and in fact, the market is -- in Brazil is quite buoyant. If you look at the overall run rate, my assessment is that it's in the sort of high single-digit overall growth rate on a run rate basis in the first half. So that's, of course, quite positive for us but the very weak result last year was to a larger extent explained by the trucker strike. Then typically, if you look at the pattern in Latin America then Q3 is a relatively soft quarter and then we have a strong fourth quarter, that's typically what the pattern is.

Then going outside of Brazil, Argentina is very soft still. And I think the year-over-year effect is starting to be less negative, but it's not because the market is returning, it's still quite soft, and we expect that to continue through the presidential elections that are upcoming this fall. But we are able to offset or compensate for the inflationary pressure through price, which is very good. So we're profitable, but low volume. So I think those are the headlines for Latin America.

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Operator [38]

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Our next question comes from the line of Andre Kukhnin of Crédit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [39]

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Yes. So again, thanks very much for taking the follow-ups. One, I wanted to double-check on was the tariffs versus pricing for 2020 implications, I understand that this, due to seasonality, kind of, managed to blow over for 2019. Could you help us quantifying the kind of the full year impact from tariffs with Section 301, List 3 at 25%? Just thinking about next year. And also, can you confirm that if pricing stays as it is, hence with discounts removed, that covers that headwind?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [40]

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Yes. I mean, on your second question, yes. So we actually already have -- are now removing those discounts to reflect the new tariff levels going forward. However, again the volumes from now on are very low for the rest of the year most usually. So that will have a very marginal impact for this year, but next year yes, we will see the headwinds from the List 3, if it stays in place, but the pricing is now, from now on, already in place to cover that. So we don't need to take any further action. But I'm not going to go in and quantify the individual list effects, it just gets too messy to track. It's covered in the overall guidance here.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [41]

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Right. And if we use that reference in Q2 -- sorry, in Q1 when you changed your guidance for raw materials and tariffs by, I think from memory SEK 300 million to SEK 500 million and part of that was List 3 coming out of guidance, especially the bottom end, is that sort of still a useful reference point for that?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [42]

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It was a noticeable significant part of that, but I'm not going to say exactly which is which, honestly.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [43]

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Got it. And also I just wanted to check on Electrolux brand revamp in Europe. If there are any early indications on how that is going and gearing up? And also, well maybe let's just start with that, I've got a little follow-up on that.

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [44]

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Right. So we're really doing that. In terms of the market communication, it's really going to hit the market mainly with the new launch of the built-in range that we're now starting to ramp-up heavily in the third quarter. We're extremely excited about it to basically present the Electrolux brand as a Swedish brand with leadership and sustainability, progressive, modern and inclusive. We think that's a brand that is extremely well attuned to the trends in the market and what consumers are looking for. So we're really excited about this revamp. And again, as we've indicated several times, when we did the same thing for the AEG brand with a very different platform and when you do it, a new brand platform in combination with new well-designed and very innovative products, you get sort of a cumulative effect that's quite significant. If you only do 1 of those 3 things, it's less significant, but when you can have an attractive brand, beautiful products with fantastic consumer experience-driven innovation that's when you can get the real pop. So we're excited about it.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [45]

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Great. And that reference to AEG, I just wanted to follow-up on that because I remember from end of 2017, we -- you presented a slide saying that the revamp of AEG resulted in, I think, about 7% ASP increase for the brand overall and you relaunched the whole brand over 3 years. Would you still maintain that the Electrolux revamp can have a sort of similar order magnitude effect?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [46]

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I would say so, yes.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [47]

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And it's about 2x the size of AEG?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [48]

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No, no, it's actually -- Electrolux is only marginally bigger than AEG. It's relatively similar in size, yes.

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Sophie Arnius, AB Electrolux (publ) - Head of IR [49]

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Do we have a final question?

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Operator [50]

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Final question from the line of Christer Magnergård of DNB Markets.

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Christer Magnergård, DNB Markets, Research Division - Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive [51]

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Well, I can start with just a follow-up question on the net cost efficiency. We have said that you had a SEK 250 million one-off in Q3 last year. If I recall it, I had SEK 170 million and I just want to double-check that number.

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [52]

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One was the release we had in Latin America and then the second one was the gain from the sale of our commercial vacuum cleaner business in North America.

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Christer Magnergård, DNB Markets, Research Division - Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive [53]

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Got you. And then secondly, when it comes to the production changes you are planning for next year. Will they be as significant as to do here in Q3, Q4, with double production and so on? Or it will -- there'll be a smaller exercise?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [54]

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That will be a smaller. Well, the manufacturing investment per se is equally big but the product move is much smaller because we have a -- the Memphis consolidation into Springfield is much, much lower volumes that we're moving. So the extra cost will -- at least the way I see it right now will be lower.

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Christer Magnergård, DNB Markets, Research Division - Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive [55]

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And that Frigidaire 100-year celebration last year in Q2, what kind of year-over-year impact did it have on pricing in Q2?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [56]

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Yes. I mean, we don't break it out in that level of detail, but of course, we did have a solid, really solid contribution from pricing year-over-year in North America in the quarter. And of course, the volume and the pricing to some extent, if you take the private label aside, which is not driven by pricing, then, of course, there is an impact from the fact that we had kind of a really a one-off event last year driven by the 100-year celebration. So if you then compare that year-over-year, it's a fairly significant pricing boost from that.

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Christer Magnergård, DNB Markets, Research Division - Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive [57]

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Did you also have a step-up in marketing last year related to that? Was it only on the pricing components?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [58]

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It was mainly -- there was some marketing, but it was mainly -- yes, sort of 100-year anniversary discounts, let's say. And -- but, of course, supported by marketing.

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Operator [59]

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Thank you. I'll now hand over to Jonas for closing comments.

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [60]

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All right. Thank you. As I mentioned in our presentation, we're really on our path to profitable growth, and we're continuing to focus on executing exciting new product launches, manufacturing, revamp, automation, digitalization, leading the way in terms of driving profitable growth going forward. And I'm really excited about the fact that we are already now able to show the benefits of that significant improved mix and price in the quarter showing that we're able to execute that. And we're really excited about what's coming in the second half of the year and into next year and, of course, supporting that with a strong balance sheet and continued strong cash generation. And with that, I wish you all a great summer and look forward to seeing you all soon. Thank you.