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Edited Transcript of ELUX B.ST earnings conference call or presentation 25-Oct-19 7:00am GMT

Q3 2019 Electrolux AB Earnings Call

Stockholm Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Electrolux AB earnings conference call or presentation Friday, October 25, 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

* Andreas P. Willi

JP Morgan Chase & Co, Research Division - Head of the European Capital Goods

* David Sutherland MacGregor

Longbow Research LLC - CEO and Senior Analyst

* Gustav Sandström

SEB, Research Division - Research Analyst

* James Moore

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

* Johan Eliason

Kepler Cheuvreux, Research Division - Analyst

* Olof Cederholm

ABG Sundal Collier Holding ASA, Research Division - Analyst

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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 a warm welcome to this Electrolux Third Quarter 2019 Results Presentation. With me today, I have Therese Friberg, our CFO; and Sophie Arnius, our Head of Investor Relations. I would also like to mention that this session is recorded and will be available on our website as an on-demand version.

Turning to the third quarter highlights. As we've talked about for a number of years now, innovation and operational excellence are the key pillars for us to drive profitable growth. In the third quarter, we further strengthened our platform for the future by launching groundbreaking products and initiating additional efficiency measures. This is on top of an additionally already very solid pipeline of activities.

We have a strong yield on our innovation power as we also, in Q3, have mix improvements across business areas as a result of major product launches and the focus on our core brands to drive product mix. This, together with price increases, resulted in organic growth. We saw volume declines in lower price points in Europe and continued lower private label sales in the U.S.

Operating income, excluding nonrecurring items, was down year-over-year, mainly driven by manufacturing transition costs as we started production in the new Anderson facility in the U.S., and I will give you some more details later in the presentation on that.

We also had higher marketing investments supporting our product launches. And at the same time, price increases offset significant continued headwinds from raw materials, trade tariffs and currency. In the quarter, we also had net nonrecurring items of negative SEK 412 million, and Therese will comment on the makeup of those items later in the presentation.

Turning, as usual, to some of our innovation highlights. And I think it's important to make the positive mix that we're seeing come to life to show what's actually driving it. And here, we have 2 great examples. The first one is our innovative, high-capacity top load washing machines in Latin America. This is a fast-growing market, especially with machines over 12-kilo capacity, which allows consumers to, of course, wash more in one go, which is growing quite rapidly. We are the largest player in this segment. We have nearly 1/3 of the market, and we've increased our market share by more than 4 percentage points over the last 5 years.

And this is driven mainly by 2 things. One is that we have introduced a very high-capacity 17-kilo range of appliances. And we've also introduced the new perfect dilution technology, which allows consumers to avoid spotty washing performance and residue from undiluted detergent. This has really allowed us to strengthen our market position, and we have really high consumer rating -- star ratings of 4.7 out of 5 stars in online reviews in the first half of 2019 in Brazil. So a strong case of understanding consumer needs and delivering well-suited products for them.

The other case is one that we've talked about a number of times, which is about steam cooking. As we talked about, steam not only improves taste and texture, but it also has significant health benefits. So this is a segment that we've been driving very aggressively for the last 5 years or so. And since 2015, we've increased our position by -- in steam ovens and increased market share by over 6 percentage points, driving our sales from 140,000 units in 2015 to 530,000 in 2018 with a strong profit increase to go.

And now most recently here in September 2019 at the IFA Fair in Berlin, we introduced a new range of steam ovens with the Steamify function. And the Steamify function allows users to cook their normal recipes and just hit the Steamify button to add the appropriate amount of steam to create an even better cooking experience, really improving consumer experience and further driving growth in this very profitable segment.

Turning to Europe. We saw brand and product mix impacting sales positively as well as price increases. We gained market share in premium segments, but organic sales declined 1.8%, driven entirely by volume decrease in products at lower price points. We saw especially strong performance in built-in kitchen, driven by strong hubs and dish care sales. Our -- we delivered solid underlying earnings, primarily driven by price and mix impacting EBIT. But also, we saw the -- starting to see the impact of the new kitchen range that we launched in Europe during the quarter. It's been extremely well received. It's currently rated 4.9 stars out of 5 in consumer reviews, which is truly best-in-class and groundbreaking, and has started to contribute to our European value market share growth in the focus area of built-in kitchen.

To support this launch of these really fantastic products, we've, of course, increased marketing spend. But at the same time, we're continuing to improve our overall cost efficiency. In the quarter, we also saw currency headwinds impacting earnings negatively in the business area.

Turning to the appliance market in Europe. We saw continued growth of about 1% year-over-year, mainly driven, as it has been for some time, by stronger growth in Eastern Europe of 2% while Western Europe grew 1% in the quarter.

Turning to North America, we saw more or less flat organic sales where sales volumes under core -- sales volumes of core appliances under our own brands increased in the quarter, while sales under private labels continued to decline. We continue to get the benefits of cost-based price increases and strong mix improvements, which contributed positively to net sales.

And the positive mix is driven by our new fantastic product launches, including new multi-door refrigerators as well as the Air Fry freestanding cooker.

EBIT, excluding nonrecurring items, was down year-over-year. And as I indicated, driven by higher manufacturing costs in Anderson that I will return to in a moment, while price increases continue to offset our higher cost for raw materials and trade tariffs.

Also noting -- worth noting is last year, we had a capital gain of about SEK 80 million in the third quarter related to the divestment of our vacuum cleaner business.

Going then into a little bit more detail of our startup in Anderson. I know a lot of you are already very familiar with our reengineering program, but I wanted to spend a few minutes on Anderson in particular. And during the quarter, as we've talked about, we started the first phase of production in the new facility. And by mid-2020, we expect to be fully ramped up. I want to point out that this is the biggest step we've ever taken in terms of automation as we're going from less than 10% to about 35% automation level and will significantly change our ways of working in terms of flexibility, efficiency and innovation capabilities. This new Anderson facility will result in significant cost efficiencies that we expect to start to see in 2020. And we also expect profit improvement from fantastic new products meeting consumer needs.

The consolidation of our U.S. core production into one new facility is, of course, very complex and resource-intense. As we've indicated before, we'll have extra costs in terms of running the 3 facilities in parallel to ensure a smoother transition, and we expect this to negatively impact EBIT by about $25 million in the fourth quarter, an acceleration from the impact that we saw in the third quarter. This includes both manufacturing transition costs, as we already had in Q3, as well as expected lower volumes as we're running the old Anderson facility at a lower rate since we have moved part of the employees to start up the production in the new facility. And of course, we're seeing significant advantages of having the 2 facilities next door to each other that we can flex people between the 2 sites and keep manufacturing going.

Going forward, St. Cloud, 1 of the 3 facilities, will be shut down here during Q4. And in Anderson, we'll continue to shift employees to the new facility from the old one. So a huge project, good progress, but a lot of work still to do to ramp that new huge facility up.

Turning then to the U.S. appliance market, we saw, for the first time in 5 quarters, growth in the third quarter by 3%. And if you -- but if you add all major appliances, including Microwaves and Home Comfort products, the demand development was flat in the quarter. And we estimate the sell-out to consumers have been a little bit lower than the sell-in in the third quarter.

Switching to Latin America. We saw a solid market growth in Brazil while Argentina actually had a slightly positive sales, but Chile declined in the quarter. We saw organic sales growth of 14%. Actually, sorry, I need to change, Argentina didn't grow, but it recovered from the low pace that we saw in the second quarter.

Organic growth grew 14% with strong growth in Brazil where we gained market shares. And we also saw price increases contributing positively. Operating income, excluding nonrecurring items, improved slightly, driven by higher volumes, but also significant product mix improvement from our new product launches, including the high-capacity washers that I recently mentioned.

Price increases continued to contribute to operating income and offset higher raw material costs, but that could not fully compensate for the significant additional currency headwinds we saw in the quarter. We had a reversal of a provision in the quarter, which had a positive impact on earnings in the quarter. However, last year's earnings included a more significant positive effect from provisions reversals relating to an administrative case of about SEK 170 million.

Turning then to Asia Pacific, Middle East and Africa. We saw continued but softer market growth in Southeast Asia, while Middle East Africa was flat and Australia remained soft. We had -- we reported organic growth of 1.5% with strong support from Australia where we gained market share supported by the new product launches. And that also delivered strong product mix improvement, both in Australia through the new product launches and through our new cordless vacuum cleaners in Southeast Asia.

Underlying operating income declined in the quarter due to higher investments in marketing to support the product launches as well as continued currency headwinds, primarily from the weak Aussie dollar. We also saw some increased price pressure in Southeast Asia.

Turning to Professional Products. Overall, the market demand for professional food service and laundry equipment continued to weaken across most regions year-over-year. Our organic sales declined 7%, driven by lower beverage sales in the U.S. and also lower volumes in Middle East and Africa where we saw a declining market in large projects particularly. The lower volumes were partly offset by price increases and increasing aftermarket sales.

Our underlying income declined, mainly driven by the lower volumes. But we also had initial higher product cost for the new product launches that ramped up in the quarter, including the SkyLine cooking range and the Line 6000 laundry products that we introduced in -- at the Capital Markets Day. And of course it's normal that product costs are higher in the beginning due to start-up cost for production as well as lower production volumes before we are fully ramped up. We also had higher investments in marketing as well as innovation in the quarter to support the very important product launches that we're driving.

The preparation of the spinoff for Professional Products continues according to plan. And the additional efficiency activities that we announced in the quarter are more than offsetting the increased ongoing costs that are related to the separation and the stand-alone running of Electrolux Professional.

Kai Wärn was also appointed as Chairman for -- of the Board of Electrolux Professional. Many of you know that Kai is a current Board member of Electrolux AB as well as CEO of Husqvarna.

And with that, I turn over to the financial overview and Therese.

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

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Thank you, Jonas. Organic growth was 0.8% in the quarter, and this was driven by continued price increases and mix improvements across most business areas. Total sales was up 6.8%, driven by a positive translation currency of 5.8%. The gross operating income, defined as net sales minus cost of goods sold, included the restructuring charge of approximately SEK 1 billion in the quarter. Adjusting for this nonrecurring item, the gross margin came in at 19.5% compared to 19.1% last year.

The net nonrecurring item was minus SEK 412 million in the quarter, which we will come back to later in the presentation. Adjusting for this, operating income declined 9% year-over-year.

And now looking at the drivers behind the year-over-year change. We continue to have a positive organic contribution. This is primarily driven by higher prices, where the main contributors were North and Latin America, but also Europe.

We have improved mix across business areas, which is a result of major product launches and focus on our core brands. This is offsetting lower volumes, which is primarily driven by continued decline in private label business in North America and coupled with volume decline in lower price points in Europe, which is a strategic decision to target high-margin categories, and this is delivering in a higher mix. We continue to have high headwinds from raw material and tariffs, although on a lower level than what we saw in the second quarter.

Currency had a negative impact on EBIT, primarily on our operations in Latin America, but also in Europe and in Australia. Net cost efficiency was, as earlier indicated, negative but less negative than we planned for, and the main reasons for being negative are the manufacturing transition costs related to the Anderson ramp-up, which was covered by Jonas earlier.

And we have also had increased marketing spend to support the major product launches. However, the spend in the quarter was lower than initially planned. And primarily in Europe, where we have the in-store launch of the -- that is currently rolling out of the new products in Europe. And as you know, Europe is a very fragmented market, and we don't want to execute the marketing spend before we really have the new products in store. So this is a shift between the quarters into the fourth quarter rather than a lower total spend.

And we also incurred costs in preparation of the professional spinoff. And as you may recall, we had a positive one-off item last year of SEK 250 million, and this was partially offset by a reversal of the provision in Latin America in this quarter.

And then taking a deeper look at the price and mix development. The EBIT margin accretion from the -- for the group from price and mix was 1.6 percentage points in the quarter as price continued to offset the headwinds. In Q3 last year, price increases already started to kick in at a larger pace than in Q2. Hence, our price increases in the third quarter year-over-year is lower than in the previous quarter.

In Europe, we had a favorable mix, driven by growth of our high-margin products in our premium brands and in built-in kitchen, which resulted in a continued gain in value market share. Price has also improved compared to last year based on the price increases implemented in the beginning of the year.

In North America, we continue to benefit from higher prices, which is mainly a carryover effect from last year's price increases that has been carried out this year. The year-over-year increase is sequentially decreasing as it was in Q3 last year, where we saw the price increases starting to kick in. And in Q2 2019, the year-over-year comparison was also enhanced by lower promotional spend compared to Q2 2018 when we had the 100-year celebration campaign of the Frigidaire brand.

Mix improvements continued to be strong, primarily related to growth of the multi-door refrigerators. In Latin America, we had good EBIT contribution from previously implemented price increases, coupled with slight mix improvements. In APAC and EMEA, mix remained positive, mainly driven by newly launched products in Australia as well as cordless vacuum cleaners in Southeast Asia. Price for the business area decreased in the quarter from price pressure in Southeast Asia. Professional Products continued to benefit from positive price in the quarter.

If we then take a deeper look at the nonrecurring items of minus SEK 412 million in the quarter, this comprises of 3 parts. The first part is efficiency and outsourcing initiated in Q3 across the group of negative SEK 1.6 billion. The global streamlining measures initiated in the quarter was following the major strategic overview announced in the beginning of this year with the intention to spin off Professional Product business area and sharpening of the consumer business through regionally focused business areas and a global consumer experience function. And as you can see in the chart, this impacts all business areas and group common cost. The expected annual saving for the consumer business is SEK 0.5 billion with full effect in 2024, and this should be added to the previously announced cost savings from reengineering program. So in total, SEK 3.5 billion with full effect 2024.

An important part of this initiative is the decision to outsource production of vacuum cleaners from our Jászberény facility in Hungary as well as significant part of the freestanding refrigerators that are currently produced there. This is to improve competitiveness in the market and is primarily impacting business area Europe, but also APAC and EMEA.

And from a P&L impact perspective, this is spread across applicable functional lines in the P&L. The second part is recovery of overpaid tax -- sales tax of SEK 1.4 billion, impacting business area, Latin America, positively. As previously communicated, we, in the fourth quarter 2018, received the final and nonappealable court decision in Brazil that we have the right to recover overpaid tax for the years 2002 to 2014. In the quarter, Electrolux filed a claim with the Brazilian tax authority for the recovery of the overpaid tax, and this amount was in full recognized as an asset in the third quarter.

The third part was a legal settlement in the U.S. of SEK 0.2 billion, impacting the business area, North America, negatively. The P&L impact of these administrative cases are included in other operating income and expenses.

So all in all, nonrecurring item of SEK 412 million was booked in the third quarter in EBIT while the cash flow impact from this in the quarter was limited.

And then moving over to cash flow. Our cash flow after investments but before acquisitions was SEK 2.6 billion, an increase of SEK 1.2 billion versus last year. And this was mainly due to positive contribution from net operating working capital due to timing effects. As you may recall, the ERP system go-live in North America had a negative impact on trade receivables in the second quarter of approximately SEK 1 billion, and the majority of this was recovered early in the third quarter.

This quarter, we built less inventory than we did last year as a conscious effort to reduce total inventory level somewhat. As we have announced previously, we have higher capital expenditure due to the ongoing investment projects in reengineering, and this continued in the third quarter.

The average operating working capital in relation to rolling 12-month sales showed an increase to 4.8% versus last year's 4.2%. Even if this is an increase, this is still at a healthy level. However, as we just -- as I just mentioned, we are working to reduce inventory level somewhat from this level.

With that, I hand back to Jonas.

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

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Thank you, Therese. Let's turn then to the market outlook. And we reconfirm our market view for the full year 2019. We continue to expect the market demand for appliances in Europe to be slightly positive in 2019, mainly driven by Eastern Europe.

In North America, the trade tariffs have triggered price increases, and that has resulted in some uncertainty, leading us to expect the industry volumes to be slightly negative for the full year.

In Southeast Asia, markets are generally favorable, and we keep our view to be slightly positive.

In Australia, a slower property market and weaker currency are impacting demand, and we continue to expect market volumes there to be slightly negative.

The Latin American market, specifically the Argentina, Brazil and Chile region, is expected to be slightly positive, driven mainly by Brazil.

Turning to the business outlook. We expect favorable organic contribution, both for the full year 2019 and for the fourth quarter. For the full year, this is mainly driven by higher prices, especially in North and in Latin America.

For Q4, we expect prices to continue to contribute positively year-over-year, but at a somewhat lower level than what we realized in the third quarter year-over-year. Mix has continued to contribute positively throughout the first 9 months of the year, and we expect this to continue for the remainder of the year as well.

In terms of volume, we expect lower volumes in North America as a result of the continued decline in private labels as well as the impact from the Anderson transition. We estimate the negative year-over-year impact from raw materials and trade tariffs to be approximately SEK 1.1 billion in 2019 compared to the previous estimate of approximately SEK 1.2 billion to SEK 1.4 billion. The improvement is related to that we have locked in more chemical volumes at favorable rates and have lower steel prices due to formula-based pricing for the second half of 2019.

The outlook is based on current trade tariff levels. So that means that the part of Section 301 List 4 that was implemented in September is included at a 15% rate.

In the first 9 months of 2019, price has fully offset this headwind, and we expect that to be the case also for Q4 and for 2019 as a whole. We keep our view that net cost efficiency for the full year will be negative. And looking at Q4, we also expect net cost efficiency to be negative there as well, driven by 3 areas that we have communicated to you earlier. So first of all, the manufacturing transition costs in North America that we've discussed. We will continue with transferring production to the new Anderson facility, and we are continuing to run 3 facilities in parallel to ensure as smooth as possible a transition. This means that we also, in this quarter, will have extra cost accelerating to about USD 25 million of net EBIT impact expected in the fourth quarter, capturing both the higher cost as well as the related volume decline. And as mentioned before, the new Anderson facility will result in significant cost efficiencies that we start to expect -- that we expect to start to see in 2020.

Secondly, we have higher marketing spend to support the major product launches that we have in the second half of the year. Part of the planned marketing spend for Europe in Q3 fell into Q4. As Therese mentioned, some of the in-store launches occurred in October instead of in September.

And the third and final area is costs related to the preparation work for the intended professional spinoff. A majority of the already communicated cost of about SEK 100 million for the second half will impact the fourth quarter.

Our currency headwinds are now expected to amount to SEK 500 million based on the currency rates of the 15th of October compared to our prior estimate of SEK 200 million a quarter ago. And we continue to execute on our reengineering programs. And with the investments that we announced in Nyíregyháza, Hungary, all initiatives under the program have now been announced. We now expect our full year CapEx to be slightly below SEK 7 billion. And our full business outlook for 2020 will be presented as part of our fourth quarter report.

So in summary, we continue through our pricing execution to fully offset the headwinds that we've seen throughout this year. We're continuing to invest in innovation and marketing to support the new product launches and to cater for continued profitable growth. I'm very pleased that we have a strong execution of our innovation. And once again, contributing positively to sales and earnings. All of our business areas showed improved mix in the third quarter.

We're further strengthening our platform for the future through initiating additional efficiency measures with a solid expected return. And as mentioned, we're in the middle of starting up our new Anderson facility, our largest facility in the group that is highly automated and will result in significant cost savings as well as attractive new products in the coming years.

With that, I hand the word to Sophie and open up for questions.

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

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Yes. Thank you, Jonas and Therese. We will now open up for questions from our audience from the telephone conference. Moderator, please go ahead.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And the first question is from the line of Andre Kukhnin from Crédit Suisse.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [2]

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It's Andre from Crédit Suisse. Can I firstly ask about Professional? Obviously, quite a sharp deterioration there and unexpected. Could you give us an idea on the demand environment, how much of that is maybe a blip, and how much of that you expect to come back or whether that's kind of the level that we need to -- or run rate that we need to model from going forward?

And then on the margin impact, is there any way you can quantify for us how much of that margin drop is the ramp-up costs that go away as you ramp up and investment costs that can normalize into 2020 as opposed to ongoing? And then I've got a quick follow-up [so]...

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

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Sure. Okay. So the organic sales impact was mainly 2 things. One was our chain business and our exposure. We're, of course, trying to increase our exposure to the chain business through our acquisitions, for example, in the beverage area. But in the third quarter, we had a very low level of chain rollouts, and we do expect that to be -- I mean that's just the nature of these big rollouts. We had a big one in the first half of the year. In the second half, we don't have as much activity in that part of the business. That's lumpy and not so much, I would argue, not so much a question of trends or business cycle or anything like that. In this case, it's more just that it goes up and down.

Secondly, we have some delays in major projects. Our business in Asia as well as Middle East and Africa is very project-driven. And here, we have seen some delays in decision-making on significant projects for us, and that's the other big impact. And I think that can be attributed at least partially to some of the economic turbulence and macro impacts that we're seeing. We've looked into history for those things. And what we've seen historically is that we have seen some hesitance to invest when the economic signals are a bit weaker. But typically, that ends up catching up relatively quickly because the underlying growth drivers, which are out-of-home spending in restaurants and hotels, actually has a very strong positive underlying growth trend. So there's a need to invest in new projects and in replacement products. So we're not fundamentally concerned about the demand outlook, but there could be a blip, let's say, some weakness also going forward here on the large projects. And of course, these combined effect, they do account for the major part of the earnings drop in the quarter. On top of that, we also then see the, as mentioned, the high-end product cost and the ramp-up cost of the new products that will start to abate over the coming quarters, but that will take a little while before that's fully washed out.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [4]

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Okay. Got it. And just on the NCs in the quarter, I'm trying to kind of decipher the many moving parts that are in there. So if I start within that minus 176, so we've got minus 250 for reversal of one-offs from last year, right? The 170 Brazilian and 80 North American. And then there are some extra costs for European launches, but not as high as expected. And the Anderson triple -- U.S. triple costing and some of the 100 million for Professional, right?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [5]

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Yes. Yes, correct.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [6]

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And then -- so in terms of what came in to offset that, especially compared to the run rate that we already had Q3 with kind of all these items being incremental, can we talk about that and how that can play out into Q4?

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

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Yes. So we did mention that we had a reversal, a positive impact in Brazil. That's below our threshold for sort of giving an amount, but that was a positive effect. And then, of course, as mentioned, we are flipping some marketing spend from Q3 to Q4 in Europe.

And then on -- as we talked about historically as well, there is a fair amount of discretionary spend that's controlled in a quite decentralized way around the group. And therefore, it's difficult to give very precise guidance because people are accountable for their local P&L, so to speak, and they drive their spending and investments to generate the best possible return. So that goes up and down a bit. So that gives us a little bit of a hard time to give you a very precise guidance, but that also was, let's say, a net favorable compared to what we saw in the second quarter.

And then, of course, we're continuing to work very, very hard on overall manufacturing and product cost efficiency.

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Andre Kukhnin, Crédit Suisse AG, Research Division - Mechanical Engineering Capital Goods Analyst [8]

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Got it. Got it. And just on the European marketing spend, can we calibrate that at all? I mean I was thinking about, I think, SEK 200 million, SEK 200 million to SEK 300 million for the second half. Is that anywhere near the right ballpark? And is that mainly now switching into Q4? Or...

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [9]

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It's not far off from the ballpark. We don't give that specific guidance. But of course, I mean, it's clear that, for Europe, this is the big event this year, right, in terms of marketing -- above-the-line marketing spend. And so there are, country by country, relatively large swings in spend month to month, depending on when we decide to hit the button to really support the sell-out, right? So this always goes in 2 phases. We cannot sell-in and get the products replaced in store. That happens, honestly speaking, not entirely on our calendar. That's up to when the stores are ready to switch. And then when they've switched and we have the right supply, then we kick in the big marketing investment. So that's why it's a little bit difficult to give very exact guidance. It's 35 markets, as you know.

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Operator [10]

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Next question is from the line of Andreas Willi from JPMorgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [11]

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My main question is on North American, the factory transition looking into next year. Maybe you could help us understand what the total cost this year is. Obviously, you gave the $25 million for Q4. And then if next year everything goes to plan and the U.S. environment is pretty similar to this year, are these savings then basically allowing you to get back up to kind of a 6% margin next year just from mechanically removing the drag from what you had this year and putting in the benefits for next year?

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

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Yes. So the number in Q3 is significantly smaller because that's sort of, yes, the initial ramp-up. And we -- and so we haven't sort of lost volume in the third quarter, and we also continue to produce in the old legacy factory. So the net debt in the third quarter is not as big as in the fourth quarter, where we have more people in the new plant and still relatively low, let's say, manufacturing yield, right? We're producing products -- fantastic products, by the way, but not at the full rate yet. And that's going to take time as we then introduce new variants continuously all in through Q4, into Q1 and also Q2.

Again, I think it's hard to overestimate how big a site and how complex a transition this is. We're talking about a 3 million unit site that we're starting from scratch. So of course, that will result in cost as well as inefficiencies also going into the first half of next year before we get this facility fully up and running. But obviously, I was there a couple of weeks ago, the facility is looking great. We're producing, but not yet at that rate that we need to cover the big fixed cost, of course, that we have of running 3 facilities in parallel, and that's going to continue for some time.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [13]

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So we should only expect, from the second half next year, you to be back to basically normal and fully benefiting from it?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [14]

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Yes. That's fair. Well, we can gradually get benefits as we ramp up, but also we have sort of inefficiency costs throughout the first half of the year, yes.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division - Head of the European Capital Goods [15]

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And just a couple of housekeeping questions on the financials. In terms of corporate costs, if you could help us maybe a bit with the full year expectation there, given some of the spin-off costs in Q4. And also the Brazilian tax gain, why is that mechanically going into the EBIT rather than into the tax line for Electrolux?

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Therese Friberg, AB Electrolux (publ) - CFO [16]

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Yes. If we start with the tax line, this is related to a sales tax in Brazil and not a, let's say, country tax. So that's why it's going into the EBIT line. Also, of course, it means that we have been overpaying the sales tax over a number of years. That has also hit the EBIT line previously in these years.

And then if we talk about the corporate costs. So it should be on a, let's say, normalized level compared to previous years apart from the professional spinoff costs that then we have -- we said that we had additional costs already in the second quarter, and then that we will continue to then have the 100 million on top of the normal run rate for the second half of the year.

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Operator [17]

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Next question is from James Moore from Redburn.

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James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [18]

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I think they're really all about the same sort of topics, but I'd like to come from a different angle, if I could. I think you raised the total savings plan from SEK 3 billion to SEK 3.5 billion in the quarter and you gave a very helpful annual phasing of that a couple of years ago when it was SEK 3 billion. I wondered if you have revised that and could give us a new picture as to how much of that lands specifically in 2020 and how much already landed, if anything, in 2019. That's my first question.

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

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Right. So of this, you won't see much in '19. And then the other point of this is that, of course, part of these savings are related to Professional, which will then be a separate company, just to be clear on that. And in Professional, it's more a question of offsetting the additional running costs that they will have as a separate company following, of course, the approvals required from the Board and the shareholders.

And then we have a relatively long run rate to get these effects net in because, of course, initially then, if we -- as we have a separation of the Professional business most likely, there are some extra costs related to running these 2 companies separate. So some of the initial cost savings are more offsetting that, and then we get full traction later on in the period to get to SEK 3.5 billion. And just to clarify, the SEK 3.5 billion net savings will eventually hit the consumer business. But just to explain kind of how we run into this, because there are, of course, additional running costs, both in the remainco and in professional of separating the 2 companies that we'll first have to offset.

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James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [20]

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Okay. And just to be clear, how much of the SEK 3.5 billion is roughly professional? And how much of that, which is...

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [21]

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No, sorry, sorry. Yes, the 3.5 net is consumer. However, the actions that we're taking first need to offset both the original running costs in Professional, which is a net 0, actually, at the end of the day. And then also in consumer, which then will first offset initial, call it, stranded cost from Professional and then kick on to provide net savings in a total of SEK 3.5 billion. And we gave the view in March in the Capital Markets Day of around SEK 800 million or so in '20 versus '19. And at this point, we don't see a reason to change that given the points that I just raised.

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James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [22]

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That's very helpful. And within that, whatever the number is for the U.S., which I guess is roughly half, maybe more. And if you can help us on that, it would be great. But can you help us on the modeling of the timing of whatever that FY '19 North America savings number is in terms of the savings across the fourth quarter. Because I understand that we'll have some spillover of the costs and maybe it's another SEK 50 million, I don't know, in the first half or maybe it ramps down, SEK 15 million then SEK 10 million, then 00 on the cost side. But what, on the gross savings side, is the rough cadence of the North American savings in full year 2018 across the quarters of the year?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [23]

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Yes. So yes, you see the flip side of that. As the volumes ramp up, you get more of the net cost savings, right? So you see substantially less of it in the first quarter and then a little bit more in Q2 and then more or less full run rate from Q3 and Q4.

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James Moore, Redburn (Europe) Limited, Research Division - Partner of Capital Goods Research [24]

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And lastly, if I could. On the net cost efficiency, the 176 as discussed nice and low. I sense that there was some belief it could be 500, 600, 700 in the third quarter, so quite meaningfully less than you might have thought. But is that the sort of magnitude of what we now need to expect for the fourth quarter with all the -- I get all the oral points you've made. I'm just trying to turn it into some maths for modeling purposes and scale what you're trying to say for the fourth quarter.

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [25]

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Yes. So we mentioned a few points, right, that the inefficiencies from Anderson are increasing a bit and then we have a little bit higher load of separation costs from Professional in Q4. Other than that, it's basically on the same run rate. We also talked about this sort of spillover of marketing spend from Q3 into Q4, but those are the big sort of incremental drivers.

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Operator [26]

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Next question is from Johan Eliason from Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [27]

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This is Johan here. Just a question, so I understand this reason for guiding on this $25 million extra cost in the fourth quarter, because listening to you say you already had some in the third quarter. I think you mentioned it was the delta year-on-year on the clean EBIT in North America. Is that correct? So it was sort of $13 million or $10 million to [$15] million in the third quarter?

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

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We don't give that specific detail on it. Typically, what we try to do is because it gets too messy if we gave all the little numbers up and down and try to stay to the things that are more significant. And we think the $25 million for Q4, of course, is a relatively noticeable number. So that's why we're highlighting it.

And so that's kind of how we try to make your lives as easy as possible. That when we have something that's meaningful, we'll try to let you know. And when it's less meaningful, we say, okay, it's part of the ups and downs in any given quarter.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [29]

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Okay. And do you have any update on the timing of the Professional spinoff AGM and financial targets, et cetera? And the final spin-off and...

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [30]

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We're progressing very well on the project and doing sort of, first of all, the operational separation. As mentioned, we have now a Board that's starting to execute their responsibilities. So we're making very good progress. And we will -- we are targeting to continue on our plan to do it in the early part of 2020.

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Johan Eliason, Kepler Cheuvreux, Research Division - Analyst [31]

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And do you still sort of expect the new company to sort of be spun off debt-free? Or how's the view there?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [32]

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Yes, we -- I don't think we've given any guidance on the debt level other than to say that we will make sure it has a strong balance sheet to continue to drive organic as well as inorganic growth. We see that as a big opportunity for the group.

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Operator [33]

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Next question is from Gus Sandström from SEB.

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Gustav Sandström, SEB, Research Division - Research Analyst [34]

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If I might switch to U.S. and the competitive environment, we've seen a little bit of a ramp-up amongst some of your Korean competitors in terms of production volumes this year. It doesn't seem to have started to sort of hit the competitive environment that much, but I guess the -- we'll find out during Black Friday, if not earlier. But what's your indication there? Is there still a quite solid market backdrop in the U.S.? Or do we start to see some type of higher-priced competition feeding in?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [35]

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Well, so there's, of course, many different parts to that analysis. And one of the things that I've tried to be as clear as possible on is that we -- the overall pricing environment is, to a very large extent, driven by the, sort of the macro cost environment, whether that's raw materials or tariffs or logistics inflation or whatever, right? So as that goes up and down with a lag, the market pricing tends to adjust to that, not 100% correlation, but in at least in the same direction. So to the extent that you see -- that you expect lower raw material, then, of course, you also have to expect, over time, slightly lower marketing prices, again -- market prices, again, with some lags.

Now the -- on -- specifically on the competitive situation. Of course, I can't comment on what I think specific competitors will do. What I would say, though, is that we are, in general, quite happy with competitors playing according to the same rules as we are, meaning that local production with all the benefits and challenges that, that entails. So we don't necessarily see that as a negative. These competitors are already significant players on the market, you have to remember that. It's not like they're coming new. But they're, right now, in an imported model, historically have been an imported model. And now more and more, over time, will go to a locally produced model.

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Gustav Sandström, SEB, Research Division - Research Analyst [36]

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Great. And on the black side specifically, do you believe that we'll see sort of intensified competition? Is that the house view or a more similar to what we saw last year or is it simply too early to have a view?

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

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Relatively orderly and stable development is the indication we're getting.

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Gustav Sandström, SEB, Research Division - Research Analyst [38]

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Okay. Great. And on the external headwinds, I think one of your peers in U.S. was out a couple of days ago arguing for flattish impact from raw mat, including tariffs next year, which caused some confusion. Looking at just the steel price and so forth, it seems like you would have some tailwind going into 2020. Is that a fair assumption?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [39]

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Well, I mean, first of all, of course, we have already captured some of the tailwind this year, right, which is why we've guided down on the headwind compared to what we saw a year ago. And so that will, of course, then assuming the market prices stay where they are, roll into next year. So -- and then yes, it's true that current market prices are at attractive levels, both when it comes to steel and chemicals. And we will try to capture as much as possible of that. However, currently announced tariffs will be a significant headwind for the coming year if they remain in place, and then they can go in different directions, as we know. And I think very importantly, the benefit of steel prices in dollars is lower in local currencies because, of course, of the strength of the U.S. dollar. And that is -- that effect is actually, to a significant extent, captured at least when we give raw material guidance that's part of it because even though the -- just to be clear on that, even though the market prices are denominated in dollars, we often buy them in local currencies. And then we see that negative effect on our raw material prices. So that makes it a little bit more complex and I understand why it's a bit hard to track. But that -- those 2 factors offset on the favorable sort of market dollar-priced development.

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Operator [40]

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Next question is from David MacGregor from Longbow Research.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [41]

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If I could just pick up on that last question before going to another question. But you had such great execution on price mix across all your segments this quarter, very good price -- or very good execution around new product introductions as well. And so I fully appreciate that, historically, when raw material prices have come off, there's been a lot of competitive pressure in the market on major appliance prices. But I'm just wondering to what extent, given some of these developments on mix and the consumer preference mixing higher and you having such a stronger sort of mix of products in the market, whether you feel this time around finished product prices might be a little more resilient. You talked about the lag. I guess the question is, is the lag a little more extended this time because of these other developments?

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

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Well, so the way we -- and it's absolutely a fair comment. I would say though, the way we report pricing and mix or talk -- and talk about it makes that effect more captured in mix because when we introduce a new product at a higher price point, we report that as mix. When -- and when we talk about price, that's only on product that's been in the market for a year or more and what that exact same product is sold at what price. So we're kind of separating price as like-for-like product end market net price development, and mix is sort of everything else in terms of new products or selling more of our, let's say, premium branded products or selling more of our higher-margin products. That all gets captured in mix.

So that's why I agree with your point, which is that we're really delivering strong mix, and we expect to continue to do that. That's the whole point of investing more in innovation, investing more in new and attractive product platforms and investing more in marketing. So yes, I agree with your point, but it will show up in mix rather than price.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [43]

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Great. Just a couple of quick questions for me. You mentioned the -- in Pro that the beverage business was a function of maybe just contract cadence and you had a stronger first half, a little bit of slower second half. I just wanted to ask you if you're still confident that the beverage category, which has been a very strong category over the last year or 2, still maintains its underlying growth characteristics or whether you feel as though maybe the beverage category is slowing within Pro.

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

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We're super excited about beverage. I mean we now made 3 acquisitions, as I'm sure you know. So we bought the U.S. company, Grindmaster-Cecilware. We bought the Italian company, SPM, which produces cold and slush-type beverage machines. And then we acquired a unique French manufacturer, a high-end manufacturer of espresso machines, including automatic -- fully automatic espresso machines. So we now have a full range of beverage products. That market is continuing to grow, and we expect that to continue. Of course, it's lumpy because a fair amount of these products are sold as chain products, which is actually, frankly, part of the reason why we're interested in them. So that will be -- remain lumpy and be driven by our big chains and decisions on rolling out new concepts. But we're really excited about the category, and we're really happy to have now a strong offer in it.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [45]

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Okay. In North America, I know you've been developing your builder business. I'm just wondering if you could talk about what you're expecting in terms of fourth quarter growth, or 2020 growth from your North American builder business.

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

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Yes. I mean I think, overall, the housing construction is remaining robust in North America. So we think now that's a solid and robust business for us that we've really grown over the last several years.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [47]

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Can you continue to take share in that business?

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

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Absolutely, absolutely. But it's not that we're -- we're no longer, let's say, underrepresented in construction, which used to be the case, but we now have a solid chunk of business there.

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David Sutherland MacGregor, Longbow Research LLC - CEO and Senior Analyst [49]

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Last question for me is just if you saw much prebuy -- Brexit prebuy in the U.K.?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [50]

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Quite honestly, it's a little bit tricky to track that now. Yes, I mean I think people are making -- including us, and our retailers are trying to make sure to have a high inventory availability. But we didn't see -- the market, the U.K. market grew in the quarter, which probably is an indication of some prebuy. It didn't grow by much. But of course, the track record was -- last several years has been declining. So yes, I think you can see that there are some prebuys there.

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Operator [51]

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And the final question for today is from Olof Cederholm from ABG Sundal Collier.

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Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Analyst [52]

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Sorry, I hit the mute button. It's Olof from ABG. Just quickly, the Brazil performance or Latin America performance, sometimes you have sort of every other quarter performance there. Strong performance is followed by a weaker one. Is there a different -- is it different this time with sort of a more sustainable outlook for Brazil?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [53]

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I mean that's a dangerous question, of course, because it's a very volatile macro environment, and we don't honestly expect that to change. And I think you've seen recently what's going on in Chile, Ecuador, Peru, Colombia, Bolivia. It's -- yes, it's a volatile market. So -- and that's just a reality. The big contributor for us, of course, is Brazil. And whether or not we have solid performance in the quarter is, to a very large extent, driven by Brazil. And there, I am cautiously optimistic that we are seeing more stability. If you look at things like inflation rate, interest rates and housing construction, those all have -- are ticking along at a quite nice pace. So absent any sort of significant political disruption, I'm cautiously optimistic about Brazil while I'm actually quite concerned about the other parts of Latin America.

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Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Analyst [54]

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Great. And also looking at North America in 2020, how big is the private label situation for you right now? Will you be able to talk about North America in 2020 without having to mention the fact that private label had an effect on your business?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [55]

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Yes. It's becoming a smaller and smaller issue, of course. I'm not saying that it will be completely gone, but it's dramatically smaller as an effect.

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Olof Cederholm, ABG Sundal Collier Holding ASA, Research Division - Analyst [56]

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Yes. And then lastly, on the cost improvement of 800 million from the investment program in Anderson than in 2020, that's not off the 2019 cost base, right? Because you're taking quite a lot of extra costs in 2019 that, I guess, at least won't be matched by extra cost in 2020 on this. So how should we think about sort of an overall delta year-over-year 2020 compared to 2019?

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [57]

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Actually, these costs are intended to include also the ramp-up costs and the delta year-over-year there.

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Sophie Arnius, AB Electrolux (publ) - Head of IR [58]

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That was our last question. Jonas, I hand over to you to wrap up this presentation.

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Jonas Samuelson, AB Electrolux (publ) - President, CEO & Director [59]

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Thank you very much. Thanks for good questions and for participating. We are excited about our continued journey and really pleased about the fact that we continue to deliver on the strengthening of innovation as well as efficiency measures in the quarter and, of course, with a lot of transition work that does impact our performance in -- while we're ramping up, for example, Anderson. But I'm really confident that we're on the right track to drive profitable growth also going forward.

And with that, I thank you very much and look forward to our fourth quarter presentation. Thank you.