Now that the dust has settled a little we can reflect and report on the latest set of results from Electrolux that have been hitting the headlines over the past few days. The highlights being, prices are going up in line with increases on materials costs and lower profits reported.
Electrolux is the world’s second largest maker of appliances like washing machines, dishwashers, cookers and so on, have posted worse-than-expected second-quarter results alongside a gloomy forecast and saw its shares drop 13% to two-year low this week.
It is widely regarded that these results along with the warning also bode ill for its larger rival, Whirlpool, the appliances world number one, which reports its results tomorrow and, it’s not expected to be good news. This on the back of the surprise results from Philips earlier in the week that they had suffered a mammoth €1.3 billion loss which is widely attributed to low cost competition from the Far East.
All this of course is bad enough news for Electrolux and it’s various brands (in the UK primarily AEG, Electrolux, Zanussi and Tricity Bendix) but the worse news is that Electrolux don’t seem to expect much an improvement anytime soon with warnings that profits for the second quarter will also show a decline.
“It is a weak economic macro environment and appliance demand is directly connected to consumer confidence and discretionary income,” Electrolux Chief Executive Keith McLoughlin told Reuters, referring to the U.S. market, where he said demand fell 10% in the quarter.
Important European markets like Spain and Italy were also sharply lower, hit by austerity and debt worries, he added.
Electrolux appears to have been buffeted by the debt crisis in southern Europe and a fragile U.S. economy, reported core earnings of 745 million crowns (£70 million) versus 911 million crowns forecast in a Reuters poll of analysts and 1.5 billion crowns a year ago. Electrolux shares dropped 13.6% to 124.8 crowns, their lowest since July 2009.
In a statement, the company said it did not expect earnings in the second half to reach those of the second half of 2010
“We thought there was an opportunity to match the second half of last year. Given the current market environment and the update of what is happening in North America and west Europe, we don’t expect that will happen,” McLoughlin told Reuters.
As well as weak demand, Electrolux has suffered higher costs from soaring metals and plastics prices. It stuck to a forecast for raw materials cost rises of 2 billion crowns this year.
To offset the costs pressure and demand weakness, Electrolux is set to raise prices in Europe and introduce a further price rise in North America.
In line with earlier statements, the company said it expected some small growth in demand in 2011, with Europe up about 1%, a downgrade from an earlier 2% growth forecast. Electrolux expected North American growth of no more than 3 percent.
In contrast to the weak West, eastern European demand rose 12 percent in the second quarter, the company said.
“What we have to do is take the action to navigate through the short term,” McLoughlin said, referring to cost cuts, price rises and strategic investments, such as the recent deal to buy Egypt’s Olympic
It is also being widely reported that Electrolux is now no longer in talks to buy South Korean firm Daewoo Electronics , McLoughlin said. Creditor sources told Reuters in June that creditors had rejected Electrolux’s demand to cut the sale price by 5%.
Like many global companies Electrolux is seeking to move as much as it can into new and emerging markets, so the Far East and Indian sub-continent regions are all of interest. Whether the deal with Daewoo is dead or not to help with that endeavour is yet to be made positive.
Highlights of the second quarter of 2011 as published by Electrolux are:
- Net sales amounted to SEK 24,143m (27,311) and income for the period was SEK 561m (1,028) or SEK 1.97 (3.61) per share.
- Net sales decreased by 2% in comparable currencies mainly as a result of lower prices.
- Operating income amounted to SEK 745m (1,477), corresponding to a margin of 3.1% (5.4), excluding items affecting comparability.
- Price pressure, increased costs for raw-materials and sourced products had an adverse impact on operating income in all regions.
- Lower sales volumes of core appliances in Western Europe and North America driven by weak demand.
- Price increases are being implemented in all regions.
- Results for Professional Products continued to be strong, including a positive one-off item of SEK 90m.
- Strong sales growth in Asia and a firm operating margin.
- Solid cash flow from operations.
- A final agreement signed to acquire Olympic Group in Egypt.
In a statement, Eelctrolux CEO Keith McLoughlan comments were as follows:
In line with what we had previously communicated, the second quarter was a period when our most important earnings drivers worked against us; declining volumes, lower prices and increased product costs. Electrolux volumes were adversely affected by the weak trend in North America, particularly in comparison with the robust growth, subsidized by government stimuli, during the second quarter of 2010. The European business also suffered from a weak volume development in Western Europe. Lower market prices had a significant negative impact during the quarter. Year-on-year, prices declined in the three largest markets: Europe, North America and Latin America. In addition, the cost of raw materials peaked during the second quarter, which was compounded by a sharp rise in the cost of sourced products and transportation.
The results for our European operations were a disappointment. Intensified competition has led to increased pressure on prices and lost market shares in the lower price segments. The very weak demand in Italy, a key market for Electrolux, also had an adverse impact.
We are continuing our efforts to offset rising costs and declining volumes. We are raising our prices. In North America and Brazil, we are now noting the effects of previously announced price increases. In the North American market, we will implement an additional price increase in August. In Europe, we will raise the prices of appliances by 5-7% as of October. We are continuing to launch new products. Our introduction of new and innovative products under the AEG brand continues. In Latin America, we are beginning to see the results of the new products that we launched in early 2011. Despite the difficult market environment, our focus on working capital and controllable fixed costs has resulted in a solid cash-flow development in the quarter.
While we expect the trend going forward to shift in a more positive direction in the form of higher prices, a more favorable commodities market and lowered costs, the second half of the year will remain difficult. Even though sequentially better during third and fourth quarter, we do not expect earnings in the second half of the year to reach the level achieved in the second half of 2010.
We are continuing to capitalize on profitable organic growth opportunities in rapidly-expanding markets, while generating supplementary growth through profitable acquisitions. It is thus particularly satisfying that we, just over a week ago, reached a final agreement to acquire the Egyptian appliances company Olympic Group. This will make us a leading player in the emerging North African and Middle Eastern markets.
Stockholm, July 19, 2011
Keith McLoughlin
President and Chief Executive Officer