AB Electrolux (publ) (OTCPK:ELUXY) Q2 2022 Earnings Conference Call July 21, 2022 3:00 AM ET
Jonas Samuelson – President and CEO
Therese Friberg – CFO
Sophie Arnius – Head of IR
Conference Call Participants
Uma Samlin – Bank of America
Andre Kukhnin – Credit Suisse
Johan Eliason – Kepler Cheuvreux
William Turner – Goldman Sachs
Olof Cederholm – ABG
Christer Magnergard – DNB
Gustav Hageus – SEB
Martin Wilkie – Citi
Akash Gupta – JPMorgan
Karri Rinta – Handelsbanken
Good morning, and a warm welcome to Electrolux Second Quarter 2022 Results Presentation. My name is Jonas Samuelson. And with me, I have our CFO, Therese Friberg; and our Head of Investor Relations, Sophie Arnius. Before starting, I’d like to mention that this session is recorded and will be available on our website as an on-demand version.
Let’s look at our performance in the second quarter of 2022. Organic sales were flat, with an operating income of SEK 0.6 billion or 1.7% of net sales. Like in the first quarter, we faced significant supply chain challenges in Q2. The irregular deliveries of multiple components, mainly electronics, continued to substantially lower our volumes, caused severe production inefficiencies and high costs for airfreight and spot buy.
In North America, labor shortages and a faulty critical component issue further aggravated the situation, and the business area made a loss in the quarter. The decline in market demand, compared to a strong quarter last year, also contributed to lower volumes. Industry shipments were, in the quarter, impacted by supply chain constraints in specific product categories and by softening consumer demand following high general inflation and increased interest rates.
Despite the constrained environment, we still delivered solid mix improvements as we continued to have strong demand for our newer and innovative products and optimize the use of available components. However, we could not fully meet the underlying demand, especially in laundry and premium cooking.
Our strong price realization continued, and we offset the significant cost inflation, mainly in raw materials and logistics. The significant, mainly supply-driven volume decline and related inefficiencies thus fully account for the year-over-year earnings deterioration.
Therese will now walk us through the main drivers behind the change in operating income.
We had a strong organic contribution to earnings in the quarter. As Jonas mentioned, we continued to have very good price realization from our list price increases implemented both during this quarter and previous quarters. Whilst the promotional activity normalized somewhat from a previously very low level, our attractive product and brand offering generated a positive mix despite limitations from the supply chain constraints, and aftermarket sales grew in the quarter.
Volumes declined significantly, mainly as a result of the global supply chain constraints in combination with labor shortage and production interruption related to faulty components in North America that impacted product availability negatively. Our investments in consumer experience innovation and marketing increased to support strategic growth initiatives and the product launches. Cost efficiency was negative.
The supply chain constraints resulted in considerably increased cost for logistics and components as well as large inefficiencies in production. The higher cost was both inflation-driven and due to use of express freights and spot buys of components. Price offset the continued significant cost inflation mainly in raw material that is included in the external factors and in logistics that is part of the cost efficiency.
Let’s take a deeper look at our price and mix development. The EBIT margin accretion for the group from price and mix in the quarter was 13.1 percentage points. This was mainly from price as we continue to have a strong price execution across all regions driven by the list price increases implemented both during this year and in 2021 to offset the significant cost inflation.
Promotional activities started to normalize, mainly in North America and in Latin America. Mix also contributed to improve the quarter for the group. In Europe, mix was favorable, even though the lack of specific electronic components especially impacted the laundry category negatively. I’m very pleased that our clear focus on premium brands, Electrolux and AEG as well as on mix – on high-mix products really showed a positive mix also this quarter.
In North America, our ability to drive mix was severely impacted by shortages of multiple components. By optimizing the allocation of the available components, we managed to keep the mix flat in the quarter.
In Latin America, mix was positive. It is great to see how well received our product launches, enabled by our reengineering program, are by the consumers, especially since consumer purchasing power is decreasing in the region as a whole. And improved product availability and significant growth in aftermarket sales also contributed to the mix improvement.
In Asia-Pacific, Middle East and Africa, mix increased, partly driven by successful product launches, as you will hear about in a moment. An attractive product and brand offering is essential for our profitable growth and Jonas will now give you some concrete examples of what we do.
Emerging markets’ growth is a key strategic pillar for us, and based upon our manufacturing hub in Egypt, we’re introducing new tailored products for the Middle East-Africa region. In 2022, new water heaters were launched, which have been very well received by Egyptian consumers, with a star rating of 4.89 out of 5. The launch will continue in more countries such as Morocco and Libya until 2023.
Product developments that improve the user experience have been key, with particular focus on comfort, safety and hygiene. Heating efficiency has increased, making almost 30% more hot water available at the same capacity compared to the current platform. By introducing a new material for enhanced heater insulation, heat loss has been reduced by around 15%, making these products both more energy-efficient and cost-effective for users.
I would also like to mention our new Electrolux kitchen range that was launched in Australia and New Zealand during the quarter. The launch included – includes premium multi-door refrigerators, built-in ovens, built-in hobs and freestanding cookers. In the launch, we leveraged our Swedish heritage and emphasized sustainability aspects, extending the Make It Last campaign that we’ve used for laundry products to the taste category.
The multi-door fridges and built-in ovens will progressively be launched across other markets in the region. One important factor I’d like to emphasize is that the multi-door refrigerators are built in Rayong in Thailand based on our global modularized product platform for refrigerators. It’s a very good example of how we, through the modularized platform, can leverage our global scale, accelerate innovation speed and have higher production flexibility. In this specific case, a significant part of the production is also exported to the North American market. These were some examples on how we drive profitable growth.
Operating cash flow for the second quarter amounted to SEK 400 million. We are now back to more normal seasonality in operating working capital. However, the actual inventory level is elevated due to high cost inflation and impacts related to supply chain constraints, such as longer time in transit, inefficiencies and generally high components stock while still missing certain components.
We intend to optimize the inventory levels during the second half of the year. In addition, a lower operating income and a higher level of investments compared to last year impacted cash flow negatively versus last year.
So let’s now go into our business areas performance in Q2, starting with Europe. Organic net sales declined 7.7% versus last year, where strong price and mix were more than offset by volume decline.
Russia-Ukraine was a significant factor, but the biggest challenge was the electronic component availability impacting primarily fabric care and premium food preparation. We also saw weakening consumer confidence and inflation impacting general demand. Price realization was strong in the quarter, with new list prices implemented during the quarter fully offsetting external factors.
The positive mix realization was driven by prioritization of premium brands, products and sales channels. EBIT was heavily impacted by the production volume losses, resulting in both lower gross profit contribution and significant manufacturing inefficiencies. Additionally, high cost for express logistics and spot buys continue to weigh on the results. Let’s look at the European market. In the second quarter, overall market demand in Europe declined by 10%.
Western Europe declined by 8% and demand in Eastern Europe by 15%. If we exclude Russia, Eastern Europe declined by 10%. For Europe as a whole, we have to remember that we are comparing to a strong quarter last year, and we remain above pre-pandemic levels. Market shipments were significantly impacted by supply chain constraints, limiting product availability. In addition, the negative impact on consumer demand from the high general inflation, increased interest rates and increased geopolitical tensions accelerated during the quarter. Retailers’ inventory levels are estimated to be at medium to high levels in general.
Let’s continue with our business area in North America. We had an EBIT loss with flat sales, where supply constraints continue to impact their operations heavily, with a regular supply of multiple components. Combined with labor shortages, this resulted in production volume losses, significant production inefficiencies and high cost for airfreight and spot buys of components. In addition, an isolated issue with a critical faulty component, which was fixed during the second quarter, resulted in lower volumes for specific high-mix products and lower productivity.
A strategic decision to move away from certain source product categories with low profitability also contributed to the lower sales volumes in the quarter. The combination of these challenging – of these challenges severely impacted our earnings. We managed to have a flat mix development through an optimized component allocation. Price developed strongly driven by list price increases. Although promotions started to normalize, net price fully offset significant cost inflation, mainly in raw materials and logistics.
Looking at the U.S. market, industry shipments of core appliances in the U.S. decreased by 6% compared to a strong last year. Compared to the first quarter of 2019, industry shipments still increased by 11%. High general inflation and increased interest rates started to impact consumer demand negatively, which resulted in increased inventory at retailers in general. In specific product categories, supply chain constraints continued to limit the ability to fully meet underlying demand.
Market demand for all major appliances, including microwave ovens and home comfort products decreased by 9% year-over-year. Let’s move on to Latin America. Market demand was weak in mainly Brazil and Chile, while positive from low levels in Argentina. We also saw good performance in Northern Latin America. Strong price performance more than offset the lower sales volumes, resulting in organic growth of 13%.
We also saw a positive mix from a large number of new product launches despite the market pressures. The strong price execution more than offset the impact of inflation and currency in the quarter, and investments in marketing were increased to support the new product launches. Finally, turning to Asia-Pacific, Middle East and Africa.
We saw positive demand in most key markets in the quarter, notably Southeast Asia and Australia and New Zealand. New price increases started to have effect in the quarter, supported by new product launches. However, although the availability of electronics improved sequentially in the region, it still caused constraints on key products. Price fully offset inflationary and currency headwinds, resulting in a solid EBIT.
So let’s turn to the market outlook. The market environment has, since 2020, been highly volatile, and it continues to rapidly change. Inflation soaring to historically high levels, higher interest rates and supply constraints exacerbated by uncertainty regarding the coronavirus pandemic and the war in Ukraine results in limited visibility for the rest of the year.
We maintain our regional market demand outlook for 2022, with the exception of North America, which is revised to negative. However, we still expect demand to be above pre-pandemic levels, except for in Latin America as well as the Russian market impact on Europe.
In the first half of the year, global supply chain constraints impacted the industry ability to fully meet underlying demand. In the second half of the year, we expect a slowdown in consumer demand to be the main constraint for industry shipments, while the global supply chain situation is expected to improve.
Let’s look at our 2022 full year volume demand view year-over-year for specific regions. In Europe, we expect market shipments to be negative. High general inflation, rising interest rates and Russia’s invasion of Ukraine have resulted in a sharp drop in consumer confidence. Hence, consumer spending is expected to further deteriorate, and to what extent is still uncertain. In Russia and Ukraine, we expect market demand to drop significantly. The replacement market, which in general drives roughly 60% of demand in more mature markets such as Western Europe, is still assessed to be supportive.
In terms of market value, higher average selling price is expected to offset the decline in market shipment. In North America, demand is estimated to be negative for the full year compared to our previous flat view. This is mainly driven by an anticipated further slowdown in consumer demand, a soaring general inflation and rising interest rates negatively impact consumer purchasing power. However, on the positive side, we expect support from the housing market, low unemployment rates and the replacement cycle.
We also see a shortening of the cycle – ownership cycle due to increased usage during the pandemic. In Latin America, we expect consumer demand for 2022 to be negative driven by Brazil and Chile. In both Brazil and Chile, higher general inflation and increased nominal interest rates, combined with the reduction of government aids and uncertainty on the political situation, contribute to the negative demand view. In Argentina, consumer demand growth is expected to continue in 2022, but we have to bear in mind that it’s from a weak baseline from several years that’s starting to catch up.
And finally, we estimate market demand in the Asia-Pacific, Middle East and Africa region to be positive for the full year 2022, mainly driven by Southeast Asia, which is a large market for us in the region.
In general, we have, so far, seen underlying consumer demand being solid across most markets in the region, and the uncertainty going forward is mainly around potential pandemic restrictions and impact from general higher inflation on consumer demand. For Australia, which is our other large market, we expect solid demand for the year compared to a strong 2021, with the decline for the second half of the year given an expected slowdown in consumer demand. Let’s now look at the business outlook.
The second quarter has been challenging with regards to the constrained environment. In volatile times, as we’re now experiencing, it’s vital to continue on our long-term strategic journey while also being efficient and agile. I’m pleased with our achievements over the last years, where we, step-by-step, consistently have improved earnings quality through a clear strategy for driving profitable growth, providing relevant innovations and well-established brands to our target consumers and delivering these products with high-quality and automated production.
These are key success factors also going forward in the dynamic environment that we’re facing, with high general inflation and increased geopolitical tension as well as continuing supply chain constraints and pandemic. In 2021, the combined contribution from volume price and mix to operating income was nearly SEK 9 billion. We expect this organic year-over-year contribution to be even higher in 2022, mainly driven by price but also increasing sales of innovative high-margin products and aftermarket solutions.
Price is our main tool to offset cost inflation, and we have a strong track record of successfully doing this. Through strong price execution, we offset significant cost inflation in the first half of the year, primarily in raw material and logistics. We remain confident to do so also in the full year as we have done for the past four years. In an inflationary environment, price increases are more accepted in the market.
This, combined with an attractive product range, makes us well positioned to continue to be successful in raising prices if needed. Just to be clear on what we mean with cost inflation. It comprises of two parts: first, external factors, which include raw material, currency, tariffs and excess labor cost inflation; second, the cost inflation in, for example, sourced finished goods, electronic components and logistics, which is included in our cost efficiency in the business outlook.
Starting with external factors, we maintain our estimate of a negative headwind in the range of SEK 8 billion to SEK 10 billion. The year-over-year increase is mainly driven by raw material, especially steel price. Recently, we’ve seen steel prices coming down substantially from very high levels in the spring but not significantly enough to impact second half year’s contracted costs.
The constrained global supply environment has resulted in cost inflation especially for logistics, in particular, ocean freight but also for electronics components. The increased geopolitical tension has mainly impacted logistics through higher fuel prices. If we shift focus on price to the other two levels within organic contribution, we now expect the combined contribution from volume and mix to be negative for the full year instead of positive.
Due to the softer consumer demand outlook, we now expect year-over-year volume decline seen in the first half of the year to also continue in the second half, though at a lower degree. We expect higher volumes in the second half than in the first, with sequentially improved supply outweighing the negative impact of weaker consumer demand. We still expect a strong earnings contribution from mix for the full year, and 2022 is our most launch-intensive year ever, partly enabled by our reengineering program.
I’m very pleased with the strong consumer demand for our new innovative product and the earnings contribution from these launches. This gives us confidence that consumer demand for our products will remain healthy also in a more challenging environment and provides us with a great platform to drive mix improvements. We aim to invest more in innovation and marketing to support these launches but also to strengthen our digital capabilities, supporting the consumer interactions.
In recent years, mix improvements have contributed an average of SEK 1 billion to operating income. Global supply chain constraints are expected to sequentially improve from mid-2022, with continued risk of disruptions relating to the resurgence of the coronavirus as well as consequences of the war in Ukraine.
And looking specifically at the cost efficiency, We expect this to be negative for the year. Main drivers are cost inflation on logistics, finished goods and components as well as production inefficiencies related to constrained environment, especially in North America. We estimate the elevated cost level for airfreight and spot buys of electronic components to remain in the second half of the year. We will also see an increase in depreciation as we continue to start up additional production lines and new product platforms in our factories that are part of our SEK 8 billion reengineering program.
On the positive side, we expect cost savings from the reengineering program in 2022, even if the full efficiency gains are dependent on a stable volume and supply chain. Investments to strengthen our competitiveness through innovation, automation and modularization continue in 2022, and total capital expenditures are estimated to be in the range of SEK 7 billion to SEK 8 billion. The increase, compared to 2021, relates mainly to some timing of investments from 2021 and raw material inflation on equipment.
So to sum up the quarter and the strategic drivers that we’ve delivered on. This has been a very challenging quarter, but there are highlights. In this inflationary environment, a strong price development is crucial, and we continue to successfully execute list price increases in all regions. This makes me confident that price will fully offset cost inflation for the full year as it has done for the past four years.
I’m also very pleased with the way we continue to drive mix, increasing sales of our high-margin products despite the supply-constrained environment and softening consumer confidence. It shows how well our new innovative products are being received by consumers, a key driver for us to deliver profitable growth.
With the new organization effective July 1, we further expand our strategic scope with a dedicated Commercial & Consumer Journey team. So far, we’ve successfully executed on better products, more targeted brands and increased manufacturing efficiency. We now expand our focus beyond the product itself to all interactions we have with our consumers, including aftermarket. In volatile times, as we’re now experiencing, being efficient and agile is important, but it’s vital to simultaneously progress on our long-term strategy.
With that, I leave the word to Sophie.
Thank you, Jonas and Therese. We will now open up for questions. [Operator Instructions] So moderator, please open up for questions.
[Operator Instructions] Our first question comes from Uma Samlin from Bank of America. Please go ahead. Your line is open.
Hi, good morning everyone. Thank you very much for taking my question. So I just – my first question is on the European market. So in Q2, your organic growth was at minus 8%. The market unit growth was at minus 10%. So if I assume that you had a bit of price increases in Europe, does it mean that you’re actually losing some market share given the supply chain issues? If we look at a bit longer term, how do you think about the European market evolution going forward? Now do you see the low-cost players such as like Beko, for example, taking more share given their cost advantages? Thank you.
Yes. Thanks for the question. We did lose share in the quarter. The biggest factor was that we were not selling in Russia, so – others have been, so we’re losing share from that. But underlying the real issue is, again, the availability of electronics components, which was very challenging during the quarter, particularly as I mentioned, in our fabric care laundry operations and in premium food preparation.
So there, we had a, I would say, worse supply situation apparently than the overall market situation. So we did lose some share also in the rest of Europe in the quarter. As we go forward, we’re seeing improvements step-by-step in that supply environment. So we expect to, over time, not be negatively impacted versus the overall market when it comes to availability. That’s an improvement that we’re seeing kind of on a step-by-step basis, not from just one day to the next.
But as we then look at the market, we had, in Q1 and Q2 of 2021 very, very strong demand. Then in the second half of ’21, volumes decreased in the market as a whole. That was, to a large extent, driven by the emergence of the supply issues that we’re still experiencing. And as we go into the second half of the year, we expect our supply situation to get better. And – but at the same time, to the point, consumer demand is sequentially weakening.
The net of the two, we expect to be a positive for volume for us in Europe in the second half versus the first half. But still, year-over-year, the market is going down in the second half. And this is, by the way, true for our overall outlook for the group as well but Europe being a big driver of that.
So I guess that you expect the supply chain issues to improve gradually in H2 this year.
Yes. That’s correct, yes.
Thank you very much.
Thank you. Our next question comes from Andre Kukhnin from Credit Suisse. Please go ahead. Your line is open.
Yes. Good morning. Thanks so much for taking my question. I wanted to clarify maybe a bit further on the supply chain issues in the quarter sequentially for Europe and North America, that kind of impact where we were losing kind of SEK 460 million and SEK 370 million of profit across the two regions. And then that expectation for the second half improvement, with the visibility that you have, do you think we can get to the at least Q1 run rate with that improvement in component availability? Or is that too ambitious given your expectations for demand?
Yes. On a year-over-year basis, I would say the hit is, I mean, for the group as a whole, relatively similar in Q1 and Q2, right? We lost about SEK 1.5 billion of EBIT both in Q1 and in Q2 versus the prior year. So it shifted a bit between the business areas. So whereas Latin America and APAC, EMEA became better quarter-to-quarter, Europe and North America overall were more challenged in the second quarter.
So then the issue then on the supply that we faced here in Q1 and Q2 and the projected improvements, we’re clear also in the first quarter that we expected Q2 to be tough, and then we saw gradual improvements from the second half of the year. And that’s still how we see it and what we see coming. So it’s a step-by-step improvement. It’s not from one day to the next. But we are having visibility to better supply in Q3 than we had in Q2 and even better supply in Q4 than we see in Q3.
So it’s an ongoing improvement that we see ahead of us. So even though sort of general consumer demand is weakening, we still – as I mentioned to the prior question, we’re still seeing improvement in overall shipments in the second half compared to in the first half.
Right. If I may just follow up, Jonas, on Europe and North America specifically because it’s quite hard for us to get any visibility or insight into how those component shortages issues are phasing, and clearly, they managed to have a substantial impact in the second quarter and first quarter. While you did say it gets worse in Q2 but broader messaging and industrial seems to be that kind of shortages were sort of evening out compared to sort of beginning of the year, there’s not been that much kind of worsening while, here, we’ve got quite a substantial impact. So I’m just trying to gauge whether there is a relief kind of in Q3, Q4 that brings us back to Q1 in terms of kind of that availability of supply for you from what you see from suppliers already. Or is that too ambitious to think about specifically for Europe and North America?
Yes. Actually, I would say the electronic – specifically electronic supply situation was actually more or less as we had predicted in the second half. And then we saw this improvement in availability coming already in Q1 but from Q3 and on.
So we were pretty clear about that also in – after Q1. So yes, it shifts around a bit because these are very specific components that go into specific products. And also in the quarter, we had high impact specifically on our higher-margin laundry and premium food preparation products in Europe as well as in North America, and then we had a specific component issue in North America that’s since been fixed.
So we’re actually not really changing our view there. We do see continued – or we do see improvement sequentially now from Q3, and that’s expected to further improve in Q4 and into next year. So step-by-step, we’re coming back to a more normalized supply environment. And again, we expect that to be a bigger positive than the negative we see from consumer demand in the second half versus the first half.
Got it. Thank you for your time.
Thank you. Our next question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, Good morning Jonas, Theresa and Sophie. I’m not envying you, the juggling you have to do right now with things going left and right. But on one topic, external factors, i.e., raw materials, I think when you entered this year, you indicated you had a lower-than-normal hedging volume for steel. And I’m sort of just wondering in Q2 when we saw this rapid steel price hikes coming after the – or was it end of Q1? Did you sort of basically hedge the rest of the year? Or how is the hedging volumes looking right now considering your comment on lower steel price not impacting you yet for the second half?
Yes. So thanks for the sympathy, first of all. And then on the raw material outlook, so for steel, we have a fairly significant portion of our contracts on certain types of pricing mechanisms. So prices for the second half for a portion of our supply is impacted by mechanisms related to the average prices in the first half.
And there, we’ve seen a bit of a roller coaster, as you hinted. We saw a big spike, and then it dropped back substantially from those spike levels. On average, that means that our price level for the second half is more or less similar to what we had already guided for. Now of course, the fact that steel prices have dropped back from those spikes is very good news.
So – and as we go forward, we still consider steel to be at sort of historically elevated levels with further downside potential. So that’s something that we will, of course, work on and push for as we go into next year. But for the rest of this year, the vast majority is now locked in.
Okay. So it’s an issue for next year then. Okay. Thank you very much.
Thank you. The next question comes from William Turner from Goldman Sachs. Please go ahead. Your line is open.
Good morning, everyone. Thanks for taking my questions. So when we look into the remainder of the year, it’s pretty clear that consumer demand is reducing. And as you mentioned earlier on the call that retailer inventory levels are healthier. So in my mind, I can see it being a lot more challenging to push through higher prices going forward. And at the same time, obviously, you’ve got quite intense cost inflation. So my question is, what can electrics do to get off these low-margin levels that you’ve had in the second quarter? There’s obviously the improving supply chain situation. But I can imagine, like I said, pricing will get – will be tougher to push through. Or should we really be expecting a challenging couple of quarters ahead of us until the cost inflation abates?
So in terms of the cost inflation, I think for us, the big hits have already come, right? So our big exposures are steel, plastics and logistics, ocean freight and overland logistics. Those are the areas where we have, by far, the highest pressure. Labor cost for us is a fairly – as you know, a fairly small portion of our total cost. So I think we’ve already had most of the cost pressure that we’re going to see in this cycle, unless something dramatic happens, which it can. And so we’ve already raised prices for a significant – or most of that cost inflation, as you saw in the quarter, with very, very strong net price realization.
We have announced some further price increases taking effect now in some areas, mainly in Europe and in LATAM. And we’re constantly, of course, reviewing the need for any further price increases. Now so if you think about the composition of our results here in the second quarter, also first quarter, we were able to offset these inflationary pressures – the underlying inflationary pressures.
What we’re not able to offset is very high volume drops compared to what we had planned for and the significant inefficiencies related to those volume growth. We talked a lot about express freight, spot buys but also the fact that we have – we’re running with substantially too high manufacturing costs given the volumes that we’re able to produce. And it’s not easy to adjust the cost level to that lower production volume since it’s so unpredictable, as we’ve been guiding for.
So as we go forward, I think the biggest improvement factor that we see is more steady supply, meaning we can plan our production in a more steady way and significantly reduce the amount of express logistics and spot buys. Those factors in themselves are, if they occur or when they occur, sufficient to restore our profitability.
The challenge, of course, is that the visibility on exactly how that plays out going forward is not fantastic neither for us nor for you, of course. So it’s less about price and inflation. It’s much more about supply and availability of the right components at the right time and to be able to plan our operations accordingly. And that’s again where we see improvements coming into the second half.
Okay. Very interesting. Thanks for showing up.
Thank you. Our next question comes from Olof Cederholm from ABG. Please go ahead. Your line is open.
Hi everyone. Just another question on the supply situation and particularly with more component availability in the second half. Will you be able to direct those components towards the most profitable products that were particularly weak in Q2? Or is that out of your control?
It’s marginally at our control, I would say. Unfortunately, the components vary quite a bit between different product categories and execution. You can – just to illustrate it, the type of display on a product is – varies a lot, if it is a touch display or a rotating dial and so on. And that requires different electronic components, so we can’t really swap between those. Same goes for power electronics.
Depending on the energy efficiency requirement, depending on lots of different things, we have different components. So that’s why the predictability becomes so low that we don’t have a ton of flexibility to shift mix around.
So we may actually have too much of one component and too little of another one. So this has been our challenge now for the last year effectively. Now we are seeing that, step by step, we’re getting more visibility on which components we’ll get. And gradually, we’re also seeing better supply of those components going into our premium product. And visibility is still limited, I would say, but definitely improving.
Excellent. Thank you.
Thank you. The next question comes from Christer Magnergard from DNB. Please go ahead. Your line is open.
Good morning. So the faulty component that you mentioned a couple of times in the report and on the call, can you give a bit more flavor on that one and the implication it had?
Yes, we don’t want to go into too much explicit details but – in this one, but it’s relating to a critical component that goes into a range of important high-margin products that we have in North America where we had a, yes, significant quality issues that stopped us from producing that in the quarter and also resulted in rework of a number of products. That was fully addressed in the quarter and is now back to full production flow and distribution flow.
Is it possible to quantify the effect on earnings? Just the ballpark effect.
It’s clearly noticeable. It’s not to the point where it’s material and requiring, let’s say, a specific quantification.
Okay. Just a quick one on the share buybacks. Net debt is 1.7x now, and the visibility is still quite poor. What are your thoughts on the ongoing continued share buybacks beyond the current mandates?
Yes. So we’re halfway through the current mandate approximately, and that’s continuing according to plan. The Board will assess then if the – whether to continue with a new mandate in the October time frame. So it’s too early to have a point of view on that. So just to clarify, so we have a current mandate of SEK 1.25 billion or up to 8 million shares, and that’s – we’re pretty much halfway through that.
Thank you. Our next question comes from Gustav Hageus from SEB. Please go ahead. Your line is open.
Thank you. Good morning, guys. Thanks for taking my question. I have a question regarding the initial assumption of the cost savings for the reengineering program. I believe the last time you quantified this might have been in 2019. If I recall correctly, you were then referencing cost savings versus 2019 of SEK 3 billion. And since then, you’ve referenced the times that it hasn’t really gone through all the initial planned savings due to erratic supply constraint – supply of components and so forth. And if we’re now looking at a situation in H2 and 2023 when that part of the issue is actually much better and, as you referenced, volumes will be higher as you see it versus 2019, you then see that, that initial estimate of yours for 2023 or SEK 3 billion-plus in savings might actually materialize.
Yes. So when it comes to sort of the underlying – to your point, the underlying drivers of those improvements, most of those are in place. So we’ve – we’re concentrating manufacturing of food preservation and food preparation in North America into two factories. The first step of that has been done, and the food preservation is consolidated.
Food preparation, we’re still in the early stages of the phase-in of that new range of cooking products. So that’s still to come. On the food preservation side, as mentioned, the underlying factors are there. We’ve consolidated the factories. We’ve introduced a highly automated production processes. We’ve modularized the product. So the underlying drivers are there.
Then, of course, as you’re well aware, we have a situation with massively increased raw material costs, logistics costs. Labor availability is very challenging, and then we have these component supply issues. So while those are all improving in the second half, I would struggle to say that they’re normal – expected to be normal in the second half.
So we’ll see improvements. Definitely, again, the underlying conditions to realize those benefits are there. Then the other thing that we mentioned is that compared to the initial forecast that we had on cost reductions, we’ve changed the mix quite substantially in our production. So we’re producing more of our higher-margin, higher-featured products and a bit less of our lower-margin sort of mass products.
So while we expect the same benefits, the way they come through is a little bit different, so a little bit less in net sort of cost savings, a little bit more in mix improvement. But that definitely stays as was previously noted.
Thank you. Our next question comes from Martin Wilkie from Citi. Please go ahead. Your line is open.
Thank you. Good morning. It’s Martin from Citi. The question I had was on pricing. Obviously, very good performance across the industry so far on pricing. We do get comments that promotional activity, things like that, have obviously been curtailed to some degree because of lack of supply. As we go into the second half, if supply eases and therefore industry volumes are more able to be delivered, is there a risk that you start getting more promotional activity? And how should we think about that in terms of pricing in the second half? Thank you.
No, I actually do expect promotional activity in terms of the promotional cadence to start to normalize, which is, in my view, not necessarily a bad thing because it also serves to drive volume to some extent. But I think the cost realities are what they are for us and for other players in the market. So I don’t expect a very deep discounting like we had prior to the pandemic. And a more sort of healthy normalized promotional cadence is not necessarily a bad thing for our sales and profitability over time.
Of course, we have to watch out and see that it doesn’t escalate, but we don’t really see that happening across the board right now. So in terms of our outlook, our guidance in terms of pricing offsetting cost inflation, that’s still – I mean that takes into account that there will be a certain amount of normalization in promotional activity.
Great, that’s helpful. Thank you.
Thank you. Our next question comes from Akash Gupta from JPMorgan. Please go ahead. Your line is open.
Hi, good morning. Thanks for your time. My question was on your market demand comments for Europe and North America, where you expect a negative development. Maybe if you can elaborate on what level of negative development are we expecting in both of the regions, and clearly, Europe has already gone down quite significantly already in Q2. So are we talking about high single-digit decline in volumes for the year or more like double-digit decline? And similarly, any similar comments you can provide on North America, that will be great. Thank you.
Yes. So obviously, we don’t give specific guidance. But what I can do is to give a little bit more context. So – and honestly, being able to guide and also look at the numbers is challenging because we had a – if you go back then a couple of years, the first half of 2020 was super bad for the industry with lockdowns and coronavirus. Then we saw this roaring recovery particularly in Q1 and Q2 of 2021.
And also, the second half of 2020 was quite strong. And then in the second half of 2021, the industry actually started to decline. Most of that decline though was driven by the fact that industry supply was impacted by component availability.
So we had constraints in the second half of ’21 but not yet really driven by weaker consumer confidence or anything like that. Then as we go into the first quarter of 2022, industry is still constrained by availability, but then we see a normalization and decline in demand from those very elevated levels of 2021. But I think it’s important to note, as we did that, demand is still above that 2019 level – or total sales are above that 2019 level in the first half of 2022.
And we expect that to be the case also for the second half of ’22. So continued negative development year-over-year in the second half in terms of overall demand. But for us, we expect the improvement in supply that we are expecting now in the second half of the year to actually be a net positive compared to the first half of the year.
So obviously, these complexities in terms of comparison, I understand that it makes it challenging to fully track it. But what we are able to say is that despite this continued weakening in consumer demand, we expect to ship more volume in the second half than in the first since we are getting better supply.
Thank you. The next question is a follow-up question from Andre Kukhnin from Credit Suisse. Please go ahead. Your line is open.
Yes, thank you very much for taking the follow up question. I just wanted to check on that faulty component issue quantification. Could you share with us what is the materiality requirement for disclosure? So kind of what level would it need to be for you to quantify.
No, we haven’t given that. But that’s something that – yes, that’s the internal to us.
Okay. Okay. Fair enough. And if I may, just on promotional activity. I wonder if you could help us with that differentiation, as what you’ve just said, about deep discounting versus promotional activity actually being helpful to drive volumes. It’s still somewhat perplexing that in the environment where it’s out to fulfill existing demand, there’s promotional activity coming back. Is it to do with kind of driving promotions on specific products that you can supply, and hence would like to maximize? Is that the way to think about it?
Yes. So first of all, we’re not talking about major promotional deep discounting. So it’s more – for example, in North America, there’s always kind of a Labor Day event or a Memorial Day event or – and so on. And for the past few – couple of years now, those have been essentially nonexistent. Now we do see them – those events coming back. And retailers have inventory, so they definitely want to promote.
Now as we’ve kind of indicated here in the first half of the year, we have been, yes, more impacted than the industry as a whole from – in terms of component availability. So as that now improves in the second half of the year, we definitely expect to start to – start that – restart that promotional cadence. Again, this is not necessarily a negative thing for us.
We think we expect to sell higher volumes. And even if that means a little bit more promotional spend, we have raised prices to the point where – and continuing to raise prices to the point where we can afford that also given the inflationary headwinds. So the overall equation is what we’re trying to optimize in terms of growth contribution, let’s say, sales.
Right. Got it. Thank you.
Our next question comes from Karri Rinta from Handelsbanken. Please go ahead. Your line is open.
Yes, thank you. Karri Rinta, Handelsbanken. I wanted to get some clarity on your thinking and policy when it comes to preannouncement because you did report quite a bit below consensus expectations for the second quarter. So since you don’t give any sort of guidance on a quarterly basis, so should I understand that as a – that you only preannounce if you see that your full year performance is deviating materially from consensus expectations? Or is there some other reasoning behind that, not preannouncing the second quarter numbers?
Yes. So no, I mean, obviously, we take that very, very seriously, what would trigger any type of preannouncement. So what we relate to, and that’s what the regulation says, is the performance in relation to what we have previously communicated and what can be recently expected based on what we have previously communicated.
So that’s the assessment that we continuously make. And clearly, here again, as mentioned, we saw a profit drop of about SEK 1.5 billion in Q1. We saw a profit drop of about SEK 1.5 billion in Q2. We had clearly indicated that we expected Q2 to be as challenging as Q1 and with low visibility on the specifics. So in this case, we evaluated the performance, and we said that we didn’t have a – and we concluded that we didn’t have a requirement to communicate. So it’s something we take incredibly seriously.
All right, fair enough. Thank you very much.
Thank you. Our last question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, hi again. Just to follow up on demand and the situation especially in Europe in terms of energy prices, et cetera. Back in 2007 – this 2010, we saw a scrapping premium in the U.S. appliance industry that sort of reinstalled consumer demand, at least in the first half of 2010, to a significant degree. Do you see any sort of actions like that happening in any significant country in Europe, considering that there’s a gas crisis and energy needs to be saved going forward in order to be able to heat the houses over the winters?
I’ve seen a lot of discussion around incentives for energy efficiency. We haven’t seen – I haven’t seen anything specific related to appliances though at this point. So no. But a lot of discussion on the topic, to your comment. I think it is clear though that very significant increase in electricity prices makes consumers more conscious about energy consumption, which is a positive overall for us and for mix and demand in Europe as people are choosing more energy-efficient appliances, yes.
Okay. Yes, yes. Makes sense. We’ll see what happens there. And just coming back a little bit on pricing. I think you alluded to in Q1 that prices, on average, were up some 8%, and now we see price/mix was 13% on the margin here. Is the price component higher than this 8% now in the second quarter? Or is it a mix effect that has driven the development?
No. Price execution is better in Q2 than in Q1, yes.
Okay, perfect. Thank you very much.
Thank you. There appear to be no further questions. I will turn the conference back to you.
Thank you, operator. And thanks, everybody, for very important and good questions. So recognizing this has been a very tough quarter, I’m still pleased with our strong price and mix execution. And as we go forward, we’ll most likely continue to experience this type of high volatility, although we do estimate some improvement in the supply situation, as mentioned. It’s crucial that we also, in this environment, continue to our strong focus on innovation.
It’s clear that it not only pays off in terms of stronger mix but also drives volume and facilitates necessary price increases. And as mentioned, this is our most launch-intensive year ever, and that’s continuing in the second half.
Adding to the consumer experience of using our products, we’re now taking the innovation further and getting closer to the consumer in all interactions. And we’re committed to deliver long-term shareholder value through profitable growth.
Thank you very much, and talk to you soon again.