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Electrolux Reports Tough Second Quarter
Jul 20, 2011
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Appliance maker Electrolux (Stockholm) said price pressure on finished goods and higher costs for purchased raw materials/components were a drag on operating income in all its worldwide operating regions.

Electrolux reported net sales of SEK 24,143 million (approx. US$3740 million) in the second quarter of 2011, compared to SEK 27,311 million in the second quarter of 2010. Income in the second quarter was SEK 561 million (approx. US$87 million), compared to SEK 1028 in 2Q 2010.

Net sales decreased 2% in comparable currencies mainly as a result of lower prices, the company said. Operating income was SEK 745 million (compared to 2Q 2010's SEK 1477, corresponding to a margin of 3.1% (compared to 5.4%), excluding items affecting comparability.

Electrolux President and CEO Keith McLoughlin wasn't surprised that weak demand in key markets and the imbalance between higher costs for raw materials and price pressures on finished appliances hurt 2Q results. "Even though sequentially better, we do not expect earnings in the second half of the year to reach the level achieved in the second half of 2010."

He pointed to a "weak trend" in North America that hurt Electrolux sales volumes there, "particularly in comparison with the robust growth, subsidized by government stimuli, during the second quarter of 2010," he said. SEEARP (the State Energy Efficient Appliance Rebate Program) was federally funded as a part of the U.S. stimulus package and most states issued the rebates, stimulating a rise in sales of energy efficient appliances, in the second quarter of 2010.

"The European business also suffered from a weak volume development in Western Europe," McLoughlin said. He called European operations disappointing.

"Intensified competition has led to increased pressure on prices and lost market shares in the lower price segments," McLoughlin said. He noted that one key market, Italy, showed very weak demand.

"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," McLoughlin said. "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."

McLoughlin said the company intends to raise prices and take "decisive cost-efficiency measures."

Electrolux already sees the impact of previous price increases in North America and Brazil, and more prices will be raised in the North American market in August. Prices will go up 5-7% in Europe in by October.

"We are continuing to launch new products. Our introduction of new and innovative products under the AEG brand continues," McLoughlin said. "In Latin America, we are beginning to see the results of the new products that we launched in early 2011."

He added, "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."

What to Expect Going Forward

McLoughlin expects the trend to be more positive in the second half of 2011, with higher end-product prices and lower costs for raw materials. "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," McLoughlin said.

Electrolux is continuing to move into potentially big-growth, markets, mostly in developing economies. The Electrolux purchase of Egyptian appliance maker Olympic Group, which was stalled during the period of political upheaval in the country, reached a final agreement last week. "This will make us a leading player in the emerging North African and Middle Eastern markets," McLoughlin said.

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