Electrolux consolidated results 1999

CONSOLIDATED RESULTS, 1999 Strong growth in results - income after financial items up more than 30% Report by the President and CEO During the past few years we have implemented comprehensive restructuring and continued to streamline the Group in order to focus on our core businesses. Electrolux shall be a leading company in consumer durables for indoor and outdoor use, with a selected range of corresponding products for professional users. A company with good growth and profitability, creating value for business partners, employees and shareholders. The restructuring program and other adjustments in 1997-1999 have involved total personnel cutbacks of about 14,500 and divestment or shutdown of 27 plants and 50 warehouses. Since 1997 eleven operations have been divested with total annual sales of more than SEK 20 billion, annual operating income of about SEK 1 billion, and about 22,000 employees. The Group's quarterly income and margin, excluding items affecting compara-bility, have improved on the previous year for 11 consecutive quarters. For the full year 1999 the operating margin was 6.2% and the return on equity was 17.2%. In both the second and fourth quarters the operating margin was 6.5%. Both these key ratios are now in line with the Group's previously established financial targets. Between 1997 and 1999 the trading price for Electrolux B-shares rose by 170%, while the general index for the Stockholm Stock Exchange increased by 101%. We are now entering a new phase where the focus is on growth and proactive investments in customer relations and product management. At the same time, we are developing our systems for monitoring results and profitability in order to obtain greater focus on value creation. This will involve creating possibilities for growth as well as optimal operational and capital efficiency. Bonus systems and stock options for 350 top managers are directly linked to value creation. Increased resources will be allocated to development of new products, e. g. for the "networked home". Work on improving internal efficiency is continuing, but at a less dramatic pace. Improved income and profitability in 1999 Market trends in 1999 were favorable in both North America and Europe. The market in Brazil was weaker in most of the Group's product areas, however. Demand in South-east Asia stabilized, and in some areas even increased somewhat from the low level of the previous year. Group sales rose by 4% for comparable units, after adjustment for exchange-rate effects. Exclusive of items affecting comparability, operating income rose by 22% to SEK 7,420m, which corresponds to an operating margin of 6.2%, as against 5.2% in the previous year. The improvement in operating income is traceable mainly to higher sales volumes and improved productivity. A large share of the increase in productivity refers to the restructuring program. Lower costs for materials and half-finished goods also made a positive contribution, while price and mix had adverse effects. Changes in exchange rates, i.e. both translations and transactions, had a positive effect on operating income amounting to approximately SEK 380m, mainly referring to the USD and currencies outside Europe. In connection with comparisons it should also be remembered that divested operations contributed approximately SEK 130m to operating income last year. Income after financial items, exclusive of items affecting comparability, rose by 30% to SEK 6,358m, and net income per share rose by 29% to SEK 11.45. The return on equity, also excluding items affecting comparability, improved to 17.2% from 14.8% and the return on net assets to 18.4% from 14.7%. Cash flow improved considerably even when proceeds on divestments are excluded. The net debt/equity ratio decreased to 0.50, the lowest level since 1973. A large share of the increase in sales and income during the year referred to the North American operation, where we had a positive trend for major appliances, floor-care products and leisure appliances as well as outdoor products. The increase in volume was particularly favorable in major appliances, where we had higher growth than the market. Increased capacity utilization and continued improvements in internal efficiency led to higher operating margin in major appliances, which is now nearly on a level with the corresponding operation in Europe. This is of course especially gratifying since we reported a break-even result in 1997. Our operating margin is nevertheless still considerably lower than our major American competitors. Higher sales and income as well as an improved margin were also reported in Europe for comparable units. The increase in income is traceable mainly to Household Appliances and Professional Appliances, where restructuring also had a positive impact. Income for Household Appliances improved in both Germany and the UK, where we previously had problems. As expected, the operations in Brazil and Asia reported losses, although trends were generally favorable. We expect to report continued improvements in income in both these regions in 2000. In the third quarter we made a provision of USD 225 million, or SEK 1,841m, as a result of a decision in litigation on pension obligations in the US. The litigation refers to pension obligations for three operations which our American subsidiary White Consolidated sold in 1985, the year before the company was acquired by Electrolux. The court's decision was appealed in August. During the fourth quarter of 1999 net financial items were charged with losses on currency trading in the amount of SEK 240m, resulting from unauthorized and irregular trading in forward contracts by an employee at our internal bank in Germany. I regard this occurrence as very serious. We immediately launched an investigation and a review of our routines for authorization. Trading in forward contracts is now largely managed centrally by the Group's Treasury department in Stockholm. Restructuring program completed The restructuring program that has been in progress since June 1997 was essentially completed during 1999. The program involved total personnel cutbacks of about 11,000, or 11%, as well as shutdown or divestment of 23 plants and 50 warehouses, corresponding to 15% of the total of these facilities. The program was a prerequisite for increasing capacity utilization and reducing costs. Approximately 95% of the total anticipated annual cost savings and efficiency gains had been obtained by year-end 1999. As we have stated previously, the full effect of the program will be generated during 2000. The greatest changes were made in Europe, where most of the discontinued facilities were located. Substantial efficiency gains have been made in production as well as in sales, marketing and logistics. For example, productivity within our German production system for major appliances increased by approximately 30% from 1997 to 1999. In the US, productivity improved by about 40% in production of refrigerators and more than 50% in dishwashers. Implementing such comprehensive changes and cutbacks has been a difficult and painful process. This task has been performed very well. We will have to continue restructuring in the future as well, but as an ongoing process in our daily operations. New Group structure In 1999 we divested the operation in food and beverage vending machines and the major part of the operation in direct sales. An agreement was also reached in December for the divestment of the professional refrigeration product line. The vending-machine operation was highly profitable but offered only limited opportunities for synergy effects. In refrigeration equipment, the Group's market position was too weak to enable good profitability. The direct-sales operation had become marginal in terms of the Group's sales of vacuum cleaners, which are mainly to the retail sector. Achieving success in the face of increasingly tougher and more global competition requires concentrating the Group's resources to a limited number of areas where we are a leader and have competitive advantages. The professional operations differ in most respects from consumer products. Production involves smaller volumes, often manufactured to customer specifications, and the channels for distribution are different. There are some synergies when it comes to products, however, and concepts for the more advanced professional products can be transferred to consumer items. We are now concentrating the professional operation to food-service equipment, laundry equipment and leisure appliances, all of which have strong positions in the international market as well as good profitability. In the US and elsewhere, household appliances and outdoor products are distributed through the same retailers, since they are sold to the same consumers. About 50% of our sales in North America refer to dealers who buy both categories of products. In recent years we have obtained synergies as well as lower costs for sales and administration by supplying household appliances for both indoor and outdoor use. As of 2000, in our external financial information we will refer to Consumer Durables and Professional Products, instead of to the three business areas Household Appliances, Professional Appliances and Outdoor Products. Consumer Durables, which accounted for over 75% of Group sales in 1999, will be divided into three geographical regions. Professional Products will be divided into indoor and outdoor products. Focus on growth Now that the restructuring program has been completed, we are shifting our focus to proactive investments in customer care and product management in order to generate growth. Our primary aim is to grow organically, and our goal is to have a higher growth rate than the market. There is also a potential for acquisitions within a number of the Group's product areas. Between 1990-99, sales for Electrolux more than doubled, from SEK 59 billion to SEK 120 billion, inclusive of acquisitions and after adjustment for divestments. This corresponds to an annual growth of 8%. I expect that Electrolux will continue to show good growth in the coming years and simultaneously achieve good profitability. Group headquarters in Stockholm were moved into a new, modern and highly functional facility during the summer, which also reflects the fact that we are entering a new phase in the development of our business. Changes in European retailing sector create opportunities Consolidation of the retail structure in Europe toward a smaller number of large chains that operate in several countries is currently accelerating. Mergers in 1999 included the acquisition of Hugo Van Praag in Belgium by Kingfisher of Britain, one of the largest retailers in Europe. The French retailers Carrefour and Promodès merged to become the second largest retailer in the world. Dixon's, the biggest retail chain for electrical appliances in the UK, acquired Elköp of Norway, the largest such chain in Scandinavia. The US company Wal-Mart, the biggest retailer in the world, entered Europe through the acquisition of ASDA, the largest supermarket chain in the UK. In household appliances, three retail companies now account for about one- fourth of the market in Western Europe. This trend is most advanced in the UK, where 9 large retailers account for about 60% of the market, and in France, where 10 account for about the same market share, and in Scandinavia, where 9 also account for about 60%. Of overall Group sales the ten largest retail customers currently account for about 25% of sales, and their share is growing. The trend for consolidation favors large producers that can provide pan- European service, which requires a good geographical spread and a broad product range. Electrolux is the largest household appliance company in Europe and is the only one of the major producers with substantial market shares and leading brands in virtually every Western European country. In order to better coordinate operations on a pan-European basis, we are changing the structure and organization for major appliances in Europe. The national organizations are being coordinated through a new company, Electrolux Home Products, with headquarters in Brussels. All marketing, product development, production, logistics and other vital functions will be integrated on a European basis and managed by the new company. The national sales organization, which previously comprised a number of these functions, will instead focus mainly on sales and customer service in their local markets. This change, which will be largely completed in 2000, will reduce costs and improve customer service and make us a more attractive partner for both large and small retailers. For service to large customers, we can utilize our experience in the US, where consolidation among retailers has already taken place. Three large chains now account for about 40% of sales of household appliances in the American market, and the top ten chains account for about 60%. The Group has for many years been the main supplier of outdoor products to the largest chains in the US. In recent years the US operation has achieved good sales growth for household appliances by among other things providing better service to the major retailers. As I mentioned previously, this has also enabled greater efficiency in internal flows, which in turn made a considerable contribution to the improvement in income and profitability. ------------------------------------------------------------ Please visit http://www.bit.se for further information The following files are available for download: http://www.bit.se/bitonline/2000/02/11/20000211BIT00360/bit0001.doc The full report http://www.bit.se/bitonline/2000/02/11/20000211BIT00360/bit0002.pdf The full report