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Edited Transcript of ELUX B.ST earnings conference call or presentation 7-May-20 7:00am GMT

Stockholm May 7, 2020 (Thomson StreetEvents) — Edited Transcript of Electrolux AB earnings conference call or presentation Thursday, May 7, 2020 at 7:00:00am GMT

* Andreas P. Willi

DNB Markets, Research Division – Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive

Good morning, and a warm welcome to the First Quarter 2020 Electrolux Results Presentation. With me today, I have our CFO, Therese Friberg; and our Head of Investor Relations, Sophie Arnius.

Before I start, I’d like to mention that this session is recorded and will be available on our website as an on-demand version. I also want to highlight that this presentation will be slightly longer than normal due to the coronavirus situation, which will require us to be efficient in questions asked later on.

Let me begin by updating you on the Q1 impact of the coronavirus pandemic. In several of our main markets, both demand and production have been severely impacted by the strict lockdowns initiated from mid-March in many of our key markets, resulting in factory and retail shop closures. We’ve seen a significant increase in online sales, but not enough to materially offset physical retail.

The initial outbreak in China caused delays in component of finished good deliveries and higher logistics costs in the first quarter. But due to our strong actions, the impact on Q1 was relatively contained.

In Europe, we had sharp sales declines from mid-March as physical retail stores were closed in most of Western Europe. The effect in Eastern Europe was mitigated by Russia, where we saw significant prebuying as a result of the currency devaluation.

In the second half of March, we temporarily closed the factories in Italy and at the end of the month, factories across Europe to adjust output to near-term demand.

Unlike in Europe, appliances have, in general, been classified as essential goods in the U.S. and most stores remain open. Demand remained strong through March, but availability constraints in refrigeration impacted our sales negatively.

In Latin America, demand dropped significantly in all markets at the end of Q1 as most retail stores were closed and several of the markets were fully locked down. In addition, political instability in Argentina and Chile exacerbated the negative development. In late March, we had to temporarily close most of our factories in the region.

In APAC MEA, consumer demand is estimated to have declined in Q1, primarily in East Asia. China was the first market to impose restrictions, and later in the quarter, many countries in the region followed. However, consumer demand in Australia and Egypt, for example, are estimated to have increased.

In light of the sharp demand decline, we have implemented comprehensive mitigation actions to reduce the impact on earnings and cash flow. As we navigate through this — through the crisis, we see 3 phases. The first phase with major demand and supply disturbances started in the first quarter and actions focused primarily on cash management. We have strengthened processes to monitor working capital, implemented production reductions and employee furloughs and secured new loans and a new credit facility, together summing up to SEK 11 billion to further strengthen our liquidity buffer. We’ve also received support from our shareholders to withdraw the annual dividend to preserve balance sheet strength.

The second phase, which is currently ongoing, focuses mainly on further cost efficiency actions, including significantly reduced discretionary spending, adjusting production to be in line with expected sales volumes and reprioritizing capital expenditures by deferring and scaling back some investments. This means that some of our investments in the reengineering program will be impacted.

When it comes to our 2 U.S. strategic investments, the Anderson refrigeration factory is largely completed while the Springfield cooking facility will be delayed by up to half a year.

In the new normal following the pandemic, we will further strengthen our go-to-market approach, including online sales capabilities and increased supply chain flexibility. Our core strategy of relevant and sustainable consumer experience innovation and modularized and automated production at scale is well suited to the more challenging demand landscape we anticipate. The actions taken to streamline and focus the company on the consumer business with clear strategic priorities makes us stronger, and combined with a strong liquidity position and an action-oriented company culture, we’re well positioned to execute our strategy also in a lower demand environment.

But in these difficult times, it’s not just about business, it’s also about being a good citizen and helping people in need. To support society, the Electrolux Food Foundation has made funding available, and our people have donated time and products to contribute to the health care efforts.

Organic sales decreased by 5% as a result of lower volumes. In North America, volumes declined mainly due to the manufacturing transition in Anderson while the other 3 business areas’ volumes were impacted by the pandemic towards the end of the quarter. Mix improvements and price increases partly offset the volume decline.

Operating income amounted to SEK 122 million, corresponding to a margin of 0.5%, significantly impacted by North American manufacturing transition. The EBIT impact of the coronavirus was approximately SEK 400 million negative. In addition to the decrease in demand impacting volumes, it also resulted in production constraints and increased logistics costs.

Currency headwinds linked to the coronavirus impact on the global economy also had a significant SEK 600 million negative impact on earnings in the quarter. This was partly offset by price increases, mix improvements across all business areas as well as lower cost for raw materials.

In the quarter, Electrolux Professional was distributed and listed on NASDAQ in Stockholm. Hence, the financial information presented here refers to the consumer business, unless otherwise stated.

Also in the new reality following the pandemic, we expect relevant, sustainable consumer experience innovation to drive demand and profitability. A great example is our range of UltraCare washing machines that combine the best in gentle care with leading energy efficiency, resulting in margins that are twice the average laundry products.

During last year, we launched a new range of Electrolux-branded kitchen products in Australia, leveraging the strong Swedish heritage, which is associated with sustainability and quality in Australia, resulting in a 45% sales increase. We will continue to accelerate meaningful innovation in taste, care and well-being also going forward.

Organic sales for business area Europe increased slightly as a result of mix improvements in the built-in kitchen area. It’s great to see that our new built-in Electrolux kitchen range continues to do very well. The mix improvements compensated for the volume decline we experienced from the second half of March.

Operating income declined year-over-year impacted by currency headwinds. The volume decline was offset by cost-cutting measures, mix improvements and lower cost for raw materials.

In the first quarter, overall market demand in Europe declined by 1% year-over-year. This was driven by a decline of 4% in Western Europe, mainly driven by France, Italy and Iberia, where demand dropped sharply in the last 2 weeks of March due to the extensive lockdowns. Demand increased by 7% in Eastern Europe, driven by Russia.

In North America, organic sales declined 13.1% in Q1 due to lower volumes, primarily relating to the ongoing manufacturing consolidation to the new facility in Anderson, which resulted in capacity constraints, as we’ve already communicated. Lower sales of private label products as well as of air conditioners also impacted volumes.

Operating income declined significantly year-over-year, excluding last year’s nonrecurring items as a result of the lower volumes and increased costs related to the manufacturing consolidation. On a positive note though, aftermarket sales increased.

Finally, I’d like to give you a short update on the situation in Anderson. In the quarter, we increased production in the new factory, and we now have less bottlenecks. We’ve also, during the course of Q1, ramped up the legacy Anderson factory. However, absenteeism and social distancing measures due to the coronavirus situation have impacted output negatively in both facilities as well as at our other facilities in North America.

During the quarter, market demand for core appliances in the U.S. increased by 2% year-over-year. Going into March, there was strong order intake by retailers driven by solid consumer demand. However, overall, in March, we estimate sell-out to be lower than sell-in. Market demand for all major appliances in Q1, including microwave ovens and home comfort products, however, declined by 7%.

In the first quarter, consumer demand for core appliances in Brazil is estimated to have grown in January and February. Demand in Argentina and Chile declined significantly in the quarter, driven by political instability as well as coronavirus quarantine procedures. In the second half of March, the demand dropped significantly also in Brazil. To give you some flavor, in Brazil, more than 80% of retail stores were closed for the last 2 weeks of March while Argentina implemented total quarantine since mid-March, and Chile closed the most populated areas.

Electrolux operations in Latin America had an organic sales decline of 1.9%. Lower sales volumes were partly offset by price increases and mix improvements. Operating income declined year-over-year, excluding last year’s nonrecurring items due mainly to accelerating currency headwinds. Price increases and mix improvements more than offset lower volumes. We are working constantly with pricing to offset external headwinds such as currency and implemented price increases in the quarter in our main markets.

In Asia Pacific, Middle East and Africa, consumer demand is estimated to have declined in Q1 due to the coronavirus situation. Some countries like Malaysia, South Africa and New Zealand implemented lockdowns while other markets such as Australia remained more open.

Electrolux reported organic sales decline of 3.2% due to lower sales volumes in Southeast Asia and China, and this was partially offset by increased sales in Egypt and Australia. Operating income declined year-over-year. Strong currency headwinds, mainly from the Australian dollar, impacted earnings negatively. Cost savings activities were implemented, which, to a large extent, offset the negative impact of the lower volumes. To mitigate the currency impact, we are implementing price increases in Australia and other countries around the region.

With that, I turn it over to Therese for the financial overview.

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

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Thank you, Jonas. Looking at our financial overview, I would like to comment on a few items. Organically, sales declined by 5.1% in the quarter due to lower volumes. In North America, this was primarily due to the manufacturing transition while the other 3 business areas were negatively impacted by the coronavirus pandemic towards the end of the quarter. Total sales were down 3%, including a positive translation currency effect of 2.1%.

The gross operating income, defined as net sales minus cost of goods sold, increased slightly compared to last year. However, the first quarter last year was including a nonrecurring item of approximately SEK 1 billion. And adjusting for this, the gross operating margin of 15% for the first quarter this year decreased 4.5 percentage points compared to the first quarter last year. Operating income, including last year’s nonrecurring items, declined significantly.

So now let’s look at the drivers behind this year-over-year change. The organic sales decline had a limited impact on earnings. As mentioned before, volumes were significantly down, but the lower volumes were compensated by mix improvements across all business areas as well as price increases, mainly in Latin America. The combined impact from raw materials and trade tariffs was slightly positive. Currency had a significant negative impacts on EBIT and was, to a large extent, indirectly related to the coronavirus impact on the global economy, and I will come back to that later in the presentation.

Net cost efficiency was negative. The ongoing consolidation of manufacturing in North America continued to impact earnings negatively, where we also had effects from production inefficiencies and logistic cost increases related to the coronavirus situation. These were, however, partly mitigated by implemented cost-cutting measures and reduced discretionary spend towards the end of the quarter. The negative impact on EBIT from the coronavirus situation of approximately SEK 400 million affected both volume and net cost efficiency negatively.

If we then take a deeper look at the price and mix development, the EBIT margin accretion from the group from price and mix was 2.9 percentage points in the quarter, mainly coming from mix, but also from positive price.

In Europe, we had a favorable mix, driven by growth from our premium brands and in built-in kitchen, while prices decreased slightly compared to last year.

In North America, mix had a positive impact on earnings, partly driven by increased sales of our front-controlled cookers. Price also increased slightly year-over-year.

In Latin America, we had a good contribution to earnings from price as we continue to implement price increases in all 3 main countries. Also mix developed positively.

In APAC and MEA, mix improved in several important markets such as Australia, New Zealand, Northeast Asia and Egypt, while price remained flat.

As highlighted in the EBIT bridge, currency had a major negative impact on our earnings in the first quarter. In our outlook given on January 31, we calculated the currency effect to be approximately negative SEK 150 million. With the coronavirus impact on the global economy and the implications on exchange rates, we saw that increasing to almost negative SEK 600 million in the quarter. The major effects are related to the weakening currencies in Latin America, but we also have movements heavily impacting our operations in Europe and Asia Pacific.

And then looking ahead, we calculate the second quarter to have a negative year-over-year impact from currency of approximately SEK 500 million and the full year 2020 of around SEK 1.7 billion. However, these calculations are built on current exchange rates as per May 4 and our forecasted future flows. And given the current situation, the size of those future flows are much more difficult to predict than normal. Therefore, our calculation regarding currency effects includes a significant degree of uncertainty.

And then looking at operating cash flow. Operating cash flow for the quarter was in line with last year. EBITDA was on a lower level, but this was compensated by a lower outflow from working capital than last year. Our operating working capital developed better in the first quarter than last year, partly as we do our best to quickly adapt to this very different market situation. Hence, we were not building inventory to the same extent as we usually do this time of the year.

With our lower level of both sales and production, we also decreased our trade receivables as well as our accounts payable. The more favorable development of operating working capital also compensated for the timing of some large payments, which we mentioned in our last earnings call that was impacting cash flow negatively in the first quarter.

We have, during many years, successfully worked with lowering our levels of working capital. But looking ahead under these conditions with rapid shifts and high volatility in sales and production, this will temporarily put pressure on managing inventory levels, paying our suppliers for deliveries received at a period of higher turnover as well as collecting receivables from our customers that are going through a period of low revenues.

And to safeguard our liquidity in this turbulent time that significantly impacts both earnings and cash flow, we have further strengthened our liquidity buffer. In March and April, we issued new debt of approximately SEK 8.4 billion, and we secured a new credit facility of SEK 3 billion. We have very good relations with our financial institutions, which is an important asset in times like this.

In the first quarter, we amortized long-term borrowings of approximately SEK 1 billion. And during the remaining part of 2020, we have a very limited amount of long-term borrowings that will mature of approximately SEK 0.3 billion.

In addition to the new credit facility, we also have 1 unused committed backup revolving credit facility of EUR 1 billion. Given our cash position at the end of March and then adding our credit facilities and new borrowings in April, we currently have accessible cash and unutilized credit lines of more than SEK 30 billion.

And with that, I hand back to you, Jonas, for the outlook.

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

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Thank you, Therese. In assessing the market outlook for 2020, it’s important to evaluate the demand drivers for appliances. 60-plus percent of the demand is replacement-driven in mature markets, and for most consumers, appliances are essential to daily life in their homes. Short term, store closures and restrictions on movement can, of course, drive demand below the natural replacement level, but that should tend to recover as restrictions are gradually lifted. Based on our experience, the more discretionary demand is mainly impacted by consumer confidence and interest rates over time as these factors impact willingness and funding cost for refurbishments and new construction. Near term, consumer confidence appears to be significantly impacted in most markets while interest rates are generally very low.

As mentioned, it’s a fluid situation, and it’s very difficult to assess the full impact on market demand for full year 2020. But with that said, we expect negative demand in all our main markets for the full year, with Q2 most likely being the weakest quarter. This, of course, depends on how long the sale crisis will be, the pace and extent of easing of restrictive measures and resurgence in infections, the effectiveness of stimulus measures and how these factors will impact unemployment and consumer confidence over time.

So looking specifically at Q2. In Europe, the negative demand trend continued into April, and our sales were down approximately 40%, heavily impacted by the most locked down countries. We expect May, June to be somewhat less negative as more markets and retailers open up. However, it’s yet to be seen to what extent shopping traffic and consumer spending recovers. Factories were soft opened end of April, and production is now aligned to demand.

In North America, consumer demand in April was softer than in March, and our sales were down approximately 15%. We expect sell-in to decline in Q2 with increased unemployment rates and lower consumer confidence impacting demand. We also anticipate production constraints related to social distancing and component supply and production in Mexico.

For Latin America, we expect the demand in Q2 to decline significantly, but at a somewhat lower pace than in April where our sales declined by approximately 15%. As more retail outlets are opening, particularly in Brazil, and in addition into the coronavirus impact, political instability is also a factor behind the expected negative development. The negative currency developments are leading to significant price increases, which in turn will have an unfavorable impact on demand.

The coming development on the currency front would be important in all the main markets. We have started to gradually reopen several factories in May in order to ensure sufficient supply.

Finally, a few words of our Q2 market view for the APAC MEA region. Also here, the market downturn extended into April, and our sales were down approximately 25%. The main impact is in Southeast Asia and Middle East Africa while Australia have imposed fewer restrictions and kept stores open. We expect the APAC MEA region as a whole to have negative demand in Q2, but less so than Europe and Latin America as the region has progressed further in the pandemic. Production is aligned to demand.

For the group as a whole, sales in April was down by approximately 30%. And although we foresee a gradual recovery going forward, we expect a significant loss for the group in the second quarter.

So to sum it all up in the business outlook. We expect unfavorable organic contribution in both Q2 and for the full year 2020, driven by lower demand from the coronavirus pandemic. We also expect production constraints in North America in Q2, as mentioned on the previous slide. These effects will be partially offset by currency-driven price increases, mainly impacting the second half of 2020.

In 2020, we estimate the positive year-over-year impact from raw materials to more than offset the negative year-over-year impact from tariffs in the U.S. as well as the indirect currency headwinds, primarily impacting Latin America. The raw material improvements are mainly due to more favorable pricing for steel, but also chemicals and plastics.

As I previously mentioned, we have implemented comprehensive actions to mitigate the impact on earnings and cash flow from this exceptional market situation. Our actions include significantly reduced discretionary spending such as marketing, travel, consulting, but also furloughs of employees. Hence, we expect a favorable impact on net cost efficiency for the full year. However, in Q2, this will be offset by production inefficiencies due to sharply lower volumes and disturbances as well as by operating 2 facilities in Anderson. We’re also reassessing our longer-term cost structure based on the anticipated new demand environment.

The impact from the coronavirus situation not only shows in the organic contribution, but also indirectly through a significant currency headwind of approximately SEK 1.7 billion for full year 2020 based on the currency rate as per the fourth of May. This mainly impacts our operations in Latin America, but also Asia Pacific and Europe.

And finally, we have reprioritized capital expenditures by deferring and scaling back some investments. Hence, we expect CapEx investments for the full year to be approximately SEK 5 billion.

Going forward, we remain well positioned to create value. We continue to execute on our strategy to improve mix through innovation and stronger brands throughout the group. Even though currently very painful, the North America refrigeration manufacturing consolidation with great new products is setting us up for long-term competitiveness. U.S. food preparation and other transformation initiatives are progressing, but with even more focus going forward.

We have followed through on the streamlining of the company through the separation of Professional, which will continue to yield structural efficiencies and increased focus. So overall, we’re already on a clear path to become even more cost competitive.

As a team, we remain agile and flexible while accelerating our value creation strategy. A clear focus and strong liquidity makes our strategy resilient.

And with that, I would like to 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. (Operator Instructions)

So with that, I hand over to our moderator, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question is from Andreas Willi from JP Morgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division – Head of the European Capital Goods [2]

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Yes. My question is on FX and mix and how that’s playing out. So in Q1, you’ve had a massive FX headwind. What share of that were you able to offset already with price? And how do you look at the timing of that going forward in terms of the offset? You did very well on mix in Q1. Do you expect mix to continue to be positive despite the impact from price increases on the consumer and the demand impact going forward?

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

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Right. So good questions. I think, of course, a lot of the currency effects hit Latin America, but then also, of course, a significant impact in Australia as well as Russia and Eastern Europe in general. So those were quite sudden. So we had, say, limited ability to fully offset that in the quarter. So that hit pretty hard in Q1. Gradually, here, we are able to raise prices to offset that. But of course, with — in most situations with retailers, we have a certain lead time before — between announcing price increases and getting them through. So we’ll see a relatively limited impact in Q2 and then much more significant as we go through into Q3 and the rest of the year. So that’s kind of the pattern more or less.

If we go to mix, I think we’re — our strategy really is focused on innovating in relevant ways for consumers. We’re not talking about gadgets, we’re talking about very useful features that consumers — that give value to consumers and that they’re willing to pay for. I mentioned, for example, the laundry example. So even in a quite challenging environment, we do expect to continue to be able to drive mix. Now the overall market, though, I think, is, of course, most likely shifting more towards a replacement-driven demand as a total mix as opposed to, let’s say, new construction and major refurbishment. And typically, the market mix is a little bit weaker in replacement than it is in new projects, let’s say. So the market most likely, based on history, tends to drive a little bit negative on mix whereas our product innovation and product and strategy tends to increase our mix. So we’ll see how that plays out. But of course, we remain super focused on driving positive mix.

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Operator [4]

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And our next question is from James Moore from Redburn.

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James Moore, Redburn (Europe) Limited, Research Division – Partner of Capital Goods Research [5]

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Hope you can hear me. Jonas, my question is on the positive structural change potential after COVID-19, working from home, digital, et cetera. Could you remind us of the online share of revenue for the 4 businesses, I don’t know, say, last year, versus how that’s changing in the crisis and whether you see any evidence of structural change? And are you still margin-agnostic between the two?

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [6]

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Yes. So actually, to be honest, the data is a little bit inconsistent or incomplete here because much of the online sales is actually done by our traditional retail partners, and we don’t always get a perfect view on the mix between store sales and online sales. Having said that, we expect the, let’s say, mix before corona to be around 20% on average in mature markets, Europe and North America. Asia, outside of China, is substantially less than that. Latin America, we have some markets with very high penetration like Brazil in particular, where it can be higher than 20% whereas some other markets in Latin America are much lower. So it varies a lot historically. What we have seen though is in — I would say, on average, what we can see in markets, excluding North America, essentially a doubling of online sales in the quarter or in — sorry, in the period following the lockdown, let’s say, not in the quarter as a whole, but — and into now into Q2. In North America, we don’t see as much of a shift because, there, most stores are — remain open, and people are able to go and pick up goods and so on. So penetration, we don’t have exact numbers. But if I say 40%, I think I’m not too far off in most markets. But again, it’s not enough to offset the sharp decline in physical retail trade.

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James Moore, Redburn (Europe) Limited, Research Division – Partner of Capital Goods Research [7]

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That’s very helpful. I’m just trying to understand the human interactions in the entire chain. I guess you’ve got that in a retail store, but you’ve also got it when people connect an appliance in the home. I mean what share of appliances that you sell require a human being to deliver and connect an appliance?

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [8]

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Yes. So the main sort of driver of whether that is required or not is, of course, the bulk of the appliance per se, how hard is it to move around and then to what extent it needs to be connected to the water mains. So — and this has been a factor because in different countries, different regulations have applied. In some places, it’s been installation by — let’s say, external parties has not been allowed whereas in others, it has been. I would say, in general, it has been allowed. And I think that — indeed, one of the limitations in terms of online sales growth is the sort of the physical distribution capability of — in the online flow, if you will, right, warehousing and trucks and things like that. And the other part is indeed the number of people that they have access to that can actually install appliances whereas the traditional retailers have a much more sort of well built-out infrastructure for that type of installation. So that is one of the limiting factors in terms of really accelerating the pure online. And that’s also why a lot of our traditional retailers have — are picking up most of that online sales growth. But yes, that has and is causing some complexity as we go through here. And of course, also, people in general are more reluctant to allow people in their homes in this situation, of course.

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Operator [9]

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And our next question is from Erik Paulsson from Pareto Securities.

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Erik Paulsson, Pareto Securities, Research Division – Analyst [10]

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Yes. It’s Erik at Pareto. So can you elaborate a bit how you solved the Chinese sourcing situation during Q1, which obviously only resulting in a limited impact as you write? And how can you use this sort of useful information, for instance, now in the Mexico situation here in Q2?

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [11]

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Yes. I think we’ve been on crisis footing here since the end of January. And really, the setup that we have with what we call a global sourcing organization and inside of our global operations has been extremely helpful to us. So we’ve been able to really globally coordinate and drive emergency logistics in terms of airfreight, making sure that we’re able to access inventories in China and get them out in an efficient way and to distribute available components between the, let’s say, most needy factories around the group. And so during the more acute lockdown in China, we were able to kind of manage through, through that type of process. And then, of course, suppliers started to ramp up, and we were able to then replenish our inventories.

And the other factor is, of course, that in normal times, we have these 6 weeks of components, let’s say, on the boat, and then — so that kept things going. And then to replenish that, we then did much more airfreight. So matching those two, we were able to more or less manage through with some higher cost, but with limited production impact. The challenge with Mexico is that, there, we have, I’d say, a little bit of a different approach in Mexico compared to in the U.S. when it comes to which suppliers are allowed to be open and also manufacturers, which causes a very complex situation right now. It’s gradually starting to get resolved, but it’s very, very difficult there. We have much shorter supply line. So when a supplier shuts down or one of our factories shuts down, the impact is much more immediate. There’s no, let’s say, on the boats type of buffer there. So there, we usually only have a week or 2 weeks’ or maximum 3 weeks’ worth of supply on hand. So the impact is much more difficult to manage.

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Operator [12]

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And our next question is from Johan Eliason from Kepler Cheuvreux.

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Johan Eliason, Kepler Cheuvreux, Research Division – Analyst [13]

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It’s Johan here. I hope you’re all well. On the cash situation, you obviously had a negative cash flow during the quarter, but I also noticed that your pension debt has increased a lot. Could you give some background to that and how you expect that to unfold over the year?

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Therese Friberg, AB Electrolux (publ) – CFO [14]

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Yes, it’s mainly related actually to a slightly lower discount rates — or slightly higher discount rates during the quarter. We actually used the rates by the end of February when we do our balances by the end of March. And we see now by the end of March that this has essentially reversed. So I would say if we would do it by the end of April, we would be pretty flat compared to what we saw last year. And I think to speculate on what will happen with rates going forward during the year at this point is quite difficult.

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [15]

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And overall, we have a quite high funding level, right? So there’s very limited funding need also in the foreseeable future. So this is — from a liquidity, let’s say, consumption perspective, we don’t really have an issue with our pension liability.

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

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No, no, for sure not.

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Operator [17]

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And our next question is from Christer Magnergård from DNB Markets.

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Christer Magnergård, DNB Markets, Research Division – Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive [18]

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Christer from DNB. I have a question on the cost savings related to the reengineering and streamlining programs. You showed quite detailed pictures in Q4 where you said that you can have, well, SEK 3.5 billion of cost savings by ’24 and roughly SEK 1.5 billion by 2021. Given what you say today with lowering CapEx to SEK 5 billion and also delaying the factory structure in North America, can you — is it possible to update us on the planned cost savings for this program?

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

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We will after Q2. But right now, we don’t have enough — honestly, we haven’t worked through it enough to be able to give you that yet. So we’re actually in the middle of that process of figuring out what 2021 is going to look like and so on. So we’ll do that when we come to Q2.

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Christer Magnergård, DNB Markets, Research Division – Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive [20]

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But is it fair to assume that the curve will be pushed out a bit?

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

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Yes. I mean the one thing we did announce is that 6-month delay of Springfield, and that will, of course, be a corresponding delay of those savings.

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Christer Magnergård, DNB Markets, Research Division – Head of Equities Research of Sweden and Senior Equity Analyst of Capital Goods & Automotive [22]

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Just a very short follow-up on the Mexico issue from Erik Paulsson. More ESG-related, actually. There were some news related to the protest in Mexico that after the protests, that 20 workers were fired because of them protesting of — for lack of health protection. Can you comment on that? And also how you work with, well, health protection in emerging markets?

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

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Yes, absolutely. I mean let me start by saying that, that report, I think, was heavily misrepresenting facts, but I won’t go into that in detail. I think the key point here is that we have extremely high safety standards. And we started to work with this very, very early in the process, partially because we have the experience from China with our factories there and how to make sure that we have appropriate protection, social distancing, working our adjustments and so on to make sure that the workplace is completely safe. And then we very quickly rolled that out on a global basis with face masks, and we have installed plexiglass dividers between workstations. We have — in the places where we transport our workers, we double the capacity on our buses, so we can have distancing between our employees. So we’ve done very, very extensive measures in all factories globally. We have no sort of differentiation between different factories. And on the flip side from that reporting, I would point to a situation in Italy where we were allowed to start up manufacturing 1 to 2 weeks before the country was opened up because we were able to reach agreements with our unions and local authorities that our factories were very safe workplaces. So — and again, we have no different standards in Italy than we have in Mexico or the rest of the world. So I’m actually extremely proud by the work done by our organization to really ensure that the workplace is a much safer place to be than your home.

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Operator [24]

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(Operator Instructions) Our next question is from Björn Enarson from Danske Bank.

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Björn Enarson, Danske Bank A/S, Research Division – Head of Equity Research of Sweden [25]

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Yes. I have a question on net cost efficiency. You had a quite negative number in Q1, and you’re talking about a flattish neutral development in Q2, but you are still revising your full year ambition from unfavorable to positive. Can you walk us through a little bit what kind of actions you are taking? And is this material number that we should consider for the full year? And how quickly can the improvement in the second half hit the P&L?

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [26]

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Yes. So there’s a number of different things here, right? So one of them is that in Q1 and also in Q2, we will have this significant sort of cost inefficiency from Anderson — from our manufacturing consolidation there. And then as that goes into the second half, that becomes a much smaller issue, right? So that’s one reason for the swing between first half and second half.

Then the other factor, which is complicating things for us is that with the sharp production reductions that we’ve seen towards the end of Q1 and also now in Q2, it’s impossible for us to completely variabilize our variable costs, if you know what I understand — what I try to say. So typically, we consider direct labor and other variable costs to be variable. But then, of course, the ability to variabilize those costs is limited when you have such sharp production decreases. We have things like furlough programs in Italy and Germany and some other markets, but they don’t cover all of the cost. And in many markets, we don’t have any government programs supporting the cost of workers. And of course, we can’t adjust our workforce to reflect these sharp drops. So you get these significant cost inefficiencies in manufacturing that shows up in net cost efficiency. It’s really a volume thing, but we show it in cost efficiency because we have a kind of a standard view on what the volume drop-through is. Does that make sense?

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Björn Enarson, Danske Bank A/S, Research Division – Head of Equity Research of Sweden [27]

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Yes, very much. And on the positive development in the second half, I mean, historically, you have been quite — you have been able to show quite significant improvement on this line when you have been forced to. I mean a couple of years ago, you basically doubled your initial guidance for the year on net cost efficiency. Are you seeing a material impact in the second half from actions that you are taking?

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

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Yes. So we’re actually currently evaluating exactly how much that would be, to be fair with you, but I think it will be — it will definitely be a material number that we’re — in terms of costs that we’re taking out. We also expect our — again, our manufacturing cost efficiency to be much more aligned in the second half of the year. So yes, we expect it to be substantially more cost-productive in the second half than the first half. But the exact sort of magnitude of that will depend on what the new reality looks like as we come out of this crisis, how much is demand going to be down. And of course, we do want to continue and drive the transformation projects that we drive, not just on the manufacturing side, but also digital transformation and building our online capability and so on. So there’s a fine balance there that we’re working through. And of course, it will depend on what the market looks like as we come out here.

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Operator [29]

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And our next question is from Martin Wilkie from Citi.

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Martin Wilkie, Citigroup Inc, Research Division – Director [30]

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It’s Martin from Citi. Just coming back to the question on online. You mentioned that percentage going up, which I guess is not so much of a surprise. But just your comment that the retailer often takes responsibility for that. Obviously, the retail sector is going through its own significant disruption. A lot of companies are saying that they will not reopen the same number of stores. I know there are some retailers where you effectively take the responsibility for the delivery to the customer. Is that a possible change here? Is more of that is going to be taken in-house at Electrolux? And would there be a cost implication if you effectively have to own much more of that piece where you get the appliance to the customer directly?

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [31]

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Yes. I mean, we’ll see. I think there are some opportunities for direct sales to consumers from our own, let’s say, websites and so on. I don’t think that’s going to be a major factor in the foreseeable future. But certainly, I mean, for us, the key point is we want to be where our consumers want us to be, right? That’s the #1 guiding principle here. And so we need to make sure that our products are offered through the channels where our consumers want to interact with us. And to your point, though, it’s not necessarily so that we would be more cost-efficient in supplying or executing the full supply chain than our retail partners are. So I think that’s not a — it’s not a purpose on its own to sell direct. But in some markets and in some situations, I think that will be — that is something that we’re executing and looking into, but I don’t think it’s going to be a major factor.

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Operator [32]

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And our next question is from Karri Rinta from Handelsbanken.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division – Research Analyst [33]

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My question is about the very helpful April trends that you provided. And I guess the first part of the question is that this 40% drop in Europe. So should we see it as a — pretty much, because I think you have earlier commented that replacement market is roughly 60% of the overall market. So should we read that 40% drop as everything, but the bare bones necessities went away in April? So basically, the only thing that was left was replacement and maybe you saw a significant shift towards refrigeration, people being worried about the sort of the most important appliances? That’s the first part of my question.

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [34]

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Yes, there is some — yes, there is, of course, some of that. But I think, actually, when we look — we don’t know, first of all, what — short term, what drives the purchase. So it’s — that part is speculation. But what we do see is that there’s a very, very significant difference country to country. So Italy, Spain, France, U.K. were virtually stopped, right? I mean we’re talking about negative 70%, 80% in many cases. Whereas other markets, some Eastern European markets, the Nordics, Switzerland, also Germany, were much less affected. So I think it has more to do, honestly, with the extent of the shutdowns and the restrictions imposed by governments than consumer behavior per se. That’s at least our assessment, and it’s very difficult to validate that.

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Karri Rinta, Handelsbanken Capital Markets AB, Research Division – Research Analyst [35]

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Okay. That, I guess, pretty much answers the second part of my question, which was this difference between North America and Europe, 40% versus 15%. So your best estimate is that, that’s also related to the degree of openness in the region.

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [36]

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Yes. So for example, if you look at the Nordics, we were actually fine, right, more in line with what we see in North America. So I think that is — just looking at some of those data points, you would draw that conclusion.

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Operator [37]

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(Operator Instructions) Our next question is from Andreas Willi from JP Morgan.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division – Head of the European Capital Goods [38]

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Yes. I wanted to follow up on the earlier discussion on kind of the — your customers, the retailers in — what are you doing there in terms of kind of receivable management and concerns around their well-being and structural shifts there within the distribution of your appliances? Are you seeing some concerns and tightening basically terms with them as you kind of fear that some of them will not make it to the other side?

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

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Well, I mean, clearly, cash management and our receivables management is an absolute focus for us right now and making sure that we get paid for what we sell. I mean that’s a basic requirement. And so far, that’s been going very well, I have to say. There are some cases, of course, where we have some retailers here and there that are extremely stressed already before the crisis. And there, we have to be very careful and work very closely with them to manage through. But so far, it’s been going almost, I would say, surprisingly well, not so to speak. But yes, so far, so good.

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Andreas P. Willi, JP Morgan Chase & Co, Research Division – Head of the European Capital Goods [40]

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And maybe just a follow-up on the CapEx, which you reduced to SEK 5 billion for this year. Is that a reduction of the overall program or just a shift also in terms of kind of your view on future demand and therefore need of capacity relative to just delaying the spending?

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [41]

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Yes. So there’s a number of different factors here. One, quite frankly, is physical, meaning that our suppliers of manufacturing equipment aren’t able to produce, and they are not able to travel to the factories to install the new equipment. So there’s just a natural sort of involuntary or automatic delay in a lot of these programs. So that’s the first thing.

Then the second thing, I think, is that most of the capital that we’re spending is not capacity increase-driven. It’s new products and productivity, mainly. In fact, we’re taking out capacity in North America with the closure of St. Cloud and Memphis. So having said that, as we look at the new demand environment, of course, we have to make sure that we appropriately size the investments, that we time them in a way that we’re able to execute with quality because we don’t want to do it halfway, so to speak. It’s — these are major transformations that we’re doing. So it’s better in some cases to sequence them a little bit more and make sure that we do them the right way, given these new sort of constraints in terms of demand, in terms of cash management and so on.

Do you want to add something, Therese?

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Therese Friberg, AB Electrolux (publ) – CFO [42]

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And potentially, the payback on automation in times when we have lower volume demand, that’s another point that we are reviewing both in the larger programs, but also in general.

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Operator [43]

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And our last question for today is from James Moore from Redburn.

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James Moore, Redburn (Europe) Limited, Research Division – Partner of Capital Goods Research [44]

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Yes. James, I’ve got 3 if I could. On your volume price/mix outlook for the second quarter and the full year. Can I ask what sort of organic sales growth we’re talking about behind that? Would it be correct to assume that the second quarter will be better than the minus 30% in April as we see some reopenings in May and June. And actually, I’m really more asking about the cadence of how you’re seeing the third and the fourth quarter behind that organic sales guidance? Maybe go one at a time, that’s the first one.

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [45]

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Yes. So yes, our — let’s say, the guidance that we gave is that, indeed, that we do expect sort of gradually from here on sales to improve, as you say, as more actually outlets are opening up and more countries are opening up. So yes, that’s true. The longer-term question, though, is the tricky one. Meaning, what is the — as we try to outline, what is the impact on consumer confidence? What is the ultimate level of unemployment? How effective are stimulus programs? Those things will be really, really important for the demand picture starting in Q3. But really as we go into Q4, very, very difficult to predict, right? We expect sales to be below prior year or demand to be below prior year also in the fourth quarter. We don’t expect that to fully recover. But to put the number on that, I think it’s just something we don’t dare to try.

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James Moore, Redburn (Europe) Limited, Research Division – Partner of Capital Goods Research [46]

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And could we switch to Anderson? And could you talk a bit more about what’s going on with new Anderson and old Anderson and how it compares to the timing of what you expected 3 months ago? And the reason I asked is I saw that market growth was plus 45% in freezers in AHAM in March. And I wondered if that’s an indication of your old plant ramping back up a bit quicker than you hoped or whether it’s just pre-COVID stockpiling.

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Jonas Samuelson, AB Electrolux (publ) – President, CEO & Director [47]

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So during the quarter, we did ramp up the old, let’s say, old facility in Anderson. So by now, if we hadn’t had the coronavirus situation, I would say that we would have been quite aligned in terms of supply out of the combined new facility and old facility in Anderson. Unfortunately, we’re not. And the reason for that is that we have these very strict social distancing measures, which reduces the number of employees that can operate on the line at a given point in time and with more spacing, which reduces the output. And also, whenever we have a case, which, fortunately, we don’t have too many, but whenever we’ve had a case, we, of course, stop production, we disinfect, we shut down and do all those things. So the actual output is quite heavily impacted by that from late Q1 and onwards here.

And then finally, and this is the really tricky question is then what we touched upon, which is component supply out of Mexico where it’s a very different picture state-to-state inside of Mexico in terms of whether suppliers are allowed to open up, whether they’re considered essential or not. And this is a situation that we’re managing through and our suppliers are managing through on a daily basis, but it does have an impact on availability and production. So unfortunately, we will remain constrained, it seems like here, throughout the second quarter also despite the fact that we then ramped up the old facility. So in terms of — in terms of shipments, we sold everything we had, right? So — and t there was a lot of demand on the refrigeration side. And unfortunately, we were not able to take advantage of that the way normally we would have. So that was a big negative for us in the quarter and also in April.

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James Moore, Redburn (Europe) Limited, Research Division – Partner of Capital Goods Research [48]

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And lastly, on Brazil, if I could. The Continental brand, you…

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Sophie Arnius, AB Electrolux (publ) – Head of IR [49]

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Sorry, James. I think we need to end there, and Jonas will just give his concluding remarks.

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

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Yes. Sorry about that. Give us a call out. All right. Okay. So thanks everybody for very good questions. And of course, it’s a situation unlike any — that any of us have experienced. So to provide appropriate description of what’s going on and guidance is a high priority for us, but there are significant limitations to the ability we have to see forward here. And I think that’s true for all of us. But I think the key point here, and I think where I want to leave this is that we really are well positioned to create value going forward. We are not revising our financial targets. We do see a clear path to coming back over 6% operating margin and with good return on investment and growth after this very difficult period. And the core pillars of our strategy to drive sustainable consumer experience innovation and, in combination, increased efficiency through digitalization, automation, modernization, those are the same drivers that will guide us as we come out of this crisis as well. Of course, we have to focus, we have to prioritize, we have to sequence in a way that takes into account the new reality, the new demand environment, new behaviors. But I think fundamentally, we’re super well aligned to that direction. And the fact that we have strong liquidity, strong access to funding gives us the ability to continue and push through with the transformation that we’re in the middle of to really put us on a value-creating journey. And that’s our promise to you going forward as well.

With that, I thank you all and wish you all a good health and good luck, and look forward to talking to you soon. Thank you.

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