ELRXF - AB Electrolux (publ) (ELUXY) Q2 2023 Earnings Call Transcript

2023-07-20 05:52:08 ET

AB Electrolux (publ) (ELUXY)

Q2 2023 Earnings Conference Call

July 20, 2023 03:00 ET

Company Participants

Jonas Samuelson - President & Chief Executive Officer

Therese Friberg - Chief Financial Officer

Sophie Arnius - Head of Investor Relations

Anna Ohlsson-Leijon - Executive Vice President & Chief Commercial Officer

Conference Call Participants

Akash Gupta - JPMorgan

David Macgregor - Longbow Research

James Moore - Redburn

Johan Eliason - Kepler Cheuvreux

Martin Wilkie - Citi

Presentation

Jonas Samuelson

Good morning and welcome to the Second Quarter 2023 Earnings Presentation. My name is Jonas Samuelson. And with me today, I have Therese Friberg, our CFO; and Anna Ohlsson-Leijon, our Chief Commercial Officer; and Sophie Arnius, our Head of Investor Relations. I'd like to mention that this session is recorded and will be available on our website as an on-demand version.

Before we go into our performance in the second quarter, I'd like to take this opportunity to say a few words about the announcements we made earlier this morning. As a pure consumer appliance company after the spinoff of our professional business in 2020, we're continuing our work to sharpen our strategic focus to grow profitably in home appliances in the mid and premium segments, primarily under our main brands, Electric, AEG and Frigidaire. We have therefore initiated preparations to divest noncore assets with total potential value of approximately SEK10 billion. This includes Zanussi and other noncore brands, water heaters in Egypt and South Africa and also certain nonstrategic real estate.

Although the water heater businesses in Egypt and South Africa have developed well and are profitable and the brands, we are now looking at divesting are all well known in their respective markets, these assets do not have sufficiently strong synergies with our core strategy to warrant the required focus and investments from Electrolux. Therefore, we believe in the opportunity for greater value creation and growth under different ownership. In addition to an increased focus on core brands and categories as well as complexity reduction, the intended divestments will provide resources to execute our strategy at speed and scale as well as supporting the work to optimize our capital structure.

We're currently experiencing a challenging macro environment in which focused and strategic portfolio management are more important than ever. Therefore, we also evaluate further structural simplification and complexity reductions in order to execute our strategy with focus, scale, speed and lower costs. This requires us to make tougher choices on where to invest in innovation, manufacturing technology, digitalization, branding and distribution and where to reduce or exit. It's too early to communicate on what choices we will do and it's vital that this review is done thoroughly, so we will not rush it even if the intention is to keep a high pace in our work. We will share more information once ready to do so and cannot speculate on timing areas impacted, et cetera.

So, let's go into our performance in the second quarter 2023. The market environment continued to be weak with lower consumer purchasing power. As a result, our volumes dropped significantly and our organic sales declined. The market was particularly challenging in the key category, built-in kitchen, in Europe. In light of this, I'm pleased that we managed to keep mix flat in the quarter, thanks to our attractive offering. Price was somewhat positive as the contribution from this price increases last year tapered off sequentially and promotional activity increased significantly year-over-year.

Despite the significantly lower volumes, the underlying EBIT was in line with last year. The group-wide cost reduction and North America turnaround program continued to progress well and generated a substantial step-up in savings sequentially. Our number one priority this year remains to deliver on this program and I will later in our presentation come back on the progress more in detail. Raw material costs was neutral year-over-year but deteriorating currency and higher cost inflation from labor and energy resulted in a combined headwind from external factors that, to a significant extent, was offset by price. EBIT included a nonrecurring item of SEK643 million negative, mainly related to a provision for the French antitrust case.

Therese will now take us through the main drivers behind the change in operating income.

Therese Friberg

Yes. We had a negative organic contribution to earnings in the quarter, driven by a significant volume decline year-over-year as a result of large demand drop in most of our main markets. Price was positive year-over-year despite that promotional activity was back on normal levels. And this was based on price realization, mainly from increases during last year which also means that the year-over-year increase sequentially reduced compared to the first quarter.

We managed to have a flat mix in the quarter despite consumers mixing down to lower price points and specifically weak demand in built-in kitchen in Europe. Mix was still back flat on the back of strong product innovation. Our investments in consumer experience innovation and marketing decreased as a result of implementation of the cost reduction program. And we saw very positive cost efficiency in the quarter with strong traction on the cost reduction program where Jonas will come back on the progress on the different components. Price was almost offsetting the negative external factors. And external factors here, besides raw material that was neutral or slightly positive, is impacted by the negative currency and headwinds related to labor inflation and energy cost increases. Also, for the external factors, the negative effect -- the effect was less negative year-over-year compared to what we saw in the first quarter.

And now let's take a deeper look at our price and mix developments. The EBIT margin accretion for the group from price and mix was 2.2 percentage points. This was mainly a result of positive price year-over-year while mix was, as mentioned, essentially flat in the quarter. If we look at the business area, in Europe, we had a positive price on the back of increases done during 2022 and some additional increases implemented going into 2023 to offset the inflation. Sequentially, the year-over-year increase is reducing. The positive mix from focusing on our premium brands and strong product innovation is, in the quarter, offset by consumers mixing down which is generating a slightly negative mix.

In North America, the promotional activity was high and the effect is more than offsetting the positive effect from the price increases made during last year. Mix was flat in the quarter. In Latin America, the price development was positive, mainly related to price increases done during 2022 and continuous increases in Argentina. In Brazil, the promotional activity continued to be back on a normal level. Mix is positive based on successful product launches and growth in aftermarket. Also in Asia-Pacific, Middle East and Africa, we had a positive price year-over-year related to increases during 2022 and additional increases in Egypt to offset the inflationary pressure. Mix was slightly positive driven by product availability being fully recovered compared to a year ago.

The group-wide cost reduction and North America turnaround program is progressing well and Jonas will now give an update on the progress.

Jonas Samuelson

As indicated, we are ahead of plan in terms of cost reductions with cost reductions of SEK1.6 billion impact in the second quarter. We had very good progress on supply chain costs, both through better efficiencies, much lower express logistics and significantly improved rates, particularly on ocean transportation.

Production output is now generally stable with improved efficiency and 82% of targeted blue collar reductions have been implemented. The big task right now is scaling up the new cooking factory in Springfield, where most of the new products have been launched and are scaling up while we're ramping down the old factory in the second half. Our structural cost reductions are also progressing to plan with most head count reductions implemented or announced. We are therefore confident that the year-over-year positive earnings contribution will be at least SEK5 billion in the full year 2023, an improvement compared to our previous view of SEK4 billion to SEK5 billion. And we're accelerating cost reduction activities to achieve above our SEK7 billion target for '24 compared to 2022.

Let's have a look at our cash flow and liquidity, Therese.

Therese Friberg

Cash flow after investments was positive SEK3.1 billion. This is positively impacted by the finalization of terminating the U.S. pension plan of SEK0.9 billion. But also excluding this onetime effect, the underlying cash flow is materially higher than last year. As you remember, we significantly reduced the inventory level in the fourth quarter and have been focused on stabilizing the inventory levels from there which is proceeding well. Our aim is to have a positive cash flow after investments for the full year of 2023.

Looking at our liquidity and maturity profile. From a balance sheet perspective, we have solid liquidity with SEK30.2 billion in liquidity, including revolving credit facilities as of the end of June. We have a well-balanced maturity profile and we have no financial covenants. The target remains to maintain a solid investment grade rating by delivering on the cost reduction program, generating a positive cash flow after investments in 2023 as well as divesting the mentioned noncore assets over the coming years.

And I'll now go into the business areas performance in Q2, starting with Europe. The European business had significant volume decline in a contracting market due to the weaker consumer demand and our strategically important built-in kitchen categories were especially hit in a market with declining residential construction and remodeling activity. This negative product mix resulted in a slightly negative mix for the quarter. Further, what we see is the consumer mixing down in discretionary categories and in connection with distressed purchases. And this is also putting pressure on the mix.

Price was up, mainly driven by previous list price increases while promotions increased. Price in the quarter did offset the headwinds of external factors, mainly driven by energy and labor cost inflation. All in all, the organic decline was close to 11% in the second quarter. The group-wide cost reduction program contributed positively to the bottom line. And excluding NRI, the EBIT for the quarter increased to SEK297 million versus SEK142 million last year.

Now, let's look at the European market. Market demand in Europe continued to decline throughout the second quarter and was down by 12%, excluding Russia. And we saw the Western Europe declined by 12% and demand in Eastern Europe by 13%. Compared to the pre-pandemic levels, market demand declined 9% compared to the second quarter of 2019. The consumer confidence remains low with consumer demand being negatively impacted by geopolitical tensions, the high general inflation and the increased interest rates. As mentioned earlier, we also continued to see that the reduced purchasing power result in more consumers shifting to lower price points and postponing purchases in discretionary categories.

The promotional activity increased year-over-year in this weaker market with consumers searching for deals and lower price points in general as a consequence of the low consumer confidence. In addition to this, the declining residential construction and remodeling activity have resulted in weaker built-in kitchen demand. This is most significantly impacting the kitchen retail channel as they're more exposed to renovation compared to the electrical retail channel, mostly selling built-in appliances for replacement. When it comes to retailer inventory, we assess that these are on the high side as a result of sell-out being slower than sell-in, especially in the beginning of the quarter; this stabilized towards the end.

Let's continue with our business area North America. In the North American business, we had an organic decline of 12.3% in the quarter in a market that was slightly down. In the beginning of the second quarter, we saw some negative volume timing effects of the high sell-in, in some of our key customers at the end of the first quarter. We are in the midst of the transition of our cooking manufacturing to the new facility in Springfield and we're now in the ramp-up phase of these high-volume freestanding cookers which continues throughout the year. The transition hampered our ability to follow the demand fully. The mix for the period was flat and we saw significantly higher promotion activity in the market comparing year-over-year and this resulted in a negative price development in the quarter.

Summing it all up, there was a negative organic contribution in the quarter. The turnaround program is the highest priority for the team in North America that's now well underway. In the quarter, there was a significant contribution from all these efforts and a substantial step-up in savings sequentially. To conclude, the EBIT for the quarter was a loss of SEK160 million versus a loss of SEK270 million last year.

Now, we will take a look at the U.S. market. The industry shipments of core appliances in U.S. decreased overall by 1% with variations between categories. Refrigeration and cooking appliances declined while laundry and dishwashers were up. Compared to the second quarter of 2019, the industry shipments were up 10%. Consumer sentiment continues to be negative -- negatively impacted by high general inflation and increased interest rates. However, compared to Europe, we see that U.S. consumers being financially resilient, still with unemployment at low levels which, in combination with high promotional activity, contributed to a relatively stable overall market demand. And market demand for all major appliances, including microwave ovens and home comfort products decreased by 6% year-over-year.

Let's move on to Latin America. The trends of the consumer demand continued in the quarter with a decreasing market in Brazil and Chile and growing market in Argentina on the back of the highly inflationary environment, although at a lower pace than in the first quarter. In Brazil, we estimate the inventory levels at retailers have increased in the quarter. Our price was slightly positive and we also had a positive mix as our laundry ranges were driving growth in the quarter. Another positive mix contributor in the quarter was the aftermarket business.

And to sum it up, the total organic growth was 5.6%. The Latin America business benefited from the group-wide cost reduction program, whilst the external factors were negative mainly from currency and labor cost inflation. The EBIT for the quarter was SEK333 million, in line with last year.

Finally, we'll turn to Asia-Pacific, MEA and Africa. The consumer sentiment in Australia weakened considerably early in the second quarter on the back of increased cost of living and interest rates, as mentioned in the earnings call for Q1. This resulted in a marked decrease in the quarter and we estimate that the retail inventory levels being at normal to low levels.

In the SEA market, we note that low consumer confidence and an overall market decline with some differences between countries with Vietnam, in particular, being very weak. On the back of lower consumer confidence, consumers gravitated to lower price points in general. The mix was, despite this, positive in the -- despite this positive in the quarter, partly on the back of growth in the multidoor category with recently launched innovation as well as contribution from cooking categories. Our price contribution was positive and offsetting deteriorating currency impact. But the organic contribution in total was a decline of 10.7% in the quarter.

The EBIT for the quarter came in at SEK200 million versus SEK426 million last quarter. And now I will hand it back to Jonas to give our market outlook.

Jonas Samuelson

We expect consumer sentiment in 2023 to be negatively impacted by high inflation and interest rate environment, although with regional differences.

In Europe, although energy inflation has not been as high as feared, overall inflation is running above prior assumptions. In the Asia-Pacific region, where consumer sentiment first weakened considerably in Australia a few months ago, we recently have seen the same development in other markets such as Southeast Asia. The housing market, a key driver for appliance demand in mature markets like Europe and North America is expected to decline in 2023.

In the second half of the year, forced replacement is expected to remain the main demand driver since the reduced consumer purchasing power is not only resulting in more consumer shifting to lower price points but also in lower remodeling activity and postponement of purchases not deemed necessary. On the back of this, we maintain our regional market outlook for Europe, North America and Latin America and expect demand for appliances for these regions in 2020 full year to be negative compared to 2022. We revised the demand outlook for the Asia-Pacific, Middle East and Africa region to negative from neutral.

Let's look at our business outlook. Based on our market outlook with negative demand in all regions, we estimate our volumes in 2023 to decline year-over-year. In addition to the general weak market, we expect lower residential construction and remodeling activity to also in the second half of the year lead to weaker market demand with the built-in category mainly impacting us in Europe where we have a strong position in this category. This, in combination with postponed purchases of certain appliances such as dryers, we expect a less pronounced positive seasonality in the year -- in the second half of the year which normally is a stronger period for us as a group than the first half of the year.

We continue to expect the volume decline to be partly mitigated by mix improvements from our strong offering, where 2023 is another launch-intensive year. This challenging demand environment with more consumers shifting to lower price points and driven to a large extent by forced replacement is, however, assumed to limit our ability to fully drive mix improvements.

Looking at price, we expect a positive impact for the full year, though not large enough to offset the negative impact from external factors. The price dynamic is very different for the first half of the year compared to the second half. As we highlighted previously, the carryover from list price increases implemented a year ago has mainly benefited the first month of 2023 and was the main driver for the positive net price impact in the first half of the year.

As we saw in Q2, these carryovers were largely offset by promotions while net price ended up only being slightly positive. Due to lower consumer demand and resolution of supply chain constraints, promotions are expected to remain high also during the remainder of the year in all major markets. However, the magnitude of promotions going forward is uncertain as it is much linked to the macro environment and the health of the consumers in different parts of the world. But historically, the second half of the year is a more promotionally heavy season compared to the first half, especially in North America.

Given this, we expect net price to turn negative from the third quarter and be negative for the second half of the year. As mentioned, we expect external factors to be negative for the year driven by energy and labor inflation as well as currency headwinds. Although we foresee benefits from lower raw material costs, the positive impact on earnings is reduced as the higher share than normal of raw material procured at last year's rate was consumed in 2023. This lag from entering 2023 with higher inventory levels of supplies than normal has predominantly impacted Q1 negatively and to some extent also Q2, resulting in flat raw material costs in Q2 year-over-year.

The outlook for external factors in the second half of 2023 remains somewhat negative driven by currency and inflation while raw material cost is estimated to be slightly positive.

I'm pleased that the group-wide cost reduction in North America turnaround program is progressing well. Given the Q2 significant step-up in sequential cost savings, we are now for the full year 2023 targeting a positive earnings contribution from cost efficiency and reduced investments in innovation marketing, combined, of at least SEK5 billion. This is an improvement compared to our previous view of cost savings of SEK4 billion to SEK5 billion.

In 2024, the aim is to further accelerate cost improvements to achieve over SEK7 billion target compared to 2022. Investments to strengthen our competitiveness through innovation, automation and modernization continued in 2023. We revised our total capital expenditure for the full year and estimated to be approximately SEK6 billion compared to previously SEK6 billion to SEK7 billion.

So, to sum up the quarter and the strategic drivers we've been delivering on, our number one priority this year, the group-wide cost reduction in North America turnaround program is progressing well. We had a significant step-up in savings sequentially and most prerequisites for stable operations are now in place. Our attractive product offering allows us to keep a flat mix in the quarter. This in a very challenging market environment with reduced consumer purchasing power which shows that our user-centric consumer experience innovations under well-established brands are appreciated by consumers.

In the current macro environment, focus and strategic portfolio management are more important than ever. The initiated preparations to divest noncore assets are part of our ongoing work to sharpen our strategic focus, to grow profitably in selected home appliance categories in the mid and premium segments, primarily under our main brands and increased speed and scale. We're also evaluating further strict structural simplification and complexity reductions. And once this comprehensive review of our operations is complete, we will provide an update.

With that, I'll leave the word to Sophie.

Sophie Arnius

Thank you, Jonas. We will now open up for questions. [Operator Instructions] With that, I leave the word to our operator.

Question-and-Answer Session

Operator

[Operator Instructions] We're now going to go to our first question. And the first question is coming from Akash Gupta from JPMorgan.

Akash Gupta

My question is on divestment. Maybe if you can update us with where do you stand on the carving out of these businesses? And when do you expect this process to be finished? And if you can provide a bit more granularity on how do you arrive at this SEK10 billion valuation tax which I believe also includes the real estate portfolio. I mean you say revenues are SEK7 billion last year. Can you also provide some color on the profitability and how that profitability has trended in this year?

Jonas Samuelson

Yes. Thank you. So the preparation for this announcement has been ongoing for some time. These assets are fairly easy to separate as business units. There's always, of course, work required. So the reason why we went public now is we, of course, now need to do more extensive preparations for these divestments which then requires us to announce at this point. But it's not very complicated to extract these assets; so now the process starts. We've appointed a financial adviser and we will now accept interest -- let's say, indications of interest and so on. Having said that, of course, there is a preparation period now ahead of us to ensure that we have the right information and so on for potential buyers; so the due diligence materials and so on will need to be prepared. So, this will take some time. And also we are not in a rush. We need to make sure that we have the right buyers with the right plans for these businesses.

On the business side, the operations both in Egypt and in South Africa are quite profitable. They've developed well and also are developing well in 2023. So we think that these are quite attractive businesses for the right buyers. As mentioned, we don't plan to continue to invest in water heaters and that's why we're divesting that part of the business. And then the Zanussi brand portfolio is also not, let's say, a segment of the market where we're investing in and most -- or a very large majority of the appliances that we manufacture and sell in Egypt are Zanussi branded. So they're positioned well for the Egyptian market and are doing well. But again, since we are then planning to leave the Zanussi brand that comes along. So well-performing attractive businesses in our view, some work to prepare. Then when it comes to the Zanussi brand position in Europe, the position in the market is not profitable for us.

And we have been I think communicating for a long period of time that we are reducing our focus on the mass end of the market in Europe and increasing our focus on the mid and premium under Electrolux and AEG. That's been our strategy for the last 10, 11 years. And now we're at a point where these brands are still well recognized by consumers. They're well known and they have a value but it's kind of the right point in time for us to say, look, if somebody has the desire to invest and play in this part of the market, that can probably generate more value than it does under our ownership. So that process has now kicked off. So again, we take some time. We have time. So that's why we're saying over the next couple of years. But of course, we're progressing with high speed right now.

Operator

And our next question is coming from David MacGregor from Longbow.

David MacGregor

Yes, Jonas, I was wondering if you could help me better understand the organic decline in North America to 12.3%. And you cited a few factors there: there was the pull-forward from 1Q but also the cooking market share seems to have been an issue and then the core 6 versus the microwaves and the home comfort, it seems like there may have been some dynamics there. Obviously, price. Can you bridge for us the North American business, just addressing some of those factors so we can get some sense of magnitude in terms of which were the most influential versus which may have been a little more tangential.

Jonas Samuelson

As usual, you're very well informed your questions. I'll give it to Anna.

Anna Ohlsson-Leijon

Yes. No, exactly to point here. We saw a slightly declining market in the core categories and we were having this on the volume side timing effects from the first quarter where we did see high volume levels of sell-in into some key account retailers. And of course, that impacted the first part of the second quarter. And then on the promotional side here, of course, year-over-year, we did see significantly higher promotional level. Of course, this is starting from a higher starting point versus looking at pre-pandemic levels. But we would say that this was a high level here in the quarter. So those were the main drivers. And then to your point on cooking, yes, we have, of course, this transition in Springfield and we couldn't really follow demand fully here in the quarter. However, of course, this is of highest priority that we continue to have a stable transition according to plan. So that's our highest priority versus following the market. So that's -- those are the main explanations.

David MacGregor

Is there any way to quantify that first quarter pull-forward?

Anna Ohlsson-Leijon

No, we don't give that detail.

Operator

And our next question comes from James Moore from Redburn.

James Moore

I have a question on the bridge, if I could. In your net cost efficiency, could you say how much is savings so far cumulatively versus the plan in North America? And on external factors, you've done SEK1 billion -- SEK3 billion in the first half. I think I heard you say less, a slight negative in the second half. I've got minus SEK0.5 billion. Is that the right kind of magnitude? Any help on that would be great.

Jonas Samuelson

Starting with the last part, I think the numbers you mentioned are correct. And of course, given that raw material is turning favorable in the second half and we don't have this negative effect from, let's say, material bought at higher prices earlier, there is a positive there. But then on the flip side, the negative effects from labor inflation, from energy inflation and in particular, currency continued in the second half. So we do expect a somewhat negative number for H2. On the bridge -- or cost bridge, I guess, the simple way to put it is that all of these savings are due to the cost reduction program that we initiated and a significant portion of it is in North America. So, I have to say we're extremely pleased with the progress there.

We really stabilized operations. We've taken out a lot of the excess cost and excess head count that we accumulated during the post-pandemic challenges. So very good progress there. We're not at the point where we can say that we are operating at full productivity, especially given the ramp-up and ramp-down of Springfield and the fact that we're sort of only back to stability, not to full sort of operating efficiency yet. But on a year-over-year basis, it's a very, very significant improvement.

Operator

And our next question comes from Jonas Eliason [ph] from Kepler Cheuvreux.

Johan Eliason

This is Johan Eliason at Kepler Cheuvreux. I was just curious about the price you indicated for the assets you have now announced to be sold. It sounds if you adjust for the properties, it seems like this is basically what you paid for [indiscernible] and Olympic over the past years. Is that a realistic assumption to get back those price levels considering where you are in the market right now? And secondly, I thought this presentation, sharpening the strategic focus on core portfolio, further structural simplification and complexity reductions evaluated was quite interesting. When -- do you have any timing of those further actions to be announced going forward?

Jonas Samuelson

Thank you. Yes. So on the valuation, frankly, we've just done, as you would expect, a valuation of all of these different assets based on market assumptions together with our financial advisers. This is kind of the midpoint of the range for all of these different assets. Of course, there is a range around that and we want to be clear about that. And of course, it also assumes that we actually choose to sell all these assets, assuming that we get attractive enough offers. So I will not go into the case by case because, of course, then we kind of -- yes, we preempt negotiations; so I will not do that. We are pleased with the development of our businesses in water heaters and in appliances in Egypt. So we're not selling them because they're not performing, we're selling them because we're shifting our strategic -- we're in an ongoing journey to shift our strategic focus to really our core.

And maybe just to spend 2 words on that. We're -- as we talked a lot about, we're investing in global modular architectures where we need -- which give us global scale and speed of innovation. We're investing in digitalization to improve the consumer experience and increasing the ability to connect directly with consumers to leverage the consumer journey which is a profitable part of the offer for us that we want to grow as we've talked extensively about. This requires speed and scale in investments and that requires focus. So, if we then look at the parts of the business that we're now talking about divesting, they don't meet those criteria. And as we then go forward and look at further sort of structural simplification, it's all along those lines of saying finding -- and it's not unknown to us but really kind of sharpening our decisions around where do we double down, invest to grow. We have our -- the SEK8 billion reengineering program. Those products are fantastic. We want to invest in further leveraging those and again, driving digitalization, consumer journey and so on.

And then, there are some categories and maybe some parts of the world where we don't see those opportunities and we need to then invest less. And all of these actions are now kicked off or in progress. And we will take the necessary time. We're not under, let's say, pressure. We're delivering on our cost reduction program that we already announced and everything like that. So that's progressing well. And now it's about, okay which further strategic choices do we make inside of our existing strategy to further increase speed, scale and cost competitiveness.

Operator

And the next question comes from the line of Martin Wilkie from Citi.

Martin Wilkie

It's Martin from Citi. Just a question coming back to promotion activity and obviously, you talked about how normally the industry has more promotion in the second half than the first. But just to give us some sort of sense relative to history, is promotion activity now sort of typical as to what we would have seen prepandemic? And I understand that there are many moving parts within promotions. But just to get a sense, are we now at a sort of normalized level of promotions? Or just how we should frame that in a historical context?

Anna Ohlsson-Leijon

Yes. Thank you for the question. It's -- of course, it varies a bit market-to-market. And of course, we now have a higher starting point with kind of inflationary pricing activities we've seen across the regions. But we would say that, as we pointed out for North America here, we are in the second quarter at a high level and it has been normalizing towards the 2019. And here, we would say then it's, yes, slightly higher. But in the quarter, it's -- we would say high versus that level.

Operator

Sorry, I cut him off there. So we're going to move on to our next question. And the next question comes from Akash Gupta from JPMorgan.

Akash Gupta

I have a question on the channel inventories at distributors if you can provide a bit more color. And on the same topic, you said earlier on that you don't expect the seasonality that we typically see with strong H2 versus H1. Can you also comment on your rate of production like do you need to increase? Or do you need to stay at the current levels? Like anything on rate of production would be good.

Anna Ohlsson-Leijon

Yes. So on the market, as we indicated across the region here, it's negative and we see less of the kind of seasonality, stronger second half. So that's kind of that seasonal trend we see not as explicit as we have seen before. And of course, we need to follow in terms of production levels, volumes follow that. And especially when we talk about North America here, for example, the turnaround program is definitely important to create stability in our production volumes not incurring additional costs and volatility. So that's, of course, a key part. We think there was a third part to the question -- or did that answer your question? Or was there a third element?

Akash Gupta

I was curious to know if you need to increase your rate of production or just keep at the same level or need to reduce it further?

Jonas Samuelson

No. We're running at the right rate right now to meet demand and we don't see any significant changes going forward. Maybe to provide a little bit of light on the seasonality question because I can understand if that's difficult to read. The reason why we have seasonality to a significant extent is because of discretionary purchases, such as tumble dryers in Europe when the rainy weather starts, to take one fairly significant example. And this is then an outlook, we don't know. But of course, since consumers are holding back right now, they're delaying discretionary purchases and so on, that's then our forecast that, yes, it would probably be a bit weaker. So that's what's behind the statement about the softer seasonality than we normally see.

Operator

I'm aware that I might have cut Martin Wilkie short from Citi. So I'm just going to bring Martin in again.

Martin Wilkie

Yes. Thank you for letting me rejoin. It was really just a follow-up on the normalization of the promotional activity. Obviously, as you mentioned, in North America around Black Friday, Thanksgiving and so forth, we normally have a lot of promotions in the second half as well. And obviously, it's way too early to perhaps predict what's going to happen there. But is the sense that the industry in the second half is then back to a normalized level of promotion relative to 2019 and it seems like inventory in the retail channels has begun to normalize. It's not as if you're overstocked or anything. But just to get a bit of sense on that promotion activity for the second half, is it sort of normal relative to history?

Anna Ohlsson-Leijon

I think you bought -- I mean, your assumption here, we can cover with, of course, this is very uncertain, as we say, right and of course, driven on the back of the consumer confidence. And unless something significantly changes in the macro trends, I think your assumption is fair.

Operator

And our next question comes from David MacGregor from Longbow Research.

David MacGregor

I guess a 2-part question. Number one, on the promotional levels just because it seems to be what we're focusing on here now. How much of the elevation is due to market conditions versus maybe retailers expecting to extract a little more from Electrolux just due to Electrolux-specific fulfillment challenges. And then secondly, if you could just update us on the revised thought around the North American savings. You're now looking at SEK5 billion-plus, previously SEK4 billion to SEK5 billion. Can you just talk about why you're raising that expectation is? Is it a better realization around the freight and logistics? Is it maybe an accelerated head count reduction progress there and maybe it's the acceleration of the move from Memphis. Just talk a little bit about why you're taking that guide up.

Jonas Samuelson

Yes. So let me take that one. So we don't have any fulfillment challenges in North America. Our service levels are back to where they need to be since the last 6 months or so. And the only area as we, as Anna mentioned, that we have a transition is in cooking where, of course, that is well let's say, planned for and agreed with our trade partners. So yes, I mean, the cooking transition is causing us to not be as aggressive in the cooking category in terms of participating in promotions and so on. But we don't have supply challenges per se. And that was the case a year ago. It's not the case right now. Just I want to be very, very explicit about that. And our factories are operating normally. So I would say that -- and obviously, this is more Anna's point but the promotion levels are high as mentioned. I think the lower cost environment with lower freight rates and lower steel and lower ocean logistics, of course, allowing players to get back to normal sales incentives and promotion practice. And if we remember back to 2019, levels were higher then as well, right? So normalization in this case means high and we don't see any significant change to that trend going forward.

Then on the cost savings -- yes, go ahead.

David MacGregor

No, I just -- I'm aware that people are getting back to container discounts and there's a lot of those kind of promotions going on. But I guess my point I just wanted to identify is these elevated promotional conditions you're talking about, they're not specific to Electrolux. They're...

Jonas Samuelson

No, no, no. If anything, we are lower than the market. We're not pushing this. So then on the cost savings, yes, I mean, we -- obviously, we are delivering ahead of plan here in the second quarter. This is -- we've talked about it, this is our number one focus and we are seeing good traction not just on ocean logistics because that was already known, or let's say, or predicted that those rates would come down and they are. But also in other just pure supply chain efficiency, whether it's inbound logistics and outbound logistics, manufacturing productivity, material cost savings and so on. So, it's -- and head count reduction is progressing very well according to plan. And as you -- I'm sure you're aware, there's always uncertainty around the ability to execute that in Europe, for example, how long it takes to actually get the cost reductions or the head count reductions to happen. And all of that is progressing very well. So we're not changing the program at this point. We're not necessarily expanding it either; we're just executing even better than plan.

David MacGregor

Thank you for the detail.

Operator

We're now going to move to our final question. And our final question comes from James Moore from Redburn.

James Moore

Well, 2 questions really. No warning. In the past, you've sometimes made a comment coming into the results. I wondered what your thinking was this time to not do that given your EBIT was kind of half expectations. And the second one is perhaps a bit more complicated. It's some questions on the disposal of assets. I wondered if you could help me understand the perimeter a bit. The SEK7.1 billion, my assumption is SEK5.6 billion for Zanussi and SEK1.5 billion for Olympic and [indiscernible] on whether that's the right level. And on the margin here, I wondered if you could scale that because you said Zanussi we're talking like low single digits, I say high single digit. And I think Olympic fell from 11% margin to 8% back in 2010 to '11 when you bought it. Is it broadly the same? And if it is the same, I'm guessing the overall margin is a lot for the whole perimeter of the SEK7.1 billion. So why 1.4x sales when Electrolux trades at 0.5x sales? And is it more profitable, better.

Jonas Samuelson

Yes, a lot of assumptions there in what you just said. So I'm not going to go in and dissect them. But -- so first, on the market communication, we always kind of monitor the development that we have vis-a-vis the communications we've had to the market and the outlook that we've given to the market at any given point in time. And then we assess whether there's a need to do further communication or not. We don't see that we've been in a situation like that in the second quarter. But it is something we, of course, continuously monitor. And if you go back in Q1, we had a similar amount of over-performance versus the market consensus. Clearly, it is a volatile period as we've communicated and the consensus reflects that both over and below, let's say, actual performance. So we didn't see anything that in our performance that contradicted our previous communication.

Then on the perimeter of the answers, we do provide some information on that in the press release about how much of this is sold in Europe and how much is sold in APAC and MEA. So of course, what's sold in Europe is the mass brands that we're selling. There, we are just selling the brands. We're not selling assets or products. So it's just immaterial assets around the brand. So it's not really relevant to talk about profitability for that because we're not selling the business there in Egypt and in South Africa. As mentioned, we have very good profitability and solid businesses there. But I won't go into the specific numbers.

James Moore

Maybe if I could just follow up because I now don't really understand because Olympic was like SEK1.5 billion when you bought it which I would struggle to see is now SEK7 billion or maybe [indiscernible]. But are...

Jonas Samuelson

No, no. It's not -- the Zanussi business in Europe is not sold out of Egypt. It's produced in all of our European factories. So the European part of it is not Zanussi. Yes, it is not Egypt, sorry. It is Zanussi, it's not Egypt, sorry. Okay. Thank you very much for good questions. And hopefully, we'll clarify it a bit more where we stand and how we see the business and the plans we have going forward.

In the challenging times that we are experiencing, it's vital to continue with this strategic portfolio management to be able to provide attractive and relevant consumer experience innovation under our strategic brands. Efficiency is a prerequisite and our number one priority this year remains is to deliver group-wide cost reduction to North America turnaround program and further accelerate our cost improvements.

Thank you very much and look forward to talking to you all soon again.

Operator

This concludes today's conference call. You may now disconnect.

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AB Electrolux (publ) (ELUXY) Q2 2023 Earnings Call Transcript