Dear shareholders and guests,
We introduced this meeting with a cavalcade of product sketches from an exhibition devoted to the design history of Electrolux that was shown last year at the Forum for Form here in Stockholm.
You probably noticed the anniversary logotype, which shows that Electrolux celebrates 80 years of operations in 1999. Although the first vacuum cleaner was actually produced in 1912 at the plant in Lilla Essingen, Electrolux was not formally established until 1919. Electrolux was a world-wide Group as early as the end of the 1920s. Here we see typical salesmen from that period. The picture was taken in Melbourne, Australia.
Electrolux was listed on the stock exchange in 1928, when the company had annual sales of SEK 70 million. In 1998, Group sales were about SEK 117 billion. Let us have a look at our performance in 1998.
The Group had a good year in Europe and North America. Outdoor Products enjoyed profitable weather. The bad news came from Brazil and Asia, where both demand and Group income weakened considerably.
As I said previously, sales increased to more than SEK 117 billion. Excluding capital gains of almost SEK 1 billion, operating income rose to more than SEK 6 billion, and income before taxes rose to almost SEK 5 billion.
Looking at the business areas, Household Appliances reported the largest increase in income. For the second consecutive year, we enjoyed a marked improvement for white goods in North America. Operating income for Professional Appliances more than doubled. And Outdoor Products also achieved an improvement.
Restructuring program
The restructuring program that started in June 1997 has proceeded according to plan. By the end of the first quarter this year we had implemented more than 80% of the program. As I have stated previously, it will be essentially completed by this summer.
The goals of the restructuring program are to raise productivity and reduce costs. This applies not only to manufacturing, but to all parts of the Company.
For example, the order fill rate for white goods in Europe, i.e. deliveries of the right products to the right place at the right time, has increased by more than 30% since the program began. Inventory area will be cut by a total of 25% by year-end 1999. Inventory area in the US has been reduced by 35%. Productivity within the refrigerator division has risen by about 40%.
Restructuring is a painful process, and has affected many people within Electrolux. In this connection I am impressed by how well the process has been implemented.
Exclusive of capital gains, the Group’s return on equity in 1998 was 14.8%. Operating income was 5.2% – the highest since 1989. Our goal is still that the full effect of the program will generate an operating margin of 6.5-7% next year and a return on equity of at least 15%, assum-ing that overall demand remains the same. Although we have not yet quite reached our goal for margin, I venture to say that we are well on the way to creating the attractive company that we want, focused on indoor and outdoor products for households and professional users. A company that is interesting to do business with, to be employed by and to own shares in.
Acquisitions and divestments
In 1998 we divested the last operations outside our core areas. We also sold operations that were either non-strategic or could not achieve profitability within Electrolux.
The divestment of the direct sales operation that was announced in December has not yet been completed.
In 1998 we strengthened our position in India through a new joint venture with Voltas Ltd and we are now one of the largest white-goods companies in the Indian market. Voltas produces the type of top-loaded washing machine that is sold in high volumes in Asia.
A more cohesive Group
In addition to streamlining and the restructuring program, we want to create a more cohesive Group.
Major changes are being made within white goods in Europe, where we are consolidating the national operations in a single, unified organization – Electrolux Home Products. All marketing, product development, production, logistics, and other functions are being integrated on a pan-European basis and managed by the new company. This enables resources in the local organizations to be used for building customer relations.
We are also concentrating our IT resources in a new organization with global responsibility, and are standardizing systems and applications. Last year’s investments in IT amounted to almost SEK 200 million.
In terms of the Year 2000 issue, by the end of the first quarter of 1999 we had ensured compliance for 65% of our systems for administration and production. The goal is for all systems to be compliant by the end of the first half. The cost is estimated at about SEK 320 million. We do not expect any problems with either currently or previously sold products.
We also have a new purchasing organization with global functions. Electrolux annually buys products and services for approximately SEK 55 billion. We now have a systematized purchasing process and greater coordination, which enables us to make better use of the Group’s size. We are also aiming at better integration of purchasing in product development and production.
At the end of 1998 we established a new brand policy. Acquisitions have given Electrolux a large number of brands. These are naturally assets, but they also create complexity that generates costs. We are now concentrating our resources to a limited number of large, well-defined brands, which will be positioned consistently in all the countries where they are used. They will also be linked to an Electrolux endorsement, which shows that they are part of the Group’s family of brands. This policy will be implemented within three years.
In terms of human resources, we are focusing on creating a leadership with greater diversity in terms of age, gender and nationality. Among other things, we are introducing an open internal labor market for everyone, in order to stimulate greater mobility between countries and operations.
Three new members have joined Group management – Detlef Münchow, head of Professional Appliances, Hans Stråberg, head of floor-care products and light appliances, and Cecilia Vieweg, general counsel, whome has already been presented.
Greater focus on value for shareholders
We are continuing the development of internal systems for monitoring results and profitability in order to obtain a better focus on value for shareholders.
In order to facilitate trading and distribution of Electrolux shares, the Board decided in February to obtain listings in both the euro and the krona on the Stockholm Stock Exchange. The listing will be effective as of June 7 this year. The share will thus be accessible for many investment funds in Europe, which according to their charters can invest only in the euro. This should have a long term favorable effect on the valuation of Electrolux shares.
The trading price for Electrolux B-shares rose in 1997 and 1998 by a total of 76%, as against slightly more than 50% for the general index. Between January 1 and April 26, 1999, the trading price rose by about 22%, as against 12% for the index. The market capitalization of Electrolux has increased from SEK 29 billion in 1997 to approximately SEK 60 billion. Average daily trading volume has also increased considerably.
After several years of unchanged dividend, the Board is proposing an increase for 1998.
This year we have distributed options to senior management for the first time in accordance with the new annual program that is linked to improvement in value for shareholders.
Changes in our business environment
I would also like to comment on some of the changes in our business environment.
Increasing competition means that we must continuously improve our efficiency and competitiveness.
The markets in Europe are becoming increasingly similar in terms of consumer attitudes and purchasing behavior. This trend is favorable to Electrolux, as product and services become more internationalized. The introduction of the euro means greater transparency in the prices of our products, so that we will be devoting more time to strategic marketing issues. But the overall effect of the euro for Electrolux will be favorable, on the basis of lower costs for transactions and reduced currency
exposure.
The retail sector in Europe is also undergoing a change toward larger and more international chains. This is favorable to large producers who can offer pan-European service. Electrolux has size, a broad product range and a number of strong brands, and we can therefore provide customers with differentiated product offerings. We have seen a similar change in the US, and our experience there has shown that the ability to be an attractive partner for dealers is decisive for success. That is why we are
enhancing our marketing and logistics functions, and changing the structure of our white-goods operation in Europe. We are now going to hear an American retailer’s view of trends in the industry.
The rapid growth in use of the Internet opens new opportunities. Our strategy is to develop new business solutions in cooperation with retailers. We already have considerable contact with consumers on the web, which we want to develop further. Our home page is accessible in an increasing number of languages. In the near future, user’s instructions for our products will be available on the web. In fact, this speech is being sent on the Internet right now.
New regulations and legislation regarding the environment along with greater consumer awareness require us to improve our products and processes continuously. The Electrolux strategy is to invest in products with lower environmental impact, and this has contributed to increased profitability. Within white goods in Europe, environmentally leading products accounted for about 16% of all products sold during 1998, but for about 24% of gross margin.
Electrolux has a strong product range today. But we must invest even more in product development. Innovative products have often generated higher sales and profitability, in the US and other markets.
For example, in 1996 Frigidaire launched a water-efficient front-loaded washer featuring European washing technology. It has become a best-seller, despite the fact that the US market is dominated by top-loaded machines, and it was ranked number one by a leading consumer magazine in both 1997 and 1998. We have also achieved recognition for several other innovative products in the US. In 1998, Frigidaire received the prestigious “Partners in Progress” award given by Sears in six different product categories. Sears is the largest American retailer, and gives this award to its best suppliers.
Here in Sweden we received an award for the design of a new refrigerator door handle that makes life easier for the disabled.
In 1998, AEG received a design award for a new oven with an electronic control panel that provides greater ease of use.
Here is the Zoe washing machine, part of a new series of products from Zanussi that feature a completely new design. The series also includes the OZ refrigerator, which was launched in 1998 and aroused a great deal of interest.
In Sweden we have recently launched a new series of refrigerators in which the consumer can select various colors and materials for doors, handles and fittings – an Electrolux exclusive.
We are currently about to launch the new Oxygen vacuum cleaner, which has stronger suction power and a new, more effective filter. It features a curved tube, so that the user no longer has to kneel on the floor to clean under low furniture. Oxygen is being offered today at our Annual General Meeting at a special discount for shareholders.
A new battery-driven version of the Auto Mower was launched in 1998, a member of the same product family as the Solar Mower.
And here is the TrioClip, a new tractor mower that we are launching in Europe. It has been developed jointly by Husqvarna and Frigidaire, and is a good example of how we utilize expertise in various markets to develop new and improved products.
At the beginning of this year we acquired the American company McCulloch’s European operation. McCulloch produces outdoor products for the consumer market that are a good complement to Husqvarna’s professional products.
Electrolux Wascator has continued development of its intelligent control system for professional laundry machines. Wascator has also developed a new system for laundry rooms in apartment houses. Users have a personal card for booking time in the laundry room, on the Internet if they choose. The card registers how much the user has washed, so that costs can be distributed according to individual use.
Customized “Sales Maker” refrigerated cabinets have become a success. This year we received an award for a version we developed for “Amstel Bier”.
Last year we presented a prototype of the world’s first robot vacuum cleaner for household use, which was highly publicized. We recently presented an intelligent refrigerator, a concept that we call Screenfridge. It’s based on the fact that the refrigerator door is often a communications center for the family. This refrigerator can help with quite a few different things at home.
First quarter of 1999
And now we are going to look at our performance during the first quarter of this year.
In the US, demand remained good in most areas. The market in Brazil continued to decline. The picture in Europe was more varied. The market for white goods declined somewhat in volume from last year, especially in Germany and the UK. Demand for Professional Appliances was somewhat higher, however.
Group sales increased to more than SEK 29 billion. Operating income improved to almost SEK 1.7 billion, an increase of 20%. This corresponds to an operating margin of 5.7%, as against 4.8% for the first quarter of 1998. Income before taxes rose by 30% to SEK 1.4 billion. The return on equity improved to 14.9%.
All business areas reported improved operating income, and both Household Appliances and Professional Appliances reported higher margin. The margin for Outdoor Products remained at a high level.
* * As you can see, the prospects for Electrolux are very good. We are implementing action aimed at improving our competitiveness and creating opportunities for pro-active investments in such areas as product development, marketing and customer relations.
Electrolux shall be an attractive company:
– With exciting products for both consumers and professional users
– A profitable partner for both large and small retailers as well as suppliers
– A company that is stimulating for its personnel
– And a company that creates value for shareholders.
