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Unformatted text preview: Shape living for the better Electrolux Annual Report 2017 Shape living for the better Our future is determined by the way we all live our lives. That’s why we strive to improve everyday life for millions of people and the world around us. It is embodied in everything we do. In every idea, every product and every human interaction. — We believe that outstanding taste experiences should be easy for everyone. That there is always a better way to care for our clothes to make them look and feel new longer. That the home should be a place for wellbeing, a place to care for ourselves and our loved ones. To succeed, we continuously rethink and improve our ways of working – internally, and together with our customers and partners. By creating desirable solutions and great experiences that enrich peoples’ daily lives and the health of our planet, we want to be a driving force in defining enjoyable and sustainable living. This is us – at Electrolux we shape living for the better. we reinvent taste, care and wellbeing experiences for more enjoyable and sustainable living around the world taste by making it possible to make great tasting food through our professional expertise care by making it possible to care for your clothes to keep them new for longer wellbeing by making it possible to achieve healthy wellbeing in your home our offering Electrolux is a global leader in household appliances and appliances for professional use. We offer thoughtfully designed, innovative and sustainable solutions, under esteemed brands including Electrolux, AEG, Zanussi and Frigidaire. 122 60 150 BILLION SEK IN SALES MILLION PRODUCTS SOLD ANNUALLY SALES IN MARKETS 56,000 EMPLOYEES contents PURPOSE Taste, Care and Wellbeing offering  3 Electrolux 2017 6 CEO statement 8 Global trends 10 Electrolux purpose 12 Targets14 STRATEGY Electrolux business model Best-in-class consumer experiences Operational excellence Talent and teamship The path forward 18 20 25 29 32 MARKETS AND BUSINESS AREAS The appliance market Electrolux market position Major Appliances EMEA Major Appliances North America Major Appliances Latin America Major Appliances Asia/Pacific Home Care & SDA Professional Products 36 38 40 42 44 46 48 50 THE ELECTROLUX SHARE AND RISK MANAGEMENT The Electrolux share  Electrolux and the capital markets Risk management 54 58 60 REPORTING Report by the Board of Directors  69 Notes to the financial statements 95 Proposed distribution of earnings 129 Auditors’ report 130 Eleven-year review 134 Operations by business area yearly 136 Quarterly information 137 Sustainability reporting 138 Corporate governance report 148 Annual General Meeting 165 History166 Events and reports 168 The Annual Report for AB Electrolux (publ), 556009-4178, consists of the Report by the Board of Directors and Notes to the financial statements, pages 69—133. The Annual Report is published in ­Swedish and English. Sustainability priorities are integrated through­out the Annual Report. In the Sustainability reporting section on pages 138—146, the Electrolux sustainability framework and execution are described more in detail. The full Electrolux Sustainability Report is published in an online version at: 6 Purpose Electrolux 2017 Key highlights • Operating income increased by 18%. • Operating margin was 6.1% (5.2). • Earnings improved across all business areas. Four business areas achieved an operating margin above 6%. Solid operating cash flow after investments. Five acquisitions completed. • • • 2017 in brief Net sales increased by 0.8%, organic growth was slightly down while acquisitions contributed to sales. Organic growth across most regions while active product portfolio management to exit from unprofitable product categories as well as lower volumes under private labels in N ­ orth America impacted sales negatively. margin improvement 123,511 109,151 122,060 6.1 5.2 Operating margin improved to 6.1%. Four of six business areas reached an operating margin above 6%. Increased efficiency and product-­mix improvement contributed to the positive earnings trend. Operating cash flow after investments amounted to SEK 6.9bn. The main contributor to this solid cash flow is the earnings development. Acquisitions of SEK 3.4bn impacted cash flow negatively. 121,093 112,143 3.2 2.2 1.4 13 14 15 16 17 Net sales, SEKm Operating margin, % ELECTROLUX ANNUAL REPORT 2017 Purpose  7 key figures OPERATING INCOME business areas 7,407 OPERATING MARGIN SEKm percent OPERATING CASH FLOW1) 6,877 CAPITAL TURNOVER-RATE SEKm times 6.1  ajor Appliances M Europe, Middle East and Africa, 32% Major Appliances North America, 33% Major Appliances Latin America, 14% Major Appliances Asia/Pacific, 8% Home Care & SDA, 6.5% Professional Products, 6.5% SHARE OF GROUP SALES 5.9 sales by region Core Markets Growth markets DIVIDEND2) 8.30 35% 30% 6% 9% SEK per share 15% 5% 1) After investments 2) Proposed by the Board Product offering for best-in-class consumer experiences Taste Care Wellbeing By making it possible to make great tasting food. By making it possible to care for your clothes so they stay new for longer. By making it possible to achieve healthy wellbeing in your home. Electrolux sells cookers, hobs, ovens, hoods, microwave ovens, refrigerators, freezers and dishwashers for households and professional kitchens throughout the world. Electrolux is a leader in kitchen appliances and new functionalities are continuously being developed. Washing machines and tumble dryers are the core of the Electrolux product offering for washing and garment care. Demand is driven by innovations that promote user-friendliness and resource efficiency. Electrolux vacuum cleaners, airconditioning equipment, water heaters, heat pumps, small domestic appliances, and accessories are sold to consumers worldwide. Electrolux has a strong, global distribution network and an attractive product offering, including service. 64% share of Group sales of which 4% professional products ELECTROLUX ANNUAL REPORT 2017 19% share of Group sales of which 2% professional products 17% share of Group sales 8 Purpose Operating margin target achieved for 2017 Operating margin 6.1% Electrolux made significant progress in 2017. I am very pleased that we took an important step on our journey toward profitable growth by reaching an operating margin of 6.1%, an improvement of close to 20%. This was achieved through our consistent focus on driving sustainable profitability, resulting in improved earnings across all business areas. During the year, a revised company purpose was launched – Shape living for the better – that sets the direction for Electrolux for years to come. ELECTROLUX ANNUAL REPORT 2017 Purpose  9 In 2017, we reached our operating margin target of at least 6%, for the first time since 2010. This was an important milestone. Our focus firmly remained on achieving sustainable profitability with key areas being product portfolio management and cost efficiency. Our product portfolio management has focused on our most consumer-relevant and profitable product categories while exiting unprofitable product categories and markets. Hence, the organic sales for the Group declined slightly as a reflection of that. With operating margin now restored to our target level, our focus is shifting towards profitable growth. Our constant work to increase cost efficiency throughout the Group made good progress and our cost structure improved significantly. We also managed to improve product quality to a new record level. A purpose-driven company During the year we also updated our ­strategic framework, connecting our ­business model and path toward profitable growth to a clear and revised company purpose – Shape living for the better. We will achieve this by reinventing taste, care and wellbeing experiences for more enjoyable and sustainable l­iving around the world. I feel very strongly about the importance of clarifying our company purpose as it sets the direction for Electrolux for years to come, and in 2017, a large number of new innovative products were launched to create best-in-class consumer experiences. All business areas improved results We experienced an overall positive demand trend across most of our markets, and the market volumes in Latin America recovered after several years of decline. In EMEA, the favorable earnings trend continued and I am very pleased that our strong focus on new innovative products is paying off and that our premium brands gained market share. We continued to successfully launch our new product ranges under the AEG brand, including the new AEG connected washing machines. Operating income improved and the margin increased to 7.2%. During the year, we completed the acquisition of Kwikot Group, a water heater company in South Africa and Best, a European manufacturer of innovative kitchen hoods. These acquisitions enable us to further drive long-term profitable growth. In North America our operating margin improved to a record high 6.8%, thanks to product portfolio management and increased cost efficiencies. We executed the strategically important launch of the ELECTROLUX ANNUAL REPORT 2017 new Frigidaire product range, which received very positive feedback from retail and consumers. The Frigidaire ­Gallery F ­ reestanding Induction Range is the first affordable induction range in the U.S. market. Our operations in Latin America accomplished a strong turnaround with an organic sales growth of 8%, following a decline of 11% in 2016. A favorable market trend in major markets such as Brazil and Argentina contributed to the positive development as well as launches of new ­consumer-­relevant products in several markets, such as high-capacity washing machines and microwave ovens with new technologies. Operating income and margin also improved significantly. In 2017, we acquired the Continental brand, an acquisition that will enable us to further expand our market coverage in the region. Asia Pacific delivered a high margin of 7.5%, coupled with strong organic growth of 6%. Sales volumes grew across most product categories. I am pleased to see that we are gaining market shares as a result of our efforts to develop innovative products tailored to the consumers’ needs in a highly competitive region. In Home Care & SDA, operating income and margin improved significantly to 5.5%. Organic sales, however, declined by 4% as our strategy to exit unprofitable product categories had a short-term negative impact on sales. We launched the robotic vacuum cleaner Electrolux PURE i9, which has a smart navigation system that can detect obstacles and manoeuvre around them. We also completed the acquisition of Anova in the U.S., the provider of a connected sous-vide device that enables restaurantquality cooking at home. Finally, I would like to highlight the performance of Professional Products which continued its profitable growth journey and yet again delivered a strong, solid operating margin of 13.7%. For the first time ever, operating income exceeded SEK 1 billion. We continue to grow this profitable business with targeted investments in new products and channels, and in 2017, we acquired GrindmasterCecilware, a manufacturer of beverage products. This broadens our offering and increases access to the important U.S. market. On the path to profitable growth Developments in 2017 have strengthened my conviction that Electrolux is well positioned for further progress in 2018 and beyond, as several important prerequisites for growth are now in place. The digital transformation is changing not only Electrolux, but the whole appliance industry, as well as consumer behavior. This offers both opportunities and challenges. We will continue to accelerate the use of digital solutions to streamline operations and increase interaction with consumers. I expect the demand growth across most markets to continue in 2018. We aim to make the most of this market growth as our innovation for Best-in-class consumer experiences is bearing fruit with new improved products that are being very well received by the markets. Sustainability leadership also continues to be crucial to delivering Best-inclass consumer experiences. For the past 16 years , Electrolux has been a signatory of the UN Global Compact, and we are recognized as industry leader in the prestigious Dow Jones Sustainability Index. We intend to improve further and to make smarter, more resource-efficient solutions available for everyone. Continuous improvements are at the core of our mindset at Electrolux, and are absolutely essential to remain competitive over time. We will continue our work to improve cost structures, methods, processes and skills. Investments in innovation We are also enhancing our ability to drive growth through investments in innovation for new competitive products, as comprehensive re-engineering programs have been initiated at our refrigerator plant in Anderson and cooking plant in Springfield in the U.S. as well as our refrigerator plant in Curitiba in Brazil. In 2018, we are stepping up investments to SEK 6 billion to support further profitable growth. The expertise and passion of our employees will, of course, continue to be crucial to our success, and I would like to thank all our employees and stakeholders for their important contributions throughout the year. The Board’s proposal to increase the dividend for 2017 to SEK 8.30 per share reflects our focus on shareholder value, and I firmly believe that we are well positioned to continue to deliver further value. Stockholm, February 2018 Jonas Samuelson President and CEO 10 Purpose Global trends that affect the industry Consumer power The global market for household appliances is being transformed by five major trends: increased consumer power, digitalization, sustainability, consolidation and a growing middle class. While these changes are placing demands on investments and economies of scale, they are also presenting major opportunities. Growing global middle class Trends in our industry Consolidation Digitalization Sustainability ELECTROLUX ANNUAL REPORT 2017 Purpose  11 Changing dynamics of the industry The increasing pace of change in the global market stems from a number of trends that influence volumes and the types of products that are in demand, but also how these products are produced, marketed, and sold. Consumer power is growing as increasingly well-informed customers easily can access information about prices, offers and product characteristics. This means that Electrolux, as well as other brands, need to offer transparent information about how the products and offers are differentiated to meet customer needs. Digitalization plays an important role in increasing consumer power. Mobile solutions and access to the Internet place demands on Electrolux and increase THE PACE OF DIGITAL GROWTH CONTINUES TO ACCELERATE Worldwide Digital Indicators +19% 3.5 4.1 2017 2021 Source: Emarketer and Electrolux estimates. Consolidation in the sector is, to a large extent, driven by the above trends as they result in challenges that require major investments and economies of scale. Manufacturers and retailers of household appliances are becoming fewer, larger and more international. The changing dynamics of the industry cause the Group’s traditional competitors to expand digitalization and smart home solutions. It also increases competition by bringing new competitors such as major digital actors and new startups that use technology to disrupt the value chain. Furthermore, the major changes in consumer behavior, and the accompanying increase in online sales, cause significant disruption in traditional retail. opportunities to interact with consumers in new ways. Digitalization also provides substantial opportunities to develop increasingly advanced products, such as connected products, as well as making the Group’s operations more efficient. Sustainability is becoming more important for customers and consumers as well as authorities, who demand that manufacturers develop and offer sustainable products. This trend has been apparent for a number of years but development is now accelerating at varying paces in the different regions. A global middle class is growing as a result of strong economic growth in emerging economies. This trend has been visible for many years and will continue. +25% 2.5 +29% 3.1 2.4 2017 2021 +112% 4.9 3.1 2.3 2017 2021 2017 2021 internet users social media users smartphone users b2c sales on-line world wide, usd + 600 million + 600 million + 700 million + 2.6 trillion The global market The global market for household appliances can be split into two parts. In the mature markets (Western Europe, North America, Japan and Australia/New Zealand), population growth is low and sales are dominated by replacement products. However, growth markets (Africa, the Middle East, Eastern Europe, Latin America, Southeast Asia and China) are characterized by rapidly rising living standards and a large number of new households being able to invest in appliances and other household products. During 2017, demand for appliances increased in both growth markets and mature markets. Demand for appliances improved across most markets during the year such as in Latin America, Eastern Europe, North America, Australia and Southeast Asia. In 2017, the demand in growth markets represented about 65% of the total market volume compared with 50% in the year 2000. Growth markets accounted for about 30% of Electrolux sales for the year, and the objective is to increase this share. ELECTROLUX ANNUAL REPORT 2017 360 4,100 450 1,500 160 650 GLOBAL POPULATION Million 13% of population in Electrolux core markets Western Europe, North America, Australia, New Zealand, Japan 87% of population in Electrolux growth markets Africa, Middle East, Eastern Europe, Latin America, Southeast Asia, China 12 Purpose Purpose-driven company PURPOSE Shape living for the better MISSION We reinvent taste, care and wellbeing experiences for more enjoyable and sustainable living around the world STRATEGIC DRIVERS Act sustainably Create better experiences Always improve Purpose Shape living for the better Our future is determined by the way we all live our lives. That’s why we strive to improve everyday life for millions of people and the world around us. This is embodied in everything we do. In every idea, every product and every human interaction. We believe that outstanding taste experiences should be easy for everyone. That there is always a better way to care for our clothes to make them look and feel new longer. That the home should be a place for wellbeing, a place to care for ourselves and our loved ones. To succeed, we continuously rethink and improve our ways of working – inter- nally, and together with our customers and partners. By creating desirable solutions and great experiences that enrich people’s daily lives and the health of our planet, we want to be a driving force in defining enjoyable and sustainable living. This is us – at Electrolux we shape living for the better. ELECTROLUX ANNUAL REPORT 2017 Purpose  13 Mission We reinvent taste, care and wellbeing experiences for more enjoyable and sustainable living around the world. To create these experiences we focus our innovation on three areas: We help people make great tasting, healthy food for friends and family. An oven that cooks evenly or a hob with ­precise temperature controls and high speed, can enable consumers and give them the confidence and skills to do well. We help consumers care for their clothes by making them stay new and great looking for longer. Electrolux ­ elivers solutions that allow consumers to d put their favorite clothes into the washing machine and be completely confident in the result. People are concerned about the air that they breathe and their environment. We call that wellbeing. Electrolux helps consumers get a better home environment thr...
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