April 27, 2018 / 6:23 AM / a month ago

Rising raw material costs throw Sweden's Electrolux into a spin

STOCKHOLM (Reuters) - U.S. tariffs helped raise raw material costs at Electrolux (ELUXb.ST), denting first-quarter earnings and sending shares in Europe’s largest home appliances maker down 11 percent on Friday.

The Electrolux logo is seen during the IFA Electronics show in Berlin, Germany September 4, 2014. REUTERS/Hannibal Hanschke/File Photo

The Swedish maker of brands such as Electrolux, Frigidaire, AEG and Anova has raised its profitability - a key ambition for chief executive Jonas Samuelson - through greater efficiency and cutting lower-margin products.

But it has faced mounting costs, mainly for steel, which risk undoing its improvement in margins and which took a toll on U.S. rival Whirlpool Corp (WHR.N) this week.

“Prices have come up in the market since our last outlook, partly due to the announcement of trade barriers for steel in the U.S., but also in other commodities like oil,” Samuelson said a conference call with investors and analysts.

“This is affecting our cost for carbon steel, plastics, chemicals and transportation.”

Electrolux, which also competes with Asian firms such as LG Electronics (066570.KS) and Haier Group, said it expected a hit of 1.6 billion to 1.8 billion crowns this year from higher raw materials costs, up from a previous forecast of 1.2 billion.

It posted adjusted operating earnings of 1.36 billion crowns ($157 million), down from 1.44 billion and short of the 1.48 billion expected by analysts in a Reuters poll.

BIG QUESTION

Electrolux has been building a reputation for being able to offset cost increases during Samuelson’s two years in charge, but analysts questioned whether it could do the same in 2018 given the rise in costs.

“There is a big question following these results,” Handelsbanken Capital Markets analyst Karri Rinta said.

    The United States set duties of 25 percent on steel in March and while it provided temporary exemptions for most allies, U.S. steel prices have risen this year, becoming a headache for white goods makers for which it is a key raw material.

    Prices for the steel used to make white goods have jumped, with U.S. NYMEX hot rolled coil futures HRCc1 up by roughly a third this year.

    Samuelson said that Electrolux, which sources it steel in the United States, still expected to be able to make up for the rise in raw material costs this year.

    “For the full year 2018 we continue to plan to offset these raw material headwinds with our cost efficiency measures in combination with price increases,” he said.

    Samuelson told Reuters he saw further potential for savings in production which has increasingly harnessed auto industry techniques such as modularization.

    “There appears to be some kind of worry that these cost efficiencies have an end point. But they don’t,” he said.

    Besides seeking to raise prices for its own products, which include fridges, freezer and washing machines, the company has taken steps to shield its business in the face of cost rise.

    Last month, Electrolux said it was putting a $250 million investment to expand and modernise its Springfield, Tennessee plant on hold due to rising steel prices.

    The first-quarter results and analysts’ estimates excluded a charge related to consolidation of freezer production to its plant in Anderson, South Carolina.

    ($1 = 8.6612 Swedish crowns)

    Reporting by Niklas Pollard and Johannes Hellstrom; additional reporting by Maytaal Angel in London; editing by Alexander Smith and Jason Neely

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