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Electrolux Pins 2013 Growth on Emerging Markets, US

Friday, 1 Feb 2013 | 9:14 AM ET
Electrolux Q4 Profit Misses Forecasts, Europe Still Weak
Keith McLoughlin, CEO of Electrolux, tells CNBC that Western Europe consumer demand is weak as austerity measures take hold and they expect low demand in the first half.

Home appliances maker Electrolux said booming emerging markets and an improvement in North America would help offset poor sales and price pressure in Europe in 2013, after the company posted a smaller-than-expected rise in fourth-quarter earnings.

Operating income in its Latin American business jumped 90 percent to 657 million Swedish krona ($104 million), well above a forecast for 459 million, and the company forecast further growth in the region.

"We have increased our exposure to emerging markets, which now represent more than 35 percent of sales, and we expect this figure to reach 50 percent within five years," Chief Executive Keith McLoughlin said.

Electrolux, second only to U.S. rival Whirlpool in size, said fourth-quarter operating earnings, stripping out one-off items, rose 13 percent to 1.63 billion Swedish krona ($256 million), compared with a forecast for 1.7 billion Swedish krona in a Reuters poll.

Sales for the fourth quarter came in at 29.2 billion Swedish krona ($4.63 billion), just ahead of the forecast 28.4 billion Swedish krona. The company said profitability had been held back by Europe where consumers continue to struggle with austerity measures in the aftermath of the euro zone debt crisis.

It forecast low single digit growth in the U.S., where improving consumer confidence enabled it to raise prices last year, and a low single digit demand drop in Europe.

"It reads to me like the politicians and financial experts have done good work in easing or preventing a euro zone break up or collapse. My take is that someone needs to tell the European consumer, because they're not buying," McLoughlin said.

Speaking on CNBC, McLoughlin forecast sales in Europe will be down by around two percent in the first half of 2013.

"For at least the first half, we expect that demand will be down slightly… it is hard to get visibility into the second half but we hope it starts to come back."

Cost-cutting measures such as factory closures meant Electrolux took a previously advertised charge of 1 billion Swedish krona ($158 million) in the quarter, leaving operating earnings after one-offs at 596 million Swedish krona ($95 million) versus last year's 512 million krona, also below the average forecast of 695 million krona.

"We anticipated a year ago that demand in Europe would be slow and get weaker, so we announced the need to reduce overheads and take restructuring activities to adjust our cost levels in a lower demand environment; that has happened," McLoughlin told CNBC.

McLoughlin defended his decision to "on-shore" an appliances factory to Memphis, despite an uptick in the U.S. economy. Electrolux has built a new 750,000-square-foot plant at the Tennessee site.

"As labor rates increase significantly in the emerging markets, whether Brazil, China, Thailand, or Chile… that differential to go and find lower cost labor is less than it was 3-5 years ago," McLoughlin said.

He added that given the improved outlook in the U.S., "The arithmetic has changed: it is not night and day."

The emerging markets, which are providing a buffer for Electrolux, are also helping its rival Whirlpool, which on Thursday reported a higher-than-expected quarterly profit and gave a strong 2013 outlook.

(Read More: Demand Has 'Strong Momentum' in 2013: Whirlpool CEO)

Improving US

The U.S. market looked more optimistic due to a recovery in the housing market, which benefits the company as people think about buying new appliances when they move house.

Unemployment needed to drop from the current 7.8 percent, closer to 6 percent, for a good pick up in demand, said McLoughlin, whose company's brands include those under its own name as well as Frigidaire, Zanussi and AEG.

(Read More: Stock Market Braces for a Blah Jobs Report)

Electrolux shares have risen 50 percent since the start of last year. The shares trade at 10.9 times expected 2013 earnings, lower than Whirlpool's 11.9 times, according to Thomson Reuters Starmine data.

McLoughlin said the group aimed to launch more new products - which attract higher ticket prices, even if volumes are down - and to continue cutting costs.

He told CNBC that Electrolux was launching a line of premium appliances in China.

"When we say premium, we do not mean super-premium, it is more what we would call mass premium, the trade-up market from the entry level. So it will have good, western-designed, high style, quality, innovative features, but aimed at the Chinese consumer who has already had their first, and perhaps second, appliance and is now looking to trade up."

Another leg to its growth plan is more acquisitions. McLoughlin told Reuters he thought deal sizes between $200 and $500 million would be on the menu. In 2011 the company bought Egyptian appliances maker Olympic and then Chilean appliances company CTI.

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