October 26, 2018 / 6:28 AM / 18 days ago

Sweden's Electrolux feels the squeeze as tariffs eat into margins

STOCKHOLM (Reuters) - Home appliance maker Electrolux (ELUXb.ST) forecast higher costs this year and next from rising raw material prices and tariffs on Chinese goods, sending its shares tumbling on Friday.

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

The owner of the Electrolux, Frigidaire and AEG brands estimated those costs, including a hit from currency movements, will be about 3 billion crowns in 2018, higher than an earlier expectation of about 2.7 billion.

CEO Jonas Samuelson said “almost all” of the increase was due to its sourcing of tariff-hit Chinese goods, which include electronic components, compressors, electric motors as well as finished goods such as air conditioners.

The company also forecast a cost level similar to 2018 for next year, which Credit Suisse analysts said was about 1 billion higher than their expectations.

“We have announced price increases to cover the costs,” which will take effect in January, Samuelson told analysts.

Under his leadership, Electrolux has worked to raise profitability through greater efficiency and cutting lower-margin products.

Yet tariff-related increases in the price for steel, higher costs for plastics and chemicals as well as the currency headwinds, caused the third-quarter operating margin to contract to 5.8 percent from 6.8 percent a year ago.

WORSE THAN WHIRLPOOL

Operating earnings were 1.76 billion Swedish crowns ($193 million), down from 1.98 billion a year ago but in line with the 1.75 billion seen in a Reuters poll of analysts.

However, profits were boosted by clawing back a provision of about 170 million crowns in Latin America. Credit Suisse said earnings were therefore about 10 percent below expectations.

Electrolux shares fell 7 percent by 1043 GMT.

The miss was driven by worse-than-expected results at Electrolux’s North American business, which Handelsbanken analyst Karri Rinta called unexpected given strong results from U.S. rival Whirlpool (WHR.N) on Wednesday.

“These are weaker numbers and an outlook that will make people more concerned about next year,” said Rinta, who has a “buy” rating and a 250 pence target price on Electrolux’s stock.

Electrolux and Whirlpool have both lost a third of their value this year, but the U.S. firm gained this week after it beat quarterly profit estimates, showing it had been able to counter costs arising from trade tariffs with price hikes.

“We, like Whirlpool, have announced future price increases ... We’re fully committed to offsetting these cost headwinds through pricing,” Samuelson said. “I don’t see much difference between us and our competitors.”

Price increases made earlier this year though have hurt demand, with the company cutting its sales outlook for North America and Latin America back in July.

Blaming softer sales goods manufactured by Electrolux but sold under other brand names, the company again trimmed its North American demand guidance for 2018 to flat to up 1 percent from flat to growth of 2 percent.

It also forecast market growth this year of about 1 percent in Europe rather than a previously expected 1 to 2 percent due to sagging demand in Britain as the country prepares to leave the European Union.

“Our indication is that in most markets, we don’t see any real sort of downturn in terms of consumer demand, so I think these are relatively short-term effects,” Samuelson said.

($1 = 9.1310 Swedish crowns)

Reporting by Esha Vaish and Johannes Hellstrom; editing by Niklas Pollard and Elaine Hardcastle

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