Start Time: 03:00 January 1, 0000 3:56 AM ET
AB Electrolux (publ) (OTCPK:ELUXY)
Q1 2024 Earnings Conference Call
April 26, 2024, 03:00 AM ET
Company Participants
Jonas Samuelson – President and CEO
Therese Friberg – CFO, Head of Finance, Legal and IT
Oscar Stjerngren – IR
Conference Call Participants
Johan Eliason – Kepler Cheuvreux
David Macgregor – Longbow Research
Björn Enarson – Danske
Alexander Virgo – Bank of America
Jonas Samuelson
Good morning, and a warm welcome from a snowy Stockholm to Electrolux Group’s First Quarter 2024 Results Presentation. With me this morning, I have our CFO, Therese Friberg; and Oscar Stjerngren from Investor Relations.
As you will have seen, I announced yesterday that I intend to leave as CEO by the January 1, 2025. This will be after nine years as CEO and over 16 years in the Electrolux Group management team, which has been an extremely rewarding time for me. But I think that after this long time, it’s the right time for me to hand over to a successor that will take this company forward for the coming years into the next phase.
We have a clear strategy and we are delivering on a lot of our priorities in a challenging environment. And by announcing this already now, I wanted to give the Board the chance to have ample time to find the right successor. And in the meantime, I will give everything to deliver on our targets and objectives for 2024, together with the group management team and the Board. So with that, before I continue, I’d like to mention that this session is recorded and will be available on our website as an on-demand version.
The first quarter continued, as anticipated, to be impacted by low consumer activity in many markets in combination with continued high price pressure in line with the levels that were established in the fourth quarter. This had a significant negative effect year-on-year on price and resulted in slightly lower volumes overall.
Organic sales declined by 3.7%, driven by the negative price and lower volumes that were partially offset by a positive mix. Cumulative effect of high inflation, high interest rates and geopolitical tensions continued to weigh on consumer sentiment, which remain weak in our major markets. Although consumer confidence indicators seem to have bottomed out, this is, with the exception of Latin America, not yet visible in demand on our main markets.
Weak residential construction and remodeling activity continued to lead to weaker market demand in the important built-in kitchen category in Europe. Our ability to continue generating a positive mix in this challenging market environment shows that our focus to strengthen our position in the mid and premium categories continues to be effective.
As expected, income for the group was negative in the first quarter, driven by SEK1.2 billion loss in North America, resulting mainly from heavy price pressure. Latin America delivered a record first quarter and are now above 6% EBIT on a rolling 12 basis. Europe, Asia delivered a profit despite weak demand and price pressure due to good mix and cost management. Our aggressive cost reduction actions are progressing to plan. The 0.6 billion in cost efficiencies in the quarter were mainly driven by previous actions, and the expanded cost actions are mostly impacting the second half of the year.
Therese will now walk us through the results for the quarter.
Therese Friberg
Yes. We had a negative organic contribution to earnings in the quarter, driven by a negative effect from price and mix combined of 4.7 percentage points in the quarter with negative price in our main markets as we generally saw the fourth quarter price levels continuing into this quarter and in Europe, a higher promotional activity. Mix continued to be positive, both in Europe and North America despite consumers mixing down based on our strong product offering. Volume decline had a negative impact in the quarter.
Cost was in total reduced by SEK0.5 billion with cost efficiency and innovation and marketing combined. The cost reduction program is on track, and the year-over-year increase in innovation and marketing is due to timing effects between quarters during the year. External factors was slightly positive in the first quarter, driven by positive raw material. This was offsetting currency headwinds and headwinds related to labor inflation.
As last quarter, the external factors is including both the negative effect from currency and inflation as well as the positive price effects related to Argentina and Egypt; in Egypt, which experienced a substantial devaluation in the quarter.
Jonas will now give an update on the progress of the cost reduction.
Jonas Samuelson
Our simplification and expanded cost reduction measures are progressing according to plan with an objective to deliver SEK4 billion to SEK5 billion in cost reductions through a combination of organizational simplification and focus, finalization of the Springfield ramp-up and this is meaning that all of our reengineered factories will be ramped up, and a strong focus on product cost enabled by modernization through supplier consolidation, low cost country sourcing and value engineering.
The SEK0.6 billion in cost efficiencies in Q1 were as mentioned mainly driven by carryover of previous actions. And the new simplified organization structure was implemented in Q1, leading to fewer levels and increased focus throughout the company. Implementation of the 3,800 headcount reductions are progressing well and are mainly impacting financial performance in the second half of the year.
Ramp up of our important cooking factory in Springfield, Tennessee is also progressing to plan and is anticipated to be completed by the end of the year. Intense work on component cost and sourcing is progressing, with high potential savings in the second half of the year and into the coming years driven by a high pace of activity as our main new products…
[Technical Difficulty]
Operator
Please continue to standby. Your conference will resume shortly.
Jonas Samuelson
I think we’ve dropped the call, but we’re back on now.
Operator
Loud and clear.
Therese Friberg
I’ll start with cash flow. Cash flow after investments was negative SEK2.7 billion in the quarter, reflecting what could be considered to be a normal first quarter seasonal cash outflow. This is compared to a significantly negative cash flow last year of SEK5.1 billion, where we saw a large increase in working capital as we were reducing production and purchasing in order to optimize inventory after the supply constraint situation while adjusting to a lower market demand.
And now by the end of March 2024, operating working capital amounted to SEK6.6 billion compared to the SEK10.9 billion one year ago. This corresponded to 5.2% of annualized sales compared to 8.4% last year.
And looking at our liquidity and maturity profile. From a balance sheet perspective, we have a solid liquidity of SEK31.9 billion, including revolving credit facilities at the end of March. We have a well-balanced maturity profile and we have no financial covenants. With a strong cash flow in the later half of 2023 and a better first quarter cash flow than last year, we now have a lower financial net debt than one year ago.
The focus remains to deliver on the cost reduction program in 2024 and beyond as well as divesting the previously communicated non-core assets over the coming years to maintain a solid investment grade rating.
When it comes to the divestment initiatives of our non-core assets, we are progressing with the processes at different pace, as the pace is being adopted to the respective geopolitical situation, market environment and the complexity of the transaction.
Jonas will now go into the business area performance in Q1, starting with Europe, Asia-Pacific, Middle East and Africa.
Jonas Samuelson
The combination of the business areas Europe and APAC and EMEA was successfully executed in the quarter with minimal disruption. The low market demand driven by the cumulative impact of high inflation and interest rates as well as geopolitical uncertainty continued in Q1. This mainly impacted construction and remodeling activity, which are key segments to Electrolux. It also drove continued high promotional activity in the quarter, resulting in a significant year-over-year net price impact.
In view of the consumer spending weakness, it is very encouraging that we continue to deliver positive mix contribution as we sell more of our Electrolux and AEG-branded premium products despite reduced overall market volumes and as we reduce focus on our tactical brands. This shows that we have a range of very attractive premium products that are well positioned for when kitchen remodeling activity normalizes.
EBIT was negatively impacted by price and volume, but this was mitigated by mix and solid cost productivity. Lower raw material costs offset continued high labor cost inflation. And while we were negatively impacted by the significant devaluation in Egypt, this effect was somewhat mitigated by proactive price management.
Now let’s look at the European market. Market demand in Europe declined in the quarter and was down 5% year-over-year with a decline of 7% in Western Europe and an increase of 1% in Eastern Europe. Compared to the first quarter of 2019, demand in Europe decreased by 13%, a similar decline as seen in the recent quarters compared to 2019. In Asia-Pacific, consumer demand is estimated to have been largely unchanged year-over-year. Let’s continue with business area North America.
During the quarter, market demand for core appliances in the U.S. decreased in terms units by about 3%, mainly due to low selling volumes in the beginning of the year. Intensified market pressure in the latter part of 2023 remained and was at similar levels in the first quarter as in the fourth quarter. The lower market price levels, particularly in Europe Asia, were enabled by cost discrepancies between production located in North America and production located in certain parts of Asia.
The business area reported an organic sales decline of 13%. This was driven by lower sales volumes due to the weaker demand and price pressure in the market compared to the first quarter of last year. In addition, product availability was negatively impacted by the ramp-up of the new cooking facility in Springfield. The strategy focusing on growth in targeted high-value categories resulted in a positive mix in the quarter enabled by the investments in new innovative modular product architectures.
The business area reported an operating loss of SEK1.2 billion. The main driver behind the loss was price pressure year-over-year, particularly in refrigeration, which is a key category for the business area. The negative effect from lower volumes was partially offset by a positive mix. Cost reductions under the North America turnaround program contributed positively to earnings, although incremental savings actions will benefit mainly the second half of 2024 as previously communicated.
The ramp-up of the new factory in Springfield continued to result in production inefficiencies in the quarter. The ramp-up is expected to be finalized in terms of volumes and cost efficiencies by the end of 2024. External factors had a positive impact on earnings, driven by lower raw material costs.
Now we’ll take a look at the U.S. market. The market volume decline of 3% in the first quarter was driven by low selling volumes in the beginning of the year, while demand was solid in March. Replacement demand remained solid. And while existing home sales and new construction remains subdued due to high mortgage rates, we see continued high levels of remodeling in existing homes. The strong economic activity is supportive of demand and we continue to expect relatively neutral overall market demand in the year.
Let’s now move on to Latin America. During the quarter, consumer demand for core appliances is estimated to have increased in the region driven by Brazil, where higher consumer confidence, supported growth in demand and warm weather benefited particularly refrigeration and air care products. In Argentina, consumer demand decreased significantly following the devaluation of the Argentinian peso in December, while in Chile, there was a slight increase in demand from low levels.
The business area reported an organic sales increase of 14.8%, mainly driven by significantly higher volumes in Brazil. Price increases in Argentina impacted sales positively, while promotions in other markets had a negative impact. Mix was negatively — negative due to high growth of air care. Aftermarket sales continued to develop strongly. Operating income increased significantly year-over-year, and the high organic sales growth as well as the group-wide cost reduction program contributed positively to earnings.
External factors were slightly positive, driven by lower raw material costs. Investments increased in brand building activities and consumer direct capabilities. It’s very encouraging to see that the EBIT margin is now over 6% on a rolling 12-month basis. And now let’s go over to our market outlook for 2024.
Looking at the remainder of 2024, the impact of cumulative inflation and elevated interest rate is anticipated to continue to impact demand for a while longer but with consumers shifting to lower price points in replacement purchases and postponing purchases in discretionary categories. Forced replacement is expected to continue to be the main demand driver. However, as inflationary pressure is subsiding and interest rates are expected to slowly come down, we expect demand in major markets to stabilize in the course of the year.
As interest rates come down, this is positive for remodeling and new construction, which are key drivers for appliance demand in mature markets like Europe and North America. However, there’s always a lag before this shows in demand. In Latin America, the strength of the Brazilian market seen in the latter part of 2023 continued and was supported by warm weather in the first quarter.
Consumer demand in the other Latin American markets is mixed. On the back of this, we maintain our regional outlook of relatively neutral market demand for appliances in Europe and Asia-Pacific as well as in North America in 2024 full year compared to 2023. For Latin America, we revised our outlook from neutral to neutral to positive. In line with our new organizational structure, we have combined the outlook for Europe and Asia-Pacific.
Now let’s look at our business outlook. The business outlook for full year 2024 that was provided in the fourth quarter of 2023 interim report remains unchanged. Organic contribution from volume, price and mix combined for the group is expected to be negative in 2024 full year, driven by negative price.
The new market price levels established towards the end of 2023 largely remained in the first quarter. Looking at the phasing of the impact of negative price, we expect the majority of this impact in the first half of the year. This, as we last year benefited from list price increases in that part of the year. However, we anticipate promotional intensity in North America to moderate sequentially throughout the year.
For the full year, the negative price is anticipated to be partially offset by growth in our focus categories, such as premium laundry and kitchen products under our main brands, Electrolux, AEG and Frigidaire. The recent investments in new product architectures provides us with a great platform to drive growth in these focus categories going forward, even though the challenging macro environment is a limiting factor.
As mentioned previously, we have continued to deliver positive mix even in the recent period of squeezed consumer disposable income, and we anticipate to accelerate this further as consumer sentiment recovers and new housing and renovations take a larger share of sales.
We expect external factors to be positive for the year, mainly driven by lower raw material costs. The positive effect of external factors from raw material is, however, expected to be mitigated somewhat by negative currency effects, mainly related to countries with high inflation, experiencing varying degrees of depreciation in their respective currencies. As mentioned before, external factors also comprised the net effect of currency development, including related pricing adjustments in Argentina and Egypt.
We continue to successfully execute on substantially expanded cost reduction activities that we previously outlined in response to the increasing competitive pressure and weak market. We still have much work to do to meet this year’s ambitious target of saving SEK4 billion to SEK5 billion, but the target is in sight. And as previously communicated, the positive earnings impact from the simplified structure and measures to reduce product costs is expected mainly in the second half of the year.
Investments to strengthen our competitiveness through innovation, automation and modernization continue in 2024. And total capital expenditures are estimated to be around SEK5 billion to SEK6 billion. So to sum up the quarter and the strategic drivers that we’ve been delivering on, we can say that while Q1 financial performance was clearly challenging, as previously anticipated, there are some clear points of validation of our strategic focus.
We delivered positive mix in the quarter despite the challenging market dynamics, enabled by our focus on premium brands and categories, enabled by sustainable consumer experience innovation and state-of-the-art modularized product architectures that are now fully launched in the market.
Consumers are telling us that they really appreciate our products offered by awarding a global average consumer star rating of 4.69 out of 5 in the first quarter. This is the highest growth we’ve ever seen. Our cost reduction activities, enabled by a simpler and leaner organization structure and the modernized product architectures in highly automated and digitalized factories, are continuing at a high pace. Further resource allocation to product cost optimization is enabled by the finalization of our accelerated product and manufacturing reengineering program.
And with that, please, Oscar, let’s go to questions.
Oscar Stjerngren
Thank you, Jonas and Therese. And that brings us to Q&A session. We will start the session shortly. Please limit yourself to one question. If you have any additional questions, please dive back into the queue. So Sharon, can you please facilitate the Q&A session for us?
Question-and-Answer Session
Operator
Thank you, Oscar. [Operator Instructions]. Your first question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead.
Johan Eliason
Yes. Good morning. This is Johan Eliason at Kepler Cheuvreux. I hope you can hear me well, Jonas Samuelson.
Jonas Samuelson
Yes, we can hear you. Sorry about the technical issues here. We’re back.
Johan Eliason
No worries. So Jonas, sorry to hear that you’re leaving. Would you stay your decision to leave at the end of the year coincides with you finally delivering the benefits from the automation program that you launched back in 2018 or is it more related to what looks like a very weak balance sheet?
Jonas Samuelson
No. Look, this is a purely personal decision. Nine years in the role is a long time. We’ve delivered on a lot to a point we will deliver on even more by the end of the year. And it has — my decision has nothing to do with the financial performance of the company or any other sort of milestone for the group. It’s purely sort of my own time line. However, I do fully expect us to – I mean we already have delivered on the reengineering program. I fully expect that by the end of the year, we’ll also see a lot of the productivity effects of that. And we are seeing really, really good reception of our new product platforms in innovation. As I mentioned, we have a consumer star rating at record levels at 469 which is something we’ve just never seen before. So yes, it’s a challenging macro environment, not much we can do about that. That will turn. In the meantime, we’re really delivering on our priorities. So, yes, I feel good about that, but that’s not related to the timing of my departure.
Johan Eliason
Okay. Thank you. And finally, just what’s your view on Whirlpool’s ambition to high prices by 5% in North America? It doesn’t look like the market is seeing anything of that sticking.
Jonas Samuelson
Yes. I’m obviously not able to comment on pricing particularly from competition, but my point would be more around if you look at the efficiency of promotional periods right now in terms of picking up consumer demand, that efficiency is clearly declining. Having said that, I think the new, a general price levels that have been established in North America are not going to materially change in the near term. However, the depth and length of promotional periods, I think there is a — we certainly see an opportunity and anticipate that will moderate a bit during the course of the year which is a slightly different thing than raising prices if you know what I mean. So we don’t think the pricing will materially go up, but yes promotional period, the extent and depth of promotional periods that, we think, is an opportunity to moderate a bit.
Johan Eliason
Okay. Thank you very much.
Jonas Samuelson
Thank you.
Operator
Thank you. We will now go to the next question. And your next question comes from the line of David Macgregor from Longbow Research. Please go ahead.
David Macgregor
Yes sir. Good morning everyone. Thanks for taking my question. I guess just given the first quarter cash flow was dominated by the seasonal working capital investments, how are you thinking about the quarterly cadence of working capital and the free cash flow over the balance of the year?
Therese Friberg
Yes. Usually, we build some inventory in the first half of the year yes to — because there’s usually kind of the summer season with some closing of factories than during, let’s say, July and August. So that’s why we prepare and build some inventory in the beginning of the year for the high season then starting from September onwards and then usually our strongest cash flow in the last quarter of the year.
David Macgregor
Yes, sure. I’m aware of that. I guess I’m just trying to get a sense of numbers here in terms of what you think is achievable?
Therese Friberg
Yes, we wouldn’t go into numbers. I think – but of course, if we look at the last number of years from the COVID period with — from 2020 onwards of course we have had very, very large swings. So my recommendation would be more to go back to the periods prior to that so to periods like ’17, ’18, ’19, that would represent a more normal seasonality in terms of cash flow.
David Macgregor
If I can just squeeze in one more. The Whirlpool announcement in North America is not an increase in MSRPs, but it’s rather a 5% increase in MAP pricing which is to your point, Jonas, just promotions getting less deep or less acute. And I’m just wondering if you see that — if that’s really kind of what you’re talking about, would you make the comment about seeing declining depth and shorter life of the promotional periods?
Jonas Samuelson
No, that’s exactly what we see going forward as well, yes.
David Macgregor
Thank you.
Jonas Samuelson
Thanks.
Operator
Thank you. We will now go to the next question. And your next question comes from the line of Björn Enarson from Danske. Please go ahead.
Björn Enarson
On price again in North America, again, I guess, we’re talking about what we have seen for some time now a little bit of a major shift in pricing towards the lower levels. If these prices, as you say, remains — give or take your promotional activity, but just looking at price, is that okay with the — for you with the planned production cost or improved efficiency following the investments in the region or are you thinking considering that you need to do more to reach the targeted profitability for the region or for the group?
Jonas Samuelson
No, I think the pricing reality is where it is and that’s what our plans are based on. And a combination of cost – product cost productivity, manufacturing ramp-up and increased productivity there and driving mix. So selling more of our high-value platforms that’s kind of what our plan is based on going forward. And that will be sufficient indeed, yes.
Björn Enarson
And have those plans — have targets been revised or plans or what you do being revised as pricing, I would assume are much worse than you initially at least were planning for or is this more like an ongoing reality?
Jonas Samuelson
Yes, if you go back to 1.5 years ago it is certainly it’s worse than what we planned for back then. But if you look at this program that we’re driving now the simplify program where we again leaning out our organization and really focusing a lot of our efforts on product cost out and productivity, that’s in line with this current price environment that we see.
Björn Enarson
So no — I mean maybe you can’t answer that right now, but no — as you feel no change to long-term ambitions on this?
Jonas Samuelson
No, for sure not.
Björn Enarson
Thank you.
Jonas Samuelson
Thank you.
Operator
Thank you. We will now go to a next question. And your next question comes from the line of Alexander Virgo from Bank of America. Please go ahead.
Alexander Virgo
Yes, good morning, Jonas. Thanks for taking the questions. I wondered if you could just clarify something for me. I think you made a comment that you had 500 million of savings in Q1 in — sorry, I forget whether that’s group or Europe, of which 600 million was cost efficiency. So I just wondered if you can explain why — see, I was great [ph], wasn’t it? I just wanted if you could explain why there’s a negative number in there and what the moving parts are. That’s the first question. And then the second question was, I wondered if you could give us a sense — appreciate it’s always very difficult, but give us a sense of how much your North American decline is. I don’t want to say self-inflicted because I appreciate what you’re doing, but as a function of the ramp-up and your inability to meet demand, is it that the 10% difference between the market declining 3% and you’re declining 13% or is there a little bit more in that? Thanks.
Therese Friberg
Yes, I can start with the first question. And as you rightfully say, the pure kind of cost reduction is then delivering around SEK 600 million in the quarter. And then we have an increase year-over-year in the quarter related to marketing and innovation. And this is purely, I would say, a timing effect throughout how you spend marketing and innovation costs over the course of the year compared then to last year. So this is more a temporary effect that we see in the first quarter.
Alex Virgo
Okay. Thank you.
Jonas Samuelson
And then in terms of the sales development in North America in Q1, we — it’s a combination of the market being down and very significant price pressure and that we didn’t fully participate in some of the very low end, entry-level kind of product price points. That meant that we lost a bit of share in some entry-level products, while we actually gained share in some of the higher-value categories.
Alex Virgo
Okay. And you’d expect that to continue through the year as you push the ramp-up on product — producing new products?
Jonas Samuelson
Yes. So as our cost efficiency measures kick in, we will be able to be more competitive also in the lower price points. So we expect to gain competitiveness as the course of the year progresses.
Alex Virgo
Okay. Thank you.
Jonas Samuelson
Thank you.
Operator
Thank you. We will now go to the next question. And your next question comes from the line of Timothy Lee from Barclays. Please go ahead.
Timothy Lee
Hi, thanks for taking my question. Just a little bit more follow-up on the price action from your competitors. So I know you are not going to comment on pricing, but are you going to implement similar price hike on your end? That’s my first question. And on the — what they’re complicating regarding the price increase is also related to the expectation of inflationary. I mean there’s some cost inflation from their end. Are you also seeing some increase in terms of cost? As I look at your outlook statement, is still maintaining your expectation that the external factor will be a positive contribution for the year?
Jonas Samuelson
Right. So again, I can’t comment on other people’s pricing actions. What we are indicating and what we’re saying is that it’s unlikely that we will see significant list price increases on our end in North America in the current environment. However, we do anticipate to be able to run shorter and less deep promotional activity, and of course, a very large portion of our units sold, are sold on some type of promotion. So as that intensity reduces, the net price impact, let’s say, after all promotions are counted, can sequentially — or will hopefully sequentially be contributing.
So that’s what we’re targeting. Of course, it’s a very volatile and very dynamic market. So this is not something that we can take to the bank yet, but that’s certainly the opportunity that we see.
And the point is — to your point about inflationary pressure, it’s not that we see incremental inflation from what we saw, but the reality is that we’ve seen 20% plus of inflation over the last three years cumulatively. And in the current environment, we’ve struggled to compensate for that through price. And hence, we’re working very intensively to take out costs, but we’re also trying to recover some price efficiency in the market in combination with driving favorable mix.
Timothy Lee
Understood. Thanks for presentation. Thank you.
Jonas Samuelson
Thank you.
Operator
Thank you. We will now go to the next question. And your next question comes from the line of Tranjot Singh from JPMorgan. Please go ahead.
Unidentified Analyst
[Indiscernible] on behalf of Akash Gupta. Can you hear me?
Jonas Samuelson
Yes, we can hear you. Hello?
Unidentified Analyst
Yes. So my question is, your leverage ratio is still very high, and the timing of deleveraging through divestments is somewhat uncertain. Can you please tell if you have been given any target corridor for leverage ratio from 5.2x at the end of Q1 to maintain your investment-grade rating? Thank you.
Jonas Samuelson
Yes. I mean clearly, our ambition is to reduce our leverage ratio as the year progresses and into the coming years, mainly through operational improvements and cash flow. But of course, the divestments that we’re mainly doing out of a drive to simplify and focus our business on the core, that will help. We’re not rushing those divestments because, yes, clearly, there are some geopolitical issues and macro concerns that could potentially impact the valuation. We’re now — we don’t want to sell these assets at below fair value. So that’s what we’re managing through right now. But we don’t have any immediate urgency in terms of our funding situation. We have, as Therese mentioned, very ample liquidity. We have secured funding. We have limited maturities in the coming two years. So we have — not plenty. We have time to work on improving our leverage, and we’re doing that very intensively.
Unidentified Analyst
Thank you.
Jonas Samuelson
Thank you.
Operator
Thank you. We will now go to the next question. And your next question comes from the line of Mads Lindegaard Rosendal from Danske Bank. Please go ahead.
Mads Lindegaard Rosendal
Hi, thanks for taking my question. It’s actually also related to your leverage ratio, and you are now down to a BBB flat rating from having been an A minus rated company. It’s your policy to have an investment grade with a safe margin, but could you, given the current environment, accept just having an investment-grade rating, i.e., potentially going to BBB minus rather than doing something drastic like a rights issue or something like that?
Jonas Samuelson
Thanks. Yes, I mean certainly, our rating and our investment grade rating are important for us. But for sure, that would not be any trigger for capital raise. As I mentioned before, we have very ample liquidity. We have good control of our cash flow. We don’t have any covenants. And we have secured funding. So there’s really no reason why we would need to seek additional equity funding.
Mads Lindegaard Rosendal
Okay. Thank you.
Jonas Samuelson
Thank you.
Operator
Thank you. We will now go to the next question. And your next question comes from the line of Karri Rinta from Handelsbanken. Please go ahead.
Karri Rinta
Yes. Thank you for taking my question. In the last two quarters, you have given some directional guidance for your earnings for the quarter ahead. Now you don’t. You say that the trends that we have seen are continuing and the cost savings are mainly coming in the second half. So should I read that as you have established, you have stabilized your earnings at this level that we have now seen in the fourth and first quarters? Or should I read it as you are comfortable with what you can see in terms of consensus expectation for the second quarter? Thank you.
Jonas Samuelson
Yes. Yes, we don’t give guidance for quarters, as you know, and I’m not going to comment on the consensus either. But clearly, we are on a sequentially favorable development trajectory actually in all of our business areas in Q1. And we intend to continue to push throughout the year to deliver on our cost or mix and control pricing in a continued very challenging environment. But again, we stick with our full year guidance.
Karri Rinta
Okay, thank you. And my second first question is related to the promotional environment. We have discussed the U.S., but that Europe and Latin America — or maybe starting with Europe. So who is driving the promotional intensity that you saw in the first quarter? And Latin America, how does that market work in terms of promotions? And then you have talked about the Asian competitors having an unusually large cost advantage. What has happened on that front in the recent months? Thanks.
Jonas Samuelson
Yes. Thank you. I think there’s no material change on the — in terms of the cost, sort of the externally driven cost environment. Of course, we are driving cost efficiencies. And hence, we’re gradually establishing a better competitive position really globally. If you look at Europe specifically, we have had 1.5 years or so of quite weak markets. We have obviously a very competitive landscape. And it’s not unexpected that we see a higher promotional intensity for a period of time here. I don’t think there is the same type of structural shift as we’ve seen in North America. Europe is much more fragmented. We have a much stronger premium market position and focused on kitchen retail, which is a tougher set of customers to serve. So hence, we see — while we do see promotional pressure in Europe, it’s less intense than in North America. Now as we always have said, the U.S. market is more competitive, but it’s also a richer market than Europe. It’s a market where consumers are buying a rich mix of products. And hence, we have invested in more premium platforms and are able to drive a favorable mix, compensating for this more competitive price environment in North America. So if we then look at Latin America, to your point, it’s quite different in different parts of the region, but our biggest part of the region is Brazil, over 70% of our sales. And there, we have a very strong market position where we have good coverage of all the segments. So despite the fact that the market is mixing down and getting more promotional, we have very strong offers there as well and play very competitively.
So while the market is somewhat mixing down, it’s actually — well, I mean, as we mentioned, relatively strong in terms of demand, and we’re able to serve that competitively. So it’s a bit of a different dynamic there.
Karri Rinta
All right. Thank you very much
Jonas Samuelson
Thank you.
Operator
Thank you. [Operator Instructions]. We will now take your next question. And your next question comes from the line of Johan Eliason from Kepler Cheuvreux. Please go ahead.
Johan Eliason
Yes. Thanks for taking my follow up. I was just wondering here about the market. Could you mention a little bit how Australia is faring as well in terms of price and demand going forward? And then you mentioned that the ambitions for North America remains to be achieving the company target of 6% margin over time. You have halved your market shares. You don’t have the strong premium brands as you have in Europe where you’ve done a very good job on improving the margin structure over the years. Do you think the actions you have taken should be enough to bring North America towards the target? Or do we have to have a super booming market again? Or what’s the situation over there?