Welcome, and thank you for joining the presentation and discussion of Electrolux third quarter results. With me today, I have our new CFO, Therese Friberg, and our Head of IR, Sophie Arnius. Before we start the presentation, I would like to mention that this session is recorded and will be available on our website as an on-demand version. I am extremely pleased and proud to welcome Therese as our new Group CFO. Therese was previously our CFO for Major Appliances EMEA and has been with the Group for a large number of years. I am really pleased to have her in her new role. Anna, who was previously CFO, has been appointed new Head of Major Appliances Europe. Dan Arler, who was previously Head of Major Appliances EMEA, is now Head of our new region, Major Appliances Asia-Pacific, Middle East and Africa.
This is a new setup that really helps us focus on growing in our emerging markets. These changes are effective from October 1, 2018, while the move of the EMEA region will be effective January 1, 2019. We are really pleased to be able to announce these great changes. Now let us turn to the presentation with our business overview, including the quarterly highlights. The performance in the quarter was in line with our plans and expectations, despite significantly increased costs and FX inflation across our business areas. We have been determined to implement cost-based price increases and continue to execute on our profitable growth strategy. Our reported sales were up 4.8% to SEK 30.4 billion. Price increases and improved product mix resulted in an organic growth of 0.8%. Looking at the business areas, EMEA, Asia Pacific, and Professional Products continue to deliver profitable growth.
In North America and Latin America, price increases improved the organic development, while volumes were negatively impacted by higher industry prices. Volumes in North America also continued to be impacted by the decline in private labels. Operating income came in at SEK 1.8 billion with a healthy margin of 5.8%. This was against the comparison with significant cost efficiencies in the same period last year. In light of the tough comparison, I am pleased that our cost-based price implementation is showing traction, and that all business areas had positive earnings contributions from price and mix. However, this could not yet fully compensate for the increased cost of raw materials, accelerating currency headwinds, other inflationary pressures such as logistics, and lower volumes. Before going into the sector business area review, I want to highlight some really significant innovations that we are launching in the quarter.
First of all, with the Electrolux Pure F9 cordless vacuum cleaner, we are creating a completely new segment in vacuum cleaner with the first product that completely replaces the corded version with great ergonomy and fantastic suction results. Secondly, many of you are aware that induction hobs has been a fantastic profitable growth area for us, where we have gained significant market shares in recent years. At the recent IFA Fair in Berlin, we introduced a new range of assisted cooking hobs that helps consumers achieve much better results by helping to control the cooking process in a more precise way. The most advanced of these hobs include a wireless sense probe that perfectly controls the temperature of the dish that you are cooking, making it much easier to get perfect results.
Thirdly, we launched a new generation of professional washers and dryers, the Line 6000, which is further improving our lead when it comes to the best-in-class professional washing machines in terms of ergonomy, in terms of energy consumption, and in terms of overall cost of ownership. These three, I think, are fantastic examples of innovation for profitable growth that we continuously make. Going into Major Appliances EMEA, we continued to show strong sales performance in the third quarter with an organic growth of 6.2%. Overall demand in the European markets increased during the period, driven primarily by strong growth in Eastern Europe. We continued to gain market share in our premium brands as well as in laundry and built-in products. This resulted in higher sales volumes and continued product and brand mix improvements.
Operating income increased year-over-year as the higher volumes and positive mix contribution offset increased cost headwinds and investments in future product launches. Price was stable and in selective markets like Russia, we had price increases to offset negative impacts from FX. The EBIT margin was at a high level of 7.4%. Let's move to the market development on the next slide. The European market showed a stable demand trend in the quarter, with total shipments up 1%. This was driven by strong growth of 7% in Eastern Europe, where we saw strong demand across most markets. Market volumes in Western Europe remain at a high level, but declined slightly due to weaker demand, especially in the U.K. In North America, I'm not pleased with the overall earnings development since we faced significant cost headwinds and had to focus on implementing further cost-based price increases.
Our price increases increased slightly above 2% net of market promotion compared to last year. We're seeing substantial sequential improvements on our bottom line. Despite the price increases, organic growth declined by 3.9% due to lower sales volumes, mainly related to the decline in private labels. The industry-wide price increases impacted market demand negatively and hence also our growth in the core brand of business. Operating income in the quarter declined significantly, partly as a result of continued volume declines from private labels, as well as one-time effects from Sears, a major private label customer restructuring under Chapter 11. Earnings was also impacted by higher costs related to raw materials, tariffs, and logistics. This is against a strong quarter last year with significant cost efficiency contributions. On the positive note, higher price and mix improvements contributed positively to earnings.
Following our price actions in Q2, we implemented part of these during the third quarter, and the remaining part will impact Q4 positively. To mitigate continued cost inflation and Section 301 trade tariffs, we have announced further price increases to have effect in January 2019. Let's turn to the market developments in North America. Market demand for core appliances in the U.S. is estimated to have declined by 2% in the third quarter, while demand for microwaves and home comfort products was up 5% year-over-year. The weak demand can partly be explained by higher industry prices in the market and retail inventory rationalizing. We estimate the retail sell-out to have been flat to positive in the quarter. The macroeconomic environment in the U.S. has in general been strong. Consumer confidence index in the U.S. remains high, unemployment is at record low levels.
Although growth in the housing sector has slowed down somewhat. Let's turn to the next slide and talk about Latin America. The macroeconomic uncertainty continued and is affecting consumer sentiment and demand in the region, similar to the weak trend in the previous quarter. We've also seen increased currency fluctuations adding to that uncertainty. Hence, consumer demand in Brazil and Argentina declined, while demand in Chile is estimated to have been stable. Although our sales volume showed a significant decline in the quarter, our organic development was supported by double-digit price increases as we implemented a large portion of the price increases announced in Q2. This, together with mix improvements, offset the sharp volume decline. Our operating income increased year-over-year. The main contributor was higher prices, but also higher cost efficiency, which together more than offset increased raw material cost and accelerated currency headwinds.
In the quarter, there was a positive impact from reversal of a provision related to an administrative case of approximately SEK 170 million. During Q3, we announced further price actions in Argentina and Chile and are committed to mitigating the cost headwinds with price and cost efficiency, although with a time lag. In the Asia-Pacific region, our operations achieved an organic sales growth of 3.8%, supported by continued good demand trend in Southeast Asia. The market in Australia, however, continued to decline, partly related to the softening housing market, as we talked about in Q2. Hence, the higher sales in Q3 was driven by continued growth in Southeast Asia, particularly in the laundry and cooking categories. Price increases in Australia, however, had an unfavorable impact on volumes.
Our operating income declined year-over-year, primarily due to accelerated currency headwinds and lower volumes in Australia, but also due to higher raw material costs. The increase in price and mix improvements contributed positively to EBIT. Despite significant currency headwinds, our margin was at a solid level of 7.8%. Let's continue with Home Care and SDA. Home Care and SDA is still in a product transition phase, but continues to execute on the strategy and plan to profitable growth with new premium product launches. We saw the demand shift from corded vacuums towards cordless vacuums accelerating in the third quarter, and this impacted our traditional vacuum business volumes negatively and hence organic sales declined. In Europe, however, our cordless business showed a double-digit increase and our mix improved. The divestment of the U.S. floor care business in the quarter impacted sales by negative 9%.
Operating income declined year-over-year, primarily due to lower volumes, even though the mix trend improved. We remain focused on executing on our core business transition in Home Care and SDA with products such as the new Electrolux Pure F9 cordless vacuum cleaner I mentioned earlier, that was launched late in Q3. We've received positive response from retailers and media and are excited about the unique features and design that will set it apart in the market. In the quarter, the Anova business continued to have a negative result as launch delays were still a constraint. Continued investments for new product launches, together with the Anova development, were offset by the net impact from the divestment. Let's turn to our professional business. Professional Products continued to deliver solid performance in Q3. Organic sales grew by almost 2%, driven by growth in all 3 segments: laundry, food, and beverage.
Higher volumes and price mix contributed positively. The positive price mix was partly related to growth in customer care, an area we are focusing on growing in the professional business. The acquisition of Schneidereit boosted our acquired sales growth with about 5%. Earnings increased compared to the same period last year and benefited from a strong volume price mix contribution. Operating margin was at a high level, although impacted by investments in marketing and R&D to support the new product generations and the customer care business. During the quarter, we also announced the acquisition of a leading beverage company, SPM Drink Systems, in Italy. The acquisition will strengthen our professional beverage offering and enable Electrolux Professional to become a full-service solution provider in the hospitality segment. With that, I would like to hand over to Therese to go into the financials and the cash flow in the third quarter.
Thank you, Jonas. Let us move into the financial overview. As Jonas said, higher prices in several markets in combination with improved mix, thanks to our premium brands and products, resulted in an organic sales growth of 0.8% in the quarter. Gross operating income declined somewhat year-over-year to SEK 5.8 billion, corresponding to a margin of 19%. This as we were not able to fully offset the continued cost inflation related to raw materials, logistics, and tariffs, together with an accelerated currency headwind, primarily in Latin America. Despite these cost headwinds, operating income came in at SEK 1.8 billion and was somewhat lower year-over-year, comparing with a strong quarter with the significant cost efficiencies we had last year. We managed to partly mitigate higher cost inflation and unfavorable currency effects with price and mix improvements.
It is really pleasing to see that all our business areas showed positive price mix contribution. The EBIT decreased one percentage point to 5.8%. Let us go through the sales and EBIT bridge for the quarter on the next slide. Our organic growth, comprising of volume, price, and mix, had a positive impact on operating income in the quarter. The leverage from price in the quarter was strong as our price actions, mainly in North and Latin America, but also in Australia and Professional, have started to give improved effects. We also had good product mix that contributed positively to the organic development. As Jonas mentioned, the cost-based price increases impacted, however, sales volumes negatively, primarily in Latin America, North America, and also Australia.
Volumes were also impacted by the lower sales of private label products in North America and lower sales of corded vacuum cleaners in Home Care and SDA.
Headwind from raw materials and tariffs was SEK 549 million in the quarter, in line with expectations. In addition, the negative currency impact continued to intensify during the quarter and was, in total, SEK 252 million. The negative currency impact was mainly in Latin America, but we also had a negative impact in Australia. In total, currency had slightly more than 1% in dilution effect on margins. Net cost efficiency in the quarter was flat. We continued to track well on our underlying cost productivity, but we had higher general cost inflation from logistics and sourced products, as well as higher investments in R&D. Net cost efficiency was positively impacted by the reversal of the provision in Latin America. We also have to have in mind that we had a tough comparison period as last year's earnings was positively impacted by a strong cost efficiency contribution of SEK 1.2 billion.
Acquisitions had a slight negative effect on the group margins, partly related to the divestment of the U.S. floor care business. To summarize, despite significant organic contribution, it was not yet able to fully offset the negative effects from raw materials and currency. This resulted in an EBIT margin of 5.8%. Looking into the currency effects in more detail. In the quarter, we had SEK 353 million in negative transactional currency year-over-year. This negative impact was mainly within the emerging market currencies in Latin America due to the weaker Argentinian peso and Brazilian real versus the U.S. dollar. Asia Pacific also faced a currency headwind, and the main currency with the largest negative effect to single out was the Australian dollar versus the U.S. dollar. In Europe, there was also losses, but with a lower magnitude, mainly from the Russian ruble.
The translation effect was positive, SEK 102 million, and is related to a year-over-year EBIT effect from a weaker Swedish krona versus the stronger euro and U.S. dollar. At current rates, the negative transaction effect would continue to impact Latin America, EMEA, Asia Pacific, and Home Care and SDA negatively. I am very pleased to see that all our business areas contributed to the 2.9% EBIT margin accretion for the group from a price and mix perspective. EMEA had favorable mix fueled by the market share gains driven by premium brands and products, particularly in the built-in and laundry business. Price was fairly flat with the selective increases in targeted markets such as Russia. We have announced further price increases across the region with effect from Q1 2019. In North America, the leverage from price improved significantly.
In the quarter, we continued to implement price increases with a net effect sequentially improving versus the previous quarter. Total net price increase, including market-related promotions, was slightly above 2%. The mix contribution was also positive due to a shift in the product mix to laundry in Q3. We continue to go for price, and we announced further price increases in North America effective from the beginning of 2019. In Latin America, the implemented price increases are showing positive effect with a significant EBIT contribution. Most of the price increases announced in Q2 had full impact in Q3. Total price increases was 13%. Also in Argentina and Chile, we have announced further price increases during the third quarter. In Asia Pacific, we have taken price actions in Australia since July, which is now contributing positively.
Home Care and SDA and Professional also benefited from price mix across markets on the back of positive price adjustments and also improved mix. Cash flow after investments, but before acquisitions came in at SEK 1.4 billion and was at a lower level than previous year. The decline was due to lower earnings, higher investments, and lower cash flow from working capital, primarily related to a very strong cash flow contribution from operational working capital last year. The average operating working capital in relation to rolling 12 months net sales showed a slight increase at 4.4% versus last year's 4.1%. Our focus on working capital throughout the group is continuing and coming from a period of strong working capital improvement. We are still expecting this to flatten out at a healthy level going forward.
Investments are slightly higher versus last year due to the ongoing investment projects in re-engineering, innovation, and automation in primarily North America and Latin America. With that, I would like to hand back to you, Jonas, to review our outlook and summarize the quarter.
Thank you, Therese. Let's move on to our outlook and start with our market view. We've seen favorable demand in the appliance industry throughout this year, and expect growth to be supportive in our key markets in the remainder of the year. However, a tougher cost environment triggers further price increases in the industry, putting pressure on demand in markets such as North America and Latin America, and Australia. With one quarter left of 2018, we have improved visibility and slightly revised our market guidance for 2018. We expect the European market to remain favorable for the remainder of the year. U.K. continues to be impacted by Brexit, and hence we revised our full year 2018 growth outlook to around 1%, which is in the lower range of the previous market outlook of 1%-2%.
Excluding U.K., we expect the market to be closer to the higher end of this range. For North America, based on current industry dynamics with higher price increases in the market, in combination with ongoing debates around trade actions, we now estimate the U.S. industry to grow by 0%-1% for the full year 2018. Latin America is impacted by the current macro trends, with currency fluctuations and political uncertainty in combination with continued market price increases. We expect full year 2018 demand in the region, including Argentina, Brazil, and Chile, to be -1%-0%. As a result of the weaker housing market and higher prices, we have adjusted down the full-year market outlook for Australia somewhat to slightly negative. Market in Southeast Asia, however, remain positive.
Looking ahead at the Q4 and the full-year 2018 outlook, we continue to expect positive organic contribution, mainly driven by strong focus on executing price increases, but also through continued launches of new products supporting our product mix. We expect prices in the fourth quarter to be sequentially slightly higher for North America and Latin America due to a lag effect. Given the product launch is done, we expect mix to improve in Q4. As previously announced, however, Sears, our main private label customer in North America, filed for Chapter 11 in October, and we expect that they will liquidate inventory in Q4, impacting our volumes negatively. Looking further ahead, as we have significant exposure in cooking to Sears, we're closely monitoring the development and our appropriate actions as a large portion of this volume may be at risk.
To summarize our organic outlook for Q4, contribution is expected to be positive organically and primarily coming from the strong price drop through to our EBIT. From now on, we include the impact of tariffs in the raw material outlook, as these are closely interlinked. With additional trade actions under Section 301 implemented in the U.S. in the quarter, we now estimate the negative year-over-year impact from raw materials and tariffs combined to be approximately SEK 2.1 billion for 2018 versus our previous view of approximately SEK 1.9 billion. In the fourth quarter, we expect raw material costs and tariffs to increase year-over-year by approximately SEK 0.7 billion. As Therese showed, the currency headwind for this year is now roughly SEK 850 million based on currency rates as per 17th of October.
To summarize, we now estimate the negative year-over-year impact from raw materials, tariffs, and currency to be approximately SEK 3 billion in 2018, compared to the previous estimate of approximately SEK 2.7 billion. Looking into 2019, based on current market conditions, these combined headwinds could continue with a similar year-over-year impact as in 2018. A significant portion of these effects are offset by already implemented and announced price increases, and further price increases will be implemented to mitigate cost inflation. Besides price increases, strong focus on cost efficiency is key to be able to mitigate headwinds. For the full year 2018, we continue to expect positive contributions from cost measures. In Q4, we will, however, invest more on brands and new product launches compared to last year, while we continue to face cost inflation in logistics and wages in many areas.
Hence, we expect a neutral impact on net cost efficiency. Our CapEx projects to strengthen our competitiveness through automation and modernization are ongoing, and the outlook for SEK 6 billion remain unchanged for 2018. In the Q4 report, we will publish our full outlook for 2019. Before going to Q&A, I'd like to comment on our continuing path to profitable growth. It's clear to us all that we're facing significant cost and currency-related headwinds. I'm really pleased with our ability to offset those through cost-based price increases that we've implemented here in the third quarter. We're continuing to drive improved product mix by focusing on our premium brands and by launching new and innovative products. We're driving continued investments in innovation and R&D to support further innovation in new products.
As you've seen, we've also increased our pace in M&A, expanding the beverage business in our Professional Products to make sure that we have a full, complete offering in professional. We're doing that off a very strong and solid balance sheet position, that helps us fuel further acquisitive growth going forward. Finally, I also want to mention that we're retaining our sustainability leadership, where we're again, for the 11th or 12th year in a row now, nominated as the leading company in terms of sustainability by the Dow Jones Sustainability Index in our industry. I also want to highlight our recently issued save the date for our Capital Markets Day. It will take place in Pordenone, Italy, on March 27th, 2019, where we have our Professional Products headquarters.
We will take the opportunity to give you a real strategic deep dive on our professional business and the exciting future that we have there, of course, in addition to our regular business update. Hope to see a lot of you there on March 27 next year. With that, we're ready to turn to Q&A.
Yes. We're now ready to take your questions. Please, operator, go ahead for the first question.
Thank you. The first question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes, good morning. Thank you for taking my questions. It's good that you give some update on the headwinds you see into 2019 as well as they seem to be quite significant. I was obviously wondering, it seems like you are not yet fully compensated in price for those headwinds that you see. While when we listen to Whirlpool, they seem to think that they were basically now at the situation where they were compensating for the raw material and tariff headwinds, which I guess you share with them. Why does it seem like you're lagging a little bit in this perspective?
Yeah. I'm not sure why. It may be semantics, right? We, like Whirlpool, have announced future price increases that are not yet implemented in the market. Of course, we are fully committed to offsetting these cost headwinds through pricing like we are currently. It's hard for me to speculate, but I don't see a major difference between us or any of our competitors in that sense.
Whirlpool dares to say that they see improved margins next year. Would you also dare to indicate that?
No, we don't give margin guidance.
Good. In these headwinds that you see for 2019, is that assuming that the 25% tariffs are coming through as of January?
That's correct, yes.
Sorry?
Yes, that's correct.
Okay. Thank you very much.
Sure. You're welcome.
Thank you. The next question comes from Lucie Carrier from Morgan Stanley. Please go ahead. Your line is open.
Good morning, thanks for taking my question. I just wanted to ask you a question about the balance between the price mix, the sustainability of the strong price mix we have seen, and the volume effect. I was curious to know whether you have maybe predicted for an even more strong compression in volumes in some region, and how you are also tackling that on the other side. We do see demand underlying kind of slowing down, and the price element of it is probably not helping this demand.
I think we also have to look a little bit at that sell in versus sell out as well. I think the biggest impact with these price increases are on the sell in, meaning our sales to our retailers. If we look at and track sell out, and we have less precise data on that, so that's harder for us to give exact guidance on, but our indication is that in most markets, we don't see any real sort of downturn in terms of consumer demand. I think these are relatively short-term effects. There are some exceptions to that, of course, places like Argentina and to some extent Brazil, where the price increases are of the magnitude that they have to impact consumer demand. We're not concerned about major additional volume drags going forward. We see overall a relatively solid consumer demand backdrop.
All right. Thank you.
Sure. You're welcome.
Thank you. The next question comes from Andrej Kuklin from Credit Suisse. Please go ahead. Your line is open.
Yes, good morning. Thanks very much for taking my questions. Firstly, can I just double check on the profit bridge? Where does that SEK 170 million provision release in Latin America land?
Net cost efficiency.
Net cost efficiency. Then you expect that to be neutral without anticipating any kind of further one-offs. It's just the balance of taking costs out versus spending on marketing and logistics in Q4.
For Q4, yeah, that's correct. Yeah. There are no one-offs expected in that.
Okay, got it. Just ultimately another question on price. It does look like in Q3, you've got part of 2.6%-2.7% through price, which is nearly SEK 800 million. It is offsetting the level of headwind you're seeing right now, but then it's stepping up in 2019 with a higher tariff. I guess the question is, with the price increases that you're planning from beginning of 2019 and have announced, do you think you can maintain that sort of price momentum in 2019 at that rate close to three points?
Yeah. Look, I think for sure the headwinds that we're calling out here are not specific to Electrolux. I think we've shown our ability to offset them through pricing, even though there is a lag, and we keep repeating that. We don't expect that to change as we go into 2019. In fact, on the more positive side, I would say that we're now more sort of ahead of the game in terms of seeing these headwinds. Whereas, we have to be honest and say that throughout 2018, we've had to adjust upwards on a continuous basis what we see as headwinds and then the pricing action to recover that with a little bit of lag. Now I think we're slightly more, let's say, conservative in our outlook and more proactive in our pricing action to counter that.
Got it. Thank you. If I may, just a quick follow-up. The beginning of 2019 price increase, is that from January or is this March timeline?
Mainly in January. In some cases, it's going to be a little bit more spread out throughout the quarter.
Got it. Thanks so much for your time.
Sure. Thank you.
Thank you. As a reminder, it's zero followed by the one on your telephone keypad to register for a question. The next question comes from James Moore from Redburn. Please go ahead. Your line is open.
Yeah. Morning, everyone. Hi, Jonas. Thanks for your help on the fourth quarter and 2019. My question surrounds the SEK 3 billion, the FX raw mats tariffs impacts you're talking about for full year 2019. I wonder if you could just help us break them down a bit. I was sort of guessing half a billion SEK for currency. I could be well out on that, but just over SEK 1 billion for raw mats excluding tariffs. I kind of have a sense that most of the change is tariff. I wondered if you could break out what is the tariff impact in that?
Yeah. The reason why we're not giving you an exact guidance for 2019 is that it's not possible yet, right? There are significant movements still, as always, happening in both in terms of raw material and currency. It's very early in the game. However, we thought it was worthwhile to still indicate that, yes, that we see continued headwinds. In terms of the split, I'm not going to give you an exact breakout. We do of course see a rollover effect in terms of currency into next year. There's continued headwind from that. If we look at raw materials, we see a couple of main effects.
One is that even though steel is on a slightly negative price trend or reducing price trend right now, current market prices are still substantially over what they were a little less than a year ago when we concluded most of our contracts for 2018. There's a rollover effect of that. Maybe the biggest effect is that, as you know, we see very high oil prices right now, and that's translating into chemicals and plastics cost coming into next year. Finally, we do have substantial sourcing in China, both for components and finished goods. Again, I would say probably the industry average is not that different than what we're seeing. That has a significant impact on our cost base, which we are then recovering in pricing.
Again, I just want to reiterate that we have announced those price increases in North America to cover for that, the expectations of, again, the 25% rates on these tariffs. So have, we understand, several of our competitors. We're relatively confident in that we're facing a similar type of headwind as most of our competitors.
I think you were talking about SEK 10 million plus for the second half on tariff.
Well, that was.
That was before the latest change on the list 3.
Yeah. That's correct.
I'm guessing that number now for full year 2019 is over SEK 100 million. Is that fair?
Well, I would say that almost all of the raw material and tariff headwind increase that we're announcing is related to the tariffs.
Thank you. In terms of mitigation, the other side of the question, really. Obviously, you've expressed a desire to mitigate these numbers. You talked about wanting to mitigate it with price. You have the two big levers of price and net cost efficiency. Do you think that you can mitigate the SEK 3 billion with those two other levers so that that's a net neutral or even a positive number? Is that what you were trying to say earlier?
I think when it comes to cost efficiency, we're, I think, showing that we have a strong sort of machine in terms of cost productivity that continues to deliver benefits as we go along. Offsetting those cost efficiencies are two factors. One is that we see significant inflationary pressure on things like logistics, sourced OEM products, which we have in our net cost efficiency bucket, so to speak. Overall inflationary pressures in places like Latin America, driven, for example, by the significant currency headwinds we're facing there. There's a lot of, let's say, ancillary inflationary headwinds that we're not calling out separately, but we're mixing in our net cost efficiency bucket. Finally, as we can drive further profitable growth, we continue to invest in marketing and R&D. All those three factors are impacting that net cost efficiency line.
We are fully committed and have solid plans in place to drive continued very strong cost productivity. The net effect of that is, of course, impacted by the two other factors as well. Coming back to your question, these pretty significant, of course, but also broad-based cost headwinds that we're facing, of course, we continue with our cost productivity, but there's just no choice but to offset them to a significant extent through pricing, and that's what we're doing.
Do you think you can mitigate them?
Oh, yeah.
Thank you very much.
Sure. Thank you.
Thank you. The next question comes from Christer Magnergård from DNB. Please go ahead. Your line is open.
Hi. Good morning. Maybe start with a follow-up question from James, Jonas' question earlier about tariffs. Do I understand right that basically all of the headwind from the raw material tariff costs will impact North America, and then FX will be maybe Latin America? Is that a roughly fair assumption for 2019?
Well, the tariffs are basically North America. The raw material headwinds is everywhere. The currency is again, mainly Latin America. Yes.
Okay. Secondly, in Q2 you said that you're aiming for a stable profitability in 2018 versus 2017. Obviously, the margins are down about one percentage point now year-to-date. Can you maybe update us on that comment you made in Q2?
Yeah. Of course, the question is, what exactly is stability? I think that we're showing that we have a really strong capability of offsetting these massive headwinds. There is this lag effect, and we have mentioned that repeatedly, and we're seeing that continuing. I would say the trajectory is that we are offsetting these headwinds and creating a lot of stability in our profitability in 2018 and going forward.
Okay. Finally, on Sears, you said that there was an impact, and you mentioned one off in Q3. Can you maybe give some more color on the effect they had Q3 and also what you see for Q4?
Well, I think in terms of our, let's say, balance sheet exposures to the Sears Chapter 11 event, we are fully reserved. We have no risk in that exposure going forward. That's something that we have worked up over the course of time. We did take some further adjustments in Q3. They're not to the level where we need to call them out as a one-off or anything like that. There is a negative effect from that in the quarter as well.
The flexibility in the cooking plant in North America, how does that look like if Sears basically shut down?
Yeah, I think as many of you know, our exposure to Sears, or Kenmore particularly, is significantly tuned towards cooking products. To the extent that Sears would be a smaller customer or go away, there is a significant impact on our cooking volumes. That's something we are, of course, looking into exactly what our response to that is. We are making sure that we have the right level of flexibility to offset that as we go forward.
Okay. Thank you.
Sure. You're welcome.
Thank you. Our next question comes from Jack O'Brien from Goldman Sachs. Please go ahead. Your line is open.
Hi. Good morning, Jonas. Just want to follow on from James's question on the net cost efficiencies. I think I remember at your Capital Markets Day about a year ago, you talking about potentially up to SEK 3 billion of net cost efficiencies potential through to about 2021. Obviously, you had another good year this year. Just how we should think about the phasing of those net cost efficiencies through 2019, 2020, 2021, and moreover, where your efforts are mostly focused on whether it is still the North America and Latin America. Perhaps we'll start there.
Right. The SEK 3 billion that we talked about was specifically excuse me, related to the re-engineering programs that we had initiated. On top of that, and that's an effect that gradually phases in from late 2019 through 2022, approximately. That's a discrete initiative related to our re-engineering programs. On top of that, of course, we have our ongoing cost productivity in all our plants around the world, which does generate a continued support of cost productivity as we go forward. As I mentioned before, there is an accelerating pace of inflation also in outside of raw materials, in things like logistics and wage inflation in many parts of the world. Those are not exclusive to us, and we offset them partially through these cost productivity measures that we're driving, and partially through additional price that we're taking in the market.
Finally, this is something we're tweaking up and down, depending on where we see the return on investment, we're looking at, of course, supporting our fantastic product innovation and launches with marketing and further R&D investment, that goes in that bucket as well. We are keeping a significant amount of flexibility in that to help offset the headwinds that we're facing.
Thanks, Jonas. Perhaps just one strategic follow-up. If we think about the business three years ahead, do you see the mix of your products fairly similar? How should we be thinking about the evolution of this? I guess my question is twofold. One, you've got, obviously, Professional growing well, higher margin. Should we expect more to come from that division? Secondly, you have done a bit of portfolio action, one or two divestments, obviously, some acquisitions. Again, how should we be thinking from that perspective?
Yeah, everything we do is to drive profitable growth going forward. We're over-investing in our most profitable segments, we have been quite aggressive in downsizing or exiting unprofitable segments of the business. I would say that most of that exiting part, that's concluded now, going forward, it's more about investing in our most profitable business areas, such as Professional, for sure, such as EMEA, Asia Pacific, also, this is back to the prior question, significant investments in North America and Latin America to ensure that we have a super competitive both product offering and manufacturing footprint in those markets. Yeah, we expect to drive continued mix and as well as cost efficiency for the coming years.
Great. Perhaps just one final on your balance sheet. Obviously, you've got plenty of headroom there. Far, you've done small bolt-ons as opposed to anything more meaningful. Just how do you and the board think about the balance sheet?
I think we do have a lot of action room, and we think that's a competitive benefit for us because we are able to act on M&A opportunities as they arise. Of course, this is not something that we fully control. We have to take the opportunities that come our way, and we are able to do that, and that's really a strength for us. The other part of the strong balance sheet is that we're able to continue to reinvest in the productivity and product launches and innovations that we're driving while we continue a solid inventory payout that we expect to continue to drive and increase going forward.
Great. Thank you.
Sure. You're welcome.
Thank you. The next question comes from David MacGregor from Longbow Research. Please go ahead. Your line is open.
Yes. Good morning, everyone. If I could just go back to the SEK 3 billion of raw material inflation tariff and FX, and maybe come at that question a little bit differently. If you think about the implemented or the announced price increases so far, how much of that SEK 3 billion would be covered?
Yeah, if you look at the things that we have announced but not implemented, if you add that into the equation, the vast majority of those headwinds will be covered. Those are, of course, not translated into consumer prices yet, but they will be.
Right. Are you finding that the price increases are just getting a higher yield or a higher level of traction right now just because you're in a broader inflationary environment that's just not questioned as much, and you've got broader competitive support as well?
Yeah. On balance, I would say so. Of course, the cost and currency-related headwinds that we're facing are very evident, for us and for anybody active in this market. There's no question that we need to recover that in pricing. Having said that, it's always very challenging in our business to implement price increases, there's no way to get around that. It's a battle every time, we're doing it. That's what's creating that lag effect that we keep referring to, that you can't translate it into net price from one day to the next.
Second question, just on the volume declines. I know there is a lot of concern about elasticity, and to the extent that prices go up, you get a negative consumer reaction on volume. How much of this do you think is elasticity versus how much is just slowing replacement demand because of what was going on 10 years ago?
I think we had already called down our market outlook as we entered into the year for that replacement effect. I think that was already built into our ingoing assumptions. The effects that we are seeing right now, I think, are a combination of price increases and a little bit of the retail dynamic around those price increases, more so than real change in consumer behavior so far.
Just last question, I guess, on Latin America. It has been a difficult year. Do you sense that there is pent-up demand down there that may begin to surface in 2019 once we get past the elections and the World Cup and the truck strike and everything else?
Yeah. There is massive pent-up demand. That is not the question. The question is more affordability. We do believe that there is a good chance that some of this volatility will level out, and as purchasing power adjusts to that new reality, there is tons of pent-up demand, to your point, in most of those markets. They are substantially below the run rate that we saw in the leading up to, let us say, 2015 when we started to see this turbulence.
Do you think the affordability issue takes more than 2019? Do you think this pushes that pent-up demand back into 2020?
At least partially, I think it probably would, to be realistic about it. Yeah.
Okay. Thanks very much.
Sure. Thank you.
Thank you. The next question comes from Björn Andersson from Danske Bank. Please go ahead. Your line is open.
Thank you. Yeah, two question. One, if you can give some more color on Sears and how you would look like in the event that it impacts the cooking volumes more significantly. Secondly, on Latin America, as we just discussed on affordability, I was thinking about your new offering down there with your new brand and how that will play out, I guess, more materially next year.
Sears, or rather, the Kenmore private label business, this year is on a run rate of approximately 10% of our net sales in North America. Of course, you can do the math on the impact on future scenarios for Sears. To be more specific, of course, as then consumers then potentially migrate from Sears to other outlets. In most product categories, I would say we're relatively well-placed to take advantage of that consumer demand migration. Again, to be realistic, we have a very significant portion of the Kenmore cooking volume, and if that volume would go down significantly, it's harder for us to supplement that with branded sales in cooking. We are preparing our plans and options to address that impact on our cooking business. I don't think that's really material, but it's a reality that we are addressing. On Latin America, I'm sorry.
I kind of forgot the essence of your question. Can you please-
The affordability and your offering.
Oh, yeah. Okay. Yeah
Now with a new brand as well.
Yes, of course. The point of the acquisition of the Continental brand.
Exactly.
We have seen a significant sort of downshift in mix in Brazil and other Latin American markets over the last couple of years as affordability has been an issue, and that's the main reason why we decided to acquire the Continental brand, which is more of a mass position. We're managing that in a relatively careful way. We are, next year, starting to introduce our first product under the Continental brand. It's not going to be a major volume contributor in next year, but it starts to be a support in sort of the real low end of the Brazilian market.
Thank you.
Sure. You're welcome.
Thank you. The last question comes from Ola Söderholm from ABG Sundal Collier. Please go ahead. Your line is open.
Yes. Hi, good morning. I was just wondering a little bit about the price increases again. Is it your view that do you know the net price effects already, or is this gross price increases and the final outcome is still uncertain? That's the first one. The second one, when you talk about rising oil prices next year, what kind of oil price have you used? We've recently seen a pretty large correction in the oil price, wondered if that was factored in or not.
Yeah. Exactly to your point, there's so many uncertain aspects that will impact the outlook for 2019 in terms of very, very significant raw material and currency swings. That's exactly why we're not giving you a precise outlook for 2019 at this point. I think that would honestly not be serious to do that at this point. We're too early in the process, there are too many things still moving around. Based on current market conditions, there are significant headwinds in currency, in raw material, in tariffs going into next year. We have announced price increases, those will cover a very large portion of what we see as headwinds right now. We, of course, retain the flexibility to address any changes in that outlook. That's really the main point of what we're saying here today.
We're seeing headwinds, hard to quantify exactly how much. We're addressing that through cost efficiency and price increases, we're really on and ahead of the game leading into 2019.
All right. Thank you.
Thank you. All right. Thank you very much for those questions. Just leaving you with returning to our path to profitable growth. Of course, on the tone of your questions, there's lots of questions about these cost headwinds that we're facing and our ability to offset them through price increases. I honestly think that our traction here in Q3 shows that we are very much able to offset the cost headwinds that we're seeing, and we're completely committed to continuing to do that as we go forward through price increases that we have announced, but also very importantly, through continued focus on consumer experience-based innovation, really fueling our strongest brands and our strongest product categories with significant investments in innovation and launch support.
When you combine these two effects, the strong ability we have to respond to cost inflation through pricing and our continued focus on innovation as well as modularization and automation of our manufacturing footprint, we are continuing to refuel our path to profitable growth going forward. With that, I thank you very much, and I look forward to seeing you all soon, and in particular at our Capital Markets Day early next year in Pordenone, Italy. Thank you very much. Have a good day.