Good morning, and thank you for joining the presentation of Electrolux Q3 2017 results. With me today, I have our CFO, Anna Ohlsson-Leijon, and Mårten Kapran from Investor Relations. Let's begin the presentation. In Q3, Electrolux delivered good mix and earnings improvement in most of our business areas, supported by product portfolio management and cost efficiency. Our reported sales were down 5% to SEK 29.3 billion. Organic growth was also slightly down, while there was positive contribution from acquisitions. Operating income increased versus last year to SEK 1,960 million, and the group delivered an operating margin of 6.7%, with four business areas reaching an EBIT margin above 7%. For the last twelve months, the group margin was 5.8%, and the year-to-date reached 6.1%.
EMEA continued to show improved earnings, reaching a margin close to 8% in the Q3 . North America reported an organic decline, with lower volumes under private labels, increased price pressure, and the impact of major product transitions. Cost reductions and product mix partly offset the organic decline, and the business area reported stable profitability. The operations in Latin America delivered positive organic growth for the first time since Q2 2015, and the market demand in the region as a whole continued to improve. Asia Pacific, Home Care, and SDM Professional Products continued the positive trend, and all showed improvement in earnings compared to Q3 last year. Turning now to some of the market highlights during the quarter. During the quarter, we had a few important product launches that I want to highlight here.
One of them is the previously mentioned extensive rollout of the new line of Frigidaire and Frigidaire Gallery branded products in the North American market. One example is the new Frigidaire induction range. We're very excited about this launch, which has received very positive reviews from customers. We expect to be on more than 2,000 customer floors with this new co- cooking lineup. The second thing I want to mention is a recent presentation at the IFA trade show in Berlin. This was another successful year for us, where we introduced top-of-the-range AEG products, such as the new AEG connected laundry range. In the spotlight were also star products like the ComfortLift dishwasher and the connected steam oven with a built-in camera to ensure perfect cooking results.
Finally, I would like to highlight the brand new smart, connected robotic vacuum cleaner, Pure i9, which we recently launched and also introduced at the IFA show. The new robotic vacuum is launched under the Electrolux and AEG brands in key markets around the world. The product is game-changing and takes cleaning to a new level with leading performance and intelligent navigation. With the Pure i9, you can vacuum from anywhere. Turning to EMEA, Major Appliances, EMEA organic sales showed slight decline in the quarter, while growth from acquisition was positive. Electrolux volumes declined somewhat due to the weaker than expected markets in the U.K. and EMEA. In the quarter, we continued to gain share in premium brands in Europe and improve the product mix across the business area.
Operating income increased versus the previous year, and the EBIT margin reached 7.9%, which corresponded to 7% in the past rolling twelve-month period. This was despite negative impact from increased raw material cost and currency headwinds, with the contribution from very good cost efficiency, both from a variable and structural cost perspective. In the quarter, we also closed the acquisition of the European kitchen hoods manufacturer, Best. The acquisition will enable us to develop a complete offering of built-in cooking solutions and further drive profitable growth in the EMEA region. Let's turn page and talk about the market development in Europe. The European market improved slightly in the Q3 , and total unit shipments were up 1%. Demand was positive in most markets in Western Europe, while demand in the U.K. continued to decline. Demand in Eastern Europe was up by 2%.
We expect the European market to remain favorable in the last quarter and confirm our outlook of around 1% growth for the full year. This reflects the stable demand trend in Western Europe, but also some weakness in the U.K. In our operations in North America, we continued to see strong underlying operational performance and intensified traction, both on the variable cost performance and the structural part in the quarter. Our organic sales, however, were down by 11%, impacted mainly by three factors in the quarter. First, the continued decline of volumes on the private labels. Secondly, the intensified competitive environment in the U.S. with continued price pressure. Finally, the major product transitions.
The product transitions planned in the quarter are related to the Frigidaire product range and the most extensive launch in terms of number of products that we've done in recent years, supporting the strategic focus on the Frigidaire brand family. The reactions to the refreshed line of products have been very positive from retail as well as consumers, which makes us confident with the new lineup. In this transition, however, we experienced delays due to availability of parts from suppliers, operational capacity planning constraints, as well as delayed flooring execution at our retail partners. Unfortunately, on top of this, the hurricanes impacted the logistics flows in certain regions. As a consequence of the delayed market introduction, we decided to shift the main launch spending into the Q4 , mitigating the impact in Q3.
The operating margin was stable at 7.5% in the quarter, and the 12-month rolling operating margin is at 7%. The stable profitability level was a result of positive mix and the overall very strong contribution from net cost efficiencies. Let's turn to the next slide and talk about the market development in North America. Demand for core appliances in North America continued to be positive and grew 3% in the quarter. With the year-to-date growth of 4%, the market for appliances in North America remains solid, and we continue to see a favorable macro environment supporting the positive trend in appliance demand. For the full year 2017, we remain at our outlook for the North American market and expect a growth rate of 3%–4%. Let's move to Latin America.
Demand for appliances in the region continued to show recovery in the quarter, with volumes in Brazil, Argentina, and Chile improving significantly. Electrolux sales volumes also improved in Brazil and Argentina, and we gained share across most categories in the region. Although pressure on price mix continued in the Q3 , we achieved an organic growth rate of 7.4%. Earnings in Latin America in the Q3 increased year-over-year, driven by the strong volume growth, but also better cost efficiency. Actions to improve our profitability for the business area are progressing according to plan. In October, we also announced the acquisition of the rights to the well-known brand Continental, with a long-standing history in Brazil.
This brand will be a valuable asset for us in this important market and enable us to further expand our market coverage in the growing market, where we already have a very strong position with the Electrolux brand. Let's turn slide and talk about our operations in Asia Pacific. Market demand for appliances in all sub-regions, Australia, East Asia, and China, were up in the quarter. Our organic sales declined slightly, however, and was impacted by lower sales volumes of air conditioners in China compared to the same period last year. The acquisition of Vintec had a positive impact of 0.5% on sales. EBIT in Asia Pacific improved slightly versus last year, and margins reached 8.9% in the quarter and 7.1% for the last rolling 12 months. The good performance in Australia and Southeast Asia continued.
Better factory absorption and cost efficiency contributed to earnings. Let's continue with Home Care and SDA. During the quarter, the Home Care and SDA business continued to execute very well according to the recovery plan. Our sales in cordless categories continued to grow, while other parts of the business declined, impacted by the portfolio management and exit of less profitable products. Operating income continued to improve year-over-year, and the margin increased to 4.2% from 1.7% in the previous year. We remain focused on executing on the cost reduction program and the plan to restore profitability. The acquired smart kitchen appliance company, Anova, had a positive impact of 5.6% on sales in the quarter. Let's turn to our professional business. Professional products continued to deliver strong performance in Q3, with profitable growth in most key markets.
Organic sales grew by 6.4%, and volume price mix all contributed positively. In terms of earnings, the business developed well with stable operating margin of 14.3%. This was supported by good organic drop-through, and in spite of increased investments and currency headwinds. Operating income in the quarter was positively impacted by the acquisition of Grindmaster-Cecilware, however, with a dilutive EBIT margin impact. Now, I would like Anna to go into the numbers and go through our financials and cash flow for the Q3 .
Thank you, Jonas. Let's start with the financial overview. In the quarter, organic sales growth declined. This was a result of price pressure and continued decline in volumes under private labels, in combination with a product transition effect in North America. The acquisitions and divestments combined had a positive impact of 1.4%. Currency translation impact was negative of 3.4%. In total, reported sales declined by 5%. Gross operating income, which is defined as net sales minus cost of goods sold, came in lower versus Q3 last year and translated into a gross margin of 20.8%, mainly explained by organic volume impact in combination with headwind from raw materials and currency, partly offset by mix and product cost efficiency.
Earnings for the group were up compared to last year, driven by the very strong cost improvement across our business areas, particularly in SG&A. EBIT increased by 7.3% versus last year, the margin in the quarter increased by 0.8 points to 6.7%. Cash flow remained at a high level, was lower than Q3 last year. Earnings per share showed an increase from SEK 441–SEK 496 per share for the quarter. Let's move to the sales and earnings bridge on the next slide. Let's start with the organic growth. Volume price mix had a negative impact on operating income in the Q3 . Price was a key negative driver due to continued pressure in several markets.
Sales volumes were negatively impacted by a decline of private label volumes, and on top of that, the major product transitions in North America. These effects were, to some extent, offset by positive contribution from mix. The impact from raw materials was SEK 410 million negative. Moving to the net cost efficiency, this shows an improvement of SEK 1.2 billion, an accretion of 4.1 points. This was related to strong efficiency actions in product and structure cost throughout the group, but in particular in North America. In total, we had a margin dilution of 1.5 points from the organic part and 1.4 points from raw materials, which was more than offset by the contribution from net cost efficiencies. The net negative impact from currency was mainly from the Egyptian and British pound, slightly offset by the Brazilian real.
Let's look into the drivers of the net cost efficiency on the next slide. As you have seen in the EBIT bridge, we achieved significant contribution from net cost efficiency of about SEK 1.2 billion in the quarter. This reduced cost was a result of net cost efficiency actions and contributions from all business areas, with a major part from the contribution from the group, from activities in North America, EMEA, and Latin America. About SEK 610 million was achieved in variable cost improvements, comprising of purchasing savings, production efficiencies of labor, and contributions from lower warranty costs as a result of better quality. We see service call rates coming down across the business areas as a result of strong focus on quality in all parts of the organization, R&D, operations, and purchasing.
Efficiencies linked to structural costs amounted to a record net of about SEK 590 million in the quarter. This was mainly related to operational improvements within factory fixed overhead, warehousing, and the sales and admin areas. This improvement is showed net of investments in brand, marketing, and R&D. Investments in marketing and sales driving activities were lower than planned in the quarter, mainly related to North America as a result of the delay in connection with the product transition. We are progressing well ahead of our cost efficiency targets. We have, since the start of the year, put focus on maximizing both ongoing efficiencies and the benefits of more streamlined brand and product offering. Year to date, we have now delivered close to SEK 2.8 billion in net cost efficiency. Let's go to the cash flow.
Cash flow after investments, but before acquisitions came down, came in at SEK 2.3 billion in the quarter and was at a high level. The main contributor was the improvement in earnings, while changes in operating assets and liabilities had a somewhat lower contribution compared to the same period last year. Investments in the quarter were also slightly higher. Our net operating working capital, measured as inventories, trade receivables, accounts payable, continued to improve despite the impact of the acquisitions. The average net operating working capital in relation to rolling 12 months net sales came down to 4.4%, an improvement from 5.2% last year. With that, I would like to hand back to you, Jonas, for summary and conclusion of the quarter.
Thank you, Anna. Let's move on and summarize this presentation with the outlook for Q4 and the full year. Looking ahead into the last quarter of 2017, we expect the favorable consumer demand to further drive growth in the appliance industry. We expect demand in Western Europe to be stable, although the outlook for the U.K. remains weak. In Eastern Europe, we expect the region as a whole to show positive growth. We anticipate demand in North America to be positive for the remainder of the year, although slightly impacted by the hurricanes that occurred during the quarter. Given the positive demand trend year-to-date, we maintain our full year growth forecast at 3%–4%. Markets in Latin America continue to show recovery, and we expect demand in that region to further improve.
Demand in East Asia shows an overall positive outlook, the demand in the Australian market has continued to show growth for several quarters, we estimate the market to continue to be positive. To our business outlook. We expect the organic contribution to be slightly positive for the next quarter, with the benefit of a stronger market in Latin America and traction on our product launches in North America and EMEA. We reconfirm our expected negative impact from raw material costs of SEK 1.4 billion for the full year. We furthermore continue our efforts to drive cost efficiency and aims to deliver a net cost efficiency of around SEK 3 billion. For the next quarter, variable cost savings will be partially offset by investments in R&D and brand marketing, in particular in North America.
We expect to see a positive tailwind from currencies, predominantly in EMEA in Q4. At current rates, we expect a net negative currency effect of SEK 100 million for the full year. Our CapEx outlooks, the outlook remains slightly above SEK 4 billion. With that, I would like to pass it to Mårten to open up for Q&A.
Thank you, Jonas. a few comments there. Before we begin with the questions and answers, let me remind you that as we conduct the session, please keep your questions one at a time, so that those who are waiting in the line can also have a chance to ask a question. If you wish to call them, call back, then you can do that to follow-up questions. With that, operator, please go ahead and take the first question.
Thank you very much. We're off the line of James Moore at Redburn. Please go ahead, James. Your line is open.
Morning, everybody, Mårten, Anna, Jonas. I wonder if I could start with the U.S., where you talk about the Frigidaire launch challenges. Obviously, it looks like they've had quite an impact on volume growth, but I get that Kenmore will also be having an impact. I guess it's had an impact on the EBIT. I wonder if it's possible to scale the volume impact on sales and EBIT impact that we saw specifically from the product launch transition issues in the quarter, and how much we might see next quarter, and whether it's contained to 2017, or could it spill into 2018?
Yeah. I think that's, of course, a relevant question. If we, if we start with the private label, that's more or less on the same pace as it has been for the last year, so there's no sort of change in impact. Price pressure, as we mentioned, did accelerate a little bit in the quarter. So that's a little bit worse, but not massively. Then we have these temporary transition issues for the new Frigidaire range. It's about 40% of our Frigidaire range that we're transitioning. In the quarter we've ramped up a lot of these new SKUs, and at the same time, we had to continue to produce the old one.
We had a quite sort of challenging, both supply chain and logistics and manufacturing ramp-up, situation in the quarter. We are working through that, and that's, we only expect very minor impacts of that in the Q4 . But in terms of the earnings impact, we were able to mitigate much of that, impact. By, not, and for sure, not all of it, but a good part of it through delaying our marketing activities, that we had planned for the quarter.
We will spend some of that money in the Q4 , but of course, the total spend, let's say, launch spend in the year will be a little bit less than what we originally had planned, which then contributes to our, also our raised, savings guidance for the year.
Thanks. If I could just try a follow-up. It's not that related, but I'll try. On raw materials and savings, you've been very clear for this year. As we go into next year, maybe it's a bit early, but could we think? I think you said less than SEK 1.4 billion on raw mats, but is it more or less than half of that? I'm trying to scale it. Also on savings, how should we think about this big SEK 3 billion number? Does it come down to SEK 1 billion, SEK 1.5 billion, SEK 2 billion next year? Anything on that would be helpful.
Yeah, it's a little bit, it's a little bit early. We will give a first sort of glance at that during our Capital Markets Day, even though that also, honestly speaking, is a bit early to really have a good view on the raw material cost. I think we're just gonna have to stick to our prior guidance, which is that we will have headwind next year, but it's gonna be substantially less than this year.
Thanks, Jonas.
Yeah.
Okay, before we go on to the next question, just a reminder, participants, that if you haven't already, just press zero and then one if you want to ask a question, or if you have asked one and you want to reenter the queue, press zero and then one again. We're now over to the line of Andre Kukhnin, Cookin of Credit Suisse. Please go ahead.
Good morning. Thanks so much for taking my question. I'd like to just ask a broader question on the cost savings and the degree of overdelivery we've had this year when you started with 1.6 net, and I think consensus at that time was that's quite punchy, and then now you're doubling it effectively. Can you give just a kind of a broad idea of how much of that was low-hanging fruit, things that you came in and saw and addressed? Or how much of that is kind of setting up the company for a recurring higher delivery of cost savings versus to what we're used to? If you could talk about that, please.
Right. There, I think you can, you can kind of break it down in three pieces. One is that we are accelerating our, let's say, call it continuous improvement initiatives in all aspects of our business, right? Really working cross-functionally, both on the variable cost side, you know, with automation, with supply chain efficiency, integrating more with our suppliers, to drive efficiency, and so on. That is something that we have set very aggressive plans on in motion last year, and we're getting actually better traction this year than an earlier traction, let's say, than what we had originally expected.
The second major driver is that the portfolio management that we have, that we have driven, again, over the last two years, which is really focusing our efforts on our most competitive parts and profitable parts of the business, and really reducing the focus on other parts of the business. That has allowed us to reduce spending and reduce cost on those elements of the business. In the beginning of the year, it was a little bit difficult to quantify the exact, let's say, size, magnitude of the opportunity, and we've actually over, clearly, as you can tell, have over-delivered on that part as well. That's less of a recurring element.
That's more kind of a, it's not a one time, but it's a one once thing that you can get that improvement. Then finally, you have, of course, the, let's call it the discretionary investment in whether it's marketing or R&D. There, as we have been very clear with, our focus right now is to get our profitability to a sustainable level, at above 6%, and that's been our strong focus. Particularly when it comes down to our marketing and promotional spending, we only spend money where we see we can get the traction on that.
That was for of course, let's say, evident in the Q3 here, in particular, where we said, "Okay, we don't really have the new products out in the market yet, so we're not gonna spend that money until we have the products in floored and can get the sales traction out of that." Those three factors all impacted both the year to date and the quarterly performance. Yeah.
Got it. Thank you. That's very useful. If I were to venture a guess on the relative sizes of these and think about sort of half towards the continuous improvement, and then the rest split equally between the portfolio management discretionary, would that be far off truth?
No, that's not far off. I think It's probably a little bit more on the continuous improvement, but yeah, no, that's about right. Yeah.
Great. Thank you. Can I just another follow-up on discretionary? Is this something that some of that needs to kind of flow back in 2018? I think you've implied some of that for the U.S. just by timing the kind of delay in the launch. More structurally, I remember, I think you took some, as you described, the drastic actions in EMEA.
Yeah
At the start of the year in response to some currency fluctuations.
Yeah.
Yeah, how should we think about that? I understand that's a second follow-up, so I'll stop there. Thank you.
Yeah. Thank you. Look, I think we're gonna play this with a continued focus on maintaining our profitability at a high level, and of course, we want to start to drive more growth. I think that as we see opportunities to invest behind, again, our focus brands, our focus categories that we're now that we now have clearly established and supporting launches of innovative products that can generate profitable growth, we will do that. We will not do that in, at the expense of maintaining high margins and profitability. That's the balance that we're going into for 2016 and beyond.
Of course, we want to invest behind our innovative product launches, because that, I think, generates long, both short and long-term profitable growth.
Very helpful. Thank you.
Thank you.
We are now to the line of Lucie Carrier at Morgan Stanley. Please go ahead, Lucie, your line is open.
Yes. Good morning, Jonas. Good morning, Anna. Good morning, Mårten. Just one follow-up, actually, on the previous question and on your portfolio management initiative. When you think about it across the group, I mean, you've been implementing this for already a couple of years, how much is really left of those initiatives in terms of, you know, the business line or the range of products that you think, you know, do not necessarily kind of belong to the Electrolux strategy? That's question number one.
Yeah. I think we're through much of that, I would even say most of that. We have a few things here and there that takes a little bit longer time to get the full traction on, but if you talk about the broad, sort of, here's the strategy for our portfolio and the decisions and activities related to that, much of that has been done. Follows more the continuous activities around portfolio management, both in terms of what categories we invest in, and the traction that we get out of that, which is, again, a result of our more focused approach. The benefits are not sort of one-off. It really gives us traction also in the longer run.
Again, the big decisions on are we in or out, and should we invest or not, that's for the most part, behind us.
Thank you. I just had a quick question on the mix in North America, and also, you know, what we saw weather-related. It looked like the kind of the home comfort was strongly up, the shipments were strongly up in AM in September. I was wondering whether it had kind of contributed maybe to the earnings mix, and whether you are expecting maybe some beneficial kind of delayed purchase, you know, on the back of the weather condition we've seen in the U.S. in September, or whether you think that it was already kind of done in the Q3 ?
No, we didn't have a particularly big positive impact on home comfort in the quarter from that. I would say that of course, you know, to the extent that you have damaged goods in Texas and Florida, that will give a little bit of a temporary demand boost, but I would say that's more very marginal in the scheme of things.
Thank you.
Sure.
We're now over to the line of Jack O'Brien at Goldman Sachs. Please go ahead, your line is open.
Obviously, a phenomenal operational improvement, but if we just think about the growth backdrop, how are you thinking in terms of volumes for EMEA and the U.S., looking into 2018? From your conversations, are you seeing any sort of signs of saturation in the market, or do you still think we'll grow? Just on that, in the U.S., obviously pricing has become more of an issue, despite sort of raw material headwinds increasing, and you could perhaps think that pricing would get easier. What are the underlying reasons behind the tough pricing backdrop in the States?
Right.
Thank you.
Sure. When it comes to the market outlook, I think we're continuing to be positive on Europe. You know, clearly in Europe, we have not seen a very big bounce back from the very depressed levels we had through 2013, 2014. I think there's a lot more upside, even though it's slow, relatively slow, and that probably will remain slow in the coming for 2018 and beyond. North America, we've seen a much sharper recovery over several years. We do expect that growth to taper, as we've seen this year, and we'll probably see. Our outlook for next year is not finalized yet, but we expect that trend to continue.
We see, though, you know, and there's been maybe, we'll come back to that maybe at Capital Markets Day, but of course, we've seen these comments that, well, if you look at the replacement cycle, there should be a drop coming and so on. What's missed in that, is that the household formation that's happened over the last 10 years, right? Which provides a much stronger sort of underlying demand trend. If you try to adjust for that, then, and you look at the very positive consumer sentiment and unemployment rate, in low interest rates, and so on, we see a continuing good support for demand in North America also going into next year.
You had a second question, which I then forgot. Price pressure in North America, yes. The situation, of course, in North America is one, again, of good demand growth. It's a very attractive market, attracting a lot of volume. We have seen a trend, you know, we've mentioned that since second quarter last year, where the promotional intensity has increased significantly. At the time, I think it was driven by actually very low raw material prices. I think raw material prices are now more, let's say, back to historical averages.
I think it's fair to assume that that will have some impact on, let's say, the available gross margin for promotional spending. That would, of course, indicate that there's a little bit less room going forward for these very aggressive promotional stands in North America. At the same time, it's still a very attractive market, attracting a lot of volume and attention from global players. We fully expect it to remain highly competitive.
Thanks, Jonas.
Sure.
Our next question is from the line of Johan Eliason at Kepler Cheuvreux. Please go ahead. Your line is open.
Hi, here is Johan. Just a question related to your cash flow. I read that in Sweden, you have made an agreement that you will sort of prolong the payment terms for the suppliers. Is that something you see impacting you overall, or is it just such a minor thing, mainly affecting Sweden so far?
That's, that is indeed a minor thing specific to Sweden. I think, you know, you've seen it over a number of years, our strong focus on working capital has really paid off, and we're down to just over 4% of net sales in the quarter. Of course, we see less of a further opportunity to improve that. We think we are at a very attractive level here. We'll continue strong focus on it, managing inventory and payment terms, but the big benefits, I think, are behind us on that.
Great. Then just on the situation in North America, coming back to that again. We heard Whirlpool the other day saying that they didn't agree on pricing with Sears, and they stopped selling their own labels there, but obviously still supplying the private label. Is that an opportunity for you, or is this sort of such a rapidly declining account anyhow, so it won't really impact you?
Well, I mean, as we tried to be clear on, we don't comment on individual accounts, so I can't really do that. Of course, we're, you know, as I mentioned, we're really optimistic about the strength of the new range of products that we've launched under Frigidaire, we will, of course, push heavily to grow that business profitably. That's our key focus going forward. The Frigidaire brand family with a really strong lineup behind it, that's our main weapon for the coming year.
Good. Just a short question. The mix, online sales versus brick-and-mortar, I mean, maybe not directly for you, but implicitly through your clients, how is that today, in the different geographies, and how do you see that evolving? Thank you.
It's, yeah, it's growing rapidly everywhere. In North America, I think we're now approaching around 15% of the market, end market online. Almost all or the very large majority of that is through our traditional customers. In Europe, it's approaching 20%, with large varieties between different markets, with the U.K. being the highest or among the highest, and countries like Italy being the lowest, and a big spread there. On average, around 20% and growing rapidly. There is a combination of, let's call it, pure players, pure internet players, as well as then, click-and-mortar, relatively even split between those two. In Asia, it's a really, really significant variation, so.
But again, growing, of course, in China, growing very rapidly, in other markets, a little bit more, cautiously. Finally, Latin America, where in particular, Brazil, I would say, is probably a leading market globally for the sort of development of online sales platforms and commercial models, which is really interesting to see, and we're participating actively in that.
Is this trend positive or neutral to your margins?
I think it's largely neutral to our margins, since most of this happens through our existing key accounts, yeah.
Okay.
At the end of the day, this is. For us, what's interesting about this is that we want to serve our consumers where they want to shop, right? With the right tools and the right service levels and the right products. We're agnostic, let's say, to the channel in that sense, as long as we meet the needs of our end consumers.
Good.
Okay, we're now over to Christer Magnergård at DNB Markets. Please go ahead, Christer. Your line is now open.
Good morning. I had a question about, well, if you look at historically, normally it's about three quarters lag before from the appliance makers start to see raw material cost inflation to prices are started to move up. Now we're seeing Whirlpool, they're talking about the cost base, based price increase from the beginning of 2018. I heard something about 5% list increases. What are your thoughts about just general pricing for, well, offsetting cost inflation, as of 2018?
Yeah. Well, clearly, we have seen, let's go a little bit back, right? In 2016, we saw a very significant down trend in raw materials, and that's then turned around to headwind this year, and we do expect that next year as well. Again, you have to kind of look at the cycle and see where we are on versus the, let's say, long-term averages. I would say we're probably now back to the long-term average. Maybe that's even gonna go up a little bit further.
We, as I mentioned, we believe that some of the increased promotional pressure that we have seen has been a result of that initial sort of downdraft, and it's then, you know, reasonable, I think, to expect that there will be some less, some lower headroom, let's say, to be promotionally aggressive. In that sense, I think that's a reasonable assumption that we will have some less price pressure going forward. However, we're very clear that on the fact that we have an extremely competitive market backdrop, and we don't expect that part to change.
We're now over to the line of David MacGregor at Longbow Research. Please go ahead, David, your line is open.
I almost feel like jumping on that last question and asking: So, does that mean you're going for a price increase or not? You seem to have an opportunity to get behind a large market leader here, and gain from their cover. At any rate, I'll leave that to, if you wanna comment on that. My question is just, I guess, with regard to the private label business, Jonas, and, you know, how do you manage the P&L impact of declining private label volumes, and are there pricing provisions that allow you to recover the inefficiencies that you undergo as the volume continues to drop?
Yeah, right. On the first one, I will not comment, of course, as we don't comment on competitor behavior or actions. The impact of private label volume decline, of course, we have to offset through capacity adjustments and cost efficiencies in our supply chain, and that's something we're doing very actively, as you can see, of course, in our numbers. So far, we're quite successful in doing that, and we expect to be able to continue to do that, you know, at the current pace of decline of our private label sales. That's not something that is overly concerning for us.
Okay. Just follow up on Latin America. Can you just talk about the Continental acquisition and how it helps your Latin American business?
Sure.
Where does the brand fit into your market segmentation strategy?
Sure.
Does it help you at all in terms of your distribution?
Yeah, absolutely. I mean, we have in Brazil, our current market share is in the mid-30s, and that's with one brand. We only cover Brazil with the Electrolux brand right now. Our assessment is that it's challenging from a price point coverage perspective to grow that much more with a single brand approach. Continental is a strong sort of mass brand position, a well-known brand in Latin America, which then allows us or in Brazil in particular, which then allows us to cover those price points with a broader offering. That's the reason behind that.
Okay, thanks.
Sure.
Congratulations on all the progress.
Thanks very much.
Our next question is over to RBC and Matthew Spurr. Please go ahead.
Morning, everyone. Matthew Spurr from RBC. Jonas, can you help me out with that sales decline in North America? 11% is quite a big decline. You talked about the new products having supply chain issues. You've got the decline in the private labels, but you also said you delayed the launch, but you continued producing and selling the old products.
Mm-hmm.
I don't quite understand why that impacted sales quite so much. Can you help me just get my head around that, please?
Yeah. It's this launch is a little bit sort of key account by key account. You know, while we're introducing the new product range at certain key accounts, we're still producing the old range for others, right? That results in a quite challenging logistics and manufacturing execution during that transition period. And, of course, that, you know, in the accounts where we had or were transitioning, of course, to the new products, then, to the extent that we weren't able to deliver those, that had a significant impact. That's the reason behind that.
That's a relatively sizable part of the net sales decline in North America in the quarter, which we then, as I indicated, expect to only have you know, much more minor challenges within, in the Q4 . We are seeing already here in the key accounts that have fully transitioned, a very positive sales trend here in October on sellout of those new products.
I had a follow-up on the, on your guidance for the Q4 around price volume mix going slightly positive. From your comments earlier, assuming price is still going to be a headwind overall, you talk about the promotion environment perhaps not being as severe, given the raw materials. Is it mixed from that product launch, plus you expect a bit of volume to go positive then?
Right.
Is that the main part of the guidance?
Yeah, exactly. There's three parts to it, and that I also mentioned. One is North America, we are going to be largely, let's say, floored with the new products of new Frigidaire products in the Q4 , and we're seeing very good sellout of those products. We're really enthusiastic and optimistic about that. Given in the context of continued challenges on, as mentioned, on private labels and pricing, sort of sequentially, that's a big contributor. We have Latin America, which in the Q4 of last year, in particular in Brazil, we had a very weak quarter in both from a market demand perspective, and also we had a significant reduction on channel inventory.
Going into the Q4 , we see positive market demand growth and a very healthy channel inventory situation. That's a relatively sizable year-over-year benefit. Then in Europe, year over year, of course, last year, we were only in the beginning of our launch activities for the new AEG range, and we have also had some other significant challenges in the Q4 last year in EMEA, and of course, we expect to recover that in the Q4 as well. Then finally, but a somewhat smaller impact, of course, we're continuing with the turnaround of our home care business area with really good traction.
When you put all that together, we see a significantly more favorable environment than we saw in the Q3 .
Okay. I have one very quick one at the end. Sears Canada, is there any exposure there? I know earlier you said you don't comment on individual accounts, is there a template there for how volumes are displaced or any sort of consignment stock issues?
Mm.
I saw on my newsfeed that you had something earlier in the year with one of the retailers that went into liquidation around consignment sales. Just wondering.
Right
If you had any thoughts there.
Sears Canada is behind us. All the, let's say, financial impacts of that are behind us.
Thanks very much.
Sure. You're welcome.
Okay. Before we go to James Moore at Redburn, please can I remind all participants that if you do have a question, simply press 0 and then 1, if you want to remove yourself from the queue, just press 0 and then 2. James, please go ahead.
Thank you very much for the follow-up. I wanted to ask about Latam and EMEA. I can see from you and others in the market data that volumes are getting slightly better in Latin America, but it looks to me like pricing and mix is still quite a tough picture. As volumes carry on improving, do you think price and mix will remain tough, or can they come up, and do you still feel the same about the trajectory of margin potential in Latam, given, you know, another three months of development?
Right. Yeah, it is fair to say that a lot of the market recovery that we've seen has been in sort of the mass end of the business. I think that will likely continue and, but then gradually improve. We've seen also during the crisis, that a lot of the mix shifted towards the low end. I think we'll continue to see that, and that only gradually improving. I think the pricing has a lot to do with currencies and raw materials, and of course, we saw a strengthening of the Brazilian real starting really mid-year last year, and that I think has impacted pricing negatively.
We don't really expect that to continue sequentially unless something else significant happens on the currency side. When you kind of look through those items, I think we're in a pretty healthy position, starting to get back into a pretty healthy position, rather, in Latin America, and we're quite optimistic on the market outlook here for the Q3, Q4 , as well as into next year.
Thanks. On EMEA.
Yeah
I see that market volumes, you talk about them fractionally positive, but you and your big U.S. peer, I think, saw volume down. Is it just the U.K.? Is there something else going on there?
It's, it's the U.K. for sure, but then of course, we kind of mix a little bit, because we don't have good market data for Middle East/Africa. When we talk about market data, we mainly, we refer to Europe. Of course, we have a relatively sizable exposure to Middle East and Africa, in particular Egypt and the Gulf region, where we've had very tough, market demand development, and then that has negatively impacted our volumes. It's a combination of those two mainly.
Okay, thanks. Lastly, on raw materials, resins and plastics seem to be becoming an issue as well as just steel. given your comments earlier, were you factoring in with the significantly less next year, the picture for resins and plastics, or is that something to incrementally worry about?
No, that's including, well, I mean, our current view on all raw materials. I think the ability to lock in prices on resins is in most plastic compounds is lower. Of course, there we have a more variable exposure, generally speaking, than we do in steel. It includes all raw materials.
Thanks, Jonas.
Sure. You're welcome.
We're now over to Olof Cederholm at ABG. Please go ahead. Your line is open.
Yes, hi. It's Olof Cederholm from ABG. Just a quick question on how we should think about mix going forward. You say you've done most of the sort of portfolio streamlining now. Going into 2018, 2019, should we expect that the mix effects, which have been very positive, that they will slow going forward?
Actually, no. I think we're really continuing to put a huge amount of focus on our mix improvement and then the continued impact of that. What I was referring to were mainly sort of the big decisions on that. Now we're talking about execution. We're going into the focus on really driving our star products with profitable growth in our most competitive, most profitable, most innovative products. That's will remain our one of our absolute key focus areas also into the coming year and the coming years.
All right, perfect. Just a quick follow-up on capital allocation. You've been more active on M&A over the last 12 months. Is that the plan also going forward? Could we also see larger deals going forward? You certainly have the balance sheet. Thanks.
I think we're very pleased with the acquisitions that we've made. They're really kind of complementing and filling some gaps in our, in our offering, and that's an approach that we continue to see also going forward. We have been focused a lot on professional and key emerging markets, as we've been talking about. I think as the home care and SDA business is now also returning to its potential, that's also an interesting area to further expand for us.
I can't really comment on the size because that's, it, you know, if something of high, of larger size that fits our strategy comes across, we will look at it, but that's hard to predict.
All right, many thanks.
Thank you.
We're now over to David Vos at Barclays. Please go ahead, David.
Thanks for taking my question. Just 1 more, please, on pricing in the U.S. We've spoken a bit about it already, but I have perhaps missed any comments around changing industry dynamics. What I'm particularly referring to here is, you know, with GE Appliances in new hands for 12 months now, have you seen that business become more aggressive on pricing or not? That's the question. Thanks.
Yeah, again, we can't comment on individual competitors or accounts. I would say this, that as I indicated, look, the U.S. is a very active market. It's attracting a lot of attention. Of course, one of the reflections of that is the higher acquisition of GE, and that's a tough competitor. In general, yeah, it's a competitive market, attracting a lot of volume and focus and attention, resulting in continued promotional price pressure. As we have indicated, of course, we see less, let's say, gross margin opportunity for that going forward, given the raw material headwinds.
Okay. Thank you very much.
Sure. Sure.
It looks like our ultimate question is over the line of Johan Eliason at Kepler Cheuvreux. Please go ahead again.
Just a minor follow-up. You mentioned Anova's significant impact on the top line in small appliances. Could you say anything about the profitability of that business in the quarter?
Yeah, sure. It's. Q3 is not a very strong quarter for the Anova business. It's mainly actually the Q4 , where we see a lot of volumes and margin in Anova. That's, you know, quarter to quarter will be a net contributor in the Q4 .
Okay, thank you.
Thank you.
May I please pass it back to you for any closing comments at this stage.
Thank you very much, operator, thanks, everybody, for good questions. Let us summarize the Q3 . The group achieved another quarter with strong earnings improvement, driven by most business areas, this resulted in an increase of our EBIT margin from 5.9%– 6.7%. We are focusing on product portfolio management and further improving our mix, while driving cost efficiencies, which is mitigating the increased costs from raw materials and the currency headwinds. EMEA and Asia Pacific delivered strong profitability in the quarter, our North American operations showed a stable margin in development. In Latin America, markets are showing recovery, we're progressing according to plan on the cost savings program.
Actions to restore profitability in home care and SDA are making excellent progress, the profitable growth journey continues for our important professional segments. All in all, Electrolux focus on continuous earnings improvement resulted in a strong financial performance. Before we close this presentation, I'd like to remind everybody that you are now welcome to register for our Capital Markets Day here in Stockholm on November 16th. You can register to the event at our website. During the CMD, we will provide you with further insight into our business and a financial outlook and update for 2018. With that, thank you very much for listening and the good questions, and talk to you in a couple of weeks' time. Bye-bye.