Hello everyone, welcome to this presentation and discussion of the third quarter results 2015 for Electrolux. With me here today, I have our CFO, Tomas Eliasson, and our Head of IR, Catarina Ihre. Before we go into the details of the Q3 earnings, I would like to make a brief comment on the status of the GE Appliances acquisition. As most of you know, on July 1st, the U.S. Department of Justice filed a suit to stop the acquisition of GE Appliances that we announced last September. As we have said previously, we strongly disagree with the DOJ's assessment of the acquisition, and we are confident on the merits of the case. We are now preparing to defend ourselves in court in November. At the same time, as you've probably read, we have this week presented a proposal for settlement to the DOJ.
We believe this transaction will provide consumers with access to a greater choice of high quality, innovative products at more competitive prices. This will improve the dynamics in the marketplace. We still have the ambition to get this deal done to close it before year-end. Now let's turn to our presentation of the Q3 results. In the third quarter, Electrolux continued to show positive organic growth, driven by good development in our two largest business areas, North America and EMEA. The organic growth for the quarter was 2%. Price mix contributed positively. There was also some contribution from acquisitions in the quarter, including positive translation effects, total sales increased 8.7% in the quarter. The market trend in both North America and all key Western European countries continued to be good in the quarter, supporting our businesses in those markets.
In Latin America, the Brazilian market continued to be weak and deteriorated significantly in the quarter. In total, the group's earnings improved in Q3, and EBIT increased 8% versus a year ago. This was a result of a positive contribution from price mix and due to cost savings and higher efficiency within the group. The strength in earnings resulted in a strong cash flow in Q3, which improved substantially year-over-year. On the next page, here, I'd like to briefly mention a few of the key market highlights during the quarter. Number one, in September, Electrolux participated in one of the largest fairs in Europe, called IFA, in Berlin. This year, we had a strong focus on connectivity, and we showcased the concept of My Smart Home in our well-attended booth, sharing our technology, products, and its benefits to consumers.
We were present with both major and small appliances, and in overall, it was a successful showcase of the next generation of smart appliances coming from Electrolux. Second, during the quarter, Electrolux launched the world's first connected steam oven with an integrated camera. It combines two trends, the growing interest in cooking with tasty, healthy food at home through the technology of steam cooking, with the newly developing ecosystem around connected appliances in the market. With the CookView camera, you can get a live feed direct from your oven to your mobile devices. Lastly, in the quarter, I'd like to point out Electrolux was once again ranked number 1 as the most sustainable company in the world in the household durables category for the 9th consecutive year, as measured by the Dow Jones Sustainability Index. We're obviously quite proud to maintain our leadership role for yet another year.
If you go to the next chart, this next chart shows the sales development for the group in local currencies. In the third quarter, we continued the growth trend by increasing sales in local currencies by 2.1%. In addition, we had acquired growth of 0.3%, contributing positively to that trend. Over the last couple of years, Electrolux has achieved a compounded annual growth that has been in line with our strategic target to grow the company 4% annually. Let's go through each of the business areas, and we'll start with EMEA. Major Appliances Europe, Middle East, Africa, continued to show positive organic sales growth, driven by good mix and higher volumes. Market demand in all key Western European countries continued to increase, while demand in Eastern Europe was impacted by sharp declines in Russia and the Ukraine.
Electrolux sales volumes in several key European markets continued to grow in the third quarter. Our mix improved in the quarter due to the ongoing strategic focus on higher-margin product offerings. We continued to gain market share in key Western European markets. Our underlying results increased 25% versus the previous year, and our EBIT margin reached 6.3% in the quarter. This was mainly a result of higher sales volumes, improved product mix, and benefits from ongoing cost efficiency. Price pressure continued to have a negative impact on our operating income. Now let's turn the page and talk about the overall market development in Europe. The European market continued to grow in the third quarter and was up by 3.3% if you exclude Russia. Including Russia, the market was flat.
Demand in Western Europe increased by 5% and has now increased for 7 consecutive quarters. Growth was broad and particularly strong in Italy, Spain, and the U.K. Demand in Eastern Europe declined by 15%, where Russia was down by 30%. Apart from Russia and the Ukraine, growth actually was positive in Eastern Europe. We expect the European market to grow by 1%-2% for the full year, including the deterioration in Russia and the Ukraine. You can turn to the next chart, our operations in North America showed a year-over-year improvement in the third quarter, both in terms of organic sales growth and in earnings. Electrolux sales volumes increased in almost all core categories. We saw good development in refrigeration, freezers, and cooking products.
The third quarter generally shows a seasonally strong pattern, there's usually a slowdown in the fourth quarter due to the December holidays. During the quarter, we continued to work to restore profitability within food preservation or cold products. Earnings in this category have, in previous quarters, been impacted by the transition of the product ranges following the new energy requirements by the U.S. Department of Energy. Actions are also underway to ramp up the cooking plant in Memphis, which had been slower than anticipated. We estimate that this work will continue throughout this year and into the first half of 2016. All in all, our earnings in North America improved by SEK 225 million, or up 43% year-over-year, and we achieved an operating margin of 6.4%.
The recovery in profitability was a result of positive price mix and improved cost efficiency. Let's turn to the next slide and talk about the market development in North America. Market demand for core appliances in North America increased by 8.2% in the third quarter. The strong development in both the replacement market and the builder channels reinforces the strength of the U.S. appliance market. This means we have a year-to-date growth for the industry of 5.7%. We believe the underlying market for appliances in North America remains healthy, and we continue to see consumer confidence and the macro environment to be positive for future appliance demand. Within builder channels, we also see continued improvement in the housing market. As such, we now expect the full year market growth in North America to be in the range of 4%-6%.
On the next page, if you look at market demand for appliances in Brazil, it deteriorated significantly in the third quarter. The macroeconomic outlook remains quite weak. The unfavorable market conditions affected both our volumes and mix negatively as consumers continued to trade down. To mitigate the weak market in Brazil, our team have taken substantial cost reduction actions. We have also implemented price increases to compensate for the continued currency headwinds. These measures, to some extent, mitigated the negative development. The decline in operating income in Brazil was partly offset by stronger financial performance in Argentina and Chile in the quarter. Now let's turn the slide and talk about our operations in Asia Pacific. Market demand in Australia was positive in the quarter, with increased demand for core appliances. Demand in China slowed down and was negative, while the picture in Southeast Asia was mixed.
Electrolux sales declined in the quarter as a result, primarily of proactively reducing our activity or business in China, but also due to some lower sales in parts of Southeast Asia, which affected our top line. Our sales in Australia continued to show good growth. The new product launches and previous price increases in Australia contributed positively. Our operating income in Asia Pacific declined in the third quarter compared to last year. However, these earnings were impacted by both the negative trend in China, but also due to an inventory write-down of approximately 70 million SEK in the quarter. Both Australia and Southeast Asia performed well and had positive earnings impact. Now let's continue with small appliances. Sales in our small appliance business were negatively impacted by lower volumes in the US and Latin America in Q3.
However, sales of vacuum cleaners in Western Europe continued to show good performance. New premium products within floor care and small domestic appliances led to an improved mix. Due to the positive price and mix and cost efficiency measures, our operating income increased year-over-year. However, headwinds from currency continued to impact earnings negatively. We have a strong focus to restore profitability in this business area and are taking measures to reduce costs across several of the markets. Now let's turn to our professional business. Professional products showed strong performance in Q3 and continued to benefit from growth in key strategic markets. Sales growth was positive in Europe, North America, and Middle East Africa, while the trend in Eastern Europe and Asia was weak.
The acquisition of the manufacturer of professional dishwashers in China, a company called Veetsan, had a positive impact of 2.2% on sales in the quarter. In the quarter, our professional operations achieved 15% earnings improvement year-over-year, which resulted in an all-time high EBIT margin of 13.5%. This was driven by prior prices and increased operational efficiency. Now I'd like to ask Tomas to give his thoughts about our financials and our cash flow in the third quarter of the year. Please, Tomas.
Thank you, Keith. Let's start with the financial overview, as usual. The reported sales was up 8.7% in the quarter, of which 2.1% was organic. Acquired growth was 0.3% from our recent acquisitions in China and Australia. The currency impact was a positive 6.3%. We clearly see a pickup of the organic sales growth in 2015, as you've heard, driven mainly by EMEA and North America. Earnings were up 8.2%, with a particularly strong improvement in those two business areas, EMEA and North America. Cash flow was also very strong in the quarter, up 100%, driven by higher earnings, working capital, and a prudent approach to CapEx. Also earnings per share was up 8.2%.
Let's now take a look at the sales bridge, the sales and earnings bridge for the quarter. Let's start with organic growth, where we split the numbers into price mix, then into everything else, which we call volume here. It's really everything else, which is not price and mix. If we start with the volumes, they were down 2.8% in the quarter, mainly driven by Latin America, China, and all regions in small appliances except Europe, where we do really good. However, the effect on the EBIT, as you can see in the table here, was positive in absolute terms, SEK 105 million, driven by very good positive leverage in EMEA, in the professional business, and cost savings and efficiency gains throughout the group.
If we look at the next column, price mix, that contributed with SEK 445 million to the operating income in the quarter. If you compare this with the negative transactional effect of SEK 389 million negative, you can see that we, in total, have more price mix than we have negative currency transactional effects. Of course, it varies a bit from region to region, a little bit behind in some regions, a little bit ahead in other regions, but in total, we do compensate. You can also see that we had a rather strong positive currency translation effect in the quarter, SEK 164 million. Acquisitions contributed with SEK 12 million in the quarter. That's from Australia and China, as mentioned.
The other number here, the negative SEK 222 million, is mainly the GE Appliances transaction integration costs in the quarter of SEK 126 million, and also, as Keith mentioned, an inventory write-down in China of SEK 70 million. Talking of the GE Appliances transactional in-integration costs, year to date, for nine months, they are just short of SEK 400 million. If we close before the year end, it'll be at least another SEK 150 million in the fourth quarter in transaction costs. The big one here is, of course, the success fee to our advisors. In total, then, this means that we had a margin accretion of 1.8% from the organic part, which mitigated the dilution we had in the quarter from currency and from acquisition costs.
Let's move slides then and have a look at the currency effect. Just like during the first six months, the U.S. dollar has continued to strengthen against emerging market currencies, and we have also seen continued strong currency movements in this period. As previously, it's the Latin American operation, which takes the biggest hit, both major appliances and small appliances. In total, SEK 390 million negative in the quarter. If you look at the table, we, of course, have a big effect from the ruble. We have big effects from the Australian dollars and the Canadian dollar as well, two big import countries. We have positive effects from the British pound and from the Swiss franc.
All in all, SEK 389 million in negative currency effects, and to be compared then with the price mix effect, which you see at the bottom of SEK 445 million. For the full year, with these rates, we see around SEK 1.9 billion in negative transactional effect and around SEK 500 million in positive translational effect. That gives a total of negative SEK 1.4 billion. The ambition, of course, here is to keep the price mix at the same level or actually a little bit more than this level. Now let's move page again and have a look at the cash flow. The cash flow was strong in the quarter, SEK 3.2 billion, driven by higher earnings and also by working capital.
The CapEx is stable, as you can see, no major change. On the next slide, you have the long-term view on the cash flow, we have a strong seasonality in the cash flow. Q1 is always weak. Q2 is the best quarter. Q3 is historically a weak quarter. However, this year, or this quarter, it was unusually strong. Q3, as you can see, sequentially, was just as good as Q2. Very good development, this, of course, continues to strengthen our balance sheet. Our net debt of EBITDA is now down to 1.0, basically, which is half of what it was only a year and a half ago. The financial net debt is down to SEK 2 billion now, it hasn't been this low since 2011. Okay.
With that, I would like to hand back to Keith for summary and conclusions.
Okay. Thank you, Tomas. Let's actually just jump right to the summary page for our outlook for Q4 and 2015. Looking ahead into the fourth quarter and full year, we believe that growth will continue for both Electrolux and the appliance industry. We expect a positive growth trend in Europe to continue, although the development in Russia and Ukraine, we expect to remain weak. We anticipate growth in North America to continue, supported by a healthy macro environment, lower unemployment, higher consumer confidence, and also from continued improvement in the housing market. Latin America continues to be weak with limited visibility. We expect demand to remain weak in Brazil for the remainder of the year. Demand in Australia appears to be better, to be stable, and there may be room for continued market growth.
In terms of price and mix, we expect a slightly positive net impact for EMEA, North America, Latin America, and Asia Pacific in Q4. We expect raw material costs to have positive net impact in the fourth quarter and for the full year, primarily driven by steel and resins or plastics. In 2015, we continue our cost reduction activities to increase our efficiency in our operations. We will focus on initiatives to further improve structural costs. We expect benefit from savings to approximate SEK 1 billion-SEK 1.2 billion for the year.
One note, to bring to your attention is that as we have, as you know, postponed our planned Capital Markets Day from November to early next year due to the GE acquisition. We can comprehend that when we meet together, we will come back to you with some guidance for 2016 and update you on a market demand and raw material picture, outlook in the latter part of November so that you can update your 2016 models and forecasts. Expect that from us, and about, around about the same time as we normally would have Capital Markets Day, we'll probably issue, probably in the form of a press release, our overall expectations for 2016 in terms of demand and raw materials.
Expect that from us to help you with your 2016 models. Okay, Catarina, I think with that, I think we're ready to take some Q&A.
Yes. Good morning, everyone. We're now ready to take your questions. Please operator, go ahead.
Thank you. Ladies and gentlemen, if you have a question, please press zero one on your telephone keypad, and you'll enter a queue. There'll be a brief pause while we're awaiting questions. We have our first question from Andreas Willi, JP Morgan. Please go ahead. Your line is now open.
Good morning, everybody. My question relates two things. First, on your guidance for the U.S. market, the 4%-6% range would imply quite a material slowdown, potentially from the 8% run rate of Q3. Is there anything you see in the market that would lead to that, or should we could the good growth of Q3 also continue? On cash flow, which was very strong in Q3, you said it's unusually strong. Should we expect some reversal of that in Q4, or is that just an improvement in the way you can run the group in terms of working capital? Thank you.
Okay Andreas, thanks for your questions. Tomas, I'll take the first one if you take the second one, is okay?
Yes.
Andreas, in the U.S. market, no we're not signaling a downturn in the market. We're really just reflecting, you know, a full year forecast. Now we've, you know, we've gone from 3%-5% to 4%-6%. The primary reason is year to date, it's at 5.7%. That's the only reason. There's no hidden notion that we think it's gonna get slow, slower, going forward. That's that part. Thomas, will you address the cash flow question?
Yeah, absolutely. If you look at the pattern, Andreas, Q4 will most likely not be as strong as Q3. Q4 always slows down a little bit. Then when it comes to working capital, there's always an end to what you can do with working capital, of course. There is some working capital action, let's say, structurally in the quarter, but there is also, a part of this positive number, which is, you can say, accruals for customer bonuses and for earnings improvement, et cetera, et cetera, which sort of weighs down the earnings and which will have to go out as cash, not in Q4, but in Q1 and Q2 next year.
Thank you.
Thank you. Our next question here comes from Andre Kuklik from Credit Suisse. Sorry about that. Please go ahead. Your line is open, Andre.
Yes, good morning. It's Andre from CS. Can I just ask on the North American performance in the quarter, clearly impressive margin despite the issues. Could you just talk about whether that's all underlying, or was there any factors in North American Q3 that were operational but particularly positive? Secondly, on that, how much were the costs related to the ramp-up issues that are still ongoing for Memphis in the quarter so that we have an idea versus the sort of previous, I think, run rate that you talked about around SEK 300 million-SEK 400 million?
Let me start with the overall performance in North America. It was all operational performance. There were no one-time effects. As you know, if they were significant, we would have called them out, but there were none in the quarter. Of course, there's always tiny things that are pluses and minuses. It was a good, strong underlying operational quarter for North America. The reason is, as we've talked previously, is we have mitigated, as we communicated previously, that we would, the DOE impacted part of the company. The Department of Energy drag we had previously, I think last time we talked, we said, look, we think we'll get that back stable again by mid-year Q3, and that's what you're seeing.
There was good performance in many of the businesses, but in particular, the refrigeration business had a strong quarter because we got behind us, the DOE challenges. Again, I think partly, you know, the team did a nice job doing what we committed to do. Memphis, to your point, you know, as we said previously, that's still going to take a little bit while longer, and it's improving. It's improving every week, every month, the line rates, the yield, the utility, the uptime, but we're still going through the startup phase of that plant, and that will continue. I'm actually reluctant to try to put a specific number on that. That's probably a little bit too specific for us, if I could avoid that.
Okay, got it. If I could just follow up on DOE issue resolution. There was no catch-up effect or anything like that in Q3 that helped?
Just so I understand, when you mean catch-up effect, you mean, what do you mean?
A pent-up volume that went through your operations, as you resolved the issue, or anything like that?
Not really. It's just, you know, got the plants running well again, right? I mean, when these - you know what we do, we make stuff, right? When these plants run well, it has an impact, and when they don't, it has an impact. We struggled with that DOE transition that negatively impacted our factories, and the team did a nice job of recovering from that, and candidly, that misstep. You know, back in stable position in our factory.
Great. Thank you very much.
Thank you.
Could we have our next question then, please?
Our next question comes from Johan Eliason from Kepler Cheuvreux. Please go ahead. Your line is now open. Johan Eliason, your line is now open. Please go ahead and ask your question.
Sorry, now I pushed the mute button. Europe, the market seems to be growing well here. Could you talk about where the price pressure is today and where it has been historically? Is it the same rate, or has it improved, or how is it looking in Europe?
Yeah, as you know, historically, if you go back a little bit, when we were in the recession, it was kind of running around 2%. It's now below that a bit, it's in the 1%-1.5% range, and it really has been in that range for a few quarters now. We don't see it getting worse, but we don't see it yet getting materially better. It's in that 1%-1.5% range is kind of where the price deflation is.
Good. You talked about leverage on the European volumes as well. Is there anything specific we should take into consideration there? Historically, leverage has not been a big sort of earnings driver for you.
Yeah no, as you know, of course, actually, we you know, leverage does matter for us. I don't know, Tomas, can you speak to that a little bit?
Yeah, we I mean, we do have a leverage here from both from volume and from mix, that's on the positive side, that helps. The price, of course, is negative, but we still have a pretty decent chunk of savings and efficiency coming into the operation. We are in the, well, I shouldn't say in the mid-low, but we are still working with the restructuring program that we announced in November 2013, and it will run until the end of 2016. That still gives good contributions and helps the leverage.
Excellent. Thank you very much.
Thank you.
Thank you. Our next question comes from David MacGregor from Longbow Research. Please go ahead. Your line is now open.
Yes, good morning everyone. Can you hear me okay?
We can.
Okay, thanks. A couple of questions. I guess, just to go back to the European price pressure, I wonder if you could just elaborate on your thoughts on just how long this condition is likely to continue? Is it being driven by one player in particular? Is it just where we are in the cycle, and as the cycle progresses, that'll alleviate? Or just if you could sort of dig in a little further on the price pressure in Europe and just how sustainable you see that.
Yeah. Well first, let me say good, very early morning to you, David.
Thank you.
Thanks for joining us. Yeah, good question, and you know, there's no, there's no magic here, right? It's, you know, does the market demand improve? Because we're coming out of, as you know, several years of weak demand, and now, at least in Western Europe, we've got, I think, as I mentioned earlier, about seven quarters of coming back. If you look at, you know, look at the data underneath that table, it's actually not only is it coming back for seven quarters, but it actually last three, it's strengthening. To your point, I mean, demand matters, right? When the asset utilization starts to increase, you know, normally, you know, people get, you know, more aggressive, in terms of their pricing strategy. Certainly, we do, right, as our factories start to fill up.
I think the little bit of that is just how long is that gonna take? You know, how much demand do we need to get the asset utilization up to where people have confidence, in their ability to get prices up? The other factor, as you know well, is, you know, what's the market structure look like? You know, there's been some changes in the market structure. I think as those two things evolve, assuming they'll continue to evolve in the right direction, I would expect that the deflationary market would ease.
Based on the kind of levels of growth you're seeing in Western Europe right now, the focus on the West, when do we get to that level of capacity utilization that you would expect pricing to begin becoming a little more rational?
I think my opinion, David, based on, you know, our U.S. experiences, you know, because, you know, the peak to trough was, you know, 20-plus %, it takes a few years to recover that, few being, like, 3. I think we're still a year-plus away from that, is my guess.
Okay, that's helpful. Secondly, is there anything you can say about your offer to settle with the GE transaction, and just the thought process behind what you put on the table?
Yeah, of course I can't talk specifics about that David, other than to acknowledge what you know, which is we have put an offer on the table. We're in discussions with the DOJ about a settlement. As soon as we have news to report, we'll certainly do that. Sorry, I can't, I'm not at liberty to go beyond that right now.
Okay, thanks very much.
Thank you.
Thank you. Our next question comes from James Moore from Redburn. Please go ahead. Your line is now open.
Yes, good morning everyone, Keith, Tomas . I've got a couple of questions. On the North American core white business, could you perhaps help us understand the degree to which Anderson and St. Cloud, Memphis volumes have refilled? I think I'm really trying to understand if we fully reloaded production levels ahead of plan to whatever you see as normal for current demand, or whether we still have more to fill. If you could talk about that plant by plant, that'd be great. Secondly, I suspect the answer is you can't talk about it. Specifically to the DOJ's comment in the pre-court hearing, that the package offered wasn't that different to any originally offered package. Could you say whether you feel it was different or not?
Hello, James. Let me answer, try to answer both questions as best I can. Yes, in North America, let me give you a plant by plant. I would say Anderson and Juarez were running hard and running well in the quarter. As you know, the summer is the, you know, July, August, September is the cold season, right? You get heat, you get compressors fail, and you sell a lot of refrigerators, right? It was a strong part of the season for the refrigeration business, and thankfully the team had done a nice job of getting those factories back on track, and we were able to service that demand. We're gonna start going into the weaker season now for refrigeration in Q4, of course, as it gets colder.
Yes, in those two factors, I'd say we ran well and full and close to full, you know, in the peak season. Of course, we're gonna have additional capacity here in Q4 and Q1, there, as this season comes down. In St. Cloud, we could use more volume. St. Cloud being the freezer factory, we could use more volume there. I mean, again, the good news is the plant's running well now, so you know, you got high utility, high yield. And so, you know, we could use a little bit more demand there. Again, the freezer season, actually, which is a little bit counterintuitive, is more the fall, because believe it or not, it's the hunting season that drives freezer sales. It's funny phenomenon. Just fun fact to know, I guess.
Okay, so that's kind of the call, and hopefully, that answers your question on the cold side. On the DOJ side, you know, as you said, their remark was: We don't see any different. Our position is: It is different. Hopefully, they'll have a chance to read it and understand that.
That's very helpful. Just on Memphis, is there anything to say there?
Not more than probably I said during my remarks, which is the plant is week by week, month by month, doing better. You know, we're making more products, the line rates are going up, the yields are getting better. You know, it's a, it's a long process to... I would say, before we're running at, you know, what I would call, you know, a high level of operational excellence in that factory, it's gonna take most of the year and into the first half of next year, I would say, James.
Is that a profit opportunity next year, getting Memphis running?
Well, yeah. Yes. We're gonna make more money when that plant runs well than when we are now, for sure.
Great stuff. Thanks.
Thank you.
Thank you. Our next question -
Could we have our next question?
Yes, sorry. The next question comes from Natalie Faulkner from Esplanade. Please go ahead, your line is now open.
Yes, good morning Keith, Tomas, and Catarina. Thank you for the presentation. I have just a couple of questions on the FX first. We are FX transactional effect of almost SEK 390. Was it in line with your expectations, or was it a bit lower, for example, than you expected or higher? If you can just describe that. Also question on the North America. North America sounds very rosy, and it's not just from you, it's from your peers and from your retailers. Do you see any clouds on the horizon there, or do you feel that it is really strong underlying without currently no worries? Thank you.
Yeah. Maybe let me take the second question first, and then, Tomas, you can address the currency question. Yeah, I - you know, again, if you look at what drives appliance demand, particularly in the U.S., but true for most markets, you know, there's three or four key variables, right? What's the overall economy and you know, what's the GDP? But beyond that, it's housing activity, that's both housing starts and resales, because when houses turn, people re-outfit the kitchen with appliances. Right now, the U.S. is, I think, is forecasted to do about 1.1 million housing starts in 2015. As you probably know, the household formation requirement for housing is about 1.3 million-1.4 million starts. There's still room.
It's improving, it's up double digits, the housing starts, and there's still room to go. That's a key variable we think that will continue to stimulate appliance demand. Second, of course, as you know, is unemployment. People don't buy appliances if they don't have a job, right? With unemployment at 5.1%, that's a pretty low level in the U.S. Third is interest rates. Even though the Fed is threatening to increase right now, 30-year mortgages are at or near 30-year lows, right? Money is available, and it's affordable. The fourth factor is consumer confidence. As I look forward, and as you know, the consumer confidence index from the Michigan index continues to improve.
If you put those four factors together in a regression model, the R-squared relative to appliance demand is very, very high. All four of them are moving in the right direction. That doesn't mean there aren't issues in the U.S., right, with trillions of dollars of debt and all other issues. The factors that drive appliance demand are lining up in the right direction. You know, how long will that last? I don't know. Right now, it looks to us like that demand is gonna continue, at least in the near term, if that helped.
Thank you.
Tomas, if you could, respond to the currency question.
Yeah, sure. I mean the expectation was around minus SEK 400 for the third quarter with the rates we had at that point in time. Overall, we are where we expected to be, but there are, of course, differences, because all the forecasts that we give on currency effects is assuming the same rates as we have at that point in time. The rates have moved, like the BRL has moved and et cetera. We have other movements as well. We're a little bit helped by hedges and so on. Basically, according to expectations.
Thank you very much.
Thank you. Our next question comes from Lucie Carrier from Morgan Stanley. Please go ahead. Your line is now open.
Hi, good morning, everyone. Thanks for taking my question. A couple of follow-ups on my side. The first one on Memphis. In terms of the ramp up, I mean, you said it was going to go now into 2016, but when you think about the cost and the development of that ramp up, are we indeed going now to lower cost, lower impact, or we haven't passed that tipping point? That's question number one. Question number two is regarding inventory level at your distributor. I mean, we've seen very strong growth in this quarter and also the previous quarter. Do you think there was some strong restocking, or do you think the inventory situation is healthy?
Last question was actually on the situation on the professional product. We are seeing, it seems that quarter, a bit of a slowdown in terms of organic growth. Is that just maybe kind of project related, or should we, you know, kind of look at that market a bit more carefully in terms of the dynamics?
Yes, good. Let me try to take those in order, maybe. Memphis, yes, certainly as it ramps up with higher volume and improved throughput and yield, our cost per unit, both from a variable standpoint as well as a fixed cost amortization standpoint, will go down over time. You asked about where's that tipping point? You know, it's hard to call that by month. Of course, you know, the better utilization, the better, you know, the more volume we have running through there, the better it's gonna get. You know, that's partly why we're, you know, we're calling, hey look, this is gonna continue into the first half of next year, because that tipping point is probably not this year, just to be straight with you. It's coming.
Inventory levels in the trade, I think, in the U.S., I'm assuming, is the question, at retail and distributors. I don't see that. I'm not aware of a high buildup of inventory. It doesn't mean there aren't pockets of it, you know, depending on the product, depending on the retailer. You know, as you probably recall, all of us have been burned by carrying too much inventory, all of us being every part of the appliance industry in the past, including retailers and manufacturers. I think people keep working capital and inventory pretty tight. At least that's been my experience over the last couple of years, two, three years. I don't, I don't see, and I'm not aware of any big bubble of inventory out in the trade there.
There could be pockets by product or by retailer, or distributor, but we don't see, or at least I'm not aware of any big bubble that's out there because the demand has been so good. Lastly, on your comment on professional, it's exactly what you said. It's a contract business, right? It's a project business. You know, it's always about, you know, what's kind of your lag of projects or your input of projects relative to the ones you're executing, how many more you come in. You know, we had some big flurries of several projects that we're not comping at the moment in parts of the world. But I don't think there's any fundamental, hey, the market's deflating. Obviously, China is weaker.
Obviously, Brazil is weaker, but Western Europe's very good. North America is good, continues to be a good market. Australia, of course. The big markets for us, we think are fine, and it's more of a contract or project-related, comp situation.
Thank you very much.
Yeah.
Thank you. Our next question comes from Fernando Younes, from Younes Advocates and Associates. Please go ahead. Your line is now open.
Yeah, hello, thanks for picking my question. I would like to learn more about the situation in Brazil. How is the market in Brazil? How much has it declined, and what is the expectation for Q4 in 2016? Thank you.
Let's just talk Brazil, because actually it's important to separate Latin America, Brazil, versus the rest of the market. You know, it's really an acute Brazilian challenge at the moment. It's really Brazil that is very weak, obviously, economically, and inflation, unemployment. Appliance demand was down about 25%. I think it was 24%-25% for the quarter. That's wicked. You know, you take a 24%-25% decline in demand year-over-year and a quarter, that's horrendous. That's what the situation is, and as you probably know, it's not unique to appliances. The automotive industry's got the same kind of downturn in terms of percentages. It's a very weak market and difficult situation.
We don't see in the short term, and of course, you know, now I'm starting to speculate, but it's hard for us to see in the short term an improvement. We think it's gonna take a while. For sure, it's not gonna be bounce back in Q4. The question is, you know, how much of 2016 is it gonna take? You know, will it be 2017 before it comes back? That's our planning. For planning purposes, we're not planning for a recovery in the near term.
Thank you.
Thank you.
Thank you. Our next question comes from Karri Rinta from SHB. Please go ahead. Your line is now open.
Yes, thank you, Karri Rinta, Handelsbanken. I have a technical question related to the ongoing legal process in the U.S. related to GE. You mentioned in the report that your ambition is to close this deal by the end of this year. I guess at the hearing on Wednesday, the indication was that if there is a trial, the final ruling is not expected until January at the earliest. My question is that it would be helpful if you would go through the basics of what needs to happen if there is a settlement, what needs to happen between the settlement and the date when you can close the deal?
Is that a sort of a two-week process, two-month process, and what technicalities need to take place for you to be able to close the deal when there is a approved settlement on the table? Thank you.
Yeah. Again, I'm gonna try to answer your question, but I've got limitations on what I can say here. I would say that, to repeat, we are very confident in the merits of this case. You know, whether we settle it or we go to court, you know, we're going with full expectations that it will be ruled in our favor. We are, as you would guess, we're motivated to get this done. I know that GE is motivated to get this done, and we're driving as fast and as hard as we can to get it done as soon as possible. You know, there's a, you know, there's someone called Judge Sullivan out there that, you know, he's mildly interested in our motivations, right?
You know, I can't predict what he's gonna do or not do. That's why we say, look, you know, everything we're doing is driving to get this thing done, and we're confident it will be successful, but we're planning to get this done this year. You know, can I say with certainty, given that I can't speak for the judge? Of course not. We're driving to get this done as certainly as soon as possible, and our intention is to get it done this year, whether that's through court or through remedy.
All right. Thank you.
Thank you, Karri. We have room for two more questions, so please, go ahead.
Thank you for that. The next question comes from David MacGregor from Longbow Research. Please go ahead. Your line is open.
Yeah, Keith, just thinking ahead to 2016 and going back to the previous question on Brazil, you have the Olympics coming up, and, you know, we had the World Cup that was pretty disruptive to what saw otherwise a pretty troubled market. What's the thought with respect to 2016 and how the Olympics play into this?
Yeah. No, that's a good question, David. I think actually it'd be a plus and a minus for us. I think it'll be a plus on the professional side, because, you know, we will probably, you know, and I think we know already, but, well, I got to get confirmation. We generally get sourced as the provider of all the equipment for these, you know, World Cup and the Sochi Olympics. We're generally the provider of the professional equipment for these major world events. I think we'll have a plus from that standpoint. To your point, you know, I think, you know, I think probably the residential appliance demand will go soft for a period of time during the Olympic period. I think it's more likely than not that it'll soften.
It's a little bit hard to, you know, to imagine softer than -25%, right? Which is going on right now. Hopefully, it'll be a little bit better than that by that time.
Okay. Secondly, just if you could talk about, I know it's a small part of the business overall, but China and the extent to which the inventory write-off leads to any kind of discernible margin improvement going forward.
China, as we've talked about previously, you know, We made an attempt to launch a new line into China, more premium, and candidly, the product was good, the design was good, the marketing campaign was good, but we didn't get successful placement at distribution, and the economics of that distribution didn't make sense. We had to, you know, as you know, the signs of a good company, at some point, you got to stop throwing good money after bad, right? recognize that it's not working. That's what we're doing. We're pulling out, we're pulling back. As part of pulling back to regain or restore profitability, is, you know, there's inventory out there, right? That's what we're doing. We're writing off that inventory.
You can't just let it sit there when you know it's not going to sell, as you know, from an accounting standpoint. That's what's happening. Of course, the team is looking at, okay, what's plan B or plan C in this case? I'll review that, Tomas and I will, at the next, we call, sector board in November. Clearly, I just talked to the sector CEO day before yesterday, and he's looking for some guidance. Of course, the primary guidance was profitability, right? I'm not interested in hollow or negative earnings market share. Stay tuned. We'll come back to you with that. Right now, we're, you know, we're digging out of the hole that we dug there.
That's why you see Asia Pacific, you know, the China market was down. Our business was down 50%. That's because we're pulling out of the unprofitable business. Stay tuned, I would say, on China for more to come there. In the meantime, we're applying the tourniquets.
Thank you.
Okay, thank you. Could we have a final question then please, before we hand back to Keith?
Okay, thank you. The last question here comes from David Vos from Barclays. Please go ahead. Your line is now open.
Thank you, gentlemen, for taking my question. It's a technical one on the transaction effect, please. If I interpret your guidance correctly, we're seeing about 750 million SEK negative impact of transaction in Q4. I just want to hear your thoughts about how confident you are that you are going to be able to offset that through price actions, presumably in Brazil and also in Russia, perhaps, given the increasing volume weakness in those markets. Thank you.
Tomas, would you take that one, please?
Sure, absolutely. I mean if we look at transactional currency effects and then mitigation through price mix, I mean, in Brazil, to be honest, as you might have read between the lines, we are a little bit behind. Given the volatile development of the BRL versus the USD here, we have not been able to fully offset the effects. On the other hand, in other parts of Latin America and in other parts of the world, we are ahead. Like, we are ahead in, yeah, other countries. I don't have to mention the specific countries, but behind in Brazil. We can't say that we will fully offset all of it. Our ambition, of course, is to offset the whole, but we'll say that's our ambition.
Okay, it occurs to me that a run rate, you know, implies a doubling of, you know, of that wedge, more or less. Is that what we're looking at?
I can give you some numbers, on the major currencies here. If we take the BRL, for example, the 9-month accumulated negative effect is minus BRL 6 million to BRL 5 million.
Yeah.
The full year outlook is SEK -950. Yeah, you're right, it's quite a pickup. If you look at the negative euro, look at the negative rubles, it's kind of straight line. I mean, it doesn't decrease, and it doesn't increase either. The Chilean peso is also pretty straight line. The Canadian dollar and the Australian dollar will take a bigger hit in the fourth quarter as well. We're a little bit helped by hedges right now. The real, the Australian dollar, and the Canadian dollar is really driving the pickup, if I use that word, or the deterioration of the negative currency effect.
That is very clear. Is there perhaps, an offset from, you know, a better Pound and a better Franc?
The positive pound, the pound, well, yeah, a bit. The pound has contributed GBP 197 positively for nine months, and the full year number is expected to be GBP 264. The Swiss franc is CHF 116 for nine months and will go to CHF 175. Yeah, a little bit better than straight line, you could say, on these two markets.
Thank you very much, gentlemen.
With that, we'll hand back to Keith for a summary of the quarter.
Okay, good. Tomas, I think you need to be more on top of the currencies here, so please work on that.
Dollar approximately.
Okay, let's summarize. If you go to the last page, the summary on Q3, obviously, we had a good quarter, right? It was a quarter with positive growth, driven very much by sales development in North America and Europe. I'd say the performance in our European operations continues, right? Continues this trend of very strong performance with higher earnings and a stronger, more sustainable, structural cost. It certainly is due to, or connecting to several questions, we're positive and encouraged to see the volumes in Western Europe continuing to increase and a little bit at an accelerating rate in the last 3 months. That's positive. That's contributing positively.
As you know, the sequential improvement in North America continues and continued quite significantly in the quarter, both driven by good sales development across most of our core categories. For several of the questions and the answers, profitability was restored substantially in those cold DOE-related factories and product lines. However, we continue to be impacted, as we discussed, with the ramp-up of Memphis. Price increases in the quarter, and price mix in total, as Tomas just described, compensated for currency headwinds. This was particularly evident in the total Latin America operations, not specifically Brazil, but total Latin America.
I'd say also, just to acknowledge that I think the team in Latin America is doing a heck of a job against a very, very difficult macro environment in showing good cost execution in challenging markets. Good cost, pushing prices in a difficult market, not easy as you could expect. Finally, as Tomas mentioned, cash flow was quite strong in Q3.
With that, I'd like to thank everyone for listening in to the presentation and for your continued support of Electrolux. Have a great day. Thank you.