Good morning, good afternoon to everyone who's on the webinar. Good evening, perhaps, and welcome everyone to the Q3 report for Electrolux. With me, as usual, I have our CFO, Tomas Eliasson, and our Head of IR, Catarina Ihre. For those that are in Stockholm here, during the live broadcast, hope you had the opportunity to visit the Electrolux food truck downstairs, which actually is a vehicle we've used with our customers, and actually around town and throughout Europe to showcase some of the key products we have, including steam ovens, that, in fact, do help consumers make great-tasting food. Ultimately, that's what we do for a living. We help consumers have great-tasting food, take care of their clothes, and improve their health and well-being through their environment. The food truck is an example of us doing that.
Let's go ahead and jump into the report. If I can turn your attention to page two, you'll see that sales for Q3 were up 1.6%. Primarily driven by growth in North America, Latin America, and professional, with some negative sales in Europe, Asia Pacific, and small appliances. Sales up 1.6%. Earnings up almost 30%, primarily driven by good profit, strong profit recovery in Europe, continued profit growth in professional, and good defense of earnings in difficult markets in Asia Pacific and Latin America, and cash up 55%, and pretty much across the board between the earnings growth, the working capital productivity, and the CapEx.
With sales up 1.6%, earnings up 30%, and cash up 55%, as we would say in Sweden, quite okay. If you go to the next chart, just a couple of market highlights. As you know, on September 8th, we announced, signed a deal to acquire GE Appliances, about a $5.7 billion U.S., primarily U.S. appliance business. I'll talk about that in a minute. Also in the quarter, we announced a slightly smaller acquisition, which was the barbecue business, a company called BeefEater, in Australia, about AUD 17 million in sales, so a little bit smaller. I'll talk a little bit about what that is and how that connects to what we're doing in Australia.
The third thing I'd highlight in the quarter, of many things, is we've been working for a while now, over a year, on developing a premium line of small domestic appliances that we call the Masterpiece Collection, and that rolled out in the quarter. So I'm very happy to see that, and for those that actually live and work in the Sweden area, you'll see in the high-end department store called the NK, in the front window is the Electrolux Masterpiece Collection. So important and good work by the small appliances team. Just talk for a minute on the acquisition of GE, and we've talked about this when we announced it, so I won't go into too much more detail, but just kind of a summary. Of course, the investment is in a large, growing appliance market called the United States.
That's primarily what they do. 90%+ of their business is the U.S. That market is large, growing, and stable. As we've talked about, there's great complementarity in the brands, in the products, in the channels between the GE Appliances business and the Electrolux appliance business in the U.S. Of course, a big part of what this is about is significantly strengthening the balance sheet of the corporation as you bring those assets onto the balance sheet, get the synergies, and increases the firepower, the ability to invest to win globally in this business. As we mentioned, there are significant synergies associated with the acquisition, over $300 million, primarily on the cost side, which is good because that's the, you know, the highest confidence synergies you can get.
As we've mentioned, what comes with the business is a very, very strong, perhaps the best operations, logistics, distribution system in the appliance industry, and that will be important for us now, we think, and in the future. We expect to close the acquisition, obviously, all predicated or dependent on the regulators, but our best guess is sometime in mid-2015. Okay, that's the GE acquisition. Just briefly on the BeefEater acquisition, this actually complements. We have a very, very strong cooking position in Australasia, as you know. I'll turn your attention to the pie chart there on the left, and just look how large the barbecue business, the outdoor cooking business is in Australia.
Of course, once you see it doesn't shock you, but the first time you see it's like, wow, 23% of the cooking appliance business in Australia is outdoor, is barbecue. We had a very small share of that. Very large share of the indoor cooking business. This acquisition brings us the leading barbecue player in Australia and rounds out our position in cooking, particularly in all cooking, but importantly in the middle and premium segment of the market, so that our cooking position is now fully scoped between indoor and outdoor. A good company, well-run, good margins, immediately accretive, and we'll just bolt it on and grow the business.
If you go to page seven, or the next slide, which is in sales and local currencies, you can see that in Q3, the company has returned to growth. 10 out of the last 11 quarters have been growthful quarters, with the only exception of Q2, last Q2, this prior quarter, as you know, when Brazil was quite negative. Back to the growth pattern, which we're happy to see. Let's get into the sectors, and let's start with Europe. In Q3, sales were down slightly. It's a mix throughout Europe, as you would guess. We had positive sales growth in Sweden, in Spain, in Benelux. We had negative growth in Russia, Eastern Europe and Italy. Overall, I would say the market in Europe, in total, is weak.
It's weaker than we would have anticipated at the beginning of the year. Kind of going sideways. Eastern Europe, decidedly down, Western Europe, kind of flat, up to 1%. It's a mixed picture. The earnings, of course, in Europe were up significantly, as you can see, it hasn't been driven by volume. It hasn't been driven by price. It's been driven by very good work by Jonas and the team around mix. Focusing on the product portfolio, being very aggressive around portfolio management, where we bring most value to the market and get paid for it, and very significant cost work, which we've talked to you about over the last several quarters. Earnings up significantly. Margins for the quarter in Europe, 5.5%. Strong recovery, up over 420 basis points.
Again, hats off to the team. We said that we would be able to, and we would restore profitability in Europe independent of the market, and that's what happened in what you're seeing here in Q1, Q2, and Q3. If you look at the market in Europe, as I mentioned, overall, the market was down about 1%, so this is in volume. Eastern Europe was down about 4%, and Western Europe was up 1%. Down 1% for the quarter. Year-to-date, Europe volume is up 1%, we stay with our communications, previous communications, forecasting the full year of about up 1%. That's what we expect for the full year for Europe appliance demand. If you go to the next page, look at North American Q3. Good sales, 5%, primarily driven by mix.
EBIT was down slightly, primarily because of a very weak air con ditioning season, which I think we communicated previously, it's been happening all year. We saw a quarter over quarter, a substantially negative impact due to the air con season. We also had a significant transition going on with Department of Energy. We had an energy store, new requirements. So all of our cold factories, so our freezer factory, our Anderson top mount factory, and our Juarez bottom mount and side-by factory, all had to transition to the new, higher standard. We had some challenges with suppliers and components. It's a little bit difficult getting through there. Those are the two reasons. At 37% of the earnings of the group, still strong profitability, very strong contributions to the group.
Again, the market is growing. Let's look at that. If you look at the next page, the demand in volume for the U.S. was up 8% for the quarter, so that was good to see. That brings the year-to-date number up 5%. As we had committed, or forecasted, I should say, previously, we expect the full year to be up at least 4%. We'll stay with that for now. Right now, year-to-date, it's 5%, so 4% or 5% looks like a reasonable forecast for the full year. The U.S. market, even with the stock market variations, at least from an appliance demand standpoint, continues to look quite stable and growing. If we look at, next, at Latin America in Q3, sales were up about 8%.
That was virtually all price and mix. You can see that the actual earnings were about the same, which means that the team did a good job defending earnings. Demand in Latin America continues to be weak. Brazil was better, certainly, than in Q3 than Q2. It actually was up maybe just a little under 1%. Argentina was very soft. Chile was actually, Chile was flat, and other parts of Latin America were quite weak. Latin America in an overall macro picture continues to be not very strong at the moment. I think the team did a nice job of, what Tomas would say, defending earnings and cash in a weak market environment. Similar story in Asia Pacific.
Sales were down, primarily due to a very weak Australian market. Actually, China declined, the China market declined in the quarter. That didn't affect us significantly, but the overall market weakness certainly impacted us, as did Australasia. Southeast Asia, market was weaker, but our business was relatively strong there. We had a good quarter in Southeast Asia, which actually helped show the earnings. You can see the earnings actually increased in a challenging market. Overall, I would say in Asia, another picture of emerging markets, China, Southeast Asia, and in this case, developed market, Australia, still being relatively weak in terms of overall demand environment. If you look at small appliances, sales were down, as were earnings, so not a good performance in small appliances, primarily driven by a U.S. upright transition.
We were transitioning from an old line of upright vacuum cleaners to a new line, and that transition has taken us longer than anticipated, is one primary reason. The other is a big part of our business is in Latin America, which we saw a very weak volume, so volume's down double -digits, and it also had some currency impacts, particularly due to the Venezuelan currency. Those are the three primary drivers of the underperformance in small appliances. On the flip side, Professional continues to do very, very well. Just a good job by the management team there, executing the strategy. Geographic growth, channel growth, better product mix, lower cost, and just good continuous improvement. You can see the trends over time, as well as good cash management by the professional team. Overall, very strong performance.
With that's a summary of the sectors. What I'd like to do is ask Tomas to come up and give us his overview of the financial results and cash flow. Tomas, please.
Okay, thank you, Keith. We'll start with the financial overview, as usual. As you heard, sales was up 6% in the quarter, 2% organic and 4% positive currency translation impact. The organic growth was mainly price and mix. EBIT up nearly 30%, EBIT margin up 90 basis points, and more on that in a minute. Strong cash flow improvement, 55% up, SEK 1.6 billion, and earnings per share up 42%. If we then move to the sales and EBIT bridge, what we do here is that we break apart the organic section in the price mix and in volume.
If we start with the volume, you can see that the negative volume of 2.3% gave us a negative top-line impact of SEK 660 million. The EBIT was basically flat or SEK -13 million. That's a very strong performance, and mainly driven by very good product cost improvements and the cost savings programs. The price mixed part gave a positive top line of SEK 1.1 billion and an EBIT impact of SEK 450 million. Just like we discussed in Q2, this SEK 450 million should be seen together with a currency transactional effect. We had SEK -160 million in currency transaction effects. Of course, when that number increases, the price increases go up as well.
We do mitigate for the negative currency effects. All in all, this gave us an EBIT margin improvement from 3.9%- 3.8%, 90 basis points. If we then move over to currencies and stay on the transactional part, the negative effects went down to SEK -160 million, just as we guided a quarter ago. As you can see here, it's mainly Latin American, South American or Latin American currencies, which gave us the negative impact. This is the U.S. dollar, which is improving against the currencies in Brazil, Argentina, Chile, Venezuela, and Colombia. The translation effects this time was positive, of SEK 40 million. If we look forward for the fourth quarter now, what will the transaction effect be?
Just take the rates of today, apply them on the currency flows, the expected currency flows. We will probably end up with a similar number that we have here, so SEK 150 million, SEK 160 million, or something like that, a similar number. However, we have to mention today as well, that there are other currency effects as well. We do have some locked-in working capital in Venezuela, and the Venezuelan currency market doesn't really work as it should. We do foresee a devaluation or a write-down of the working capital that we have in Venezuela. It's payables in non-Venezuelan currencies, so that could be another SEK 50 million. If you take the flows as they are, it's SEK 150 million, and then this Venezuelan effect, it's another SEK 50 million, so then maybe SEK 200 million.
Of course, we do have a lot of transaction flows in the group, and the sensitivity is fairly high. 1% up or down is like SEK 80 million-SEK 90 million up or down on the transactional effects. We do mitigate overall for the group in price earnings. You can have a time lag, depends on when it happens. A currency change can happen in 24 hours. A price change needs a little bit more time, 1-2 months. Let's leave it by that, then talk about the GE Appliances transaction or the acquisition here. We have some pre-closure transaction costs, of course, and this is costs which will happen and hit the P&L before we close. I think we think it's important for you to have this for your models.
The pure transactional costs, which is investment banks, M&A advisory, lawyers, auditors, and all that's about SEK 200 million. This is a big transaction, as you know. Integration costs, I mean, we haven't started the integration, but there is preparatory work internally to do. That's forecasted to be maybe SEK 100 million up until or just before closing. We have the cost for the bridge facility, that's about SEK 200 million. It's a lot of money. It's SEK 23 billion, as you know. It's SEK 200 million with upfront fees, commitment fees, tickers, drawdown fees, and all that. It's around SEK 500 million up to closing. You can see here, it's SEK 300 million on the EBIT line, SEK 200 million in the finance net.
About somewhere between SEK 125 million-SEK 150 million of this will hit 2014, and the rest will go into 2015, for the closing. Okay, then let's move to the cash flow. Cash flow, 55% up, from just about SEK 1 billion-SEK 1.6 billion, and mainly driven by stronger EBITDA, and also with more discipline in CapEx and investments. If we take a look at then the quarterly cash flow by quarter over the last four years, you can see here again that we do have a very strong seasonal pattern. Q1 is always weak, Q2 is the best in the year, every year. Then Q3 can be a little bit up and down, depending on various seasons in different geographies in the world.
This time, we had a very good Q3. Q4, without being too specific, we think will be positive, or it will be positive, but most likely a little bit less than Q3. However, the full year 2014 will be very good. Very, very good. The operating cash flow last year was SEK 2.5 billion. It's gonna be up substantially this year. I mean, we're well beyond that point already now. I think we'll leave it with that, and I'd like to hand over again to Keith for the forward-looking statements.
Okay, Tomas, thank you. Let's flip to our outlook here for Q4 and the full year. If we start with market volumes, we expect volumes to be roughly flat in Q4. We expect growth to continue in the U.S. and North America, and relatively weak in the remaining parts of the world, in summary. Europe, pretty flat. Latin America and Asia continuing to be weak. In terms of price mix, we continue to expect it to be combined positive. It certainly will be positive in Latin America and North America. Europe will be a combination of negative price and positive product mix as we focus more and more on premium products. Asia will be almost the opposite. It will be a negative country mix and a positive product mix. That's the combination.
Slightly positive, both for the quarter and for the full year. Raw materials, you can see there's a change here. We actually expect raw materials to be a tailwind in Q4. As metals and plastics and oil continue to weaken, we expect to have a positive effect from raw materials in Q4, and for the full year, staying with the SEK ±100 million, so roughly flat for the full year. R&D and marketing expense, as you know, we're continuing to invest in more innovation, R&D, stronger brands, marketing, and so we're continuing to do that on, obviously, a measured basis. Cost savings, and you can see by the earnings are doing well, the teams are doing a nice job in cost savings.
We continue with our forecast to be over SEK 1 billion this year, and about an equal amount, SEK 250 million-SEK 300 million, for the quarter, for Q4. I think with that, Catarina, we'll go to Q&A, and Tomas, maybe you can join me up here.
Thank you, Keith. Start off with the Q&A session now. I think we will start to take the questions from the floor and continue with those calling in. As always, remind you to take one question at a time and also to state your name and the company you represent. All right, I think Christer here is the first one out.
Thanks. Christer Nyberg from DNB. I have a question. Firstly, congratulations on a very strong result in especially Europe. North America, on the other hand, was a bit disappointing for me. You talk about this impact from the new environmental regulation. Why did this happen, and didn't you already see this in beforehand? Is this something that will continue going forward and impact the profitability? Also, how big impact was it in Q3?
Yes. On, in the U.S., there are two big impacts, as I mentioned. One was, the air conditioning season, and the other was this DOE transition. Let me speak to the DOE transition first. Of course, we knew about it, so this actually was a fairly significant capital program to change all the platforms to get to the new energy standard. This has been a year and a half, two-year program. Of course, that had to be implemented, in, by September. It was just a very large, complex, transition. You know, when you're dealing with literally thousands of suppliers to make all those transitions at three sites, it's not an easy transition. Could we have done better from an execution standpoint? Yes. You know, is it... Are we gonna fix it? Are we fixing it?
Are we gonna get through it? Yes. Will it roll, spill a little bit into Q4? Yes. The total effect, let me give you the total effect. The total effect for the air conditioning year-over-year comp and the DOE transition was about SEK 150 million, Tomas?
Something like that, SEK 150 million altogether, both effects.
Negative impact.
Negative, yes.
Thanks. Just to follow up on air cons. Air con market is very small in Q3. Was it the production that affected you, or?
What happens, this is probably more detail than you want around the appliance business, but when you have a very weak air con season, which we had in the first half, and to your point, 70% of the air con business happens in the first half. Then about 20% or so, 25%, happens in Q3, and then there's nothing in Q4. Essentially, what happens when you have a very weak first half, the retailers are sitting with a bunch of inventory. They say: We're gonna send this back. We say: That's not economically a good idea, and then we have to discount it heavily. It's primarily heavily discounting the product that's already at retail. That's what's causing the negative earnings effect.
Okay. The next question, please. Go ahead, Johan.
Kenneth Johansson also from Carnegie, in China, you made a big push last year to introduce new premium range products. How is that going?
Yep. The China, we call it the C5 launch, is underway. The products, as I mentioned, previously, have been quite well received. The challenge for us has been at retail, and that continues to be a challenge, particularly with the China market slowing down substantially. You know, getting the retailers to put new products on the floor, get the new associates trained, certainly has been a challenge. I think it's going okay. It's gonna take us longer than, I think, plan A, just because of the weak market. We'll continue to work at it. We're obviously comprehending the weak market. We're comprehending that the transition at retail will take longer than originally anticipated, and, of course, we're adjusting cost commensurately.
Okay. Should we have the next question, please?
All right.
Let's do one, and then continue.
Thanks. Johan Dahl at Erik Penser Bank. I was wondering, in Latin America, how far have you come by now in terms of recovering the, you know, significant currency headwinds that we've seen in that region? Just to help us understand, how much more are you pushing here in terms of basically getting the margins back?
Yeah. A lot of work underway, and maybe, Tomas, you can speak to that a little bit.
Well, the currency impacts are mitigated by price increases. They are.
If you look on the, last 2 years of currency headwind in that region.
Yeah
You would say you have fully recovered that, basically?
Yeah, but what happens from a pure mathematical point of view, if we take now a two-year perspective on this, is that when you have very negative currency impacts, and then you compensate, let's say, on a dollar-by-dollar basis, you defend the earnings, you defend the cash flow, you defend the earnings per share, but you take a hit on the margin. Because it's not possible to increase the prices with the big customers more than what you actually get, I mean, more than what the currency impacts the imports, dollar by dollar. You get a top line, which is hollow. Of course, you can see that on the earnings line. I mean, you have a deterioration of the margin. However, we defend the results. That's what happens. Yeah.
I just have to follow up, Catarina. We've seen some pretty dramatic volatility recently in energy markets, especially, but maybe, you know, steel and metals have been, you know, on a downward trend full year. What can you talk about today when we look into next year? What's the setting, basically, as you go into negotiations here, in the end of the year?
As you, as you say, and as you know, we're in heated and normal negotiations right now with our key suppliers. We'll have those finalized, and we'll have an update for you at the Capital Markets Day. I'd say so far, so good. You know, you know, if you look at the steel forecast, steel's going up, right? If you look, guess who puts the steel forecast together, right? The steel suppliers, right? That doesn't seem real to us, right? We're in the middle of negotiations. If you can, just give us another month. At Capital Markets Day, we'll give an update on where we are with those contracts. There's a couple of key ones that we have to finalize here in the next couple of weeks.
Anything on plastics?
Plastic's been trending positively with the weakening, oil market, so better than the last year.
All right. Should we have the next question, please? No, I think we have the gentleman over here. Okay.
Thank you. Johan Eliason, Kepler Cheuvreux. Just a question about the cost savings, primarily in Europe. You detail how much of the charges you have taken, but how much remains of the benefits? You talked about SEK 1.8 billion at the end of last year. How much have we achieved so far? I guess it's primarily Europe that has been impacted.
To your point, there's been significant benefit from that work, and you can see it in the Europe results, primarily. There's still a gap remaining in the finalization of that program, as you know, up to the SEK 3.4 billion in restructuring and SEK 1.8 billion in benefit. You know, we're doing some work to finalize that. There's still several SEK 100 million opportunity in front of us remaining in that.
And Mariestad and then this in Switzerland is part of that program, I take it, or?
What we communicated today, as you know, is that we have begun consultations with the union leaders at two of our sites, Schwanden, which is a cooking plant in Switzerland, and Mariestad, which is a freestanding refrigeration plant in Sweden. The no decisions have been made on those. We've just begun discussions with the union leaders and consultations with them. Of course, when they're concluded, we'll update you on the outcome of those negotiations.
Finally, just on the CapEx, down a little bit year-over-year in the quarter. How does the sort of CapEx outlook look now ahead of the GE acquisition, et cetera? What should we expect for?
Yeah, I think Tomas and I are very comfortable with around SEK 4 billion CapEx.
Yes
E xcluding the acquisition. Is that right, Tomas?
Yeah, yeah, we're trending on the SEK 4 billion, yeah, or just below.
Well, this year we'll be under that.
Yeah.
In terms of if you're talking about going forward, what does it look like? We think SEK 4 billion, you know, plus or minus is. We don't need much more than that. We can run the business effectively with that level.
Yeah.
Excluding acquisitions and other stuff.
Yeah. We're sort of on that SEK 4 billion pathway, as we have communicated, as we do the integration, we are gonna spend $60 million in CapEx.
Sure
F or that integration, but that's for that integration.
Yep.
Okay, thank you.
Yeah.
Okay. Next question, please.
Björn Enarson, Danske Bank. Question on Europe again. Where you are on the cost-cutting phase there? I guess we should expect some further cost-cutting savings going forward from the overhead program. A little bit on the geographical mix as well. I guess the market environment has been pretty beneficial or kind of beneficial for you in Q3.
A little bit. Let me start on the market environment and the mix. You know, for us, I mean, when you have growth in Sweden, when we have growth in Benelux, those, to your point, those are good, strong markets for us, so we get some benefit from that. Having said that, you know, Russia or Eastern Europe was down, you know, significant double-digit for us. Part of that was intentional because we raised prices substantially to offset the ruble and to increase profitability. The market is funny. Italy was weak, Spain was strong. You know, how do you figure that, right? It's a pretty, I think, opaque or uncertain market. It's hard to predict Europe.
Overall, we would say Europe is not strong, as many other industries and people are saying, we would agree with that. We don't see it strong. We see it a mixed picture. Germany was up slightly, but not as strong as it had been, right? Again, a mixed picture. I think what the team is doing, what Jonas and the team are doing, which, of course, is driven by this notion of restore profitability independent of the market conditions, is doing two things. One is a very significant and aggressive product portfolio management, which says we are really gonna focus all of our efforts, our resources, our merchandising, our advertising, our selling, our promotions on those key categories where we get paid for bringing value to the marketplace and less worried about volume.
The other key part, of course, is commensurate with that, is adjusting, as we talked previously, get the suit size tailored to a smaller market environment. That work on cost has been significant, and it's continuing. I think we've got good traction in Europe on both those accounts, and they are mitigating, you know, what is a relatively weak market in terms of volume and price.
You mentioned this as well, you see some weakening trends in Europe and many companies with you are talking about that, of course, right now. Should we be concerned for earnings development in Q4 out of a seasonal perspective?
I think Europe's or our business team in Europe has sufficient traction on the cost and the mix that assuming the market doesn't crash, so, you know, barring some, you know, external event where the market crashes, but assume it just stays where it is, kind of going sideways, I don't see why we won't continue to improve the profitability in Europe.
Thank you.
On a quarter-over-quarter basis.
Okay, should we start to take some questions from those calling in, operator?
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad. That is zero one. We have a first question coming in from Mr. Andreas Willi from JP Morgan. Your question, please.
Yeah, good morning. I have couple of questions. The first one, just to follow on from your earlier comment, you said you expect Europe to continue to improve. Is this a year-on-year or a sequential comment? Also, given that normally Q3 can be the stronger quarter. Second question on execution in North America. Obviously, we had couple quarters ago, the destocking problem. Now we've had maybe some issues on the transition. There was in the small appliances, you talked about an issue as well. Is there a more broader issue in your view in terms of your local execution capabilities?
The third question on Latin America, the good performance in Brazil, was there a little bit of a bounce because of the World Cup issue of Q2 having depressed activity? Or are you confident that Brazil is not going to basically go negative again in the next couple of quarters?
I think I can hit them all pretty directly and quickly. The comment around Europe increasing or improving profitability was a quarter-over-quarter statement, not a sequential statement. You know, Q4 last year versus Q4 this year should be up. To your point, there's seasonality in the business. We're not gonna change the seasonality of the business. The second was North America execution. I wouldn't. There's no really correlation between the small appliance transition at a very large retailer. You can guess who that is, because it's a completely independent business and separate run business from the major appliance business. I wouldn't make any correlation that, you know, there's some mysterious execution issue going on. I think it was very discrete things.
The upright transition at a very large customer in the U.S., then the DOE transition and the air con in North America. There's no more mystery than that. I don't think there's any fundamental operational issues beyond those discrete items. The third question was Brazil. Of course, yes, there was a significant better environment than Q2 between the World Cup and. Even with that, Brazil was up, you know, less than 1%. It's hard to get too excited that Brazil is recovering. Argentina was down double digits. Chile, which has been relatively stable, actually went flat in the quarter. Our view is Latin America is going to continue to be weak for the next few quarters.
Honestly, I don't have any certainty on whether that's two, three, four, or what it is. Of course, the elections matter. You know, most of the our guys that are, and gals that are down there are saying, you know, that looks like the outcome of that may not be the most positive result for the business climate, but we'll see.
Thank you very much.
Thank you.
Thank you. Next question, please.
The next question comes from Mr. Andre Mocciola from Credit Suisse. Your question please.
Good morning. Just a couple of questions, one on U.S. and the Sears situation, specifically, we're also seeing some press reports. Could you just help us with understanding of the sort of 20% odd of sales of North America that you have with them, how much is Kenmore purely? Secondly, looking at the year-end, I mean, in terms of your payment terms with Sears, what would be a sort of a receivables balance outstanding on, say, 31st of December for you? If you could, I appreciate if you cannot give the direct exact numbers, if you could just help us with understanding of that situation. Just a quick follow-up on Europe to the previous comments that you made in response to questions.
You've generated, a Q3 EBIT, which is bigger than, I think, the whole of 2013, and certainly bigger than H1 this year. It doesn't sound like there was anything extraordinary going on there, you know, flat, weakish market, small growth in Western Europe, declining Eastern Europe. That's probably something where we're heading into, for the next 12 months. Can we see that as sort of largely underlying performance, or was there anything in Q3 that we should be aware of so that we don't extrapolate? Thank you.
Let me start with the second one, and then also, Tomas, I'll start with Sears, and you can help me as well on that. In Europe, there actually weren't any extraordinary items. We had actually a little bit of a positive currency in there, but you can see that in the report. There weren't any one-off, you know, extraordinary positive items. It was just basic, fundamental execution around cost and product portfolio management, product mix. Therefore, I think as we've said previously, we do believe that the team has got enough momentum and traction there where we can improve the profitability, restore the profitability, not to the group target, right? Not to 6%. I think to hit that, we need the market to come back some.
You know, could we restore it to within 100, 200 basis points of that? I think we can, I think we should, and we will. I think that's the Europe story. On Sears, yes, Sears is obviously a very big customer of the U.S., a big customer, therefore, of the group. The team is obviously acutely aware of the situation there and are taking appropriate actions to mitigate that risk. Tomas, I don't know how much more we could say about that.
Not much. I think we follow the development very closely, to reduce the risks, as much as we can. I think that's what we can say right now.
Yeah. Obviously, we've got very discreet, confidential conversations going on with our big customer.
Just like we do with, with any big customer. Just to give some background here, it's not only Sears. We have 40 big customers in this group, which makes up more than 40% of the total sales. Of course, all these 40 customers, we follow every week, every month, both internally and with the board of directors as well. Following the big customers is important for our complete, let's say, total risk management.
The other thing which we've communicated previously is it's important for us. We talked about the expansion of the channels in the U.S., particularly, securing the The Home Depot account. That was important, not just for incremental sales, but to be well-represented in the total market.
Sure. Thank you. I appreciate you taking time to answer. Just on Kenmore specifically, is there?
Sorry.
Can you give us any color on how big that is?
Yeah, that's a big part. It's about 70% of the business, roughly. Tomas, 75%?
Yeah, something like that. Yes.
A big chunk of it is Kenmore. That's their primary brand. That's what they go to market with. That's what they lead with.
Of your sales with Sears, 70%-75% is Kenmore?
Yes.
Got it. Thank you very much.
Yep. Pleasure.
Thank you very much. Do we have further questions from those calling in?
Yes, there are two more questions, in the queue, and the next one comes from Mr. David MacGregor from Longbow Research. Your question, please.
Good morning, David.
Good morning, everyone. Keith, can you talk about just on the Sears business, are you ensuring your receivables, your trade credit? Secondly, in Europe, can you talk about the magnitude to revenues of the active portfolio management?
Yes. Tomas, I don't know if we disclose that or not. Are we ensuring the receivables at Sears?
No, we don't disclose those details.
Yeah.
No.
David, your question around the impact of mix and product mix in Europe.
No, it seems like there was mention in the in your report that there was active portfolio management. Sound like you may have divested some businesses or stepped back from some products in Europe. I'm just wondering what the impact to the top line might have been?
Yeah. To your point, when we say active portfolio management, we're not talking necessarily about divesting businesses, really just focusing on higher margin product categories, right? More built-in, more cooking, you know, those areas where we're bringing more value and getting paid for it in the marketplace. Yeah, is in acquiring businesses. It's not meant in that context. It's meant in the context of the product mix portfolio.
Yeah, thanks for that clarity. Then last question is just, I notice you're picking up your R&D spending, and I'm just wondering, with consolidation occurring both in Europe as well as in North America, is this a trend we should expect to see from, you know, all of your competitors? Do we sense that we're on the verge of a more significant increase in innovation spending as a way of going to market over the next couple of years?
I think, David, as you know, the, you know, ultimately, what we're gonna get paid for by the consumer is relevant innovation. I think innovation is gonna be a key competitive necessity in this marketplace. We are increasing R&D, as you stated. We're trying to do that and essentially self-fund it by improving our quality and reducing our warranty costs as a percent of sales. What I've said to my head of R&D is the combined R&D and warranty costs at a, as a percent of sales, is 5% of sales. What I've said to Jan Brockmann is, "You can have all 5% in R&D. Just make sure the other part is 0." That trend is happening. Guess what, you get traction when you get that kind of motivation.
To answer your question, yes, I think innovation is a key necessity in this industry in order to be competitive, and therefore, we will continue to increase our R&D as a percent of sales. We're looking to self-fund that by reducing our warranty costs as a percent of sales by improving quality.
Great. Thanks very much.
Thank you.
Thank you, David, all aboard. Do we have any further questions calling in?
There is one last question coming from Mr. James Moore from Redburn. Your question, please.
Yeah, good morning, everyone. I've got three. The savings have been really strong in the group this year, but the pace is now naturally slowing. As we think into 2015, are we still talking about another SEK 1 + billion ? Given the weak volumes around the world that lots of companies are seeing right now, do you feel you need to do something to accelerate that? That's really the first question on savings the next year. Secondly, on the U.S. business in the quarter, even if I strip out the SEK 150 million impact that you called out for the joint impact, it's still the U.S. margin's perhaps a little bit light. There's some commentary about price being a touch negative in the market. Volumes are down a little bit. Do you think these issues are temporary?
I've seen that housing's been a bit soggier in the quarter. Or do you think this is gonna be a more sustained period of worse volumes, and we aren't gonna continue to get U.S. housing recovery-driven growth? Thirdly, the charges that you mentioned earlier, Tomas, with the half a billion, the pre-close charges, should we expect to see them all in the IAC line, or will they sit above the line in the NAM division?
You want to do the last one?
Yeah, I can do the last one, James. There will be none of it in IAC. Gonna take it, SEK 300 million we'll take in EBIT, and SEK 200 million we'll take in the finance net. No IAC.
Is this part of getting rid of IAC?
Yeah, we're ending this practice as from, January first next year, so.
Okay.
We already have some of it in the Q3 earnings, by the way.
Okay.
Yep.
Yep. Just on that, and again, to be clear, what we've communicated in the last quarter, is we're finalizing the previously announced restructuring program, where that's identified in IAC. Well, that'll be closed by the end of the year, so there won't be a separate IAC line going forward, which doesn't mean there won't be any restructuring. Just means there'll be fewer in frequency and amount, and we'll take them to earnings. As they happen, we'll call them out so you can see, so you know what they are. We'll be transparent about it, but there won't be a separate line below the line activity.
Yeah.
Um-
Yeah, the average over the last 11 years has been SEK 1.1 billion per year. You're not gonna see that, but you will see restructuring every now and then.
Yeah
But not to that extent.
Yeah. The other two questions, James, in terms of going forward, do we expect that we will have SEK 1 + billion of cost next year? Yes. Again, we'll be a little bit more explicit at the Capital Markets Day, but the answer is yes.
Just on that...
Yeah.
Just to be clear, is that from the existing plans? Because there was already around that from the existing plans, or is that from additional action as well?
Actually, as you know, actually, what's happening now is the transition is occurring where the primary or one of the key sources of the cost out has been low-cost manufacturing footprint. What's beginning to happen, and we're starting to see it, is that shift from the value being liberated there, although it's continuing, but now it's shifting more to modularization and doing a global integration. That's exactly what we had hoped would happen, right? As we start to get more and more benefit from globalizing the architectures and the platforms of the group and liberating more value, whether it's cost or capital, from that work. You know, it's... I would say it's, we're migrating. It's not an overnight thing. We're migrating from the source being manufacturing footprint to global modularization, but the total is gonna be north of SEK 1 billion.
Yeah.
Okay.
The modularization program, as well as the continued overhead cost reduction program.
Right
Next year, and less of manufacturing footprint.
Right.
So.
North America, James, give you the kind of the breakdown here. The volume in total actually was down about 3%. The reason why it's down 3% is air conditioners were down 30%.
Mm-hmm.
The core business was up, right? You had this huge hit from a volume standpoint and an earnings standpoint, from air conditioners. The big part of the growth was mix, to your point. You know, you sell a lot less, you know, $100 air conditioners and a lot more $1,000 refrigerators, you get a big mix effect, right? That's, that's what's happening. Price was relatively flat, for the mark- for the quarter. I would say going forward, we still think the housing market's okay. I know there's a lot of speculation and noise around, well, maybe it's not recovering. We don't see that. You know, we see now we're in the builder business bigger than we were previously.
Of course, with the potential acquisition, we're about to get into it in a much bigger way. We think the housing market is still gradually recovering. It's gradually improving. We don't see it turning down. Again, barring any external, you know, factors or changes or whatever it happens to be, but it just kind of macro picture for us looks like the U.S. appliance market, combination of the overall economy and the housing market, will continue to be positive going forward in terms of demand. Maybe not 8%, but, you know, you get 3%-4% growth in a market that large, that's a good thing.
Okay. Thank you very much.
Yeah.
Okay. Do we have any final questions from the floor, before we hand over to Keith again? Do we have anyone also calling in, operator?
There is another follow-up question from Mr. Andre Mocciola from Credit Suisse. Your question, please.
We'll wait with that.
Oh, sorry.
1 second.
Yes.
I have a question from the floor first.
Okay, no problem.
Hi, Kari Rinta from Business Sweden. I was just wondering if we could have any comments on the Middle East sales distribution expansion?
Yes. Middle East question, again, market opportunity is enormous, right? There's more people in the Middle East, Northern Africa, than there are in Western Europe. They all want the same lifestyle as you and I have, right? Which means they're gonna buy refrigerators and washing machines, so the potential continues to be huge. Having said that, you know, you read the same paper as I do, you know, it's a difficult environment, geopolitically. I'd say Egypt is a little bit more stable today than it was, you know, one year ago or two years ago with the current government, and we expect it will continue to stabilize and the business in Egypt will improve, and we actually, we see it improving in Egypt.
Having said that, outside of Egypt, you know, pick your favorite country in the Middle East, it's not terrific, right? It's a pretty challenging picture. I guess the good news for us in the short term is the big part of our business is Egypt and Saudi Arabia. Those are the two countries where the biggest part of our Middle Eastern business today, and they're probably two of the more stable markets at the moment. It's actually funny, kind of funny to say that Egypt is one of the more stable markets, but it is at the moment. The other countries in the Middle East and Northern Africa are, I would say, are quite unstable at the moment.
Having said that, do we think that Middle East, Northern Africa, and in fact, Africa, will be a source of a significant source of appliance demand going forward? Absolutely. How long that's gonna take? You know, it would be hard to predict, but it clearly is gonna take some time. Yeah.
Okay. Should we have the final question from the one calling in, and then we round up from the floor? Please, operator.
Mr. Andre Mocciola, your line is open now.
Great, thank you for taking the follow-up. It's just a brief one. Tomas, you mentioned that there were already some restructuring costs you took through the underlying line in Q3. I think before you mentioned that you will quantify them in the future. Could you quantify what it was in Q3, just for the, our models?
Sure, we can do that. It was SEK 50 million in GCC, in Q3, for transaction costs, and just a little bit in the finance net. However, we should also mention that in GCC, we also have an insurance recovery of the same amount related to the Curitiba fire last year. It was a wash between those two, so that's why you don't see any major impact on GCC as such. Going forward, you will see an uptick in GCC because that's where we're gonna book the transaction costs.
Sorry-
The integration cost that I mentioned of SEK 100 million, that will be booked in North America, the North American earnings, and then the funding or bridge financing costs will, of course, be in the finance net.
Great. Thanks very much.
Thank you. I think we have a final question here from the floor.
Hi, Johan Eliason, Kepler Cheuvreux again. Just a final question on Europe. I think a year ago, you sort of blamed pricing turning a bit more negative towards 2% or so, and what are you seeing on pricing in Europe now? We've seen some bankruptcies, and we have seen the big competitor being taken over. What do you see and what do you expect going forward?
Well, I can tell you what we see and what we just saw in the quarter, and we've seen the last couple of quarters, is although still deflationary, less deflationary, so pricing was negative, but less than 1% in the quarter. That's, I guess, you know, if you're looking for the glass half full, you know, better than 1.5%, better than -2% , so it was about 0.9%, to be exact. Less deflationary.
Thank you.
Keith, should we?
Summarize?
Hand over to you and summarize the quarter?
Okay, good. Thank you, everyone. Let me just close with the last slide here. Summarize the third quarter, we just talked about it, Europe. Higher profitability in Europe, driven by cost work and product portfolio mix, offsetting weaker volumes and slightly weaker price. Very good work by the European team. As we mentioned, I don't see any reason why we won't continue to restore the profitability in Europe based on those two initiatives that are getting great traction. I think Jonas and the team are doing a fine job there. I think Latin America and Asia Pacific either defended or, in fact, in Asia Pacific's case, has actually improved earnings, and what are during the quarter weak markets.
As Tomas Eliasson would like to say, "Look, in a weak market, you have to defend earnings and cash," and they're doing that with cost work, with mix work, with price work. Good performance there. Sales and earnings in North America, again, that we weren't happy with their earnings being down, but they still represent almost 40% of the group, right? This is a big, important sector for this company and delivering significant earnings. We think we'll work through the two issues that we identified going forward. Professional continues to just do what they've been doing, which is I would say, probably the sector that is consistently executing the strategy quarter in, quarter out around expansion of channels, expansion of geographies, improved mix, lower cost, and just good execution.
We just need that business to get a lot bigger, given that it's double digits, 13%-14% EBIT margins. Of course, we mentioned the cash flow. Good focus and important for us from a balance sheet standpoint, to have very good cash flow, given the acquisition we're about to make, right? It's not by accident that we're focusing on cash and cash conversion. Every month, every quarter that we talk to the business units, right after the earnings, we talk about cash conversion. You know, we expect to be, you know, at or above 100%, 'cause we're gonna improve cash in the business, getting ready for this. Summary, earnings up 30%, EPS up 40%, cash flow up 55%.
Good performance in, you know, some challenging markets around the world. We're quite happy with it. For those that are here in Stockholm, and, if you had the opportunity to take advantage of the food truck coming in, I think it's still out there. If you wanna grab something on the way out, you're more than welcome. Thanks, everyone, for being here and for calling in. We appreciate it. Thank you.