Hello. Welcome, everyone, to this presentation of the Third Quarter Results for Electrolux. My name is Keith McLoughlin, with me today, I have our CFO, Tomas Eliasson, we also have our Merton Kaplan from our IR group, who will help us moderate the Q&A session after our initial remarks. With that, let's begin our presentation and go through the third quarter for Electrolux. If you look at the key highlights in the quarter, Electrolux continued to deliver on our growth strategy and achieved a solid 5% organic growth. We're able to grow our businesses in all regions, with the exception of Europe. In North America, market demand continued to be strong, with industry shipments up 12%, supporting our business in that market. The market conditions in some key European countries, however, continued to be weak.
In the Latin American region, demand slowed somewhat, mainly driven by decline in Brazil. In Australia, we see positive signs of recovery. In the beginning of the third quarter, Electrolux experienced strong currency fluctuations, which had a total negative effect on the results of more than SEK 500 million in the quarter. Excluding currency, earnings were well above Q3 of last year. Our operations in Europe were negatively impacted by the weak market development, with lower volumes and continued downward pressure on prices. We have, as a result, decided to take further actions to adapt our cost structure and improve our manufacturing footprint in order to restore results in Europe going forward. In North America, we continued to improve our results and margins versus last year through positive volume growth, price mix improvement, and operational efficiencies.
From a cash flow standpoint, the group had a seasonally strong third quarter. Now let me hand it over to Tomas to give his thoughts about our results and to talk about cash flow. Please, Tomas.
Thank you, Keith. Let's start with an overview of sales and organic growth by geography. Chart shows the globally diverse revenue base, both on mature and emerging markets. The mature markets represent 65% of the sales, and the emerging markets, about one-third of the sales. As you can see here on the slide, the Middle East region was down due to unrest in Egypt, and Latin America slowed down. What is especially positive, however, this quarter is that the North American sales growth increased again to nearly double digits after a little slower Q2, and also that Australia and New Zealand showed strong growth on a competitive market. Both of these two markets, North America and Australia, are very profitable and therefore very important for the group.
We also saw continued very strong sales growth in Southeast Asia and China, and especially China continues to show very good development here. Move to the next page. Let's go through the sales and EBIT bridge for the quarter, split in organic growth and currency. Our reported net sales remained basically unchanged at +0.3% in the third quarter. However, organically, it was nearly 5% up, but the currency was negative and took off 4.6% from the top line.
If we look a bit closer to the organic growth, we had SEK 1.3 billion in sales increase, with an EBIT of SEK 171 million, which gave us an EBIT leverage of about 13%. This gave us 30 basis points accretion to the EBIT margin. Price, mix, volume, and the efficiency programs continued to contribute positively to the development. On the currency side, we had a negative impact on the top line of SEK 1.2 billion and a total EBIT impact of SEK 519 million. That SEK 519 million is made up of SEK 71 million translation and SEK 448 in transaction, the negative transaction effect. The big currencies in this quarter were Brazilian real, Hungarian forint, Egyptian pound, South African rand, and Australian dollars.
The really big ones here were real and forint. Those two made up about two-thirds of the negative currency impact. What is different this quarter compared to previous quarters here, if you will look at the currency development, is the big depreciation of the Brazilian real. If we hadn't had that depreciation, the currency impact would have stayed at around SEK 200 million to SEK 250 million in the quarter. We mustn't forget that Brazilian real is the single biggest transactional net exposure that we have in the group. It's also the second largest market in the group, so it has a big impact, and we have a very short hedging horizon on the Brazilian real as well.
To sum up, all in all, this resulted in a decline in our EBIT margin from 5.2% to 3.9%, but all of the decline, and a bit more than the decline, was dependent on the currency development. We move to the next slide here. Look at the cash flow. Our operating cash flow was SEK 900 million in the quarter, compared to minus SEK 230 a year ago, a very strong improvement. We, of course, had a lower operating income in the quarter, but that was more than offset by reductions in working capital and a slightly lower CapEx. Working capital contributed with SEK 168 million in the quarter, which is approximately SEK 1 billion better than the same quarter last year.
Our net operating working capital as a percentage of revenues is now 11.2%. Compare that with what it was five years ago, it was 18%, so it's 7% improvement. CapEx in the third quarter was little bit lower than last year, but continues to run higher than depreciation as a result of our continued major investment, which are the cooking plant in Memphis, U.S., and the refrigeration plant in Rayong, in Thailand. It also is impacted by the new range of products in China and Southeast Asia that we are launching. Let's move on to the next page, and let us talk a little bit about the numbers here in the restructuring charge.
As you have seen this morning, we had announced a restructuring charge of a total of SEK 3.4 billion. These SEK 3.4 billion is made up of two parts. One is a manufacturing footprint charge, and one is an overhead cost reduction initiative. We start with the manufacturing footprint charge, that is SEK 2.2 billion, and it is a part of what we announced in 2011. So far, we have done two announcements in 2012 and 2013 for a total of SEK 1 billion, and now comes the third one of SEK 2.2 billion. The program to date is now up to SEK 3.2 billion. The overhead cost reduction initiative of SEK 1.2 billion is not part of the manufacturing footprint program as such.
It is an adjustment on the cost structure to the market development. Together, the manufacturing footprint charge of SEK 2.2 and the overhead cost reduction of SEK 1.2 makes up the SEK 3.4 billion in charges. The estimated saving is SEK 1.8 billion, and the charges will be taken from Q4, from now and during the first two, probably three quarters in 2014, as the various projects will be starting. The saving of SEK 1.8 billion will be fully executed at the end of 2016. With that, back to you, Keith.
Okay, thank you, Tomas. Let's get into the individual operating units, and let's look into our European operations. Europe continued to encounter a weak market environment during the quarter, with Electrolux volume slightly down compared to the same period last year. Our organic sales were unchanged and mainly driven by improvements in mix. Despite lower demand in Western Europe, Electrolux was able to gain some volume shares in our key product categories. Prices continued to decline in the third quarter, but on a sequential basis, the development is stable. The mix improved substantially during the quarter due to the good response of our higher-end Electrolux branded products launched across the markets of Europe. Our results in Europe were impacted by close to SEK 100 million of unfavorable currency movements, as the US dollar strengthened in relation to several European currencies as well.
Given the current market conditions, we are taking further actions to bring down costs, as Tomas mentioned. We're completing the next stage of our manufacturing footprint program, capitalizing on our shared global strength and reducing overhead costs. Our analysis shows that these actions are already improving our gross margin and will contribute to the operating margin going forward. Now let's talk a little bit about the market development in Europe on the next page. As we mentioned, the European market continued to decline in the third quarter by a little bit less than 1%. Western Europe declined by 1.2%, and East grew by 1.4%. The markets in Southern Europe continued to be weak. In France, demand was negative by 3%, in Italy, another 1%, and in Spain, by -9%.
Sequentially, these markets are not getting worse, but are more going sideways. The market conditions in Central and Northern Europe have been stable during the quarter. The market in Eastern Europe showed growth, mainly driven by the markets of Russia and Ukraine, while most other Eastern markets were unchanged. We estimate that the total market for appliances in Europe will decline in the full year of 2013. Let's turn the slide and talk about North America. Our operations in North America continued to perform according to plan and showed an improvement compared to the third quarter of last year. Sales grew 8% organically and amounted to SEK 8.2 billion, driven by the effective launch of Electrolux branded products and growth in new distribution channels and new segments. Our volumes grew in most core categories, and price mix was positive.
Operating income improved in the quarter, resulting in a 6.9% EBIT margin. As a result, the sector achieved its seventh consecutive quarter of profitable sales growth. The pricing trend remains stable for the quarter, as the year-over-year effect is becoming less. Product mix had a positive impact on earnings following improved sales of higher margin products. We continue to see a general trade up in the market as consumers buy more premium products. Operations were impacted by costs related to the consolidation of our cooking production to Memphis, Tennessee, and our infrastructure investments in expanded distribution. As we've highlighted in previous quarters, these costs will continue to impact operating income for the majority of the year. Now let's turn the slide and spend a few minutes on the market development in North America.
We are continuing to see evidence of the housing market recovery in the U.S., which has been stimulating increased consumption of appliances over the last three quarters. In Q3, market demand for core appliances in North America increased 12%. Consumer confidence is improving at a higher level than a year ago, we are seeing new housing statistics gradually improving. As such, we are revising our estimate upwards, in that demand for appliances in North America could increase with 7% to 9% in 2013. Now let's turn the slide and talk about Latin America. Market demand for core appliances decreased in the third quarter, which is a downward shift compared to prior quarters in 2013. The ending of the Brazilian government's tax incentive for appliances had a negative impact on market volumes.
Our earnings were negatively impacted by the lower demand in Brazil, as well as a warehouse fire we had in Curitiba in September. Higher price mix and savings had a positive contribution to earnings, were more than offset by increased costs for sourced products and a substantial impact from the currency movements previously mentioned. Strong actions have been taken to compensate for the weaker market environment and the currency headwinds. Price increases have been implemented in the Brazilian market and will contribute positively to our earnings. New innovative products will also help further improve our price mix. Let's turn the slide and talk about our operations in Asia Pacific. Our operating margins in Asia Pacific declined compared to the third quarter of last year. The lower profitability was mainly due to country mix and new product launches in China and Southeast Asia.
In Australia, the market demand for core appliances showed growth in the third quarter, thereby continuing the upward trend beginning from Q2. The new products in air conditioning and food preparation cooking supported our sales positively, which resulted in market share gains in these key categories. Our operating income in Australia was solid due to pro- positive product mix and lower production costs. Electrolux has implemented price increases in Australia, where we expect to begin to see the impact in Q4. The markets in Southeast Asia and China continued to grow in the third quarter. Our sales in Southeast Asia and China have continued to show double-digit top-line growth for the past 16 consecutive quarters. Higher volumes in Southeast Asia and China contributed to our operating income in the third quarter. Currency headwinds, combined with investments related to the product launches in China, impacted earnings negatively in the quarter.
Let's turn the slide and talk about small appliances. Small appliances achieved an organic growth of 5.6% during the third quarter. Sales increased in all regions and were positively driven by all key levers: volume, price, and mix, all moving in the right direction. Sales volumes for vacuum cleaners and small domestic appliances were particularly strong in Asia Pacific. Operating income declined in the quarter from continued headwinds from unfavorable currency movements that had an impact on earnings, particularly for our operations in Latin America. The strengthening of the US dollar against the Brazilian real has also increased costs for sourced products in this sector. As growth in emerging markets outperformed the growth in mature markets, our country mix deteriorated and impacted earnings negatively. Intensified marketing activities for new product launches in Asia Pacific and in North America also impacted earnings in the quarter.
Now, let's turn the slide and talk about our professional business. Market demand for professional products improved in our growth markets during the quarter. Our organic growth rate was close to 10%, and the U.S. business, which accounts for 15% of the total professional business, is increasing, and sales in emerging markets are growing. This is a result of our strategic initiative to grow in both new markets and new segments. Operating income and margins improved, primarily as a result of higher sales volume, but also due to price increases. Investments to introduce Electrolux Grand Cuisine in the market continued during the quarter. Now, let's turn the slide and conclude this presentation by looking ahead into the fourth quarter and the full year of 2013. We expect market demand in Europe to continue to be weak, which will impact our businesses in the region.
At the same time, we anticipate continued growth in the North American market in the fourth quarter, supported by the recovery in the housing market. We also continue to see solid growth coming from emerging markets. In terms of price and mix, we expect to see slightly positive impact from prices in both North America and Latin America during the fourth quarter. Going forward, the year-over-year effect in North America will be lower. Prices continue to be under pressure in Europe. The negative country mix will hopefully be offset by a much better product mix, as we've seen in Q3, going forward into the fourth quarter. We expect raw material costs to be close to flat in the fourth quarter as steel prices remain stable, while we expect to have slightly higher costs for plastics.
For the full year 2013, the net impact is likely to be modestly positive from total raw materials. In line with our strategy, 2013 has come to be a year with intensive product launches, especially in the higher-end categories, which is requiring increased investments in marketing and R&D product development. We will utilize the positive momentum we have in North America and small appliances to increase investments in brand building.
We are, as we speak, having a major launch in China, and we'll continue to support that in the fourth quarter of 2013 to establish the Electrolux brand in that important appliance market. We are seeing a reduction in our cost during the year, which is related to our previously communicated cost-saving initiatives, but we are also taking further measures to structurally reduce our cost base, primarily and particularly in Major Appliances Europe. As previously communicated, there will be some temporary cost increases as a result of consolidating our production of cooking products in North America. Finally, as previously mentioned, we expect increased costs for logistics during 2013, as we see costs for ocean freight and land transportation still holding up in the quarter.
We also see the cost for warehousing and transportation increasing temporarily as we are expanding and investing in this new distribution channels in North America. With that, we are open for questions, and let me ask Merton, if you'll help conduct the orchestra.
Thank you very much, Keith. We are now ready for the Q&A session. Before we start with the first question, I would like to remind you, as a normal, that we should try to use the time efficiently as possible and ask one question at one time. You can then go back into the line and ask more further questions. Please, operator, let's kick out with the first question.
Our first question comes from Mr. Andreas Willi from JP Morgan. Please, go ahead.
Good morning. First question on, maybe some pointers for 2014 in terms of some of the big drivers on cost savings, investments, and raw materials, whether there is anything you can say at this point in time. Secondly, on foreign exchange, given how big this is an impact on your, in your operations and kind of how much of the good work of the operations gets undone by effects, I'm still a bit surprised about that you can't hedge more of that. When we look at other companies, Whirlpool didn't have the same issues. What is it that makes it not possible to hedge these currency flows a bit better, so that we don't lose, kind of a third of earnings per quarter?
Okay, just let me, I'll start and then ask Tomas to address the foreign exchange and currency impacts and what we're doing there. Primarily, actually, what I'd like to do relative to your first question is defer a little bit to the Capital Markets Day, particularly around raw materials and commodities. As you know, we are, as per usual, right in the middle of the beginning of negotiations, with our key suppliers around steel and metals and plastics, and we'll have a better idea for what 2014 is gonna look like. As you know, and as we've said previously, we think we're in a better part of the cycle, now and going forward than we've been in the prior 10 years.
We're cautiously optimistic that raw materials won't be a big headwind for next year, but let us come back to you in at the Capital Markets Day with more specificity, if we could. In terms of cost out, we will continue to crush out cost as we have. You know, we committed to about SEK 1 billion this year. I don't see that changing materially going forward. We got to, we have to do that. Again, we'll break that out item by item for you during the Capital Markets Day. Tomas, can you speak to the currency question?
Yes, of course, I can do that. Well, as you know, Andreas, hedge doesn't take away the currency impact. Hedging doesn't, can't take away the impact. The currency effect is what it is. Hedge can only sort of postpone the effect, but when, for example, the Real depreciates, the new cost level that you get, and you can't do anything about that with hedges. We don't hedge much at all in Brazil, as it's very expensive as such. The only thing you can do when it comes to mitigating currency movement is to talk to your customers to increase prices and talk to your suppliers to negotiate with them. Also look at natural hedges as such, meaning matching flows in and out of a country, for example, like Brazil.
It is what it is. We can't answer for Whirlpool, but what we do know, looking at it from the outside, is that they have another exposure than we have. We have basically only imports into Brazil, massively. Brazil is the largest net currency exposure that we have when it comes to flow of goods and components into the country. When the currency depreciates with 20%, of course, it has a huge impact.
I mean, the Brazilian real today is at the same price as at the time of the Q3 result, Q2 results in the summer. It was a temporary spike. Should we assume it gets better in Q4?
Yeah. Well, absolutely. In Q3, the average rate is very much higher than it had been, has been previously. When it started to go up at the end of Q2 and during Q3, we have experienced a rate which has been way above what we had previously, that, of course, affects the transactional flows as you need to, as the goods becomes more and more expensive as such. If we would have stayed at the same rate as we had in Q1 and Q2, or let's say the first six months of the year, the effect of the real would have been zero, it isn't. As it's coming down now, of course, the effect will continue to go down.
I mean, the current effect in Q4, given the rate that we see now, will not at all be as it has been now in Q3.
Thank you.
Our next question comes from Mr. Andre Kukhnin from Credit Suisse. Please go ahead.
Oh, thank you. Good morning. Just one question on the timing of the new cost savings program. Could you just shed more light on that, when how you expect that SEK 1.8 billion to ramp up? Just if I may, a quick follow-up on Andreas' question. How are you treating the FX situation sort of more broadly? Are you seeing these moves as temporary and kind of waiting for things to normalize? Are you thinking of addressing it through the kind of natural hedging side, i.e., doing something to stop sort of importing into Brazil and for the business to become more kind of locally sourced?
Yeah. Again, let me, we'll do the same thing maybe. I'll start the first part. Tomas, you can build on that as well as addressing. I'll talk also maybe a little bit about what we're doing to mitigate some of the currency as well. In terms of the cost savings, the SEK 1.8 billion, as we mentioned, it's actually a combination of two initiatives. One is the next phase of the previously communicated manufacturing footprint program. You recall, the SEK three and a half billion that we talked about in Q4, 2011. We've communicated about SEK 1 billion of that. There's another SEK 2.2 billion that will help drive a big part of that, SEK 1.8 billion of savings. That will take time, right? Because we're looking at, well, two parts of that we've communicated.
One is the movement of refrigeration, a closure of a factory in Australia, moving that to Thailand. That will happen relatively quickly, but it'll still take a couple of years for that entire transition to happen, about two years. Then we also announced the beginning of an investigation of our entire Italian footprint, and of course, that's subject to lots of discussions and negotiations and conversations with all the key stakeholders, so that will take some time. The other part of that is the overhead cost reduction, which, while very difficult work as it relates to people, will happen much faster. There's a combination of activities here, some of which will happen relatively quickly in the next two quarters, others will be spread out.
The full effect of the SEK 1.8 billion annual savings is by 2016. That's the net full effect of that. I'll let Tomas to comment a little bit any more on the cost savings and the timing of that. Also relative to your point around the currency implications, we have and are making some changes relative to our manufacturing footprint, particularly in Brazil, to say, look, does it make more sense, rather than bring in X amount of product in, fully sourced, to manufacture more of it within the country? We're already underway in some of those decisions and some of those activities. Maybe, Tomas, you can comment more about.
I can just add to the timing issue here of the cost savings. As Keith says here, the overhead cost reduction is pretty straightforward and will happen more quickly. We will come back to this in Q4 when we have a little bit when we know more. We mustn't forget that a big part of the manufacturing footprint program is really just initiating a study as such. It's just estimation at this point in time. It'll be some that comes quicker and some that will be later. What we say is that our assumption is that we'll be fully done at the end of 2016.
On the currency side, of course, the first thing you do is that you, for example, in a country like Brazil, you have to increase your prices to the customers, and we do that. Of course, we do that all over the world. It's just a timing issue. You can't do it sort of overnight. There is a time lag. At the end of the day, we have to compensate for everything, basically, both when it comes to customers and to suppliers.
Got it. Thank you.
Our next question comes from Mr. Aaron Ibbotson from Goldman Sachs. Please go ahead.
Yes. Hi there, good morning. Thank Thank you for taking my question. I've got two questions, and I'm afraid I have to come back to the currency as well, and apologies for this. I fully appreciate the reluctance to hedge, which I sort of think is a good idea. What I actually don't understand how you get to your FX impact, in particular, when you're referring to the Brazilian real. I'm just wondering if either we can get more detail, or if you can send something out, because the Brazilian real I'm tracking is not weakening against the dollar, and it faster this quarter than it has on average over the last six quarters. I don't understand why it's suddenly become such a big impact.
Secondly, in light of the sort of large restructuring program that you've announced, I was hoping if you, Keith, could talk a little bit about your 6% margin target and in what context we should see that. I guess you haven't reached it for the last 10 years, and on my numbers, you've got about SEK 1 billion a year in restructuring. Should we see that as a sort of a ambition for underlying, and then you expect to maybe hit around 4%, 5% in 2016 for reported? Or do you still think it's realistic that you can reach 6%? That was my question.
Yeah, let me start with, that last one there. As at least in my calendar, we hit 6% EBITDA margin in 2010, which doesn't feel like a decade ago, but, so it's, to me, it's very doable. It is not underlying 5%, it's 6%. That's very doable. As you know, we've had and have had and continue to have, actually, with good progress, five out of the six sectors at or above that even margin target. You know, right now, we happen to be in the longest recession in Europe in history, with double-digit unemployment in the Eurozone. You know, it's a little bit above my pay grade to fix that.
The team is doing, and part of the restructuring here is to face that current reality, and to adjust our suit size, if you will, to a, to a thinner body, right? We've got a smaller market in Europe, and what we're not doing is make them believe that, you know, it's gonna magically change overnight. We have to face that reality where we and you see the same forecast we see, which is, you know, a forecast of a recovering European market, leaving the recession, getting into positive GDP territory going forward. We're hopeful that that happens, but we can't run the place on hope, right? We have to take action now given what we see, which is a relatively weak overall European market.
To answer your question specifically, with Europe being roughly a third of this group, you know, it's very, very difficult for the group, arithmetically, to be at that 6% target with Europe being in its current state. To answer your question, no, you can't get there with Europe being that weak, which is why we're taking action to improve the profitability of Europe for two reasons. One is to improve the overall profitability of the group, of course, and to achieve our targets, and to be stronger because Europe will recover. You know, this is not a question of if it's gonna recover, it's how long is it gonna take to recover?
When it does, based on the actions we're taking, we will be stronger coming out of it, and we will, in fact, hit the group, target of 6% all in.
Sorry, can I then just clarify? Because in 2010, I guess you had 6% underlying and roughly 5% reported. Is that how we should think about it then, that it's you're targeting an underlying 6% and then expect to run with 100-150 basis points or so of restructuring and other charges? On a reported basis, we should think about that as a 4.5%-5% type target.
No, no. I would say that how you should think about it is, you know, we announced in 2011, the $3.5 billion of manufacturing footprint that we've just today announced $3.2 of that $3.5. We expect that will be the end of the major restructuring programs, because there's not many facilities left, right, in terms that are in high-cost countries that need to be moved. If I were you, I would say, okay, that's the end of the restructuring program. That's how you ought to think about it. That, you know, that doesn't mean, so, you know, I've got to be a little bit careful here, but that doesn't mean that, you know, if we make an acquisition or we see an opportunity to do a value-liberating restructuring move, we won't do it.
We will do it. It'll be one, you know, it'll be one-offs and much, much smaller than what we're talking about. You should not have in your model indefinitely, you know, SEK 1 billion a year, and have the 6% margin net be 5%. That's not correct.
Okay. Thank you.
Tomas, do you have anything more to that question?
It was about the real. Well, I mean, what we talk about here is the real and the dollar. We talk about the depreciation of the real against the U.S. dollar. The average rate that we've had in July over September is 2.29. If you compare that with the rate we had for the same period last year, that was 2.036. It's like 12%-13% depreciation. What we do in Brazil is that we import goods into Brazil for around $4.5 billion. If you take a 12%-13% depreciation of $4.5 billion and then take the quarter out of that, then you have a quarterly effect. You end up on around SEK 150 million negative, more expensive purchasing.
Then to go into the details, there's a little bit more also, but not as much from Argentina, Venezuela, and Colombia as well, making the total to be a little bit above $200 million. Around $150 from Brazil itself, and then a little bit more than $50 from other Latin American countries, which have the same kind of depreciation for the US dollar. Does that answer your question?
I fully understand why it's happening now, I'm just understand why it wasn't happening before. you know, you're 12.5%, 12.8%. It was 12.9% in the first quarter, 13.8% in the fourth quarter. It was 24% in the third quarter of last year, now you're talking about it. Have you changed your hedging policy massively? That's why we're now seeing this effect, which we didn't see the previous five quarters when we've had similar depreciation.
What numbers are you referring to?
The year-over-year effect of the U.S. dollar, Brazilian real.
Well, the BRL effect has been pretty stable since the BRL against the USD has been pretty stable since May 2012. We had the last heavy effect we had in early Q1 2013. We had a big hit, and after that, the year-over-year effect ran out. In Q2, it was pretty stable year-over-year. In Q3, it started to run up again.
Okay. You must have different exchange rates from me. Okay. Thank you. We can take it offline.
Could we have the next question, please?
Our next question comes from Mr. Johan Eliasson from Kepler. Please go ahead.
Yeah, hi, this is Johan from Kepler Cheuvreux. Just a question on your restructuring. If I recall it, when you talked about manufacturing footprint in 2011, you said $3.5 billion to get $1.6 billion in benefits. Now you've sort of taken almost that, which assumes, I guess, $1.5 billion in benefits should come from the manufacturing footprint, and then another $300 million from the overhead reductions. Is that a correct statement, or has there been any changes in the benefits from the manufacturing footprint programs since 2011?
Yeah, let me start with that, and Tomas jump in, too. Of the 3.5 and 1.6 that we talked about, and again, we'll go in a lot more details during the Capital Markets Day. What we're communicating today is 3.2 of that 3.5. The benefits right now will be running a little bit, about 1.2-ish, you know, not quite 1.6, partly because we're anticipating, you know, two big ones, as you know, have been France and a study that we've initiated here in Italy. We're anticipating that those are not gonna be those are gonna be relatively expensive restructuring programs.
The actual, the SEK 1.6 net net could be a little bit less, proportionally to the SEK 3.2, relative to the SEK 3.5. We'll break it out for you specifically as we get closer to this thing. Tomas, anything to add to that?
Could you remind me how the global operation is running? I think you, at that time, also said there would be sort of a benefit of SEK 800 million per annum as of 2014 and SEK 900 million, 2015. Is that sort of unchanged?
There's no change to the global operations effect. Actually, that's tracking according to plan.
Yeah, great. Thank you.
Thank you.
Our next question comes from Mr. David Vos from Barclays. Please go ahead.
Oh, hi, guys. It's David Vos. Thanks for taking my question. Just on the new footprint restructuring program, wouldn't that, you know, wouldn't shifting production out of Italy into lower cost countries, you know, on the fringes of Europe, increase your risk of, you know, the repeat of these issues we have with FX at this moment? That's question one, and then question two is just very briefly, if you could comment on the cash effect of the restructuring program in FY 2013 and 2014, please.
Yeah, of the SEK 3.4 billion in charges that we take now, SEK 2.6 billion is cash.
Okay, thank you.
Our next question comes from Mr. David MacGregor from Longbow Research. Please go ahead.
Yes, good morning, everyone. I guess, first of all, you talked about a couple of programs in 2013 in the United States, the cooking redundancy. You had the incremental costs of moving the plant from Quebec down to Memphis, and then the distribution costs associated with supporting the new Home Depot business. Those were 2013 costs, but originally, I think the plan was that they would not extend into 2014, and I'm wondering if you could just confirm that. I seem to recall that might have been about 200 million SEK, but that will not extend into 2014. Secondly, I wonder if you could just talk about Brazil and the extent to which you may have gained share as a consequence of the Mabe bankruptcy.
At a time when you seem to be contemplating developing a broader manufacturing capability in Brazil, is an acquisition of some of those Mabe assets a possibility?
Okay, David, good questions. Let me start with the last one. Of course, we're not asleep in Brazil relative to the Mabe bankruptcy, so we're paying attention, I guess is probably all I can say at the moment. You know, if there's an opportunity there that we think will be, would create economic and therefore shareholder value, we'll take action. We don't have anything specifically to report there. Relative to your question on the U.S. cost, duplicate costs, specifically running Memphis alongside of l'Assomption at the same time, as well as the investments in infrastructure and distribution to service The Home Depot and now builder accounts, you're right. They're primarily 2013 costs.
To be fair, you know, could there be a little bit of run over into Q1? Maybe. Depends. You know, Memphis is right in the middle of ramping up, so, you know, everybody's scrambling to get that full transition. You know, my guess is we might have a little bit of run over into Q1, but essentially, to the point of your question, yes, the cost goes away.
Thank you.
Our next question comes from Mr. Martin Wilkie from Deutsche Bank. Please go ahead.
Good morning. It's Martin from Deutsche Bank. Just a question on your Asia Pacific growth, very strong in the quarter. I know that you are launching, or had intended to launch, some of your Chinese product range in the second half of this year. Was that a major driver of that? If you could just walk through what's happening in your China business. Thank you.
Yeah, the China business, to your point, actually was up significantly, up well over 50%. We've had very good placement and growth there. To your question, a big part of that growth is the placement and the launch of the new product. There's obviously investments required both at the retail, merchandising, sales training, along with that. That's basically what we're seeing is that growth coming from the placement. To be fair, at the moment, that's mostly what we would call sell-in, right? We're getting the placement of our product and inventories at retail and getting the product into the distribution channels. It's probably a little bit too early to declare victory at the sell-out level, right?
We need the consumers to vote and say they want the product. We've seen some of it, but mostly what we're seeing, in Q3, and at the beginning of Q4 is the sell-in process. Again, that's good news to me because the retailers are putting it on their floors.
In terms of the investments you're having to do with that, I know that you are ramping up marketing and distribution expenses, understandably, to launch those products. Do you think those investments peak in the second half of this year, and therefore, profitability for the region would pick up in the first part of next year? Is it too early to make that call, depending on what you need to do in terms of ongoing marketing costs in China?
It's probably a little bit too early, but I would say to you that if we say to you at the end of Q4 that, okay, you know, the marketing investment in China is done, then I would be worried if I were you. Because that probably says it's not going as well as we expected. To me, a very positive sign would be, look, we're gonna continue with that investment in the brand in China. Of course, it won't be all on cost because it'll be partially offset by the sell-out, right? It won't be 100% a negative, but I'm hopeful.
I'm cautiously optimistic that I'm gonna come to you next, you know, in the next quarter and say, "Hey, things are going well, and we're gonna continue to invest in the Electrolux brand in China, in the first half of next year." To your point, it's probably a little bit too early to make that call.
Thank you very much.
Our next question comes from Mr. James Maughan from Redburn. Please go ahead.
Yeah, good morning, everyone. Keith, morning, Tomas. One quick question. Olympic Group, how negative is it as a margin on EBIT? Have you got any visibility there? A bigger question on the savings. I wonder if you could help us a little bit more on putting the new savings into context. We had the old savings of SEK 5.3 billion. My first question is, how much of this SEK 1.8 billion you talk about today is really new, i.e., how much is from the SEK 1.2 billion overhead charge? Secondly, could you say how much of that SEK 5.3 billion you think you've already achieved in the P&L, and how much you think you have to go?
I feel like you may have done around SEK 2 billion and have 3 to go, plus whatever this new number is. It's quite big numbers, which could get you to seeing over SEK 1 billion a year going forward. History tells us that we shouldn't get too excited about it. My real question at the heart of this is, what should we put in for a year-on-year savings effect in 2014?
Okay. All right. Let me start with the Olympic while I give Tomas a chance to organize his thoughts on the rest of it. The, yeah, Olympic actually was down. Actually, business and volume and sales were down in the Middle East, in Egypt, in Q3. It was negative in earnings. That's the bad news. The good news is, it wasn't a disaster. I mean, it wasn't a huge hole. It was, you know, less than SEK 50 million in terms of impact, negative impact. You know, things are not great, as you know, in Egypt, but it's... I think I'm quite happy. Given the macro environment there, I think the team is doing a good job of shedding costs and adjusting to it.
It's, my guess is it's not gonna be, and, well, it hasn't been, and a big hole for us, although it's modestly negative, is what's happened in Q3. In terms of the footprint, Tomas, can you break out some of that? I know we're gonna go into it in detail at the Capital Markets Day, but...
Yeah. I mean, yeah, let's get back to the details, on the Capital Markets Day, and then break up, over all these programs. Of course, the manufacturing footprint, charges that we present today, the continuation of the program, that saving is, of course, a part of the saving that we have already communicated, and it's a part of the SEK 5.3 billion. We have always said that we don't have the project, but the project will come over the next coming years, and here comes a big chunk as well. We have to come back on that one.
The global operations part will continue next year, as we have communicated with SEK 700 million-SEK 800 million for 2014 and 2015, until it's done. I think we'll stop there. Of course, the new overhead cost reduction program is, of course, a little bit, that's a new thing as well, outside the SEK 5.3 billion. I mean, just sort of, quick numbers here. Of course, it'll be SEK 1 billion or more next year, but we'll come back to more details on the Capital Markets Day.
Thank you. Can I assume that that program is principally an EMEA-based program?
What we have today is really fulfilling what we've communicated to you guys previously on the manufacturing footprint. What's really the only thing that's new is the overhead reduction. That's what we've been communicating.
That's what I was really getting at. Could you say what the savings is for that new overhead piece, and is it all EMEA?
No, it's not all EMEA, but the majority of it is EMEA.
It's, 80 plus 90.
Yes.
Yeah.
Yeah, something like that. The overhead cost reduction program is SEK 1.2 billion, and saving is, well, round 1.
Thank you very much. Thanks, Tomas.
Our next question goes to Mr. Ben Maslen from Merrill Lynch. Please, go ahead.
Yeah, morning. Morning, Keith. Morning, Tomas. Just something on the cost savings. You obviously been taking charges for a, you know, fairly long time now, and, you know, we all use kind of EBIT bridges to model the company. When you throw out a big savings number, we just, you know, whack in a big positive one, two years out, then that's the bar that we, you know, you have to get over. Keith, when you set these new programs and you give these big savings figures, how do you think about them? Do you set out and you expect to keep all of those savings? Do you actually assume that some of it gets, you know, given away or eroded by just the kind of natural pressures in your industry?
Have you ever back-tested the previous programs to see how much of it you did actually keep? Thank you.
Yeah, that's a, that's a fair question, and, you know, you guys that have been following us in this industry for a while know that, you know, you gotta take out $1 billion-plus a year to, you know, stay in business here, right? I mean, it's just, it's, you know, it's a competitively intense industry, and, you know, that's nothing new. We will, as we have previously, you know, we will track these initiatives, you know, both manufacturing as well as fixed overhead and deliver those benefits. That, that I'm confident that we will do. Well, your question, I think, is, okay, is 100% of that gonna drop to the bottom line?
Yeah.
It will in isolation, you know, if prices, just take an example, if prices in Europe continue to be deflationary of 100 to 150 basis points every year, you know, that eats up part of that benefit. That's, of course, partly why you have to do it.
Yeah.
Yeah, I don't think you can just say, "Yeah, let me just add SEK 1.8 billion to the earnings, and all else being equal." I'd, you know, I'd like that reality to be my world, but it's not, right? You know, are there pluses and minuses all over the place? You know, price, raw materials, demand, competitive actions, of course, there is. I think you can say this will happen. I'm very confident we will execute on this, but I can't say that everything else is gonna stay even.
Yeah.
Okay.
On the offsets, I mean, the price pressure you mentioned in Europe, can you just give a bit more color on that? You know, is it stable, intensifying, you know, isolated in certain countries or segments? Who's driving it? You know, is it kind of traditional players just scrapping for share because the market's weak, or are you seeing new players come in to make it tougher?
Yeah, I would say, you know, the dynamic, of course, is we've got a weak market, so everybody's trying to get, you know, trying to run their assets, right? Everybody's trying to run their factories, and so a normal supply-demand situation where people are trying to just, in a weak market, get a little bit more, and it's number one. Number two, it's mostly a combination of the, you know, Turkish, aggressive Turkish players on top of, some Asian, Korean players coming into the marketplace. As you would expect, you know, the, the strong regional players, us and Bosch, are trying to protect, right?
You've got to kind of get that dynamic going on, where, you know, some competitors are being aggressive and some big players are trying to defend, and that's what's happening. Of course, at the same time, with weak demand, you've got the retail chain being very aggressive, right? Trying to get their own unfair share of it and being heavily promotional. It's a relatively natural, unfortunately, environment in a weak market. I will tell you, to your question, though, is that, you know, if you're looking for, you know, positive opportunities, the decline in price, which has been relatively stable for the last few quarters of about 1.5%, was better in Q3. It was less than 1.5%. It was closer to 1%.
Yeah.
You know, there's hopefully a sign that even though it's still deflationary, it's the trend is positive.
Got it. Thanks so much, Keith. Have a nice weekend.
Yeah, you, too. Bye. Tomas, you have a question or a comment?
Yeah. Well, Ben, to if you're still on the line?
Ben, your line is open.
Hi, yeah. Hi, sorry, Tomas. I've left for the weekend just yet.
Yeah, okay, of course. No, I mean, for your modeling here and for everybody else's modeling here, of course, I mean, apart from price pressure in Europe, et cetera, et cetera, we shouldn't forget that I mean, the inflationary, the inherent inflation, for the group, if you just look at it, if you look at the personnel cost and the other expenses, if you zoom, like, around a 3%, 2% to 3% inflation rate, we have SEK 1.5 billion in inflation every year.
Annual.
Annual. Yeah, it sort of happens January first, it starts all over again. You have a headwind of SEK 1.5 billion every year. If you just look at the group and look at how we can mitigate that, if you look at the volume drop-through, what kind of, let's say, volume sales growth, price is flat, the mix flat, just volume. How much volume do you need to compensate for that inflation? You end up on a number of around 5%. Yeah, 5% volume growth sort of basically just eats up the inflation. You're sort of back on square one. What you need is, you need price, you need mix, you need new products, and you need efficiency programs to move the group forward.
The two big ones is the price pressure on the market and then the annual inherent inflation. That helps you maybe in your modeling.
That does, yeah. Thanks very much. Thanks, Tomas.
Yeah, bye.
Okay, thank you. I think that was the last, question. I would like to hand over back to Keith for or Tomas, for the final remarks.
Can I just make one clarification here? Because there's been a lot of question about currency here as well. I think I know where some of the questions come from when we look at the Brazilian Real. Let's just do a final remark on that.
Sure.
When you look at the rates, please remember that this is transactional effects that we talk about. It's not the end of the quarter rate that we talk about. If you look at the end of the quarter rate and look at Q3, Q2, Q1, and if you work it back, you get a completely different picture. What we need to look at here is what is the average rate per quarter because this is transactions that happen every day, so we have to compare the average during the quarters. When you look at the average rates in Q3 compared to Q3 a year ago, it is up, or it depreciated 12%. Q2, it was only 4% or 5%. Q1, it was close to 12% again.
Q1 was bad, we know that. And then we said it's gonna cool down, which it did. It cooled down in Q2, and then, and then in Q3, we ran into a period of a much higher average rate. To someone's point here, of course, the real is appreciating again now. Of course, if it continues to appreciate or stays at these levels, that means that the average rate in Q4, then if this continues, will be much closer to the Q4 rate a year ago. The negative effects will, of course, dramatically decrease. We don't know anything about the rate, but that's the trend right now. If that maybe helps some of the listeners.
Okay, thanks for that, Tomas . Let me try to wrap up here and try to summarize Q3 and kind of pluses and minuses. I'd say on the plus side, we're pleased with almost 5% organic growth, given some of the challenges in Europe, so quite good. I would encourage you to look underneath the tent a little bit and look at the gross margins, excluding currency, because they continue to go up, and that's a function of implementing global operations work that we've communicated, as well as a steady stream of new products that's improving the mix. Of course, we're very pleased with, given our representation in the North American market, its strength and momentum, and in particular, our position and business within that rising tide.
We also are seeing, as you can see from the numbers, very good growth in Asia. Australia's pleasant. Professional was a good turn and good growth in small appliances. As you see, also good free cash flow. I've mentioned to many of you that, you know, what I pay a lot of attention to are three key metrics: so the top line, the gross margins, and the free cash flow, and this is a good quarter for all three of those. On the negative side, we talked about it, we beat it to death, but the currency is a huge headache in the quarter. You know, if you just freeze it and exclude the currency, earnings were SEK 1.6 billion or 5.5% EBITDA margin.
I mean, that's how big we're talking about a single item here. Of course, we don't get to exclude it, so we've got to raise prices and do all the things that we talked about. Europe, of course, continues to be soft, but as we mentioned, we don't see it getting worse. You know, we see some strength in Northern Europe and in Germany and the U.K. and the Nordics, and we see Southern Europe not getting better, but not getting worse. And partly, as you heard, we're taking aggressive cost action just to adjust our size and our suit sizing and be adjusted to the current market reality. If and when it gets stronger, we'll be in a stronger position as a result of that. We stay on the strategy.
We, you know, we continue to diversify our revenue base globally to participate in the growing global appliance market, that we're confident is gonna double over the next decade. We continue to invest in R&D and brand and design to bring more consumer-relevant innovation and mix up and expand the gross margins, and that we leverage our global scale through modernization, through manufacturing footprint, through purchasing and manufacturing. Operationally, you know, we do have to face that current weak Eurozone market, and as I mentioned, we, like many others, hope and expect it to get better. As I mentioned, we can't run the business on hope, so we're taking action now. We're gonna reduce our cost, and when the recovery does happen, we'll come out stronger. That's summary of the, of the quarter.
Thank you all for joining today, and everyone, have a great weekend. Thanks.