Good afternoon, everyone, and welcome to this Q3 conference call. As usual, we'll start this conference call with a 20-minute long presentation from our CEO, Keith McLoughlin, and our CFO, Tomas Eliasson. You can find the slides on Electrolux.com, on our website. After presentation, we will have a Q&A session, and we will conclude the conference call around 4:00 P.M. Central European time. With these short instructions, I would like to hand over the word to you, Keith.
Okay, thank you, welcome everyone to this discussion of the third quarter results for Electrolux 2012. With me today, as you've heard, we have our Head of IR, Peter Nyquist, and our CFO, Tomas Eliasson. Let's go ahead and begin our presentation. You can turn to slide two. Electrolux generated strong organic sales growth during the third quarter, with both volume and price contributing positively. Our operating income increased to SEK 1.461 billion, and five of our six business units achieved an operating income at or above our 6% EBIT target. In North America, price and mix increases, together with volume growth and operational efficiency, were the most important factors for the significant improvement. Our operations in Latin America experienced another quarter with very strong volume growth.
Earnings in Europe were negatively impacted by weak volume development in some of Electrolux's key markets. In accordance with our manufacturing footprint program, we are initiating activities in Europe to increase efficiency. Now I'd like Tomas to give his thoughts about our results, and then to talk about our cash flow in the third quarter. Please, Tomas.
Thank you, Keith. Let's flip to page three. Let us start with the sales and EBIT bridge, as usual, and compare Q3 this year with Q3 last year, split in organic growth, currency, and acquisitions. Starting with the top line, net sales increased by 5.9% in the quarter, where of 4.6% were organic, -3.8% currencies, and 5.1% acquisitions. If we start with the organic growth, we had a SEK 1.2 billion increase in sales and an EBIT leverage of 22%, very much driven by the outstanding performance in North America. Price, volume, and cost savings all contributed to this development.
Currency had a negative impact on the sales, with - SEK 970 million, on the EBIT line by SEK 80 million, which meant a dilution of 10 points to the EBIT margin. The continued weak Brazilian Real was one of the largest factors here. Acquisitions contributed with SEK 1.3 billion in sales and SEK 70 million in EBIT, which had a neutral impact on the EBIT margin. CTI in Latin America continued to perform above expectations, and Olympic was a little bit behind. Let's look a little bit closer to the organic growth part on the next slide number four. We will now break up the organic portion of the bridge a bit further and look at the 120 points margin accretion.
Our prices were up year-over-year due to strong price management in North America and higher prices in Latin America and Southeast Asia. Our mix, however, was negatively impacted by the unfavorable regional mix in Europe. In total, price and mix gave us an accretion of 120 points. Volumes were up, very much driven by the operations in Latin America and Asia. This gave us 20 points accretion to the EBIT margin. Higher costs for raw materials diluted the margin with 20 points. Investment in marketing, R&D, and design, combined with headwinds from source products, were all offset by cost savings, so ±0. All in all, this gave us 120 points of margin accretion.
Below the organic split, you can see currency and acquisitions mentioned on the previous slide, with currency giving a dilution of 10 points and the acquisitions were neutral to the margin. All in all, 5.4% in EBIT margin coming from 4.3%. Just a few quick comments on the sequential development from Q2 to Q3 this year. Price mix in North America and Latin America contributed to better margin in the quarter. Volumes were sequentially stronger in Q3 compared to Q2. Raw material costs for Q3 were somewhat lower compared with Q2. If we leave the P&L then and go to the cash flow on the next slide number five.
Looking at the operational cash flow was slightly negative and amounted to minus SEK 230 million. The negative cash flow in the quarter was mainly or only a result of the working capital development. There were two main factors. The first one reflects the buildup of inventories ahead of the strong fourth quarter, and the second one was a timing difference between Q2 and Q3 related to the air care season in North America. As you might remember, we had an unusually strong cash flow in Q2 due to this air care season, and this, of course, we have to pay back now in Q3. A more fair view on the cash flow is therefore to look at the year-to-date numbers.
As you can see in the table here, we are ahead, both in terms of working capital and also in operational cash flow. Capital expenditure exceeds last year and reflects our increased investment in product and in production capacity. The two major projects, just like last time, are the cooking plant in Memphis, Tennessee, in the U.S., and the new plant for fridges and freezers in Rayong in Thailand, for the Southeast Asian markets. Our net operating working capital, measured as inventories, trade receivables, and payables on a 12-month rolling basis, is now below 11% of sales, and this number was above 16% not more than five years ago. Looking forward to the fourth quarter, the cash flow normally picks up again, mainly driven by stronger operational earnings. Back to you, Keith.
Okay. Thank you, Tomas. Let's turn the slide and talk about our European operations. Our operating income of SEK 303 million was lower than a year ago. The lower earnings can be explained by two major factors. First, prices were down compared to the same period last year, but on a sequential basis, flat to slightly positive. Secondly, demand in Scandinavia, Benelux, and Southern Europe, in particular Italy, all important markets for Electrolux, were down in the quarter. In addition, the Olympic Group had a negative impact on earnings for the quarter due to launching costs and an overall weak market. Late last year, we announced our aim to further improve our manufacturing footprint to remain cost competitive. In line with this strategy, we today present a number of actions that will have a positive impact on the European cost position going forward.
Consultation will start with employees at the washing machine plant at Redon, France, to discontinue production. Furthermore, Electrolux is initiating several activities to downsize and specialize some of the production, beginning with the plant for refrigerators in Mariestad, Sweden, and the plant for cooking products in Schwanden, Switzerland. The production at the plants at Mariestad and Schwanden will be focused on premium products, while some of the production will be relocated to the group's production facilities in more efficient operations. Total costs are estimated to approximately SEK 1 billion, which will be charged against operating income as items affecting comparability in the fourth quarter of 2012. Let's turn the slide and talk about the market development in Europe. The European market in total declined by 1% in the third quarter, which was down 2% in Western Europe and up 2% in Eastern Europe.
The markets in Southern Europe continue to be weak. As I mentioned earlier, we are starting to see demand in Scandinavia and Benelux coming down as well. We are still seeing some growth in Germany and the UK. The market in Eastern Europe showed growth, mainly driven by Russia, while the rest of Eastern Europe showed a decline. Driven by a continued weak market development in Western Europe, we still estimate the market to be down around 2% for the full year 2012 compared to 2011. Now let's turn the slide and talk about North America. Our operations in North America showed a substantial improvement compared to the third quarter of last year. We are above our target of a 6% EBIT margin during the period. Our sales were up in the third quarter.
Price, mix, and volume increases were the main triggers for the sales growth. We continued to gain market share in the North American market during the third quarter. Price is a major contributor to the strong earnings improvement year-over-year. Our previous price increases are sticking, and we have been more precise with our customers in supporting promotions. Improved efficiency within our manufacturing and supply chain also had a positive impact on our results. Let's turn the slide and spend a few minutes on the market development in North America. Market demand in North America for core appliances increased slightly during the third quarter of 2012 compared to the same period last year. Demand increased in several important categories for Electrolux, like cooking and freezers. Consumer confidence is on a higher level than a year ago, and we have seen slightly better housing statistics.
Given that the core appliance market in the U.S. is down by 2.5% year -to -date, we have changed our full year market forecast for 2012. We now expect the market to be down by about 1% now, instead of being flat to up 2%. Now let's turn this slide and talk about Latin America. Market demand for appliances grew considerably in the third quarter, driven by government incentives in Brazil and overall strong market growth in other Latin American markets. The incentive program in Brazil has been extended until the end of 2012. There are four major reasons why we're able to increase our EBIT margin by 100 basis points to 6.4%.
Our new business in Chile and Argentina generated a positive contribution to our earnings, and CTI continues to exceed our plan. Strong growth in Brazil and other countries in Latin America generated positive contribution from higher volumes. Mix was positive, thanks to a better customer mix and continuous product innovation. Lastly, we've been able to increase prices in the key Brazilian market. In the third quarter, we were unfavorably impacted by the recent development of currencies. The strengthening of the U.S. dollar versus the Brazilian real has made raw materials and components more expensive since they are partly priced in U.S. dollars. Let's turn this slide, and we'll talk about our operations in Asia Pacific. Our operating margin in Asia Pacific improved to 9.9%. The Australian market declined slightly compared to the corresponding period of last year.
Our operating income in Australia improved compared to last year, mainly as a consequence of cost productivity and currency. The markets of Southeast Asia continued to grow considerably in the third quarter. By growing even faster than the market, we're able to gain market share, and our operations in Southeast Asia continued to show good profitability. Electrolux sales in Southeast Asia and China have now showed a double-digit growth for the past 12 consecutive quarters. Let's turn and talk about our small appliance business. Market demand for vacuum cleaners in Europe and North America declined in the third quarter compared with the same period of last year. Group sales increased during the third quarter year-over-year as a result of higher sales volumes, and the group gained market share in Europe and North America.
Higher sales for vacuum cleaners in Latin America, Asia Pacific, and Europe contributed to the increase in sales. Strong sales growth for small domestic appliances and cordless handheld vacuum cleaners, mainly in Asia Pacific, also contributed to the improvement in net sales. Lower sales prices, increased costs for source products, and deterioration in mix had a negative impact on operating income. The acquired company, Somela in Chile, had a positive impact on results. Now let's turn the slide and talk about our professional products business. Market demand in Europe for food service equipment declined in the third quarter of 2012. Consequently, sales of Electrolux food service products declined. Operating income declined as a result of lower sales volumes and a negative country mix due to lower sales in Europe and increased sales in growth markets.
Price increases and cost savings partly offset the decline in income. Costs for the Electrolux Grand Cuisine launch impacted the results of the professional group negatively in the quarter. Market demand for professional laundry equipment during the quarter declined. Group sales decreased due to lower sales volumes. Operating income declined as a result of lower volumes, while price increases and improved product mix made a positive contribution to the operating income. We turn to the next slide. Before talking about Q4, I'd like to just say something about a major event for Electrolux that took place in the last month in London. On the September 17th, we launched Electrolux Grand Cuisine, a new product range in the ultra-luxury premium segment for consumers. This kitchen range is the first-ever professional cooking system in the market, specifically designed for home use.
The launch is an important strategic move to further leverage on the group's professional heritage and expertise. This is a milestone for Electrolux, and you'll be hearing more about Electrolux Grand Cuisine going forward. Now let's talk about how 2012 will end. Looking into the fourth quarter of 2012, we expect market volumes to be slightly positive in the fourth quarter. The European market continues to be weak. In North America, we expect growth. Emerging markets will continue with higher volumes. In North America and Latin America, we will see a positive year-over-year impact from price in the fourth quarter. We expect raw material costs to be close to flat in the fourth quarter as steel prices are coming down. This will bring this year's headwind of raw material costs to around SEK 400 million for the full year.
We are continuing to support our launch of high-end Electrolux products into the European market. We are also increasing our brand investments in the U.S. as we begin to see a recovery in the U.S. market. Our acquired units will give us a positive contribution for the full year of approximately SEK 400 million compared to 2011. As there is great uncertainty in the Egyptian market, we have seen weaker performance from Olympic. Chilean CTI, on the other hand, has exceeded our expectations. We are also seeing positive development from our cost-saving program initiated at the end of 2011, and in combination with already implemented actions, we expect overall cost savings in 2012 to amount to approximately SEK 1 billion. Finally, we expect the increased cost for transportation and source products to continue for the remainder of the year.
With that, Peter, we're open for questions.
Okay, thank you, Keith. We're now ready for the Q&A session, and we should try to use this Q&A session as efficient as possible and let everybody have a chance to put forward questions. I would like there for you to ask one question at a time, and if you have more questions, you're of course, welcome to line up another question. Operator, by that, I would like to open the Q&A session.
Ladies and gentlemen, if you have a question for the speakers, please press zero one on your telephone keypad, you'll enter a queue. Our first question comes from Mr. James Moore from Redburn, London. Please go ahead, sir.
Good afternoon, everybody. It's James at Redburn. I've got a question on the net of investment in brand and the impact of source product costs with savings, which you sort of grouped together. I get the sense that the running rate and the momentum on the annualized savings has perhaps slowed a little into the quarter, and that the degree of brand investment has perhaps increased a bit. I wondered if you could just give us a feel for whether that's something we should expect more of going forward and how that looks in 2013.
I think, James, let me start with the, if I understand the question, there are both sides of that, but start with the savings side. I wouldn't read that as a slowing down in the savings rate. I think we're tracking pretty much as we've communicated, you know, to that SEK 1 billion. We've got another SEK 250 million, SEK 290 million in this quarter, tracking toward that SEK 1 billion. I wouldn't say, you shouldn't take it as a slowdown there. I think your observation, though, is that we are increasing our investments in R&D and in marketing and design. You know, not grossly different than we've communicated previously, but we are doing that.
We have some very successful and positive momentum in the U.S., and I think we've communicated in this report that we plan to invest behind that, to keep that momentum going with some additional marketing expense here. Actually, it started already in Q3 and will continue into Q4. That's how I would take it. Savings, no change, modest increases in marketing and R&D and design.
Could you size the U.S. impact we might see next quarter?
Yeah, it's gonna be between SEK 50 and SEK 100, James.
Okay, thanks. I'll jump back on the queue.
Okay. Thank you, James. Next question, please.
Our next question comes from Mr. Andreas Willi from JP Morgan. Please, go ahead, sir.
Hi, Andreas.
Yeah, good afternoon, gentlemen. My question on the sequential earnings development Q4 over Q3, if I look at the last few years, Q3 was often the stronger one of the two, in terms of the highest annual and for EBIT number, happening in Q3. If I look at consensus for the full year, that now implies about SEK 1 million higher EBIT in Q4 than Q3. Maybe you could give us some pointers from your side, what is different this year about seasonality, and what will be the sequential drivers that result in this increase in Q4, given also that foreign exchange hasn't necessarily got better relative to Q3?
Yeah, Andreas, actually, as you probably know, when you look back over time, there's actually been some quarters or some years when Q3 has been higher and there's been some when Q4 has been higher. You know, it's a, it's a close call, actually. I would say for this year, what's trending positively for us is, as we communicated, we think the cost, the increase in raw materials are behind us. We think there's good momentum in Latin America and North America on both volume and price and mix. We got two of our strongest months in October and November, which are a big cooking-related season for us. I think those are the primary reasons.
It's been, you know, as you say, some years it's been Q3 as the peak quarter, and some years it's been Q4. Our view, given the trends both in volumes, price mix, and raw materials, is that we'll have a sequentially better Q4.
Thank you.
Thank you, Christer. I'm sorry, Andreas. Next question is from Christer Magnergård on the line.
Yes. I was wondering about your cost savings in 2013, since that's probably gonna be a quite important earnings contributor for the next year. If you can give us some, any more comments on that?
You know the cost savings program. Tomas, you got that handy?
Well, you know, the overhead cost reduction program, the savings there, around SEK 700 million is split between 2012 and 2013. We will get just as much next year as we've had this year.
The overhead cost?
Yeah, the overhead cost savings program, the one we kicked off in December last year.
Right.
Then for the global operations part, well, we know it's gonna be SEK 3 billion. We had SEK 100 million two years ago. It will be something like SEK 500 million this year, and then SEK 2.4 billion spread out over 2013 to 2015, but we haven't really communicated the spread of that, but it's gonna be big back-en d loaded. We shouldn't forget that the modularization books are actually launched this year.
Yeah.
it's more starting now. For the footprint programs, well, we have just announced a new program to be kicked off here in Q4, w e'll see. We'll talk more about that later when the projects have actually started. Okay?
Yeah. Thank you.
Okay, thanks, Christer. Next question, please.
Our next question comes from Mr. Ben Maslen from Bank of America. Please go ahead, sir.
Hi, Ben.
Hi there. Yeah, good afternoon, everyone. Just, Keith, if I can, a question on Europe. I think the report says you did 1.6% growth in comparable currencies in the quarter. Does any chance you can give as a split between how much M&A price and volume contributed to that? Then just more broadly, talk about how your market share in Europe is developing in this difficult market.
Actually, let me start with the last part, and I'll come back to the first part. Market share, actually, for us in the quarter, we actually gained market share in Western Europe with the continuing momentum we've had over the previous quarters. We lost a little bit, honestly, in Eastern Europe. We lost a little bit in Russia. That's kind of been the picture on market share for the quarter. I think for the organic growth in sales during the quarter, you know, Europe was down, you know, about 3 .5 %, and that was mostly price and volume and a little bit of mix from a product standpoint.
It was pretty much spread actually, price, volume, and mix, but down about 3.5% organically. Obviously, partially offset by the addition of Olympic, so that's about 5%, 5.1%.
Got it. Thank you.
Bye. Thank you.
I just heard that we had some issues with the server here for the first question here, but it's actually recorded on server if you, if you want to listen into it later on, so it's no problem there.
Okay.
We can continue this. For the next question, I think that's it. Operator, please.
Our next question comes from Mr. Andre Kukhnin from Credit Suisse. Please go ahead.
Andre?
Hey, good afternoon. I have a quick question on CapEx. We've been running at SEK 1 billion for the first couple of quarters and then stepped up in Q3, and you normally get a step up in Q4. Should we expect that again this year, the Q4 step up further? A very quick follow-up on the cost savings question for 2013. Can I just confirm that those numbers are excluding the SEK 500 million benefit you should be getting from stopping spending on Global Ops next year?
Yeah. I think in capital expenditures, you know, I don't think there's a historical coincidence of CapEx spike in Q4, but there's no specific plan for it. I would say that, you know, we have two fairly significant manufacturing investments going on, as you know, in the group. One is the cooking facility in Memphis, Tennessee, and the other is a new refrigeration factory in Rayong, Thailand. That's bringing our CapEx to slightly above depreciation for this year.
Together with the Compass implementation.
The Compass, which is SAP.
Which adds another SEK 500 million annually, something like that, yeah.
I don't think there's, I'm not aware of a spike up in Q4, Tomas. No.
No. No, not as such. We will for another, let's say, two years, we will be a bit ahead of depreciation when it comes to CapEx, mainly due to the Compass implementation.
Right.
Yeah.
Right.
Sure, for the full year.
Yeah.
I guess your second question was more referring to the cost rather related to the global operations, right?
Yeah.
The cost was. This year. This year, SEK 500 million last year. Year-over-year, there's no change, and next year, there's nothing.
No.
It was not included in the numbers you were presenting earlier? Numbers?
The cost, no.
No, no, I was just talking about savings-
Exactly.
not cost.
Yeah, that's very clear. Thank you.
I can comment on the cost as well. The cost for the overhead cost reduction program was taken in last year. The cost for the global operation program is taken this year and last year.
Mm-hmm.
The cost for the manufacturing footprint is taken as we communicated.
Yeah.
We have just communicated a new provision here or a new program, or an extension of the program, and that's going to be charged in Q4.
Yeah, the Global Ops program costs you've been taking through the EBITDA line, as we talked about before.
Yes.
Yes, yes.
As underlying.
Yeah, yeah. Yep.
Okay, thank you. Next question, please.
Our next question comes from Mr. Erik Karlsson from AKO Capital. Please go ahead, sir.
Hi, Erik.
Yes, hello, thanks for taking my question. I just wanted to hear your thoughts on European pricing. What are you seeing there sequentially at the moment, and how do you think about pricing for Europe for 2013? Just your preliminary thoughts. Thanks.
Yeah, sequentially, pricing actually is positive in Europe, but still down year-over-year. That's kind of the current picture. I think, you know, we'll communicate more specifically on what that looks like going forward, but I think the net we should have a positive price mix effect going forward into 2013, heavily influenced by the mix effect, because we've got lots of new products, as you know, between the AEG launch last year, the Electrolux Inspiration launch, and the new Zanussi launch. That should net improve our overall product mix. Again, partially a little bit of hesitation or caution around what is going to be the geographic country mix impact of that. Without knowing that with certainty, I would expect the pure price mix trend to be positive going forward in Europe for us in 2013.
Very helpful. Thank you very much.
Yeah. Thank you, Erik. Next question.
Our next question comes from Mr. Andreas Lönnerborg from ABG. Please go ahead, sir.
Hi, Andreas.
Hi there. Yeah, thank you. Basically, the same question, but for North America into 2013, what's your take there right now?
In terms of.
Pricing.
Yeah.
Price mix.
Yeah, price mix. Right now, we haven't communicated any specific additional prices, so, you know, we'll get a little bit of a price benefit, but mostly we're going to stop, start lapping here pretty soon, the significant increases that we've had this year. In the absence of a structural change, I don't expect much positive additional price increases in North America. Again, we're planning not to lose what we've gained either, but I'd say to have structural price increases right now, we haven't announced or communicated anything related to that. Having said that, I do think there will be positive mix effect as we expand more of our business into as the builder market recovers, and as our, as we talked previously, our representation in Home Depot is favorable relative to our premium products.
I would expect we'll have a positive mix effect in North America.
Thank you.
Thank you, Andreas. Operator, next question.
Our next question comes from Mr. Johan Dahl from Erik Penser Bank. Please go ahead.
Yeah, hi there.
Hi, Johan.
Thanks for taking the question. Please, I was just wondering, since, we're going the, you know, manufacturing footprint program, this, it's a bit of new information in this report.
I have to ask it, albeit it, you're at an early stage. I was wondering, could you comment a bit on the specific categories in Europe? You know, how they have performed and how they have led up to the decisions, or at least objectives, which you have announced today. You know, you seem to be focusing on laundry, a bit on cooking. Also, I wonder if, you know, these are downsized facilities to some extent, fairly small. Is this the type of actions that you're aiming for going forward as well? I mean, should we expect fairly small activities for or are all bets off, or you can even do larger things?
Yeah. I wouldn't take the announcement today as kind of, "Hey, look, here's exactly what's gonna happen going forward." I think you should, as we've talked about, anticipate that, you know, we've got 50 facilities, plus or minus, around the world. As we talked about late last year, given the relatively low sales to capacity ratio, particularly in our mature or core markets, that it's important that we maximize the utilization of our most productive facilities, and increase their utilization rates. Which will have an impact, either in terms of closure or downsizing the higher cost facilities. That's what I would focus on. What you saw today actually was, you know, there was a refrigeration plant, there was a cooking plant, and there's a laundry plant. You know, one of each actually, talked about today.
In one case, there was a, you know, we're looking to cease production totally, which means if we can't get, you know, reindustrialization in there, that plant we'll have to close over time. A re-missioning, and a downsizing, and a focusing on specialty products in the refrigeration plant and the Schwanden plant, the cooking plant. But I wouldn't take it as, "Okay, now it's just gonna be small downsizing efforts." In some cases, it will be closures. In some cases, it'll be reconfiguring, but all obviously value-liberating restructuring initiatives.
The SEK 1 billion, is that mostly redundancies or?
Yeah, the SEK 1 billion is, honestly, a lot of it's got to do with the plant in France. A big chunk of that SEK 1 billion is France. Tomas?
Yes, it is France. The proposition is around that fact. Of course, if it is, as it is a total potential close down, it's a lot of money. A lot of money.
Thanks. I'll queue up again.
Okay. Thanks, Johan. Next question, please.
Our next question comes from Mr. Anders Trapp from SEB Enskilda. Please go ahead.
Hi, Anders.
Hi there. Just a question on your quarterly guidance. I think it's the first time ever that it doesn't contain anything negative of all the factors that you line up there. I'm sort of wondering, aren't there anything negative going on in your world right now? For instance, competitive, increased competition or currency headwinds or something like that.
Yeah. Thanks, Anders, for bringing that question up, because there's one word I'd like to say here, which is called Europe, is a challenge. Hopefully, we've been clear in communicating that Europe demand is weak and getting weaker. That has a negative impact on volume, it has a negative impact on the mix, it has a negative impact on the geographic margin impact. I'd say that's a big impact. As you highlighted, we talked about, I think Tomas talked about it earlier, you know, we've got some pretty significant currency, you know, swings going on, particularly when you look at the Brazilian real to the U.S. dollar, in particular. I would say both those things are moving in the wrong direction.
All right. Thank you.
Thank you.
Thanks, Anders. Next question?
Our next question comes from Mr. Domenico Ghilotti from Equita. Please go ahead.
Hello, Domenico.
Could you comment on the Brazilian market outlook for Q4 and possibly also 2013 after the expiry of the incentives?
Yes. The Brazilian market continues for us to, I think, defy what most people would anticipate. When I say the market, I mean, obviously, the appliance market. It continues to grow double digits, as you know. Part of that is driven by the government incentives, no doubt. It's, you know, it's also driven by the fact that there's 30+ million people that have entered the middle class and are forming households and buying appliances. It's also impacted by the relatively low penetration rate of major appliances in the population. When you think about washers, and dryers, and dishwashers, and frost-free refrigerators, it's a relatively low penetration rate. I think the affordability and the interest rates from a Brazilian perspective are quite low.
I don't think it's just the government incentives. I think there are some fundamentals that are driving consumption of appliances in Brazil. Having said that, right now, as you know, the incentives are scheduled to come off in December, at the end of the year. Do we expect that there will be a, you know, a pre-buy and also a down cycle or, you know, an adjustment after the incentives are out? Well, yes, we do. Does that mean we expect full year 2013 to be negative in demand in Brazil for appliances? No, we expect it to be positive. Just not quite as rich as, obviously, as we've seen this year.
Okay. Thank you.
Okay. Thank you, Domenico. Next question, please.
Our next question comes from Mr. Rasmus Engberg from Handelsbanken. Please go ahead, sir.
Hi, Rasmus.
Yeah, hi. I just wanted to ask you continue to surprise me with a very high organic growth rate. How do you see that in the fourth quarter compared to the third? Is there a slowdown overall for your growth in the fourth quarter compared to the third?
Yeah, I think actually, let's just try to do it by region. I think Latin America will at least be strong through the fourth quarter, per our previous question and discussion. I think while those incentives are still on, we expect Latin America will organically continue to be good, be strong.
Oh.
Our growth rate in Asia, as you know, has been driven primarily by 15%-16% each, growth rates in Southeast Asia and China for many, many quarters. Honestly, I expect those to continue, so I don't see a big change there. I think small appliances should do well. They had a very good quarter last year, so I have to look at the comp for that, but they should do fine. I think North America had a very strong organic growth in sales this quarter.
Mm-hmm.
That'll be, I think, a challenge to repeat, but it should be positive.
Yeah.
The big unknown, obviously, is Europe...
Mm.
Which we don't, honestly, we don't have great visibility to, but it's, it's not trending positively.
No. All right, thanks a lot for that.
Yep.
Thanks, Rasmus. Next question, operator, please.
Our next question comes from Mr. Johan Eliason from Cheuvreux. Please go ahead, sir.
Hi, Johan.
Hi there. I was wondering, coming back to North America again. I heard that GE talked about their appliance business last Friday. They said their housing channel was up 22% in the quarter. Did you see anything similar in that sort of channel, and how big is that, or maybe your premium exposure right now in North American markets? No.
We're seeing, as we've communicated, we're seeing positive trends in the housing sector, housing market, and builder sector in the U.S. business. We think, our view is that it continues to move in a gradual but positive direction. We have a smaller exposure historically to the builder market than two of our main U.S. competitors there. Our exposure there and our market share of the builder segment has been and continues to increase. We will hopefully be able to enjoy and participate more in that recovering market. We're a little bit, as you've heard us say before, we do think the market, the builder market and the housing market's coming back, but we're a little bit cautious on these big percentages, right? Because when you go with big percentage on a small number versus history, you can get fooled.
You go from 600,000 to 700,000 to 800,000 starts, that's great, but it's not 1.5 million, 1.4 million, 1.5 million that we need. We think it will improve. We think it'll be stronger next year than this year. We think we'll participate in that growth, but we don't see it as a hockey stick. We think of it as more positive, gradual growth.
How big a share is it right now, your North American, or maybe if you're talking about your whole premium exposure?
Yeah, I would say that our market share of the total U.S. builder market is less than 10%.
Yeah, I meant of your quarterly turnover.
Oh, I don't know if we've broken that down. Have we broken that down?
Not the housing channel as such, but we're talking about the premium market, which is 5%-10% of sales in the corporate business.
Yeah. Okay, thank you.
All right, thank you.
Okay, operator, next question.
Our next question comes from Mr. Rob Virdee from Espirito Santo. Please go ahead, sir.
Hello there, Rob.
Good afternoon, everybody. Quick question on capacity utilization in America and Europe. Just wondering where it is now, and obviously, the closing of three factories in Europe or the downsizing of them, where do you aim to get your capacity utilization in Europe at the end of this restructuring? Thanks.
Yep. Yeah, our plan is to get our capacity utilization back up north of 70%. Actually, our goal is 75% in our core markets, both U.S. and Europe. That's what we're tracking toward.
Just a quick follow-up. How far south below this are you at the moment?
Well, we, as we've stated previously, we've been running in the low 60s. You know, with this action, that'll move us in a direction, obviously higher than that, going forward. Heading towards 70, you know, we've still got work to do to get it in the mid-70s.
Fantastic. Very helpful. Thank you.
Thank you, Rob.
Next question, please.
Our next question comes from Mr. James Moore from Redburn, London. Please go ahead, sir, in London.
Hi there again, James.
Hi there. Back in a question on North America. I wondered if you could give us a feel for the Home Depot contract and what the timing is there, because I see quite a lot of potential. It's just a question of how does that ramp up? Do you think you'd be hitting sort of full revenue run rate by the end of 2013, and could you give us a size for that?
James, I think, you know, I think Home Depot is gonna, obviously, as a customer, ultimately get the final vote on how quickly we ramp up there. They will do that obviously, based on their view of performance. I will tell you that so far, so good. I think, we and Home Depot have been very pleased with the representation of Electrolux products on their first 120 floors. We take that response as a positive indication that there'll be further expansion. You know, we have to wait till we get confirmation from the customer on exactly what that'll be. Of course, as soon as we do, we'll communicate that to you and to the marketplace.
We don't yet have that finalized, but based on current trends and performance, we expect that expansion will continue. It'll take a couple of years, James. I don't think it'll be all rounded out in 2013. I think it'll be 2013, 2014 to get it fully rounded out.
Just on the distribution of that, could you explain what it is that you've added, that you didn't have, that you have to for their different business model? Does that give you access to the home builder channel?
As you're probably, to service the Home Depot account, we have to be able to drop ship or deliver direct -to -consumers, which means we've had to change and then put in place a direct -ship business model to serve that account. Not by coincidence, that same distribution capability is what's required to service the broad U.S. building, housing market, builder market. That capability that we've built in our building to service that one channel will give us significant capability to service the other segment.
Are you increasing your home builder sales force in any way to try and capture the housing recovery?
We are.
Great.
Okay. Thank you, James.
Thanks.
Next question, please.
Our next question comes from Mr. Christer Magnergård from DNB. Please go ahead, sir.
Hi there. I just had a question on Olympic Group, actually. It's almost a year ago since you made that acquisition, and it would be quite interesting to hear what you have done on this year and what the agenda is for Olympic, and what I understand is still loss-making, and when could you expect a turnaround for Olympic?
Yeah, let me give a couple of comments, and then maybe, Tomas, if you have something to add. I know we've got some equipment and some investments there and some right assets there. I think I would say on Olympic, the integration, start with the integration, because ultimately, acquisitions are about people and culture. I would say that's going very, very well. In fact, I would just literally 90 minutes ago, I was meeting with Jonas and the CEO of Olympic right here in the next room. They're here frequently, twice a month, and well, people are there, and there's good collaborative integration going on there.
I feel good about the cultural integration and the people integration and Olympic lining up with, you know, how Electrolux does thing, and the fact that we're learning from each other. We are investing significant as per the plan, per the original plan, and we've actually moved. We've closed the facility in Spain and moved the upgraded tooling and equipment to Cairo, to Egypt, to give them best-in-class products both on the laundry side as well as on the refrigeration side. There's a significant investment underway, and basically to bring Egypt and the Middle East, you know, kind of the next generation of products that the customers in the marketplace we know will want because it's essentially what's evolved in every other country in the world.
I would tell you that our Olympic teammates here and colleagues are very, very excited about the new product offerings that they will have in their arsenal, in their portfolio, to sell into the marketplace to get both market share as well as a better mix. I would say, also Olympic brings to us a business that we hadn't been that deeply involved in a category, which is in the water heating business. That season actually is coming up here in Q4. We expect to have some positive effect on that. Of course, the overlay is the political environment, and, you know, that's gonna take a while, of course, to get sorted out.
Again, we still stand firm on the premise that there's 90 million people there that are forming households and will be buying appliances, and demand will pick up for appliances, and we'll be prepared both from an offering standpoint and from an organizational capability standpoint, to be able to serve that. I don't know, Tomas, any other comments on Olympic?
Well, it's been in the red, slightly below 0, loss-making. Not a catastrophe, of course, but what we've seen in the financial trend here, or the financial performance of the company, is that it's coming around now. It's more like a break-even situation, or possibly better, depending on what's happening on the market in Q4. It should be at least sort of break even. It was in September.
Yeah.
Yeah.
Great. Thanks.
Yeah.
Thank you, sir. Next question, please.
Our next question comes from Mr. Björn Enarson from Danske Bank. Please go ahead, sir.
Good afternoon, Björn.
Good afternoon. Yes, a question on Europe. You discussed mix, quite a lot, and you have some extensive launches this year, and we hope to see some impact from that next year. If you take the European volume, historically, you have been in a revenue around SEK 44 billion-SEK 45 billion, and now we've seen a severe weakness in the market the last two years, or last three years. Has something structurally changed? What kind of revenues would you have in a normal European environment? That's the main questions, really. Also, what kind of revenues do you think there, or what kind of volumes do you need in Europe to get European margins to grow to the margin target? Thanks.
Yeah, let me try to address your question. Of course, to your point, you know, there's a weak market macro picture in Europe, and it's, and the demand, the weak demand in Southern Europe is spreading like a negative virus into Central and Northern Europe, and even parts of Eastern Europe and Germany that are growing, you know, are growing at a slower rate. We're in a weak demand environment in Europe, and we think as long as there's significant fiscal restraints and there's significant unemployment, that consumer confidence will be trending and trending lower. As consumer confidence trends lower, we know that discretionary spending, including appliance, discretionary appliance decisions, gets postponed and get deferred. We, we see that, unfortunately, we see that continuing at the moment.
I know you'd like to know, and I would, too, well, when does that turn, and when will we get to a more positive, more price mix environment? It's not clear to me when that happens. You know, we hope that's in the next 12 - 18 months, but to say with confidence that we can see that turning positively right now, we can't. We hope that it will, and we expect that it will, but right now, the trends are more negative. I think the trick for us is not to fix the Eurozone, but to outperform and stay consistent with the strategy around bringing more consumer-relevant innovation. We've got the AEG line, we've got the new Electrolux Inspiration line, we've got the new Zanussi line.
Our business in Europe will be completely refreshed here, walking into 2013. Actually, we'll have a little bit more refresh or new products in Zanussi freestanding in the beginning of 2013. By mid-2013, we'll be completely refreshed in Europe. I think it's a very good position for us to be in, albeit in a difficult macro environment. I don't have a specific number on sales. We can get back to you on it, Peter, do you have it?
Yeah, what you can say, of course, it's not really the absolute number of sales, it's also the mix of sales.
Sure.
That's, of course, important when you can get back to the number that we mentioned in the past, as we've been talking about throughout the whole presentation today.
I guess that the message you have taken, you don't really need to get back to the historic levels of revenues to take your margins to the group average number?
Yes. As you know, it's less about volume, and it's more about gross margin dollars.
Yeah. Thank you.
Yeah.
Thanks.
Thank you, Björn. The next question, please.
The next question comes from Mr. Johan Dahl from Erik Penser Bank. Please go ahead, sir.
Yeah, thanks. What's your visibility in terms of either, you know, improvement or further deterioration on your sourced product business, you know, floor care, air con? I'm sure you've tried to rework suppliers in order to, you know, fight some of the competitive pressures there. Can you say anything regarding next year in that respect?
Yeah, we'll give you a specific at the Capital Markets Day. Right now, our look is that the sourced product will continue to be a headwind next year. Perhaps not quite as much as this year, but let us confirm that to you in Capital Markets Day. Given the increase in electronics, and plastics and resins, and obviously, the contracts we have coming in as we speak, we know it's gonna be a headwind, and we'll give you the specifics going forward. Tomas, you have anything on that regard?
Yeah. Well, it could be worthwhile to mention that, I mean, this is not a quick fix. This is not about just switching suppliers. This is about working in a different way to take more control of these products, who owns the design, who owns the IP, et cetera, et cetera. It's gonna take some time, but it'll be good when we're through.
Yeah.
Okay, thank you.
Thank you. Thank you, Johan. Next question, please.
Our next question comes from Mr. Andreas Willi from JP Morgan. Please go ahead, sir.
Yeah, good afternoon. A question on the vacuum cleaner business. Years ago, that was doing very well in terms of profitability, and it was also seen a bit as a lead for the rest of the company, given that the vacuum cleaners have gone through the emerging market footprint, sourcing and price pressure, kind of first and came out on the other side. Where is that profitability now to where it was two years ago when it was at its peak? What can you do to get that business back up?
Yeah, I think good question. certainly Small Appliances, we expect to pull the averages up, and historically, it has done that. as you know, in Q3, it was right at the 6%, so below where we expect it to be and that it needs to be. It's a function, as you know, of, you know, a couple things. One is, this is a business that we talked about the Brazilian Real and the U.S. dollar. This is a business that gets hurt big time from that because they source so much product in U.S. dollars coming into the Brazilian Real. They get hurt a lot by all the sourcing activity. They get both the currency effect, as well as the increase in sourced product cost that we talked about.
As you know, they sell a big part of their business and margins are into the vacuum floor care market in Europe. Europe market is weak, as is the U.S. market. Ultimately, it's gonna be about lowering our cost and improving our price mix through more innovation. We are starting to launch more, but we will, in 2013, have a much more stronger pipeline of products that are coming to the marketplace in Small Appliances to help offset some of that market reality. It is a challenge right now. We're taking actions where obviously I'm talking to the business unit on what they need to do to adjust to, you know, a more challenging environment. We'll do what we need to do there.
Thank you.
Thank you, Andreas. Next question, please.
Our next question comes from Mr. Johan Eliason from Cheuvreux. Please go ahead, sir.
Hi there again, Johan.
Yeah, hi. Just a question on Russia. I understand that you don't have the presence there that you want to have, and now considering it's a growth area in the eastern part of Europe, what do you plan to do about Russia? Do you have anything up your sleeves, in the, in the midterm? Secondly, just a short comment on what do you see as an impact from the closer integration now of Fisher & Paykel and Haier in Australia and New Zealand?
Yeah. Let me start with your question about Russia. Obviously, to your point, it's a very large, growing market in this part of the world, and we've got to take advantage of that and capture our rightful share of that market. We're investing in the Ukraine factory. We're actually expanding from a laundry standpoint and also into refrigeration to make sure we get product that can get in under the trade barriers there for Russia and Eastern Europe. Actually, we've just reorganized the selling organization there and brought in some key talent reporting directly to into Jonas's key management. It's ultimately about getting the right product, you know, at the right cost, so therefore, inside the trade barriers with the right people to take advantage of that market.
I reviewed that recently with Jonas, and I feel confident we're doing the right things. It's just like most things, more faster, I would say, is what our challenge is there. In terms of Fisher & Paykel and Haier, well, I have no idea what they're gonna do. I really don't. I don't know. It doesn't, you know, for me, it doesn't look like a match made in heaven, but you'll have to ask them.
Okay. Thank you.
Okay, Johan, thank you. James, next questions?
Yeah, can I ask a question on branding costs? It feels like it's sort of SEK 800 million-SEK 900 million this year. I wonder if it's an exceptional year because of all the launches, and whether you could give us a sense for how that marketing headwind looks next year?
Yeah, I wouldn't call it an exceptional year, James, right now. I mean, we've got lots of launches, lots of new products, and we wanna stimulate our momentum that we have in certain key markets. We also, as we talked about, I think, probably a little bit obtusely, we have some plans in China next year that we're gonna plan to support. Again, we'll give you more details on that when we can be more specific. In terms of anticipating, I would not anticipate a slowdown in marketing investment.
The move from SEK 50 million, SEK 100 million had been the quarter up to the SEK 150 million, that seems to now be SEK 200 million. We keep it at that high level, you think?
I think in the near term, in the next few quarters, yes.
Okay. Thanks.
Thanks, James. I guess we have the last question here coming up, operator.
Yes, the last question comes from Mr. Domenico Ghilotti from Equita.
Hello, Domenico.
I have a question on Europe. In particular, you are mentioning that the weakness in South Europe is spreading to Central Europe and other, and Nordics. What about the sequential trend in South Europe? Do you see a stabilization in the performance in South Europe sequentially, or is it declining?
You're breaking up a little bit, but if I understood the question correctly, if the question was sequentially in Southern Europe, is it getting better or worse or staying flat? Actually, to your point, it's actually moving sideways a little bit. It's not continuing to go down as much in Southern Europe. You know, it changes country by country and month by month. Fundamentally, it feels like Southern Europe's at the bottom. The dilemma at the moment in Europe is that the weakness is spreading to Central and Northern Europe.
Okay. Thank you.
Thank you.
Thank you, Domenico. With that, we close the Q&A session. Before we close the call, I would like you to sum up the third quarter, Keith, please.
Okay. Thanks, Peter. Let me just try to summarize briefly. Let me just say, I think, you know, with some humility, I would say, in a pretty shaky macro environment, that we're pleased, I'm pleased, certainly with the team's results in Q3. You know, to have sales up, excluding currency, 10%, and earnings up 33% and margins up over 100 basis points, with five out of our six operating units at or above our 6% goal, I'd say that's pretty good work. We're doing that, and as we've talked about with many of your questions, while continuing to invest. Invest in innovation, in product, in brand and design. I'll tell you that our pipeline is quite strong going forward. Overall, I'd say good job by team Electrolux.
I wanted to mention a couple of non-financial things just to kind of give you a flavor for, you know, what it feels like around here in terms of energy and pride and momentum. Just in this last quarter alone, as you know, Electrolux launched for the first time ever, professional products into the domestic market in Electrolux Grand Cuisine. We've also opened and ran two Michelin star level restaurants called The Cube by Electrolux in London and Stockholm, which have both received rave reviews. We were named, just recently, the Consumer Durables Industry Leader in Sustainability by the prestigious Dow Jones Sustainability Index. In addition to that, for those that are close to Europe, but actually this is a global event, there was the Global Culinary Olympics just held in Germany this past month, with 36 countries competing.
The Swedish culinary team, which, of course, we sponsor, and who literally trains at our professional facilities and have been training for the last four years since the last Culinary Olympics, not only took the overall gold, they took gold in every single category in these Culinary Olympics. That's never actually happened before, ever, in the history of these Olympics. Quite, quite proud of the team there and what's happening. All of which, of course, builds on the brand to advance the appliance business for us and our professional heritage. I'll also mention in Q3, our U.S. Frigidaire advertising campaign was named the best ad campaign in the month of September in the U.S., and that's against all campaigns. That's pretty good company.
Just some, you know, anecdotal stuff, but to give you a sense of there's good, positive energy and momentum. In addition to that, as you heard by the announcement today, you know, we're not shying away from what we have to do to remain competitive in these tough markets. We're taking, and I think the European team appropriately is taking difficult but necessary value-liberating restructuring moves that were announced today. Of course, that were consistent with our previous communications. Lastly, I'd say that while the external landscape has gotten a bit more uncertain, particularly in Europe, we will and we'll have to therefore, make some tough choices, and we'll do that.
We're gonna do that in the context of staying the course, in the context of staying the course with the strategy around higher growth, diversifying our revenue base into emerging markets, increased innovation and funding in product and brand and R&D, driving strong value-liberating productivity through global operations and operational excellence, and accomplishing all that with great people. I can tell you that on Friday, I've reviewed all this with the board, and the determination to stay focused on the strategy, even though we'll have to make some tough choices, but be consistent with that strategy and receive their full and strong support.
I wanted to share I thought it'd be important to share that with you, that you shouldn't feel or worry that in a challenging macro environment, that all of a sudden, we're gonna panic and, you know, make a hard left turn somewhere. We're not. We're gonna make the tough choices, and we stay focused on the strategy. I think that is showing itself in the results and has for several quarters, and I expect will continue. Let me end with that, and thank you all for your time, and thank you for your continued interest in Electrolux. Thanks very much.