Good afternoon, everyone. As usual, we'll start this conference call with a 20-minute-long presentation from our CEO, Keith McLoughlin, and our CFO and becoming Head of Europe, Jonas Samuelson. The slides are available at our homepage, electrolux.com. After the presentation, we'll start a Q&A session. We will conclude the conference at around 16:00 Central European Time. As usual, my approach is to use the Q&A session as efficient as possible and let everybody have a chance to put forward questions. Therefore, I would like each of you to ask only one question at a time. With these instructions, I give the word to you, Keith.
Okay. Thank you, Peter, welcome everyone to this discussion of the third quarter results. As mentioned with me today, I have actually our former CFO and newly announced President and CEO of Major Appliances Europe, Jonas Samuelson, as well as our Head of IR, as you heard, Peter Nyquist. Now let's turn to our presentation for the Q3 highlights. The results for the third quarter were impacted by continued difficult and tough market conditions, particularly in the mature markets. Demand has weakened further in Southern Europe and in the U.S. Lower market prices had a negative impact on earnings during the quarter. Compared to the same period of last year, prices were lower in our three largest markets of Europe, North America, and Latin America. Raw material prices are still at a higher level than a year ago.
In addition, cost for source products and transportation were higher compared to the third quarter of 2010. Our professional business and Latin American business showed solid results. We have completed two important acquisitions. In September, we completed the acquisition of Olympic Group in Egypt. In October, we completed the acquisition of the Chilean appliance company, CTI. Our underlying cash flow, excluding payment for the acquisition of Olympic, is solid, mainly as a result of improved working capital productivity. We continue to raise the prices of our products, and we also need to increase the pace when it comes to adapting our cost structure to the lower demand environment. Before getting into details around the different sectors, I would like to ask Jonas to go through the cash flow and our recent acquisitions. Please, Jonas.
Thanks, Keith. First, I'll present our operating cash flow, and then I'll spend a few minutes talking about our two recent acquisitions. Our operating cash flow amounted to negative SEK 1.4 billion in the third quarter. However, excluding the payment of SEK 2.6 billion for the acquisition of Olympic Group, our operating cash flow amounted to a solid positive SEK 1.2 billion. The cash flow reflects higher sales in the third quarter. In September, we recognized particularly high sales, which has led to lower inventory levels and higher accounts receivable. We continue to see structural improvement in our working capital. Outlays for the ongoing restructuring and cost-cutting programs amounted to approximately SEK 140 million. Investments during the quarter referred mainly to new products.
To optimize and improve our manufacturing footprint, we will close 1 production line of dishwashers at the plant in Kinston, North Carolina. The cost for these activities will amount to SEK 120 million and be booked in the fourth quarter as items affecting comparability. Let's turn the page and look at our 2 recent acquisitions. Starting with our recent acquisition in Egypt of Olympic Group. In September, we completed the mandatory tender offer, and we now own 98% of the company's shares. Olympic's results are consolidated in Electrolux as of September 2011, and our intention is to delist Olympic's shares in the first quarter of 2012 at the latest.
2011 has, of course, been an extraordinary year for everyone in Egypt, and Olympic Group's sales were at very low levels in the beginning of 2011. However, the fundamentals in Egypt are strong. The young population and economic growth in the country create potential for good growth going forward. Olympic sales have shown a strong sequential recovery since the first quarter, and we expect sales to be at pre-revolution levels in the near future. On to CTI. Our second acquisition in 2011 referred to the Chilean manufacturer of appliances, CTI.
End of August, we announced an agreement with Sigdo Koppers and associated parties to acquire the controlling interest in CTI. In October, we closed the cash tender offer. We now own approximately 98% of the shares in CTI and 97% of the shares in CTI subsidiary, Somela. Remaining shareholders will have the opportunity to sell their shares for a limited period of time going forward. CTI will be consolidated in Electrolux as of October 2011. Through the acquisition of CTI, we've strengthened our position in Latin America. We're by far the largest manufacturer of appliances in Chile. We will also hold the number 1 position in Argentina. Combined with our current operations, our total market share in Latin America is approximately 20%. The acquisition will improve our long-term ability to further grow in Latin America.
Before giving the word back to you, Keith, I just wanted to mention that our results in the third quarter include a SEK 90 million charge or cost related to the acquisition, reported, the acquisitions here, reported in group common costs. Back to you, Keith.
Okay. Thank you, Jonas. Actually, before we get into Jonas's new area of responsibility for Major Appliances EMEA, I do want to just take a moment and thank Jonas for his significant contributions to this corporation, both as a CFO and COO in Electrolux. Of course, wish him all the best in his new assignment, and we're quite confident and excited to have him in that role. In the third quarter, the market for appliances in Europe turned negative. Our volumes were particularly impacted by the weak trend in Southern Europe.
The important Italian market of appliances declined by 10%. As mentioned before, the combination of positive market growth in Eastern Europe, which is primarily in the mass market segment, and the weak demand in Italy, which is more in the premium built-in segment, has contributed to a negative impact on our mix. Compared to last year, same period, lower prices had a negative impact on our sales and operating income. Our third quarter results were also negatively impacted by higher costs for raw materials and increased transportation costs. Last year's third quarter results included a positive one-off of SEK 150 million, related to the reversal of provisions for warranties and other quality measures. Our newly launched AEG products, AEG Neue Kollektion, have gained market shares in the third quarter of 2011.
Higher sales of AEG premium products generated a positive mix contribution during the quarter. On a year-over-year basis, we have lost some market shares, importantly, have captured market shares sequentially in the third quarter. In the fourth quarter, we will gradually increase our prices. In Q4 however, the impact of the increased prices will be limited as we work them through the marketplace, the majority of the impact will rather be in the first quarter of 2012, as we've previously communicated. Let's turn the page and talk about the market development in Europe. The European market turned negative in the third quarter. Industry shipments in Europe total were down by 1%. The markets in Southern Europe showed a further deterioration.
The market for appliances declined for the third quarter in a row by 10% in Italy and by 11% in Spain. Industry shipments in Eastern Europe increased by 7%, which is a slight slowdown compared to what we had seen previously. Year-to-date 2011, there was basically no growth in total Europe. As we expect the fourth quarter to be slightly negative, we have changed our outlook for 2011 from a slight positive 1% in growth to a slight negative 1%. Let's turn the slide and talk about North America. The results for our operations in North America were quite weak. First, our sales prices were still lower compared to last year's prices. Sequentially, however, we have been able to increase our prices. Our previously announced price increases have been accepted and are gradually generating a positive effect.
Second, cost for raw materials were higher compared to the same period of last year. Thirdly, our results were also negatively impacted by higher transportation costs and higher costs for sourced products. Finally, there's been an extensive promotional activity period in the quarter, which had a negative impact on our result. In the third quarter, we gained market share in the U.S. This is particularly evident within the refrigerator, cooking, and air conditioning categories. Let's turn to the next slide and talk about the market development in North America. The market development in North America has been weaker than expected in Q3. Market demand for appliances in North America declined by 4% during the quarter. Current demand levels are now lower than at their lowest point during the recession period.
Despite easier comparables in the third quarter, the market for appliances has shown a decrease compared to a year ago. Year-to-date, the North American market is down by almost 5%. As we expect the fourth quarter to be down, we have changed our outlook. We now expect 2011 to show negative growth of between 4% and 5% for the full year. Q3, as you look at it, is the sixth consecutive quarter where we have seen a declining market. The third quarter volumes of 2011 are down by around 30% compared to the volumes in the quarter of 2005. Let's turn to the next picture and talk about Latin America. Market demand for appliances in Brazil is expected to have grown by 4% in the third quarter.
Our net sales exceeded the market growth, and we continued to gain market share. The markets outside Brazil showed solid growth. Our operating income rose in the third quarter. Higher volumes contributed positively to those earnings. Retail consolidation among the largest retailers in Brazilian market had an adverse impact on our customer mix. Now let's turn the slide and talk about our operations in Asia Pacific. Our operating margin in Asia Pacific amounted to almost 9% in the third quarter. This is certainly a good achievement, although compared to a very strong third quarter of last year. In Australia, the market grew slightly compared to the corresponding period of last year. Our operating income declined due to lower prices, weaker product mix, and lower capacity utilization. The price pressure is mainly driven by the continued strong Australian dollar, which makes imported volumes more competitive in that market.
The markets in Southeast Asia and China continued growing considerably in the 3rd quarter. In addition to the high market growth, we were able to gain market share. Our operations in Southeast Asia continued to show very good profitability. Let's talk about our small appliance business. After a tough start to the year, small appliances are getting back to more normal levels. Market demand for vacuum cleaners in Europe were unchanged, while demand in North America declined compared to the same period of last year. Group sales rose in comparable currencies in the 3rd quarter compared to last year. This is a result of higher sales volumes of small domestic appliances and cordless handheld vacuum cleaners, while full-size vacuum cleaners were down. Our operating income declined in the quarter. This was primarily due to higher product costs, including raw materials and source products.
Let's talk about our professional products business. Operating income for our professional operations amounted to SEK 200 million, which is in line with last year and a solid result. Sales for our food service operations declined primarily as a result of weak market demand in Southern Europe. Operating income for our food service operations declined in the third quarter compared to the same period of last year. Lower volumes and higher raw material costs had an adverse impact on our results in the quarter. Price mix was positive since we were able to raise prices and improve our mix. Market demand for our professional laundry products increased in the third quarter, and our sales increased in the third quarter compared to the same period of last year. Operating income for our professional laundry business increased thanks to higher volumes, price increases, and higher capacity utilization.
Higher raw material costs had an adverse impact. Before talking about the rest of 2011, I'd like to spend some minutes on how we will manage our cost position, both from a structural demand perspective and from dealing with the falling demand experience in recent quarters. If you turn to the next page, which shows the market volumes in North America over time, over the years, we have seen a substantial decline in the mature markets of both North America and Western Europe. To highlight this development, we've used the North American market as an example. You see, in 2011, we expect a total of 35 million core white appliances to be sold in North America, which is on par with 1998 volumes and down 25% from its peak in 2005.
If the market would have grown in line with, at that point, expected GDP, the market would have consisted of more than 50 million units, a 30% gap. The corresponding figure for Western Europe is a gap of about 25%. As a result of the weak market conditions in the mature markets, we will further adapt our production capacity in North America and in Western Europe to achieve increased capacity utilization. Additionally, we will take actions to reduce overhead costs to accommodate the current business environment. If I ask you to turn to the next slide, you'll see the Western Europe seasonality curve. When we look into the Western Europe, we've recognized a similar difficult development during the last several quarters.
We had seen a stabilization at the end of last year, but since then, the demand has dropped again considerably, which you can see in this slide showing the seasonally adjusted volumes in Western Europe. If we annualize the quarterly volumes, the market has declined by more than 10% since 2007. We do not expect a quick market recovery in Western Europe. We have seen a similar development in North America and in the U.S., as long as construction of new houses, consumer confidence, and discretionary spending stay at these low levels, we expect demand to remain quite anemic and quite at these existing levels. To adjust to the current environment, we need to further enhance efficiency and reduce our overhead costs.
More details on our activity to improve capacity utilization, bring down overhead costs, and improve efficiency through global operations will be presented at Electrolux Capital Markets Day in Stockholm on November 15th. I'd like to end this presentation by giving you some directions for the rest of the year. Looking ahead into the fourth quarter of 2011, market volumes in the fourth quarter will be lower than the fourth quarter volumes of last year. Weak demand in Europe and North America will be partly offset by continued good growth in emerging markets. We expect the North American market to be weak in the fourth quarter, as we saw growth in the fourth quarter of 2010. We expect prices to be slightly negative in the fourth quarter, year-over-year, both in North America and in Europe, but positive on a sequential basis.
Our price increases in Europe will only have a marginal effect in the fourth quarter. The price increases will have full impact in 2012. Our product mix will be positive, as we will continue launching new products. We expect our newly launched AEG products to continue to gain market share. This will partly be offset by the negative country mix in Europe and customer mix in Latin America. The cost for our most important raw materials continue to be higher than in the previous year, but less than in the third quarter of this year. We expect the cost for raw materials in 2011 to increase by about SEK 2 billion compared to 2010, and for the fourth quarter of 2011, the increase will be around SEK 300 million.
In addition to increased cost for raw materials, we expect a continued impact from increased costs of source products and transportation, especially in North America. We will benefit from previous cost-cutting programs. Cost savings from our manufacturing relocation program will amount to SEK 500 million for the year, basically evenly distributed over the quarters. We also have great expectations for savings by utilizing our global strength and scale through global operations. The initiative is expected to save SEK 2 billion-SEK 2.5 billion per year, with full effect from 2015. Initially, the cost of these investments will be SEK 500 million per year for 2011 and 2012. We expect total contribution from Olympic and CTI to be about SEK 100 million.
This includes the effects from the purchase price allocation for the acquisitions, which means the amortization of intangible assets recognized and the realization of the step up in valuation of inventory. That concludes my remarks. Peter, let's open it up for questions if we can.
Okay, thanks, Keith. So we're now ready for the questions. As I said in the beginning, let's make this as efficient as possible and everybody have the chance to put forward questions. Please ask only one question at a time, and then you can queue up again if you have more questions. Operator, we are now ready for questions.
Ladies and gentlemen, if you have a question, please press 01 on your telephone keypad. You will enter a queue. The first question comes from Mr. Rob Verdi from Espirito Santo.
Hi, Rob.
Please go ahead, sir.
Hey, good afternoon. It's Rob Verdi from Espirito Santo.
Hi, Rob.
My question is on raw materials for 2012. Our model currently indicates an incremental headwind of about SEK 500 million, primarily from plastics. Do you have any guidance for 2012?
We're gonna give guidance, Rob, for 2012, in a couple of weeks at our Capital Markets Day around raw materials. We're still in the thick of it, with our key suppliers, and there is some, you know, some good guys and there are some bad guys. We'll, to your point, we'll come back to you, if we can, in just a few weeks with our guidance on the commodities for 2012, at Capital Markets Day.
I have a follow-up question on price increases, specifically in North America. You do not make mention of the increases of 3% for North America. Could you please tell us how they are progressing and if they are translating into effective price increases?
Yes. The increase, the August increase, as we had mentioned previously, is being passed through. We are seeing sequential improvement in our prices. Year-over-year, you know, what's become clear is that, you know, that they had dropped significantly as we talked about this time last year is when it all heated up. There is, in fact, heavy promotional activity. We are seeing improved prices sequentially, although not enough yet to offset the year-over-year.
Of that 3% list price increase, is it all translating into effective price increases?
No, I would say the answer to that is not yet, no. You know, part of that is getting consumed in promotional activity and, you know, as that starts to stabilize and more of that'll, it'll drop through.
Okay. Thank you very much.
Thank you.
Thank you, Rob. Next question, please.
Next question comes from Mr. James Moore from Redburn Partners. Please go ahead, sir.
Hi, James.
Hi, everybody. I have a question on capital allocation. Could you talk a little bit about the dividend policy? Your payout ratio of 30%, you've exceeded with 40, 50% over time. Given where earnings are likely to head this year, to sustain a SEK 6.5 dividend from last year would seem quite a high payout ratio. Could you talk a little bit about that? Within capital allocation, where the pension looks, I saw that the net deficit actually fell in the quarter against the second quarter, but given your your size of gross pension deficit, as well as where we've seen equities and discount rates move, is there some risk to that number?
Yeah. Okay, let me ask Jonas, as his last CFO role, to describe specifically what's going on relative to our expectations and policies around dividends and also the pension situation. Jonas?
Sure. All right. First of all, on the dividend, it's obviously too early to comment on that. Again, our policy is a minimum of 30% payout. We have, you know, very frequently exceeded that policy. It's too early to say anything about what's going to happen this year. Of course, we have continuously and intend to remain a shareholder-friendly company when it comes to cash return to shareholders. I guess that's the only guidance we can give right now. With regards to pensions, of course, you're right, the lower interest rate environment is impacting our net debt when it comes to the pension debt. That is probably not reflected in the net debt number that you're referring to.
I think the, you know, it depends on where we end up at the end of the year with the interest rates at the end of the year, exactly what that, how much that number will change. Again, the current levels, there will be an increase in the underfunded status of our pension by probably over SEK 1 billion. I guess that's still to be determined based on development of interest rates for the rest of the year.
Thanks. Just back to the dividend. You mentioned you want to be shareholder friendly. That's great news. You've also mentioned you want to acquire in emerging markets. I suppose I'm really just trying to rank those two, which is, the important issue.
Well, at the end of the day, I guess what it is that we have a good track record of generating free cash flow, and that's a huge focus area for us to do that. In fact, we have a strong balance sheet, so we are confident in our ability to do both.
Exactly. Exactly.
Thank you very much.
Thanks, James.
Next question.
Next question comes from Mr. James Stettler from UniCredit. Please go ahead, sir.
Hello, James.
Thank you, good afternoon. First of all, a quick follow on in the U.S., what do you think is going to stop promotional activity? I mean, what structural trends do you think is going to lead to an improvement there? The other question is, can you give, as you did in Q2, the EBIT bridge for Europe and North America in terms of volumes, price mix, and raw material impact?
Yeah. Let me start with the first question. Of course, ultimately, what relieves heavy discounting is increased demand, right? Or, and/or innovation. Those are only the two things that relieve that. Right now, there's some, I think, dramatic and anticipated, actually, pretty significant promotional activity in the U.S. I don't think that turns around immediately, but I think over time, you know, all companies want to make earnings. I saw actually a retailer promotion yesterday in the U.S. that was 40%-50% off appliances. I can tell you that the margins on the appliance industry, in any part of the value chain, don't support those kind of promotions. I mean, part of it is people got to make money, the other is increased demand, and third is improved innovation.
You know, in a weak market, it's promotional by nature. In terms of the EBIT bridge, you know, in the U.S., the big changes, of course, as we talked about, were higher raw materials and transportation and source product on the negative side. We saw a little bit positive on the volume side, and a net price mix, slightly negative result year-over-year. In terms of in terms of Europe, the bridges, you know, we had about 150, just kind of clear that out of the way so you get apples to apples. We had SEK 150 million good guy last year with a reversal of accruals on warranty, a better performance in quality.
The big negatives were there was a volume hit, a price mix, net hit, more price, and a little bit positive on the mix side, on the product mix side. The big one, of course, was the addition to that was the raw materials, partially offset by continued good quality work, good cost efficiency work, good uptime work in the plants. That was the kind of, that's the picture.
Thank you.
Yep.
Okay, James. Thanks. Next question, please.
Next question comes from Mr. David MacGregor from Longbow Research. Please go ahead, sir.
Hi, David.
Good morning, everyone.
Hello.
Keith, I guess the question is, how successful can you be in holding these prices and, in fact, gaining further on your pricing initiatives in early 2012, at a time when raw material prices are really rolling over here pretty hard? Just what, just interested in your thoughts on how successful you can be there?
No, that's a fair question. I mean, for sure, you know, in this type of mature, competitively intense market, it gets difficult to increase prices, if, particularly in a weak demand environment, you know, if there's not a headwind that forces it through, itself through the marketplace. Having said that, you know, we've had enough of it this year, you know, to last us for a while. We, you know, and as you know, it hasn't gone completely through by a long shot. You know, most of it, either we've absorbed and/or we've had to off-offset. We, you know, we've only really, we as an industry, have only passed through a portion of that.
like in previous periods, when the cyclical commodities go up so much, you know, a certain % of them have to work theirselves through the marketplace, otherwise, the manufacturers or somebody goes out of business. That's the primary driver. It's not obviously the demand environment, driving it through. The nature of your question is exactly right. It's difficult. I mean, it is very difficult to push these price increases through, and ultimately, only happens if everybody does it.
Yeah, I mean, ultimately, I guess the argument you make to the retailer is you're trying to normalize your materials margins. I'm just wondering, you know, how compelling a case that is at this point, or they just tell you to move on?
Yeah, well, I think, you know, what the retailers say is what the retailers always say, which is, "I'm not taking it," but really what they're saying is, "I'm not taking it unless the playing field stays level." That's really what they're saying. You know, these are all good business people, too, right? They know that if that tide is completely flat and the tide raises, it's in their best interest. They know that.
No.
What they don't know is, with their confidence level, that it's going to be completely flat and that they're not going to be disadvantaged.
As a follow-up, can you just talk about the negative mix in Latin America? Thank you.
Yeah. The negative mix in Latin America has primarily been, and we've talked about this, through most of the year, is when the customer consolidation, you know, the top two or three customers consolidated in Brazil. Obviously, the, you know, Casas Bahia, just to be 100% transparent, who had the lowest price at the time, that price wound up going to that completely consolidated company. Therefore, we had a negative mix effect by having lower net average prices because of that consolidation. I will tell you, we're coming up around the anniversary of that, so I would expect going forward, that you shouldn't have to hear me whine about that too much going forward in 2012, 'cause we pretty much are working our way through that full year comparable.
Thanks very much.
Okay, David, thanks.
Next question.
Next question comes from Miss Liza Kerley from Nomura. Please go ahead, ma'am.
Hi, Liza.
... Hi, good afternoon, everyone. Yeah, just a question coming back on to sort of the promotional pricing aspect. I mean, obviously, in the U.S., you've already indicated that it was perhaps more severe than you'd expected. I guess Q4 is the period in the U.S. where we normally, or certainly last year, saw a pretty tough environment also. The question, though, is, you know, how do you see that panning out already? Then also in Europe, I mean, it's not a, you know, a region where I guess we're familiar with, you know, the big seasonal promotional periods, but, you know, given the falloff in demand, do you think that's something that's going to increase? Thank you.
Yeah. In the U.S., I would like to say that more sanity will prevail, but my confidence in that is not high in Q4. I think given the current demand environment, I think retailers are gonna be aggressive. I think some retailers last year, and I can think of one or two in particular, were not as aggressive, and they lost market position. My experience with the big national account retailers in the U.S. is they don't let that happen two years in a row. Honestly, I think it's gonna be pretty promotional in Q4 here, and we have to pick our shots in terms of what we're gonna participate in and what we're not gonna participate in.
I think Europe, you know, maybe I'll ask Jonas, I know after just a few weeks on the job, whether he has a sense for what the environment, retail environment looks like there relative to promotional activity.
Right. I think it's usual in Europe. It's a little bit of a mixed picture where the Southern European countries, Spain and Italy, are very tough for all the players there, and there are some local competitors that are really struggling and are resorting to price and promotion to stay afloat. That's, it has been a tough environment here in all this year and in Q3 and expecting to have that continue in Q4.
Great. Sorry.
We're also seeing in Eastern Europe, in Russia in particular, very promotional behavior there as well. Just a little bit country by country, but I think those are the two big areas where we're seeing a lot of pressure, and then the other ones, it's more kind of businesses, as, you know, as it has been. There's really the demand isn't really going up or down much, and it remains a tough pricing environment like it has been.
Yeah.
Okay, 'cause I guess if you look at the results, and especially if you compare them to Whirlpool, there does seem to have been, in this quarter in particular, a divergence between sales growth that you've reported, obviously at the, you know, at a cost of pricing. You know, do you think there has been a divergence in your approach to absorbing that, you know, going with that promotional pressure and going for volume over price?
Make sure I just understand the question. Are you talking about in Europe or North America, or?
It was particularly obvious, I guess, in North America, but also in Latin America as well. There was obviously a big difference between the reported numbers of yours, yourselves and Whirlpool. I guess, you know, group wise, I mean, have you know, have you taken any views as to how you approach as a group, at a group level, or is it still very much on a case-by-case, how you approach the promotional activity in respective regions?
Yeah, no, that, I mean, that's one thing you learn in this business is you can't run this business from Stockholm, Sweden. You know, it happens very locally in these regions and in these countries, and you have to depend on the CEOs and the sectors to run their businesses. There is not, to answer your question, there is not a group policy that says participate heavily or don't participate heavily. Everybody is measured on earnings and cash and working capital and margins, so, you know, they're all paid to manage that mix of financial objectives. I do think, as we mentioned in the report, I do think we gained a little bit of share in both North America and Latin America, Brazil in particular.
although year-over-year down, I think sequentially we gained a little bit in Europe as well.
Okay. Thank you.
Thank you, Liza. The next question, please.
Next question comes from Mr. Andreas Willi from JP Morgan. Please go ahead, sir.
Hi, Andreas.
Hi.
Good afternoon, everybody. My question is on the sequential development into Q4. I mean, you gave us some good pointers on the year-on-year earnings bridge, but maybe you could help us understand the sequential development a bit better, given, obviously, we have moved quite a bit since Q4 last year in terms of some of the dynamics. If normally Q4 is seasonally a bit weaker, SEK 100 million, SEK 200 million lighter than Q3, if I look at market consensus, the market looks for like SEK 300 million improvement in Q4 over Q3.
I assume you would have pointed out, with today's release, if you are uncomfortable with that consensus. Maybe you could just give us some of the pointers, how we basically get from a seasonally adjusted level of Q3 to an improved Q4, given also that incrementally pricing is not really gonna help you that much, in Europe.
Yeah. No, good. I'll try to give you that bridge sequentially a bit. Again, I, we know, we walk through the bridge year-over-year. If you keep that in mind relative to raw materials and volume and price, then just kind of walk a little bit forward, I'll try to help you with the bridge sequentially from Q3 to Q4. We think the price mix will be favorable sequentially. I think there'll be a slight positive volume impact. We, you know, we're making some investments in marketing, and I think that'll be a negative and partial offset for us, because we've got some new launches and some new products that we're gonna take to market.
I would say the three big ones are, you know, volume, price, and mix, will be positive. I think sequentially, raw materials will be positive. I think they'll be partially offset, by some investment activities, in marketing and in R&D.
You're comfortable with the assumption that Q4 this year will be better than Q3, opposite to the normal seasonal trend?
Yeah. I would say, like, I think we've been consistent that we expect that sequentially, earnings will go up, but be down year-over-year. I think we've been pretty consistent with that, and I think we've actually, that's what's happened. I would say that one more time for this next quarter. When we talk about Q1, I'll have a different story, but for now, sequentially up and year-over-year down.
Yeah. I'm just asking because Whirlpool is guiding for a significantly down Q4 over Q3. It just seems a stark difference.
Well, I hope we're right.
Thank you.
Thank you.
Thank you, Andreas. Next question, please.
The next question comes from Mr. Rasmus Engberg from Handelsbanken. Please go ahead, sir.
Hi, Rasmus.
Hi there. Just wanted to set our minds straight on ahead of the Capital Markets Day coming up. You are basically telling us that you will take out, I assume, quite significant amounts of capacity in Europe and North America, if that is correct or not, and then, you know, whether or not we should be talking, thinking billions or millions?
Yeah. Let me start with, we are talking about adjusting our asset base to right size the capacity or get it closer relative to the demand picture, which means increase our asset utilization and lower our break-even rate, and have more of our most productive assets running more efficiently than our lower productive assets. Point number one is, you are correct. Significant, you know, I think that we're talking about not changing the strategy or the fundamental footprint of the company. I think we're talking about adjusting the footprint of the company to the current market reality is what I would say. If you would give, you know, give us a couple of weeks, and we'll come back to you with those specifics.
Yeah, just referring to the company, other company that just reported, which is talking about 10% of their staff in those markets, which seems rather costly.
Okay.
Correct.
Yeah. I'm sorry.
Yeah.
Was that a question, or...? I'm sorry.
No, I was just wondering whether, you know, whether you wanted to hint some sort of magnitude there.
Yeah. If you can, again, if you can give us a couple of weeks-
Sure.
We'll give you specifics on the asset, side, the capacity utilization side, accelerating global operations, and the overhead. We'll give you all three of those.
Right. Thanks.
Yeah.
Okay. Thanks, Rasmus. Next question, please.
Next question comes from Mr. Kenneth Toll from Carnegie. Please go ahead, sir.
Hi, Kenneth.
Yes, sorry. It's, I have a question on Olympic. How much sales did it contribute in the third quarter?
How much sales did Olympic contribute with? Okay.
Yeah.
Yeah.
It was around 1% of the total, so, relatively limited. Then obviously, the earnings impact was actually slightly negative because of the acquisition accounting impacts, where you have to revalue inventory and so on. But the underlying earnings were positive.
All right.
Okay, thank you.
Thanks, Kenneth. The next question?
Next question comes from Mr. Stefan Lycke from Deutsche Bank. Please go ahead, sir.
Hi, Stefan.
Hi, guys. Yeah, can you just talk a bit about the AEG launch? I mean, we've been talking about this for ages, I think, but it seems like you've done another relaunch, if you may, and it's gaining traction. I was wondering if you can shed some light on that?
Yeah. I'll turn that one over again to Jonas, but I think it wasn't ages, it seems like maybe an exaggeration, but it's been some time. I think it's a fair comment that it's taken us time to get traction. Primarily, I think the issue, Jonas, has been with the distribution setup. Maybe you can speak to that a little bit.
Yeah, sure. No, actually, I feel very good about the traction that we are getting right now with the new AEG range, and the complete relaunch of the full product range across Europe. Of course, that's a pretty complicated effort to get, you know, floor units replaced at kitchen retailers across Europe. Obviously, with a focus on Germany and Benelux and Austria, as the key markets for AEG. That's taken a while. We've also implemented a better distribution strategy with a little, you know, less sales through wholesalers and internet and things like that, which is, you know, even though there's been underlying improvement, there's been actually a negative net sales impact from that, call it cleanup of our distribution setup. Now, we've worked through that.
We're getting good traction. Dealers, retailers like the product, consumers like the product, they're moving. In fact, in Q3, we have a market share increase year-over-year in AEG in total, for the first time, as we now work through those distribution issues. We feel very good about what's happening there.
With that launch share, do you feel that you can get, I mean, you're now taking share on a sequential basis? Do you feel that you can start gaining on a year-over-year basis as well?
Well, I mean, first of all, just to be clear on AEG is a little over 25% of our European, or close to 30% of our European business. Even though we are gaining share, it has, you know, somewhat more measured impact on the total. Look, I have to say, I don't feel bad about our market share outlook for Q4 in Europe. I'm not gonna give you an exact number, but we have positive momentum right now.
Excellent. Many thanks.
Sure.
Thanks, Stefan. Next question?
Next question comes from Mr. Ben Maslen from Bank of America. Please go ahead, sir. Hi, Ben.
Yeah, hi there. Good afternoon, everyone. Just following up on the cost cutting and, you know, Whirlpool seemed to be actually, you know, rather than moving capacity around, net taking it out. I just wondered, looking back at the very big cost cutting and that relocation program you did since 2005, what your kind of potential capacity did over that period, as you moved production facilities to low-cost countries, did your capacity come down in that move, or was it fairly stable? Thank you.
No, that's a good question. It actually did not come down in total. There probably was some incremental increases just because there were some efficiencies relative to how we set up the plants and lean manufacturing and the learnings. Not dramatic, but, you know, incremental. I would say net-net, the capacity did not come down during that time period.
Okay, thank you. Then just a follow-up on, I think there was a financial gain in financial net on FX news, on CTI and Olympic. Maybe you could quantify that. Then just perhaps, you know, both those assets are in countries that traditionally have had very volatile currencies, just whether you're gonna do anything specific or different to manage that volatility in terms of hedging, cash flows, and things like that. Thank you.
Sure. We had a gain on essentially on U.S. dollars in pre-funding the acquisition of both Olympic and CTI. It was in the range of close to SEK 100 million favorable on those. In terms of the FX, it's, you know, the Egyptian pound is impossible to hedge, essentially. What we are doing is trying to get as much local funding as possible, and the same for Chile, you know, a relatively high degree of local funding to as much as possible counter the volatility.
Thank you. Then just maybe following up on that, I mean, if you get a lot of local funding, is it significantly more expensive in terms of interest rates than, you know, I assume you would get elsewhere in the world?
Right. Right. Yes. Obviously, reflecting both inflation and other things like that. Yes, it is more expensive.
Okay. Thank you.
Thank you, Ben. Next question?
Next question comes from Mr. James Moore from Redburn Partners. Hi, James. Go ahead, sir.
Hi, I just wanted to follow up. You mentioned the positive price effect in 2012. I wondered if you could sort of put a size on that or give us a feeling as to what you're talking about. In terms of reducing production capacity and overhead costs in North America and Western Europe, I know you're gonna give some more details at the Capital Markets Day, but are we talking plant closures and headcount or just headcount?
Yes. Let me start with the second part of the question. We're talking both, if you can kind of in your mind, think about Actually, it's three major initiatives, the acceleration of global operations, the asset capacity utilization or optimization initiative, and a fixed overhead cost reduction initiative. The last two, specific to your question, we're talking primarily about You know, the least productive capacity being shut down. It's not about building plants. It's certainly not about adding capacity. We don't need that. It's about greater utilization of our most productive assets, and it's a little bit what you see here with going on in the dishwasher announcement that we had today. That's one part of it that we'll talk about again in more detail.
Yes, in addition, and it as part of that, of course, if you shut down a line or a plant, you know, there are people implications of that in the, in the plants. However, in addition to that, we're also taking activities around the world in the different business units, unit by unit, function by function, to reduce our overall overhead fixed cost, and that will have implications on people as well. The first part of your question was, I think you're referring primarily to the comment around the October European price increase, which we commented that it will take several months to work its way through the complex European marketplace, and we expect that that net effect will come in full effect by January.
I was just more thinking at the group level. I mean, you've got a lot rolling over. You did professional earlier in the year, did the U.S. sort of mid, early year, and then the second bout in August, and you got Europe coming up, and there's lots of rolling in and out of price, and then we've got promotion. Just all in, at a group level, do you think we see positive price next year?
Yes, I do.
Okay, thanks.
Thank you.
Next question, please.
Next question comes from Björn Enarson from Danske Bank. Hello, Bjorn.
Hello. Yes, if you can talk about the seasonality for CTI and if any for Olympic as well, and including some comments on initial earnings contribution, including, non-recurring items for these two companies. Thanks.
Yeah, I can give you kind of a, give you a little bit of overview, and then maybe, Jonas, you can fill in, 'cause I know you're very close to both of them. I'll tell you CTI, I mean, I almost have to, I got to knock on my forehead here or knock on wood somewhere. We like what's happening there. I mean, it's a good company. It's well run. Our teams are integrating well. We're finding more synergies than we even had predicated in the business case. Their business is strong and getting stronger. You know, everything we see about CTI so far, we like.
On the Olympic side, again, no issues relative to the business case, big issues relative to the market and the country. You know, we've got constitutional elections coming up here in November. We got presidential elections coming up in March. That one's gonna be bumpy for a while, you know. If that's a year or 18 months, I don't know, but, you know, it's gonna take a little while to stabilize. I don't know, Jonas, relative to the financial, do you have any perspective on?
No, I neither of them are particularly seasonal in their earnings pattern. you know, I think there's, you know, with refrigeration, there's always a pattern related to when it's warm outside and so on, but not more than typical. I can also fill in, I guess, the, you know, obviously agreeing fully with Keith on CTI. Also on Olympic Group, we just need to be very clear that this is a, for us, a very strategic move related to the region as a whole, not just Egypt. Middle East and North Africa is a region of 600 million people, and Olympic is extremely well positioned to serve those markets over time.
Yes, we have some political instability, both in Egypt and in the region, but we feel extremely good about now working together with the premier appliance company in the region. Likewise, there, we're also in full integration mode, working with the local management, with the team on the ground, looking at product opportunities and ramping up investments in that. We feel despite, again, these political uncertainties, we feel very good about the long-term case there.
Okay, thanks. Excluding potential restructuring, if necessary, but excluding that, have you taken the revaluation that you took in Olympic? Is that taken now, and/or will we see more of that going forward, and will we have a similar-
Right.
will we see something similar for CTI?
Yeah, we will see a similar effect, which is essentially, you know, the step up in inventory, which you have to do. You have to basically market value your ingoing inventories as you make an acquisition.
Sure.
As you sell that through, you do it at a very low margin. That will continue a little bit for Olympic Group and will hit us for CTI. Even with all that, we will see a contribution of about SEK 100 million in the fourth quarter from the two companies combined.
Great. Thanks.
Sure. Okay, thank you, Björn. Next question, please.
Next question comes from Andreas Willi for JP Morgan. Please go ahead, sir.
Hi again, Andreas.
Yeah, good afternoon. Follow-up question from my side in terms of the, you showed us these long-term charts on where the appliance volumes are relative to the trend line. How would that picture look like if you adjust the trend line for kind of the longer average life of the appliances and from the fact that penetration rates have obviously, over the last 10 years in both Europe and the U.S., reached maybe as far as they will go? Would you still then argue that we are 25%, 30% below normal?
Okay, make sure I understand the question. If your question is, where do we think the long-term trend line is for Western Europe and North America?
Because you drew a trend line through basically the growth we have had up until 2005.
Yeah.
Basically the trend keeps going up. If part of the growth we have had in the past was penetration, and also if the average age or the average lifetime of an appliance is maybe 2 years more than it was 10 years ago, then maybe we do the natural level of demand is much lower than what your trend line would suggest.
I think there certainly was a spike called the U.S. housing boom. I mean, I think there's no doubt that what you see in that 2004, 2005, 2006, that part of that curve, you know, that's called the U.S. housing bubble. That obviously has corrected. Having said that, and we've talked about this previously, you know, the U.S. as, you know, as a region, has a growing population.
I mean, there's immigration, there's demographically more people with more disposable income over time, and that has been the projection. You know, that as far as everything I know, that's a continued projection, is a growing, more affluent population, which means there's gonna be continued consumption of consumer durable goods, and that means housing as well. Right now, when you look at the demographics, it says that you need somewhere around 1.2 million to 1.4 million housing starts in the U.S. to meet the population growth. As you know, they'll be lucky to do 300,000-400,000 housing starts this year, which means at some point, this correction between the overbuild and the underbuild is gonna even out and has come back.
Short version of a long story is, we think appliance demand in the U.S. over time will be in the 1%-3% range. That's what we think. We think Western Europe will be around 1%, 'cause it doesn't have the population growth that the U.S. does. Of course, when you put Eastern Europe and now Middle East, Africa on top of that, it's stronger. I don't know if I'm answering your question specifically, if you're trying to do a regression off this. I don't know, Peter, did you.
I think also, Andreas, to if you look at the line here in the picture, it's actually based on GDP growth. That's what you have to see over that time. That's the gaps that have been created from where we are right now and the GDP growth that we actually anticipated to happen from that period of time.
Okay, that explains it. Thank you.
Yeah.
Okay, next, question, please.
Next question comes from Mr. Rasmus Engberg, from Handelsbanken. Please go ahead, sir.
Hi again, Rasmus.
Hi. I'm just wondering, if we're gonna do the guidance thing again and talk about earnings going up sequentially. Should we then adjust for these SEK 90 million, or should we just take the SEK 1,064? Or which number should we start from?
Yeah, no, I mean, the SEK 90 million is a one-off.
Okay.
Okay, thanks, Rasmus. I guess the next question will be the last one today. I think it's Anders Trapp.
The next question comes from Mr. Anders Trapp from SEB. Please go ahead, sir.
Yes. Hi. I just have one short question. I wonder if you see or expect to see rather, any impact at all in the marketplace from the ongoing anti-dumping cases? I understand there was some kind of ruling or temporary ruling or indication, at least today from the relevant authorities.
Anders, you follow the market closely. That's very good. Yesterday, there was a preliminary ruling from the Department of Commerce on a petition initiated by Whirlpool, primarily against all bottom mounts manufactured in Korea and then also incorporated in Mexico. As part of that, anybody who manufactures in Mexico, including us, bottom mounts, is impacted in that preliminary ruling, which has an assessment of different tariffs. For us, that's a little under 20%. That did come down yesterday. We expect the final ruling to be April of next year. The impact for us as a company, given the amount of bottom mounts we ship out of Mexico, relative to all other refrigeration, is about 4%.
Assuming that even if it's 100% applied, and we don't have any relief on the top line, meaning prices don't go up, which is normally what happens from a precedent standpoint when you have an anti-dumping tariff ruling. Assuming all that, the implication for us in 2012, is not material.
All right. That's comforting to hear. Thank you.
Thank you.
Okay, thanks, Anders. I think we're done with the questions, please, Keith.
Yeah. Thank you all for calling in. Just a quick summary. Again, you guys know me, getting to know me a little bit, pretty straight ahead. While we're not, and I'm not happy with an earnings report being down 50% year-over-year, I have to tell you, I do think a 4-plus percent operating margin in this type of environment is respectable. I can tell you that the team, your team here, is being very aggressive in all parts of the company to accelerate. I'm pleased with the productivity that we're seeing, particularly on our balance sheet and working capital, and the focus on, as Jonas mentioned earlier, free cash flow. That helps us in a lot of ways, right?
It helps us relative to our shareholder friendliness, it helps us relative to acquisitions, it helps us relative to our investments, for growth. I can tell you that the team here is focused on both the current reality, which means we're gonna reduce our costs, we're gonna increase our asset utilization and lower our break even, and we're gonna continue to invest in the future. We are making continued increased investments in R&D, in innovation, market launches, emerging markets, driving modularization and global operations, because that's gonna be the fuel for the engine, going forward. Thank you for your time today, and we'll look forward to talking more in the future. Bye-bye.
Thank you. Bye-bye. Thank you.