AB Electrolux (publ)

Good morning, everyone, and a warm welcome to Electroc's third quarter 2021 results presentation. With me this morning, I have Therese Friberg, our CFO, and Sofia Arneus, our Head of Investor Relations. And before we start, I'd like to mention that this session is recorded and will be available on our website as an on-demand version. Let's look at our performance in the third quarter of 2021. Demand was solid in most markets, with normalization above pre-pandemic trends. Retailers' inventory levels have been replenished in most regions, but with imbalances in terms of product mix. In North America, though, we assessed the levels to still be on the low side. Last year's third quarter benefited from a significant market recovery, mainly driven by pent-up demand and government stimulus programs. Net sales were essentially flat in the quarter, and compared to third quarter 2019, sales growth was 15%. I'm very pleased with the strong price realisation, mainly driven by list price increases implemented in the first half of the year. We're on track to fully offset the 2021 headwinds from external factors and inflationary cost increases on electronic components and logistics with price. Additional list price increases were implemented in the quarter as a response to the recently significantly higher cost inflation, mainly on raw material as well as unfavourable currency effects. We're also in the process of announcing further list price increases in our main markets, as we're determined to offset accelerating cost headwinds also in 2022. A strong product range is key, not just for price execution, but also to drive mix. Also this quarter, we improved the mix thanks to our attractive and innovative product offering under well-established brands. It's been a challenging environment from a supply chain perspective, mainly electronics components availability, just as we anticipated in our Q2 interim report and earnings call. These constraints have impacted production output negatively, affecting volume, but also mix in production efficiency. We estimate that the impact is approximately 10% in the quarter compared to an undisrupted production schedule. In particular, our North American business area was affected since the congestion at important U.S. ports amplified the supply constraints. The situation also resulted in very large temporary cost increases for the group of approximately 300 million SEC for express logistics and spot buys. It is difficult to price for these temporary cost increases as we can for inflation-driven cost increases for external factors, logistics, and electronics components. Operating income amounted to 1.6 billion SEC or 5.3% of net sales. Therese will now walk us through the main drivers behind the change in operating income.

The organic sales in the quarter was essentially flat, but it was positive from an EBIT contribution perspective. We continue to have a very good price execution from list price increases implemented during the year, and the promotional discounts remained at the very low level, as it has been for the past year. Our attractive product offering and strong brands continue to generate a positive mixed development, despite the limitations from the supply and logistic constraints, mainly impacting the mixed development in North America. Our aftermarket sales were in line with last year. Volumes declined compared to the third quarter last year with significant market recovery, fueled up by pent-up demand and government stimulus programs. As Jonas mentioned, the global supply and logistic constraints impacted product availability negatively in the quarter and resulted in difficulties to fully meet the underlying market demand. Our investments in consumer experience innovation and marketing to support profitable growth increased compared to the reduced level last year. Cost efficiency was negative. The supply chain constraints resulted in production inefficiencies due to low planning visibility, as well as increased costs for logistics and electronic components, with additional temporary costs for express freight and component spot buys further deteriorating the cost performance, as mentioned before. Price offset the significant accelerating headwind from external factors, mainly driven by raw material and currency, as well as general cost inflation. However, as Jonas said, it could not fully compensate for the very large temporary cost increase of about 300 million SEK for express logistics and spot buys. Let's take a deeper look at price and mix development. The EBIT margin accretion for the group from price and mix in the quarter was 6.4 percentage points, mainly from a very strong price execution, but also mix developed favorably. In Europe, we continued to improve mix with the focus areas built-in kitchen and laundry under our premium brands Electrolux and LG, despite the limitations deriving from the supply constraints. We also had a positive price development as price increases implemented during the first half of the year gained full effect in the third quarter. In addition, promotional levels were on a lower level than last year. In North America, price continued to develop positively from price increases implemented earlier in the year. An additional round of increases were implemented during the third quarter, but hence did not generate the full effect yet. Promotional discount levels remained at a very low level. Earnings contribution from mix was neutral due to the supply and logistic constraints, impacting our possibility to drive product mix. In Latin America, price was significantly higher as a result of price increases implemented during the first half of the year, as well as some impact from the new round of price increases implemented during the third quarter. And also in Latin America, the promotional activity level remained very low. Mix was slightly negative, impacted by the supply concerns. In Asia-Pacific and Middle East and Africa, price was favorable, driven by selective price increases across most markets during the first half of the year. Additional price increases implemented during the third quarter also contributed, but not yet at the full effect. Mix continued to improve, and in Australia, kitchen products such as steam ovens performed well, and in Northeast Asia, I would like to highlight the air purifiers. Driving positive mix through sustainable consumer experience innovation is a central part of our strategy. And Jonas will now give you some concrete examples on what we do.

Thank you, Therese. And the centerpiece of our strategy is really to drive sustainable consumer experience innovation under strong brands. And I wanted to give two really good examples under the Electrox brand that we've driven in the last year and the last quarter. So first is our laundry campaign, Make It Last. which is connecting our consumer experience innovation in terms of maintaining the quality and fit, feel, finish of clothes over time to extend the lives of them with the sustainability benefits of an extended life of your clothes and reduced energy and water consumption. And this, in combination, serves to further strengthen the Electrox brand and drive the credentials of the Electrox brand. This is our first truly global Electrox-branded laundry campaign with fantastic results. When it comes to the recent examples of successful product launches, I'd like to mention our Electrox branded kitchen range that we're launching throughout the year in North America, the first one in more than 10 years. The full suite includes a range of cooking and refrigeration products, all centered around sustainability and designed to enhance nature's flavors and inspire culinary creativity. The range includes, for example, wall ovens with built-in air sous vide technology that uses precisely controlled heat and airflow to ensure meats and vegetables are cooked to perfection, just like traditional sous vide but without water. And the new Electrox refrigerators use TasteLock CRISPR technology that makes veggies stay crisp and berries stay juicy longer, helping to reduce food waste. The products in the range launched so far have been very well received, currently holding an average consumer star rating of 4.8. So these were some examples of how we drive profitable growth.

If we then look at our cash flow for the quarter, operating cash flow was negative, amounting to minus 0.2 billion SEC. This was mainly due to increased inventory levels. The global supply chain constraints continue to result in supply-demand mismatches, as well as cost inflation and increased time in transit, all impacting inventory levels. Last year, the significant recovery in the third quarter resulted in a very strong cash flow, with the exceptional increase in sales and production. Compared to last year, we also had higher investments in the quarter, impacting cash flow negatively. And earlier today, we announced that we are now executing on the next step in optimizing Electrolux capital structure. This was announced in July this year, where we are distributing a larger part of the value created to our shareholders. The board exercises the authorization from the AGM 2021 to repurchase a maximum of around 9.4 million owned Series B shares on Nasdaq Stockholm during the period from October 28, 2021, up until and including March 25, 2022, for a maximum amount of 2.8 billion SEK. And since July 19, when we announced an adjusted dividend policy of approximately 50% of annual income, the automatic share redemption of 17 SEK per share has taken place. Combined with the ordinary dividend, this means that in total 25 SEC per share will be paid out to the shareholders in 2021. Electrolux's financial position is strong and capable of providing the headroom to continue to develop the business, even after completion of the resolved share buybacks. The intention is to continue with share buybacks over time, which will further improve earnings per share and also to continue to reduce Electrolux share capital through subsequent share cancellations. The board's objective is to maintain a solid investment grade rating as defined by leading rating institutes, meaning that over time the group's net depth should not exceed 2 times the GDP rate.

Okay, let's now go into the business areas performance in Q3, starting with Europe. Organic sales declined by 1.4%. This was driven by lower volumes, but we have to keep in mind that baselines were significantly affected by unusually strong market demand. In this quarter, supply constraints impact the volumes negatively, as well as the ability to fully drive mix. I'm therefore very pleased that we, in this supply constraint environment, could continue to drive mix through innovation. We see that our strategy once again pays off. Our price index improved in our focus areas, built-in kitchen and laundry, and consumer star ratings also increased year over year, showing that we have the right offering for our Electrox and AEG consumers. Our aftermarket business continued to grow, and in the quarter we acquired a French service provider specialized in repairing domestic appliances, which is strengthening our service network in the strategic French market. EBIT was solid, but declined versus a strong last year, with list price increases implemented in the first half of the year not fully capturing the recent escalation of cost inflation from external factors, logistics, and electronics. Therefore, new list price increases were announced, or are about to be announced, across the region to be implemented towards the beginning of next year. Investments in innovation and marketing increased, mainly compared to the low levels last year. Let's look at the European markets. In the third quarter, overall market demand in Europe declined by 5%. Western Europe declined 8%, while demand in Eastern Europe increased by 3%. Last year's demand was strong because of pent-up demand from previous quarters and government incentives. This quarter, supply constraints impacted producers' ability to fully meet the underlying demand. In the quarter, we saw consumer spending patterns starting to normalize, and compared to the third quarter in 2019, market demand increased by 9%, mainly driven by consumers' increased spending on home improvement, but also some replenishment of retail inventories that continue to benefit demand. Retailer inventories are now assessed to be, on average, at fairly normal levels, though shortages in some key categories remain. Let's continue with our North American business area. Organic sales declined by 1.9%, and EBIT was 200 million SEC. As mentioned, our North American business area was in particular impacted by the supply-constrained environment, as it was amplified by the congestion at important U.S. ports and labor shortages related to the pandemic. Besides resulting in lower volume, mix was negatively impacted, including aftermarket sales, and we were not able to replenish our inventory of high-mix products. In the quarter, the contribution from mix was therefore flat. The constraints also resulted in higher costs, driven by cost inflation, the use of more express logistics, spot bites of electronic components, and high production inefficiency caused by limited planning visibility. High absenteeism due to the coronavirus also constrained North American manufacturing. I'm very pleased with the strong price execution in the quarter. This was driven by list price increases implemented early in the year and during the third quarter, and price fully offset external factors. However, the significant temporary cost increases, such as express logistics and spot buys, could not be offset in the short term. In light of accelerating cost inflation on external factors, logistics, and electronics, A third list price increase was announced to be implemented gradually during the fourth quarter. Investments in innovation and marketing increased, mainly compared to the significant reduction last year. Looking at the U.S. market, demand continued to be strong in the third quarter. Industry shipments of core appliances in the U.S. increased by 1%, and this is compared to a strong quarter last year. Main drivers were consumers' increased spending on home improvement and retailer inventory replenishment. Supply constraints impacted producers' ability to fully meet underlying market demand. In comparison with the third quarter in 2019, the increase was 12%. Retailer inventories are estimated to still be on the low side, as demand remains elevated, coupled with a constrained supply chain. Housing indicators continue to be positioned to drive growth. and market demand for all major appliances declined 2% year-over-year, driven by microwave ovens and home comfort products. Let's move on to Latin America, that delivered a strong profitable growth in the quarter, with organic sales increasing by 10.9%. Once again, we had strong price execution, driven by list price increases implemented earlier in the year and during the third quarter. Sales volumes declined in Brazil, And we estimate consumer demand to have declined mainly compared to a strong third quarter last year, but signs of inflationary pressure also impacted. Compared to Q3 2019, we estimate demand to have increased, primarily driven by increased spending on home improvement. And the other two key markets, Argentina and Chile, consumer demand increased year over year. And for Argentina, we have to keep in mind that we're comparing versus a quarter last year that was heavily impacted by pandemic restrictions. And in Chile, government stimulus packages remained an important driver for demand. Mix, unfortunately, was negative due to supply constraints. EBIT was solid and declined somewhat compared to a very strong quarter last year. This was mainly a result of supply constraints impacting mix and product availability negatively. Higher price fully offset headwinds from external factors, mainly raw material and currency, as well as from higher cost driven by supply chain constraints. Investments in brand strengthening initiatives and marketing increased, mainly due to a reduction last year. And then finally, turning to Asia Pacific, Middle East, and Africa, organic sales declined by 5.1%. Extensive restrictions following the surge in coronavirus cases impacted market demand negatively. In several markets, such as Vietnam, there were halts in retail trade, while markets with restrictions experienced significantly lower store traffic. Recently, most of these restrictions have been eased. Market demand in Australia remained at a high level. Even though it declined compared to a strong quarter last year, it increased compared to the third quarter in 2019. Despite lockdowns, we're still seeing strong purchases mainly driven by consumers' increased spending on home improvement. This market environment resulted in lower volumes year over year, but I'm pleased that we could improve mix and raise price. EBIT margin was high and almost double-digit despite the volume decline. price could not fully offset the significant headwinds from external factors. And in addition to the price increases implemented in the quarter, new list price increases were announced or about to be announced in several regions to be implemented towards the beginning of next year. So let's turn to our market outlook. With increased vaccination coverage and eased restrictions, consumer spending patterns and hence market demand started as expected to normalize in the third quarter, with market volumes in the third quarter about 8% to 12% above third quarter 2019 in key markets. As it is likely that many people will continue to work extensively from home, we expect that the normalized underlying demand levels will be above pre-pandemic levels in most markets going forward. However, we expect that supply chain constraints will continue throughout the year, with regional variances and limited availability of certain product categories. Specifically, electronic components with semiconductors are in very tight supply globally, which means that we and other actors in the industry struggle to meet the changing consumer demand mix and also incur outright shortages. The same can be said about ocean freight, where shortages of containers and vessels and unloading backlogs at major ports result in varying and intermittent supply. This means that retail inventories are unbalanced in many markets, making it even harder to accurately interpret and meet demand signals. Looking at the specific regions, we maintain our 2021 full-year regional market outlook, even though supply conditions remain volatile. European market shipments are expected to be positive for the full year, with growth across the key markets. We see a supportive trend from the replacement market and consumer confidence. Consumer spending patterns started to normalize in the third quarter and demand is expected to further normalize but at above pre-pandemic levels during the remaining part of the year as household budgets are allocated more to services than during the height of the pandemic. Retail inventories are overall at reasonable levels but with a highly unbalanced mix. Supply constraints had a negative market impact in the third quarter as the underlying demand could not fully be met and we expect that to be the case for the reigning part of the year as well. In North America, demand is estimated to be positive for the full year, partly driven by a very strong housing market and favorable replacement cycle. Government stimuli programs should further support the economy and consumer sentiment, even if these stimuli programs are progressively being phased out. Supply and logistics constraints had a negative market impact in the third quarter, as the underlying demand could not be fully met and we expect that to be the case for the remaining part of the year as well. In Latin America, we still expect consumer demand to be neutral for 2021, full year, with demand softening in Brazil, compensating for relatively healthy demand in other Latin American markets. In Brazil, we see moderation of disposable income growth, with a reduction of government aids combined with still weak labor market and rising currency and commodity-based inflation. And finally, we estimate that market demand in Asia Pacific, Middle East and Africa to be positive for the 2021 full year. In the third quarter, the surge in coronavirus cases leading to extensive restrictions impacted consumer spending negatively, especially in Southeast Asia. However, with some recent easing in restrictions, demand is recovering. Uncertainty around Chinese growth and risks related to real estate and energy sectors impact the overall region. For Australia, which is our other large market for this business area, we anticipate a slight decline in 2021 full year demand compared to a strong 2020, especially in the second half of the year, but still an increase compared to 2019. Let's look at our business outlook. For 2021 full year, we expect a continued positive organic contribution from volume, price and mix combined, driven by a favourable underlying market demand and higher prices compensating for increased cost inflation. Demand and mix are positively impacted by new product innovation and increases in marketing investments, including a step up in digitalization of our consumer interactions. In the third quarter, volume and mix growth was negatively impacted by supply chain constraints, mainly electronics component availability. In particular, our North American business area was affected since the congestion at important U.S. ports amplified supply constraints. We continue to have a tight collaboration with suppliers to mitigate these global supply shortages, but we estimate that the fourth quarter will be even more challenging for the group than the third quarter. Although we anticipate sequential improvements in 2022, we expect challenging conditions to remain in meeting continued strong demand. Turning to price, which is our main tool to compensate for cost inflation. In 2021, we're on track to fully offset headwinds from external factors and inflationary cost increases on electronics components and logistics with price, just as we've done up until now for the last four-year period. As a response to the recent significantly higher cost inflation, mainly on raw materials, additional price increases were implemented in the quarter. We're also in the process of announcing further price increases in our main markets, as we're determined to offset accelerating cost headwinds also in 2022. In terms of promotion levels, which currently are very low, we don't expect them to normalize during 2021.

We are increasing our innovation and marketing investments, including strengthening our capabilities within aftermarket and e-commerce. And during the past three years, mixed improvements from innovation, brand, and aftermarket sales growth have in total contributed more than 3 billion SEC to operating income, realizing a very favorable return on investment. We also know that strengthening of our main brands, Electrolux and AG, and Frigidaire are paying off. These brands accounted for approximately 80% of group net sales in 2020, compared to just over 70% three years ago. The more tactical marketing investments will be sized and targeted based on market opportunities as well as product availability, so this can act as a partial P&L counterbalance against any delivery issues, as has been the practice previously as well. And cost efficiency, excluding innovation and marketing investments, is revised to be negative for 2021. This as we see further cost pressure on logistics and sourcing of electronic components and finished goods. In addition to the cost inflation that we expect to fully offset with price in 2021, the tight supply chain conditions also resulted in significant temporary cost increases for express logistics and spot buys in the third quarter, amounting to about 300 million SEK, as well as in production inefficiencies. The main positive cost efficiency driver in 2021 are continuous cost improvements and execution of our re-engineering program, particularly improved productivity and output from our new refrigeration facilities in Anderson in the US and Curitiba in Brazil. And all in all, total net cost in 2021 is expected to increase.

As a global appliance company, we're exposed to various external factors such as raw materials, tariffs, currency, and excess labor cost inflation. For 2021, we revised the estimated negative headwind from external factors to approximately 4.5 billion SEC from a previous estimate of 3 to 3.5 billion SEC. This is in light of recent significantly higher cost inflation, mainly on raw materials such as steel and plastics, as a consequence of the unusually high global demand. Currency headwinds also increased substantially, driven mainly by Latin America. As mentioned, we're on track to fully offset this headwind from external factors, as well as the inflationary cost increases on electronics and logistics with price, even though the more temporary effects like excess air freight and electronic spot buys are more difficult to offset through price. Total capital expenditures are estimated to be around between $6 and $7 billion in 2021, with the range being due to timing towards year end. Our re-engineering investment program is overall progressing very well and is crucial to strengthen cost competitiveness and drive profitable growth through increased modernization and automation in the Americas and Europe. So to sum up the quarter and the strategic drivers that we've delivered on, I'm proud of our strong price execution and that we are on track to fully offset the 2021 headwind from external factors and inflationary cost increases. through price. We've done this so far this year and up until now for the last four-year period. As we are determined to offset accelerating cost headwinds also in 2022, we're also in the process of announcing further price increases in our main markets. Innovation is key to deliver profitable growth, and therefore it's very encouraging that we, despite the supply-constrained environment, continue to drive mix. My opinion is that we have the strongest pipeline ever when it comes to product launches currently ramping up. Many coming from our re-engineering investments in North America and Latin America and Europe. This gives me great confidence that consumer demand for our innovative product offering will remain healthy going into 2022. I'm pleased that we're now executing on the next step in optimizing Electroc's capital structure with today's announcement of share buybacks. Our financial position is strong and capable of combining continuous ambitious growth investments with increased distribution of the value created to our shareholders. And with that, I leave the word to Sadiq.

Thank you, Jonas and Therese. We will now open up for questions. And as always, to allow as many of you to ask questions, please only ask one question per person. And then, of course, if time allows, you are welcome to enter the Q&A queue again and ask additional questions. With that, I leave the word to the moderator.

Thank you. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad now and you'll enter a queue. To withdraw your question, you may do so by pressing 02 to cancel. Once again, if you have a question for the speakers, please press 01 on your telephone keypad now. Our first question comes from the line of Johan Eliasson from Kepler Cheveux. Please go ahead. Your line is now open.

Hi, Jonas and Therese and Sophie. Thank you for taking my questions and congratulations to the decent result in what must be a very challenging supply situation right now. It seems, though, that some players are managing this supply situation different from others. If I look at North America, where we still have some positive market volumes, it seems like, if I understand your numbers correct, that your volumes were negative year over year. We also had Whirlpool volumes being negative year over year. So I was wondering, who is taking the market share? Is it the Chinese guy who's managing the supply better or the Koreans with their new plants? Do you have any view on that?

Yeah, I mean, of course, the starting point and the position varies between the players in North America. The access to electronics and the position of the plants and so on are different for the different players. So yeah, I mean, if you look around the world... There are sort of different, relatively speaking, gainers and decliners in the market. Overall, though, I have to say that we're very pleased with how we've handled the supply situation in the quarter. We've, you know, as we said, we're flat in net sales. We're delivering a quarterly EBIT that's relatively strong in historical terms. And we're doing that offsetting external factors cost headwinds of 5.4 percentage points in the quarter. So, yeah, it's been a challenging quarter, but I think we're executing with high quality overall. Then going to North America, of course, the combination there of us being in the middle of a significant transformation program impacting our largest plants in the region in combination with significantly worse port congestions, significant COVID outbreaks and labor shortages, and electronics on top of that, we have a situation that is fairly challenging to manage, and I think we're doing that reasonably well, and we're able to execute significant price increases in that challenging environment. So, yeah, there are some temporary challenges in North America as we continue to implement our transformation programs, but I think we're making good progress on that.

Okay, thank you.

Our next question comes from the line of Gustav Hagius of SEB. Please go ahead. Your line is now open.

Thank you for taking my question. Or question, that is. Good morning, also. You mentioned the re-engineering program benefits this year, Kurtivo, Andersson, the main drivers, and also referenced, as I understand you, positive mix driven also related to this. Could you please provide an update, if necessary, on sort of the facing of the cost things from the re-engineering program? If I recall correctly, you had the latest update you had was sort of a negative impact or baseline from 2020 turning to 300, 400 million positive this year and then on to 2 billion plus in 2022. Has the base from 2021 changed and has the momentum or sort of progression into 2022 changed at all? That would be helpful. Thanks.

Yeah, I mean, obviously the situation that we're in right now with significant supply constraints, absenteeism, all the things that we just talked about, makes it a little bit difficult to kind of exactly piece apart the different cost drivers. I would say, though, on the ramp-ups that we've executed this year, Curitiba has been basically flawless. We're now launching the new products, cooking products, both in in Brazil, in San Carlos, in North America, in Springfield. That's going according to plan, and we're launching those products as we speak. Anderson, we're seeing challenges, but I would not pin them on the re-engineering program per se. This is more related to the fact that we're in the middle of the storm there from a pandemic perspective, absenteeism, again, the supply challenges we talked about. So it's a little bit difficult to piece apart. We're ramping up the factory in a good pace. Our automation, our equipment is working very well. The product is extremely well received, but it's a challenging environment, no question about it. And exactly how that's going to play out into next year will, of course, depend on that external situation when it comes to electronic supply and port congestions and the like. We remain as convinced as ever and fully committed that the overall benefits from the restructuring programs will be delivered more or less according to plan.

Okay. Thank you.

Sure.

Our next question comes from the line of Olaf Cederholm from ABG Sandal Collier. Please go ahead. Your line is now open.

Good morning, everyone. It's Olaf with ABG. So just a question on pricing. if you could just elaborate a little bit about the acceptance for further price increases here and how sustainable you think these price increases that you've already done and those to come will be going forward. If you can keep these prices basically once the situation on cost improves.

I think we've obviously talked about this particular question for years, right? And I continue to refer to the answer I always give, and that is that, you know, cost increases, inflationary pressures that impact the industry as a whole tend to be offset through price. And then, you know, if and when costs go down again, price tend to go down as well, right? That's just the nature of this industry with, you know, relatively low gross margins, meaning that As a player, you have to offset cost through price, both up and down. And we're doing that. We're doing that extremely successfully. As you saw in the third quarter, we're more than offsetting the regular inflationary headwinds. We're not fully offsetting the very temporary airfreights and spotlights and things like that, which is difficult. And also the temporary, let's say, production inefficiencies we're seeing are also difficult to offset through price. But the underlying... Cost inflation, currency, and so on, we've done it now for four years in a row. We'll continue to do it. I have absolutely no concerns about that.

Okay, so you're not seeing any sort of changing consumer behavior or changing behavior from your competitors that would lead you to think that you can hold on to prices better in the future than what you've been able to do in the past?

Well, I mean, I think we have been able to hold on to pricing well in the past, you know, and we're doing so again. Consumer behavior is very supportive, right? So we're seeing again, you know, market demand 8 to 12% above 2019. We're seeing continued favorable mix and we're getting price increases at the same time. So yes, you know, consumer demand is favorable. the impact of the supply constraints are less about magnitude and more about speed, both in terms of accelerating cost inflation, impacting us quickly, and our ability to increase prices quickly. If you look back at our Q2 guidance, we were at, again, 3 to 3.5. Now we're at 4.5. Again, if you do the math, you will see that that means the Q3 and Q4 is more or less at the same level. We have fully offset that Q3 cost increase to price already, and further announcements are on the way. So the price is in the market. Consumer demand is there. We're continuing to drive favorable mix. And then if you look at consumer behavior also going forward, and that's part of what we're guiding here, we see strong indication that consumer demand will continue at healthy above pre-pandemic levels also going into next year. We're not at a point where we give specific guidance yet, but the underlying demand drivers in terms of employment, in terms of housing values, in terms of replacement cycles are quite benign in our key markets.

Thank you very much. Sure.

Our next question comes from the line of William Turner from Goldman Sachs. Please go ahead. Your line is now open.

Good morning, Yannis. I have a question on the working capital. I guess the levels that you've reached to now as a percentage of sales is probably more comfortable with where you've been historically. But given your comments on expecting the supply chain situation to get worse into the fourth quarter, Where do you think that this will go to? And then when we look in that working capital balance, what has been the most significant driver for it to increase? Has it been just the cost of inventories and acquiring inventories, or is it just that mismatch with the components that you have and finished goods which you can't ship?

Yeah, I would say that if we start with the second question, the biggest drive for the inventory increase is not the raw material increases at this point in time. It is the mismatches in the market. The difficulty is around both having the right product at the right place at the right time, so to say, but also around the supply chain disruption and the lead time in logistics, which actually then goes into our inventory earlier and then sits at certain ports for a longer period of time when we can't really access the components. And then, of course, also with the inability to produce the food products according to our plan, it then means that we have an increasing supply, so to say, where we can't complete the products fully. So I would say that is the main part of the inventory increase. And where this will go, yeah, I would say at this point in time we'd rather sit on a little bit higher, specifically supplies, to be able to produce and get the highest output that we possibly can. How that will actually play out during the fourth quarter is hard to assess. But as we have said, the market is strong, the demand is strong, so We're doing everything we can to really get as many products out the door as possible. And then related to your first question, yes, I would say it is more of a normalization. Of course, the level that we saw last year was more or less a perfect storm in the working capital. So now we are going back to a bit more normalization of the levels. But, yeah, I would say that. probably where we are at this point.

Great. Thank you.

Our next question comes from the line of Fredrik Morgard from Pareto Securities. Please go ahead. Your line is now open.

Thank you, operator, and good morning, everyone. So I appreciate your comments on retail inventories outside of North America being largely rebalanced, but with some unbalances in between categories and impacting mix. Just curious to hear your thoughts of how retailers are sort of handling that shortage of high-mix products. Is there a risk that they're overstocking on low ticket items and there being potentially some price pressure on those categories going forward?

I think the retailers are pretty happy with their demand and their sellout. They're unhappy with our ability and our competitors' ability to supply. So I don't think in most cases there are always going to be exceptions, but in most cases I think we feel and our retailers feel fairly confident with what they have. So, no, that's not a concern. I think our main concern at this point is that, you know, very often consumers are ordering multiple appliances when they remodel their homes and so on, and then The fact that maybe one out of five or six appliances is not available, that means a delay or a lost sale. And that's something that, of course, has been for the last year or so a significant limiter in terms of our full ability to meet mix. And these are very often relatively high mix products. And again, another reason why our inventory remains unbalanced, let's say, and our ability to sell out. the full inventory is limited.

Okay, thank you very much.

Our next question comes from the line of James Moore from Redburn Partners. Please go ahead. Your line is now open.

Hey, good morning, everyone. Jonas, Therese, Sophie. Maybe I could talk about the supply chain and the pricing. Do you have a view as to when the current topics ease i mean if you want to go through them piece by piece but i guess electronics is the most important bit and i wondered if you have any visibility when you talk to suppliers and tied to that you're obviously trying to put the prices through and there's a lot of overlapping list price hikes going on out in the market which are quite tough for us to track and i wondered if you could say given everything you've announced so far and what you plan to announce When is the sort of period of peak year-on-year pricing? Is it in the fourth quarter? Is it in the second quarter next year? That would be very helpful.

Yeah. So on the supply situation, I would say, of course, we're in very, very close contact with electronics manufacturers and trying to get visibility. I would say there's a higher confidence as we go into, you know, gradually throughout next year that there will be better supply, you know, partially because some of the challenges that we've seen have been impacted by specific COVID-related shutdowns and so on. Those are getting cleared out. Some of the imbalances in the supply chain are gradually being cleared out. Then I think we are in a situation where the global sort of lack of capacity growth in electronics, and that will be with us for some time and will be a limiting factor for how long it's difficult to say, but for some time. When it comes to the supply and logistics challenges, I think this is fairly regional, where we have very significant backlogs in in Western U.S. and also in China, Shanghai and the like. I know there's very intense work ongoing to clear those out, but that will take some time. You know, we're hearing from our major logistics providers that that will take well into next year, at least before those are cleared out. So, yeah, we can expect, I think on the major drivers, we can expect that to continue at least for, let's say, another six months. and then step-by-step improving. In terms of pricing, you're right. We have multiple price increases in the market. And, you know, from a list price perspective, for sure that's increasing, you know, continuously month by month as the different price increases take effect. And then as we look into next year, We know we will have significant cost headwinds from external factors. We don't yet know exactly how much and how that will face over time. So it's a little bit difficult to give exact predictions on how the corresponding pricing will be implemented and exactly when. The only thing I can commit to is that we will price the offset for these external factors as we go forward and as we have done for the last four years.

That's very helpful. Thank you, Jens.

Our next question comes from the line of William McCauley from Morgan Stanley. Please go ahead. Your line is now open.

Hey, good morning to all. Thank you very much for taking my question. So I had a quick question on promotional activity as you head into Q4. What is your visibility on that, and especially in North America, ahead of Thanksgiving? Thank you.

Yeah, I mean, we expect a continued low promotional pressure in North America. given the availability constraints that the market is seeing and we are seeing and the strong underlying demand. So that would be low.

Thank you.

Next question comes from the line of Martin Wilkie from Citi. Please go ahead. Your line is now open.

Yeah, good morning. Thank you. It's Martin from Citi. Just coming back to the external factors, and obviously you've talked about higher raw materials. Could you remind us of the hedging? Because obviously you will have locked in some large part of the raw materials consumed in the second half of this year already, but given the magnitude of hedging, the increase in the external factors guidance, just to understand, has that come from materials that couldn't be hedged or what's driven that? And then you alluded a moment ago to some of this obviously impacting 2022, just to understand how much of the increase in romance will effectively still come through at the beginning of next year. Thank you.

Right. Right. So, so it's, it's a fairly sort of a, mixed picture of what we have hedged, what is impossible to hedge, and how that impacts the year. So if you look at most of the plastics, for example, we have fairly limited visibility on the pricing there. And of course, as fuel prices, oil prices and derivatives have gone up, we've seen some significant headwinds from that. The biggest factor has been on steel. the remaining unhedged part of steel, where, again, with high and very varying demand, we've had to buy outside of our contracts for fairly significant amounts, and continue to see that with quite high prices. And, of course, the underlying market prices have increased significantly, especially in North America, for steel. So, you know, the impact of those sort of out-of-contract transactions at spot prices are quite significant. And in terms of the outlook for that, it's very, very difficult to say. It's clear right now that many raw material producers are running at full capacity, so with fairly strong pricing power. How long will that last, given all the supply challenges that are out there in the market on other components, and on logistics. That's the interesting equation as we go forward. I think a lot of people around the world are scratching their heads to see how that's going to play out over next year, and that's also why we're very cautious, and we never give guidance this time of year, but we're cautious in terms of that outlook. But again, coming back to the point that these challenges are very transitory in nature. We get the price for them and we move on, The real issue is that are we able to continue to drive mix and innovation? And the answer to that question is we are.

Great. Thank you very much.

Our next question comes from the line of Bjorn Enarsson from Danske Bank. Please go ahead. Your line is now open.

Thank you. I have a question on the 300 million that you highlight in terms of express freight, etc. And I would assume that's the post that you have not been able to offset. And is it that post that will be more challenging in Q4 versus Q3? And for how long do you expect to see an inability to offset those more temporary cost inflation?

Yes, you're right on the 300 million. That is the part that we include in the bridging cost as a negative item in cost efficiency. And that is the item that we have not been able to offset with the price increases. As we see this more as a temporary cost pressure effect, as we mentioned, and not really driven by underlying raw material trends, and therefore it's difficult to price for it. And then when it comes to the situation of worsening in the fourth quarter, it's more related to an unconstrained production volume. As we mentioned, we had around 10% drop compared to our unconstrained production volume going into the third quarter. And we see with the challenging situation now in Q4, specifically of getting electronic components, that that situation is going to be slightly worse for the fourth quarter compared to what we saw in the third quarter. Of course, how that will play out between the additional cost of getting the components versus the production loss, so to say, that is what we are fighting with on a daily basis. And it's actually quite hard to give a guidance on how it will play out between cost and volume. And then when that will be solved, I think we have given indications that, yeah, it will gradually improve in 2022. But again, exactly when that will happen in 2022 with all of the different factors we have mentioned around electronics and poor congestion and so forth is hard to assess.

Okay, that's a good answer. But it will remain to be seen how much it will be possible to offset or not offset in that sense.

Is that correct? Look, I think this is back to that question about sort of what factors are impacting which players and when in the market. So we're making the point that what we call external factors are the things that really impact everybody in the market. And over time, we and the industry tend to offset those. Then we have these varying conditions, as we discussed, both temporarily over time for us and us versus competitors, right? So we are air freighting certain components. We are buying electronics on, let's say, the gray market, if you will. So the cost for those specific items was $300 million and a quarter. That made the production losses limited to 10%, if you know what I mean. So then if you go into Q4... hopefully, I hope that that cost is going to be higher because that means that the production losses are lower. So that's a little bit how that equation works. And this is hopefully then a fairly temporary situation, and it's something that looks different for different players in the industry, so very difficult to price for.

Okay. Thank you. Thanks.

Sure. Our final question for today comes from Johan Eliasson from Kepler Cheveux. Please go ahead. Your line is now open.

Yeah, thank you for taking a follow-up. I was just curious about you mentioning the Electlox brand portfolio in North America. I remember Keith spent a fortune on introducing the brand over there a decade ago, and the Is this now linked to the new plants and your ambition to move up in terms of position mass versus premium? Can you share any details on the Electrolux brand? What's sort of the market share for that brand and what's the share of your revenues in North America?

I think that's a very good question and the answer is yes, that's part of our premiumization efforts in North America. So, you know, you referenced the launch we did back in 2008 of a full range of premium electric appliances. That was actually very successful for laundry, less successful for kitchen due to the fact that the product platforms that were used for that launch were not, frankly, suited for premium appliances. But the laundry is doing extremely well. So, effectively... what is it, 80% of the laundry products that we sell in the U.S. are Electrodox branded and have been for the last more than 10 years and 12 years doing extremely well. We have been careful in terms of adding new products on the kitchen side until we have these new platforms in place. And as we are getting there now with new and very competitive product architectures, they're leveraging the global innovations that we're driving in terms of taste experiences and the like. We're gradually introducing new products on the electronics kitchen side in North America. And as I mentioned, and this is the key fact in this entire presentation, the consumer star ratings of those products is 4.8, right? So they're extremely well received in the market. The quality is right. The experience and the benefits that those products deliver are are fantastic. So that gives us confidence as we continue now to roll out new products from our new architectures that we will be able to grow both the Electrox brand position and the Frigidaire Gallery and professional more premium brand positions in North America. This is really a core part of our strategy there. So re-engineering of our factories to be competitive on a cost and productivity perspective, but even more importantly, get the right platforms for premium consumer experiences and higher price points.

Okay, good. Then just finally, we heard your American competitor talking favorably of especially the North American appliance market going forward, and I sort of think that you are sharing that view. They are now targeting a growth rate of 5% to 6%, which is obviously above your 4% growth ambitions. Is this a worry for you, or is it just that the market is set to grow very nicely going forward as plenty of volumes for all of us?

Yeah, I think the market is set for an extended growth period. Of course, there are always things that can happen, but if you look at the fundamental drivers, consumers are, again, using their appliances more frequently than investing more in their homes, in their kitchens, in their appliances, in those experiences. So I think there's a very good set of conditions for continued growth. And if you look at what we've been doing over these last several years is that we've sort of cleaned up our portfolio significantly, and mainly in the U.S., so that we are able now, as we introduce new products, to do that in a very focused manner, more premium products, higher innovation level, higher quality, and again, there's plenty of consumer demand there to take that on. And, you know, before we finish here, I'd like to mention, because I think there's been zero questions, I think, outside of North America during these sessions, I think it's important to note that 70% of our sales are done at really record margins in the third quarter. And the continued transformation of our business in Latin America, in APAC, and of course before that in Europe, are paying fantastic dividends. We're not there fully yet in North America, and partially because we haven't launched most of the new products that we're introducing. But we're making that transformation in North America as well. And again, consumer demand is there. The products that we're launching are extremely well received. I am 100% confident in that turnaround. So just to summarize, thank you. I'm extremely pleased with the strong price execution in the quarter, and I think the fact that we're continuing to drive mix in this high price and supply-constrained environment is a testament to the strength of our product offerings. And as the pandemic continues, we're ready to respond and continue to respond in a very agile manner. I'm confident that our strategy ensures that we remain well positioned to deliver long-term shareholder value, even in this rapidly changing market condition. Thank you, and talk to you soon.