2014 was characterized by a year of stable development in core markets, while the environment in emerging markets was uncertain with a high level of fluctuations in currencies. Electrolux monitors and manages its exposure to various types of risks in a structured and proactive manner.
Variations in demand
In general, there are three types of risks: Operational risks, which are normally managed by the Group’s operational units; Financial risks, which are managed by Group Treasury; and Other risks.
Financial policy | Credit policy | Pension policy | Code of Ethics | Environmental policy
Electrolux monitors and minimizes key risks in a structured and proactive manner. Over the years, capacity has been adjusted in response to demand, working capital has undergone structural improvements, the focus on price and mix has intensified and the purchasing process for raw materials has been further streamlined. The major risks and the Group’s response in order to manage and minimize them are described below.
The Group’s ability to improve profitability and increase shareholder return is based on three elements: innovative products, strong brands and cost-efficient operations. Realizing this potential requires effective and controlled risk management.
In 2014, market demand for core appliances in North America increased by 6%. Overall market demand in Europe increased by 2%, after several years of soft demand. Demand in Western Europe rose by 2%, while Eastern Europe was unchanged. The market in Eastern Europe was impacted by the uncertainty in Russia and Ukraine by the end of the year. Market demand in Australia, South East Asia and China declined. Demand for appliances in Brazil and most other Latin American markets also declined.
In times of weak markets and decline of demand for the Group’s products, decisive actions and savings packages throughout the Group have proven that Electrolux can quickly adjust its cost structure.
A number of the markets served by Electrolux are experiencing strong price competition. This is particularly severe in the low-cost segments and in product categories with a great deal of overcapacity. In 2014, pressure on prices continued to be evident in some of the Group’s major markets. Some sales promotions continued to be evident in the North American market, at the same time as prices continued to be under pressure in Europe, although at a lower level than in the previous year. In Latin America, higher inflation combined with currency fluctuations resulted in Electrolux carrying out several price increases to offset the negative effect. Price pressure in Australia increased towards the end of the year.
|Currencies1) and interest rates|
|Interest rate||1 percentage point||+/– 40|
1) Includes translation and transaction effects.
|Salaries and general expenses||–43|
|Variable cost to sales||77%|
|Fixed cost to sales||19%|
|Operating earnings to sales||4%|
The uncertain market conditions in some of Electrolux major markets in 2014 impacted the Group’s customers, who experienced difficult trading conditions, but this did not result in any major increases in credit losses for Electrolux.
Electrolux has a comprehensive process for evaluating credits and monitoring the financial situation of customers. Authority for approving and responsibility to manage credit limits are regulated by the Group’s credit policy. A global credit insurance program is in place for many countries to reduce credit risk.
Materials account for a large share of the Group’s costs. In 2014, Electrolux purchased raw materials and components for approximately SEK 47bn, of which approximately SEK 18bn referred to the former. The Group’s exposure to raw materials comprises mainly steel, plastics, copper and aluminum.
Market prices for raw materials was under pressure during the year. Steel prices declined through the year, while prices for plastics weakened towards the end of the year. Electrolux utilizes bilateral contracts to manage risks related to steel prices. Some raw materials are purchased at market prices. The total cost of raw materials in 2014 was somewhat lower than in 2013.
A large share of the Group’s production has been moved from high-cost to low-cost areas. Restructuring is a complex process that requires managing a number of different activities and risks. Increased costs related to relocation of production can affect income in specific quarters. When relocating, Electrolux is also dependent on the capacity of suppliers for cost-efficient delivery of components and semi-finished goods.
In 2014, the ongoing restructuring program to adapt capacity and reduce overhead costs continued. In total, restructuring charges of SEK 2.8bn have been taken during 2013-2014. This program was finalized at the end of the year. The annual savings are estimated to approximately SEK 1.8bn as of 2016.
The Group’s financial risks are regulated in accordance with the financial policy that has been adopted by the Electrolux Board of Directors. Management of these risks is centralized to Group Treasury and is mainly based on financial instruments. Additional details regarding accounting principles, risk management and risk exposure are given in Notes 1, 2 and 18.
For long-term borrowings, the Group’s goal is to have an average maturity of at least two years, an even spread of maturities and an average fixed-interest period of one to three years. At year-end 2014, the Group’s long-term borrowings, including long-term borrowings with maturities within 12 months, amounted to SEK 12,123m with an average maturity of 2.8 years. Loans are raised primarily in USD, EUR and SEK. The average interest rate at year-end for the total borrowings was 2.4%. The average fixed-interest period for long-term borrowings was 1.2 years. Long-term loans with maturities within 12 months amount to SEK 2,595m. Liquid funds on December 31, 2014, amounted to SEK 9,835m.
Since 2010, Electrolux has an unused committed multicurrency revolving credit facility of SEK 3,400m maturing in 2017 as well as an unused multicurrency revolving credit facility of EUR 500m maturing in 2018. These two facilities can be used as either long-term or short-term back-up facilities.
On the basis of the volume of loans and the interest-rate periods in 2014, a change of 1 percentage point in interest rates would affect Group income in the amount of +/– SEK 40m. For additional information on loans, see Notes 2 and 18.
At year-end 2014, Electrolux had commitments for pensions and benefits that amounted to approximately SEK 29bn. Through pension funds, the Group manages pension assets of approximately SEK 24bn. At year-end, approximately 34% of these assets were invested in equities, 44% in bonds, and 22% in other assets. Net provisions for post-employment benefits amounted to SEK 5,162m.
Yearly changes in the value of assets and commitments depend primarily on developments in the interest-rate market and on stock exchanges. Other factors that affect pension commitments include revised assumptions regarding average life expectancy and healthcare costs.
Costs for pensions and benefits are recognized in the income statement for 2014 in the amount of SEK 754m. In the interest of accurate control and cost-effective management, the Group’s pension commitments are managed centrally by Group Treasury. Electrolux uses interest-rate derivatives to hedge parts of the risks related to pensions. For additional information, see Note 22.
Reputational, regulatory and sustainability risks can potentially impact Electrolux ability to successfully conduct business. There are a number of processes in place to control these risks such as internal and supplier auditing, environmental management and certification, the Ethics program and the safety management system. The regulatory environment is monitored in order to be prepared for changes that impact the business. The process to identify material sustainability issues is described in the Sustainability Report. available at www.electroluxgroup.com.
|Carbon steel, 35%||35|
|Stainless steel, 9%||9|
|Copper and aluminum, 8%||8|
The global presence of Electrolux, with manufacturing and sales in a number of countries, offsets exchange-rate effects to a certain degree. The principal exchange-rate effect arises from transaction flows; when purchasing and/or production are/is carried out in one currency and sales occur in another currency. The Group utilizes currency derivatives to hedge a portion of the currency exposure that arises. The business areas within Electrolux usually have a hedging horizon of between three and eight months of forecast flows. Hedging horizons outside this period are subject to approval from Group Treasury. It is mainly business areas in emerging markets that have a shorter hedging horizon. The business areas are permitted to hedge forecast flows from 60% to 80%. The usual effect of currency hedging is that currency movements that occur today have, to a certain degree, a delayed effect.
Electrolux is also affected by translation effects when the Group’s sales and operating income are translated into SEK. The translation exposure is primarily related to currencies in those regions where the Group’s most substantial operations exist, that is, EUR and USD.
The major currencies for the Electrolux Group are the USD, EUR, BRL, CNY, GBP and CAD. The key currency pairs are presented in the map together with an explanation of how they impact the Group. In general, income for Electrolux benefits from a weak USD and EUR and from a strong BRL, GBP, CAD and AUD.
In countries with large manufacturing and logistic centers, effects over time will to a large extent balance out due to natural hedging.
Compared with the previous year, changes in exchange rates for the full-year 2014 had a negative impact on operating income. The total currency effect (translation effects, transaction effects and net hedges) amounted to approximately SEK –1,298m. The net transaction effect was SEK –1,394m and translation effects SEK +97m.
The impact from transaction was mainly attributable to the operations in Latin America and the strengthening of the USD against the BRL. The weakening of several currencies in emerging markets also impacted operations in Asia/Pacific and Europe, the Middle East and Africa.
The principal currency in Europe is the EUR. A weak EUR has a positive net effect on Group income, because European operations have greater expenses in EUR than sales in EUR. A majority of the purchases of raw materials and components is denominated in EUR, as are significant production costs.
The principal currency pairs for the North American operations are the USD/CAD and MXN/USD. A significant portion of production is conducted in Mexico and the products are subsequently sold in USD. Accordingly, a weak MXN versus the USD is positive for the Group. With the closure of production in Canada, Electrolux is now a net importer into this market. Hence, a strong CAD versus the USD is positive for the Group, since the imported products are expensed in USD.
The principal currency pair for the Latin American operations is the USD/BRL. Purchases of raw materials and components are to a large extent priced in USD. The products are then sold in BRL. A weak BRL compared with the USD is negative for the Group.
The principal currency pairs for the business in the Asia/Pacific region is the USD/AUD and CNY/USD. Purchases of raw materials and components are to a certain extent priced in USD and the products are subsequently sold in AUD. A strong AUD compared with the USD is positive for the Group. Some purchases from China are denominated in CNY and sold in USD. Accordingly, a weak CNY versus USD has a positive effect on the Group.
Main translation effects: USD/SEK, EUR/SEK.
|Gross transaction flow||-11356||-3749||-2618||793||1039||1361||2089||2333||2457||4868|