Electrolux ability to increase profitability and shareholder value is based on three elements: innovative products, strong brands and cost-efficient operations. Realizing this potential requires effective and controlled risk management.
Risks in connection with the Group’s operations can, in general, be divided into operational risks related to business operations and those related to financial operations. Operational risks are normally managed by the operative units within the Group, and financial risks by the Group’s treasury department.
Electrolux operates in competitive markets, most of which are relatively mature. Demand for appliances varies with general business conditions, and price competition is strong in a number of product categories. Electrolux ability to increase profitability and shareholder value is largely dependent on its success in developing innovative products under strong brands and maintaining cost-efficient operations and production. Major factors for maintaining and increasing competitiveness include managing fluctuations in currency rates, prices for raw materials and components as well as efficiency measures. In addition to these operational risks, the Group is exposed to risks related to financial operations, e.g., interest risks, financing risks, currency risks and credit risks. The Group’s development is strongly affected by external factors, of which the most important in terms of managing risks include:
Demand for appliances is affected by the general business cycle. A deterioration in market conditions may lead to lower sales volumes as well as a shift of demand to low-price products, which generally have lower margins. Utilization of production capacity may also decline in the short term. In 2015, demand for appliances increased in mature markets such as North America, Europe and Australia while demand in emerging markets as Latin America, China and Southeast Asia declined. The global economic trend is an uncertainty factor in terms of the development in the future.
Most of the markets in which Electrolux operates features price competition. Some of Electrolux markets experienced price pressure during 2015. The Group’s strategy is based on launching innovative and consumer relevant products under strong brands, and is aimed, among other things, at minimizing and offsetting price competition for its products. A continued downturn in market conditions involves a risk of increasing price competition.
The raw materials to which the Group is mainly exposed comprise steel, plastics, copper and aluminum. Market prices declined during 2015. Bilateral agreements are used to manage price risks. To some extent, raw materials are purchased at spot prices. There is considerable uncertainty regarding trends for the prices of raw materials.
Electrolux has a comprehensive process for evaluating credit risk and tracking the financial health of its customers. Management of credit limits as well as responsibility and authority for approving credit limits are regulated by the Group’s credit policy. Credit insurance is used to reduce credit risks. The trading conditions for retailers in 2015 were challenging in some markets such as Brazil and some Eastern European countries. Retailers in Western Europe and the U.S. showed a slight improvement compared to the previous year.
The Group’s loan-maturity profile for 2016 represents maturities of approximately SEK 2,677m in long-term borrowings.
Electrolux has two unused committed back-up revolving credit facilities. One multicurrency facility of SEK 3,400m maturing in 2017 and one multicurrency facility of EUR 500m, approximately SEK 4,600m, maturing in 2018. Electrolux has also a committed revolving credit facility of USD 300m, approximately SEK 2,500m, maturing in 2018.
Risks, risk management and risk exposure are described in more detail in Note 1 Accounting principles, Note 2 Financial risk management and in Note 18 Financial instruments
| Change +/- | Pre-tax earnings impact, SEKm |
|
|---|---|---|
| Raw materials1) | ||
| Steel | 10% | 800 |
| Plastics | 10% | 700 |
| Currencies2) and interest rates | ||
| USD/BRL | 10% | 270 |
| USD/EUR | 10% | 230 |
| USD/CAD | 10% | 180 |
| EUR/GBP | 10% | 170 |
| EUR/CHF | 10% | 100 |
| USD/CLP | 10% | 80 |
| USD/ARS | 10% | 80 |
| THB/AUD | 10% | 80 |
| USD/AUD | 10% | 70 |
| EUR/RUB | 10% | 50 |
| Translation exposure3) | 10% | 260 |
| Interest rate | 1 percentage | 20 |
1) Changes in raw materials refer to Electrolux prices and contracts, which may differ from market prices .
2) Includes transaction effects.
3) Assuming the Swedish krona appreciates/depreciates against all other currencies.
| Carbon steel, 35% | 35 |
| Plastics, 37% | 37 |
| Copper and aluminum, 7% | 7 |
| Stainless steel, 10% | 10 |
| Other, 11% | 11 |
In 2015, Electrolux purchased raw materials for approximately SEK 18 billion. Purchases of steel accounted for the largest cost.