Electrolux 2011 Annual Report Download - page 105

annual report 2011 board of directors report
Risks and uncertainty factors
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 gen-
eral, be divided into operational risks related to business opera-
tions 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.
Risks and uncertainty factors
Electrolux operates in competitive markets, most of which are
relatively mature. Demand for appliances varies with general busi-
ness 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 develop-
ing innovative products and maintaining cost-efficient production.
Major factors for maintaining and increasing competitiveness
include managing fluctuations in prices for raw materials and
components as well as implementing restructuring. In addition to
these operative 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 currently include:
Variations in demand
Demand for appliances is affected by the general business cycle.
A deterioration in these 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 2011, demand declined in the Group’s
major markets while, demand increased in emerging markets as
Asia/Pacific. The global economic trend is an uncertainty factor in
terms of the development in the future.
Price competition
A number of the markets in which Electrolux operates features
strong price competition. Some of Electrolux markets experi-
enced strong price pressure during 2011. The Group’s strategy is
based on innovative products and brand-building, and is aimed,
among other things, at minimizing and offsetting price competi-
tion for its products. A continued downturn in market conditions
involves a risk of increasing price competition.
Changes in prices for raw materials and components
The raw materials to which the Group is mainly exposed comprise
steel, plastics, copper and aluminum. Market prices of raw mate-
rials rose in the early part of 2011. Bilateral agreements are used
to manage price risks. To some extent, raw materials are pur-
chased at spot prices. There is considerable uncertainty regard-
ing trends for the prices of raw materials.
Exposure to customers and suppliers
Electrolux has a comprehensive process for evaluating credits
and tracking the financial situation of retailers. Management of
credits as well as responsibility and authority for approving credit
decisions are regulated by the Group’s credit policy. Credit insur-
ance is used in specific cases to reduce credit risks. The weak
trend in the major Electrolux markets in 2011 impacted the
Group’s retailers who experienced difficult trading conditions but
this did not result in any increases in credit losses for Electrolux.
Access to financing
The Group’s loan-maturity profile for 2012 and 2013 represents
maturities of approximately SEK 4,100m in long-term borrowings.
In addition, Electrolux has two unutilized back-up credit facili-
ties. In 2011, Electrolux replaced an existing revolving credit facility
with a new committed EUR 500m multi-currency revolving credit
facility maturing in 2016, with extension options for up to two more
years. Electrolux also has an additional committed credit facility of
SEK3,400m maturing 2017.
Risks, risk management and risk exposure are described in more
detail in:
• Note 1 Accounting principles.
• Note 2 Financial risk management.
• Note 18 Financial instruments.
Sensitivity analysis 2011 Raw-materials exposure 2011
Carbon steel, 35%
Stainless steel, 8%
Copper and aluminum, 13%
Plastics, 29%
Other, 15%
Risk Change
Pre-tax earings
impact, SEKm
Raw materials
Steel 10% +/–900
Plastics 10% +/–600
Currencies¹) and interest rates
USD/SEK –10% +810
EUR/SEK –10% +410
BRL/SEK –10% –300
AUD/SEK –10% –260
GBP/SEK –10% –180
Interest rate 1 percentage point +/–60
1) Includes translation and transaction effects.
In 2011, Electrolux purchased raw materials for approximately
SEK 20 billion. Purchases of steel accounted for the largest cost.
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