Fagerhult AB

STO:FAG

Earnings Call Transcript 2024-Q3

[Magnus Haegermark, executive]

Thank you, and hello, everyone. Welcome to today's presentation of Fagerhult Group's third quarter results for 2024. My name is Magnus Haegermark. I'm the Head of M&A here at Fagerhult Group. On the call today are our President and CEO, Bodil Sonesson; and our CFO, Michael Wood.

The presentation will start with Bodil, giving us a brief update on the results for the third quarter. Bodil will then continue to update us on some strategic highlights today focus on what has happened since the fluorescent ban was initiated and what we can do to help our customers with LED lighting, renovation and smart solutions. After that, Michael will follow with more details about the performance of the group. Finally, Bodil will conclude with a recap and then we will open up for questions. We will first take questions from the conference call. Then we will open up for questions from the webcast. You can post questions in the chat window on your screen, and I will read them up for Bodil and Michael.

Before we start, let me also remind you that today's session is recorded and will be available on our website later today.

With that, I hand over to you, Bodil. Please go ahead.

[Bodil Gallon, executive]

Thank you, Magnus, and welcome from me as well to everybody to this Q3 2024 webcast. So the third quarter results were not in line with our ambitions, caused by a softer market conditions over the later part of this summer. We have, therefore, taken actions with an even higher focus and cost reductions in the group. And as you know, we started this in Q2, and we start to see the effects of it already.

Additionally, we have also executed on restructuring programs in 3 entities: Veko, LTS and Arlight. In Veko, this also included the final withdrawal from the horticulture market in combination with the strategic overview of the business that was announced in Q2. We expect the benefits in operating margin in Q4 as well as in 2025. In the market, we still see large differences in activity depending on both geographies and segments and whether it's public or private spending. Being present in many markets and segment is one of our big benefits.

From customers and projects during the summer, we saw a slower decision-making process caused by the general market conditions, which was more visible in collection. Also, there are some specific events like the U.K. election that slowed down decision-making in public spending. Premium that is more involved in public spending in the Nordics, for example, in hospitals and there's a high level of renovation project had a much better quarter with an organic order intake of 6.6%. We also see positive signs from the florescent ban, and I will come back to that later on in the presentation.

That means that we see continued mega trends continue to support and remain favorable for our industry. That does not change and provide a solid foundation for our strategy and future growth, which is completely in line with our strategic focus areas. So we continue to work hard and make progress in smart lighting, sustainability and people and talent.

And as an example, we have this quarter done our first launch of our cloud-based service offering in smart lighting. The service launch will be my focus from an innovation standpoint in today's presentation, and you can in the report read about another few innovations that we have launched in the quarter as we continue product development activity on a high level.

But let's start, as always, but have a quick look at the numbers for the quarter. And first, I want to point out that we have presented our results based on the commonly used concept of items affecting comparability. This is to provide completely clarity and assist in the understanding of the numbers and the results. So order intake in Q3 was SEK 1.873 billion, which represents an organic decline of 5.1%. And net sales at SEK 1.919 billion showed an organic decline of 5.2%. At the EBIT level, we delivered SEK 181 million with a 9.4% EBIT margin and EPS was SEK 0.58 per share.

And if we then look at the quarter-to-date in figures, the year-to-date order intake is at SEK 6.106 billion, which represents an organic decline of 2.5% compared to 2023. And net sales declined organically with 2.2% to SEK 6.266 billion compared to 2023. And operating profit is at SEK 598 million, which represents an operating margin of 9.5% and EPS is SEK 1.99 per share. And as always, Michael will give you more information when we come to the financial section of this presentation.

And first, I will show you some things that have happened in the quarter. So as always, we'll give you a flavor of our strategic group focus areas. And today, we'll give you a quick update on the fluorescent ban and what it means for our renovation business and focus. And we will also investigate what advantages it brings to work with our smart solutions, Organic Response in renovation projects.

And in the first stage, as a control system and how that becomes a bridge into continued energy optimizations for our customers. And then we will look into the future with the soft launch of the service offering for smart lighting that happened this quarter.

So you probably remember that fluorescent tubes as part of the ROHS directive were banned a year ago in Europe. And the U.K. followed 6 months later in February 2024. And the ban prohibited EU production and EU importing of fluorescent tubes. But what was already held in inventory in the market were allowed to be sold. So that's the background.

And our expectations were that inventory levels to be quite substantial and that it would take time for the phaseout. The indicators we now see that this is happening far quicker than we thought. And that inventory levels are going down quickly in Mainland Europe and somewhat lower in the U.K., which is normal, let's say, with 6 months after us. So this is positive news as it generates more opportunity for renovation project. And as we spoke about in Q1, we have several renovations and refurbished concepts within the group.

So if we look at the replacement for existing fluorescence installation, we offer 2 different possibilities. We can do retrofits of the luminaire and upgrade it to new LED technology. This will give the customer the lowest carbon footprint option and is very cost effective. We will also make sure that we quality test the solution so that its CE mark is kept.

In some cases, though, it might make sense, as you see the second option here to go for new LED lighting solutions. In both cases, we will recommend a solution with sensors to optimize the energy consumption and make the solution future-proof.

There is a third solution that exists that we don't do which used to lose LED tubes, and we don't recommend this. It might, at first seem like a cost-effective solution to use LED replacement lands, but the fact is that they have one, they have a shorter life expectancy. They are 20% to 30% less energy efficient than a new or professionally upgraded LED luminaire. And that makes, if you look from a total cost of ownership, this is -- the option is actually costing more than the other more professional solution. Also with LED lamps you need to make sure that the original CE market is still valid for the solution.

As you know, we have a vision to be 100% smart by 2030, and this implies that by 2030, we need to have sensors in all our lighting solution. And this goes hand in hand with us achieving our sustainability targets. So our in-house developed smart lasting solutions for indoor application is called Organic Response. And this system provides a very easy stepping stone into smart lighting, because the solution can in its first phase be deployed as a lighting control system where the wireless capabilities make system design and installation easy and cost effective as no separate communication cables needs to be pulled through the building and this is a huge saving for the project and those involved.

And the easy commissioning and speed of deployment, thanks to wireless, makes the solution ideal for renovation projects. And in this first phase, the system can deliver energy savings up to 40%. And then by adding gateways and connecting the system to the network, we can, in a second phase, allow the customer to start reaping the full benefits of smart lighting, including energy savings up to 70%. So what you see here on the slide trying to present it in a pedagogic way. And the updated European Performance of Buildings Directive implies smart lighting solutions in new and renovated buildings. And the member states need to implement this new directive into local legislation by the latest of spring 2026.

So this quarter, we passed an important milestone with our smart lighting initiative with the launch of a service offering for Organic Response. And the service will help us to speed up the adoption and articulate the benefits with smart lighting. And as you can see here on the slide, it's a tiered offering. And the service will optimize the performance of the lighting system through the whole life cycle and help our customers to meet their sustainability targets while ensuring quality lighting experiences.

So for the brand companies in the group, the services are also a tool that will allow a closer interaction with key stakeholders, including real estate owners, real estate managers and larger end customers who value the benefits with smart lighting. So if you want to read more about the solution, I recommend you to go to the website of organicresponse.com that has been completely updated during the last month to reflect the new solution. And I'm sure we will be coming back to this topic also in future webcast.

I will end this section with an example of a nice project from Whitecroft that was won this quarter. It's a very nice proof point of what we've just been talking about with smart lighting and about sustainability. It's an office building in London's new net-zero business and innovation district at Brent Cross. The whole project has therefore had high focus on sustainability and energy efficiency. And Brent Cross is one of the key growth projects of the Mayor of London and will, when it's ready, host offices for 27,000 people and will be a completely new town center location. And this building that we look at here, you can see it's partly in wood. It's called Brent Cross 1, and it's the first commercial building to be part of the Brent Cross regeneration scheme designed and built by the construction company, BAM for the real estate company, Argent Developments. And BAM and Argent selected Organic Response, wireless controller solution due to its energy savings, ease of installation, future-proof flexibility and ability to integrate with other building services.

So with that, I will hand over to Michael with a picture of a university project in Tasmania, which is this time is done with WE-EF Lighting, and it's situated near a penguin colony. So the campus is therefore ecologically sensitive zone and has very special demands with the approach to Lighting. So with that, please go ahead, Michael.

[Michael Wood, executive]

Thank you, Bodil, and good morning to all our guests from me as well. As Bodil has mentioned, the results for the third quarter did not meet our expectations or ambitions. I am, however, confident that as a result of the enhanced cost focus, plus the 3 restructuring programs, the group's profitability will benefit in the coming periods.

The enhanced cost focus comes from a very -- sorry, comes from every business in the group, and we already, we see an average of SEK 6 million per month reduction in those targeted areas. The 3 restructuring programs in Veko, LTS and Arlight reduced the group's head count by approximately 2%. And the payback for the organizational restructuring starts in November, and will take just over 8 months for a full payback return on the IACs that have gone through in Q3.

The impact of the softer market conditions can be seen here in the lower net sales level, but with a positively developing gross profit margin and the current and enhanced ongoing cost base reduction, the operating margin is at a steady level. Remember that the Q3 results does not include the benefit from the restructuring programs. This will start during the fourth quarter and take us into next year.

Order intake levels were better towards the end of the quarter and have remained at a better level since, and we are monitoring this very closely, as you might expect. The group's ability to meet customer delivery expectations is at a good level across all brands, and this is a strength of our operating model with lead times from some factories being 3 to 4 weeks. So what we see is longer decision-making but shorter lead times when that decision is made, and we have the capability to respond to that.

The improved gross profit margins are due to quite a few things. Active portfolio management is an ongoing process here at Fagerhult Group in all brands, pricing techniques, and material cost reduction and all these activities have contributed for the ongoing development of the GP margin.

Operating cash flow remains healthy with an ongoing high degree of inventory and accounts receivable focus on management. And in the fall -- sorry, with the fall we are seeing in Europe for bank rates, the interest expense is also expected to reduce in coming quarters, plus we expect the net debt to reduce further in the rest of the year.

If we look at the year-to-date, net sales are organically 2.2% adverse to last year. We began to encounter currency headwinds, as you can see there, switched from plus SEK 6 million to minus SEK 45 million in the quarter on the FX differences beginning to see currency headwinds from the tailwinds that was there for the first 6 months of the year.

Profitability will be improved as a result of the cost focus and the restructuring and this will enhance the margins and the earnings per share going forward. Operating cash flow remains healthy. The group has a good cash conversion process and executes well year after year.

Sales development. Due to the softer market conditions, we can see the rolling 12 months net sales took a slight dip in the period but remains at SEK 8.4 billion. There are many opportunities on the market, and the mega trends remain supportive and favorable. When the new build market activity begins to return, we will see a further improved position here.

A point to make here in regards to the U.K. market. Bodil's mentioned a couple of specifics regarding the U.K. market. The U.K. market is particularly impacted by the recent governmental election, the temporary lower levels of public sector investment plus the liquidation at ISG, one of the largest installers on the market. In 2023, ISG's net sales number was GBP 2.2 billion. So it is a sizable contractor, and it has a -- it shapes the supply chain in the industry when something like that happens. As a result of all these things combined, net sales in the third quarter 2024 were SEK 111 million lower than in Q3 2023.

Margin. The rolling 12-month operating margin before IAC holds steady at 9.5 to 10.5 percentage points, and this will be improved by the cost focus and the head count reduction. Further development should be possible when the markets return to a more active level.

Collection. Business has had a weaker order intake period during the summer period. Operating the high-end segments of the industry, business area collection has seen the most instances and biggest impact of the longer decision-making process and therefore, project delays and postponement of deliveries where the order has already been received. So we're seeing it in 2 areas, particularly strongly in collection, slower and longer decision-making to win new orders and the many changes when it comes to executing on the delivery.

There is a strong focus on cost reduction to support and protect the profitability, and it is important to point out that over the longer term, we see a dip in the quarter. But over the longer term, the operating margin continues to develop in a positive way. This has been a trend during the last few years, and we see it continuing.

Bodil mentioned the growth in Premium. BA Premiums had its strongest order intake and profitability period for the year in the third quarter. Organic order intake was plus 6.6% growth and the operating margin of 13.7% is the highest this year. The Fagerhult brand is already benefiting from the fluorescent lamp as these inventory levels begin to be fully consumed in some markets, and we do expect this to continue.

We see a very strong future for smart lighting solutions and viewing the results for business area, Premium, with respect to the growing investment in organic response results in an industry-leading year-to-date operating margin of 14.8% year-to-date, when you see the combination of the lighting brands without the investment in organic response. So a healthy operating margin for the 2 businesses. The restructuring program at LTS will begin to deliver further benefit to the operating margin in Premium, and that will positively impact in the fourth quarter and into 2025.

Looking at Professional, whilst the longer-term trend for profitability for -- is positive for BA Professional, the third quarter was disappointing. In the U.K., we continue to see positive year-on-year development in sales and profitability. In Australia, we continue to see a steady and in control operation but steady at a low level. And the ambition, you're aware of the difficulties that we had in 2021 and '22 and the ambition has been to create a stable, more and controlled platform in Australia. And the new leadership team is delivering upon that plan. In coming years, we plan for growth down in Australia.

In Turkey, market conditions are particularly tough. And here, we also execute on the restructuring program to reduce the cost base. Bodil mentions, I'll repeat it. And the Brent Cross project is a proof point of how the market is turning and how our businesses offer winning solutions for lighting and sustainability.

Lastly, Infrastructure. Infrastructure slide 90 days ago, created some conversation points. And in the Q2 report and on the Q3 earnings -- sorry, Q3 earnings call, we reported a full review of the Veko business. This has been completed, and we've finalized the withdrawal from the horticulture segment as well as execute on a significant headcount restructuring program in Holland.

The operating margin has partly recovered. You can see clearly on the right-hand side, has partly recovered in the third quarter, and we expect further improvement to come. Order intake in the business area has now been positive for both Q2 and Q3, and we look to close out the year in a good way and look for further improvements in 2025.

Cash flow. On the cash flow side, we do continue in a very positive way now with 10 successive quarters of generating a positive cash flow. It will, as previously be reported be difficult to match the SEK 1.2 billion achieved in last year, but we do still see room for improvement in some businesses and improved working capital management.

As you can see, the net debt reduced in the quarter as the operating cash flow was once again quite healthy. We report a net debt of SEK 2.46 billion adjusted to SEK 1.7 billion to IFRS 16 effects and the net debt EBITDA ratio remains less than 2, meaning we are in a strong balance sheet position for M&A opportunities.

Cost savings and the restructuring programs, combined with lower interest expenses and the medium term, lowering the group's tax rate will all improve the earnings per share. And these are all activities that we see no reason why these can't be executed and delivered upon.

Before handing back to Bodil for closing and Q&A, just a very short summary message. Yes, the softer market conditions did affect the group's results in the third quarter. During Q3, we obtained many difficult decisions. We have a focus on cost reduction and confident this will improve the result going forward. The mega trends increasingly impact the business in a positive way, Brent Cross and the fluorescent lamp ban are examples of this and test cases, which are very positive towards our strategy. And despite the softer market conditions, there is no reason to lack confidence for the medium term.

And with that, I say thank you for listening, and I hand back to Bodil.

[Bodil Gallon, executive]

Okay. So here, we see a picture from a church in Denmark in the city of Silkeborg. And normally, we show you renovation of old churches. And this time, it's a completely modern new build brick church. It's an iGuzzini installation. And they have, as you know, a big focus on the cultural segment. And where this quarter, they have launched a new solution, which has focused on museum.

And as Michael said, and when we look into the conclusions and recap for this quarter, we saw longer decision-making processes from the customers, and that has been impacted us. And I think it's very much due to the general market conditions. We still see high activity levels though in our incoming pipeline that hasn't changed. And we also see some positive signs for future trends in the construction industry for 2025.

Also positively, the inventory of old fluorescent lamp seems to be diminishing quicker than we thought and that should have a positive impact on the uptake, continued uptake, I would say, on renovation projects. With the uncertainty around this in the market, we continue our cost focus in the group to support our operating margin. And as you know, we have executed 3 restructuring programs that will impact results positively on the operating margin in Q4 and in 2025.

The renovation focus also benefit our sales of smart lighting as the easy commissioning and speed of deployment, thanks to wireless makes the solution ideal for this type of situation. Q3 also marked the launch of our service offering with additional energy savings potential for our customers. And we continue to be convinced that we are doing the right actions towards our ambitious goals and that we are well positioned when the construction market again turned positive. And with that, I will hand over to Magnus and questions that we might have.

[Magnus Haegermark, executive]

Thank you, Bodil. With that, we ask the operator to open for questions from those on the telephone line.

[Operator]

[Operator Instructions]. The next question comes from Karl Norén from SEB.

[Karl Norén, analyst]

A couple of questions from my side. Maybe just to start off with a clarification one on the payback time here on the restructuring. I think you said it was 1.5 year approximately. So I'm just wondering if we should read that as like SEK 40 million in annual savings. But I also think that, Michael, you said that you already saw some like SEK 6 million cost reduction per month. So -- yes, if you could comment a little bit on that, it would be helpful.

[Michael Wood, executive]

Yes, sure. Thanks, Karl. Two things going on here. There is across all the businesses and all the group, there is a high degree of cost focus that we initiated towards the end of the second quarter, and that's delivering on average SEK 6 million saving per month in those targeted areas. Additional to that, then there is the 3 restructuring programs that we execute: Veko, LTS and Arlight. And that at Veko also includes the withdrawal from the horticulture segment. If you just look at the organizational restructuring programs, then the payback for those will start in November and will be completed within 8 months with 100% payback of the cost of the programs for organizational restructuring.

In the report, we state a longer time period, because that includes also the impact of the withdrawal from horticulture segment. So there's no actual payback, if you like, for that, except a healthier business, a more focused business. So the number that you see in the report, Karl, is the organizational savings, also funding in 1.6 years both aspects of organization as well as for horti withdrawal.

[Karl Norén, analyst]

Understood. That's very clear and helpful. Just a question also on collection here. I mean you grow organically. But despite the growth, the margin seems to come down year-over-year. Is it possible maybe to tell us a little bit more what's going on in the collection area? And also, I thought that the order intake in collection was a bit weak. So if you could give any more color on the collection development would be nice.

[Michael Wood, executive]

Yes. I'll cover order intake first. The 4 businesses in collection do operate at the high premium end of the lighting industry, offering architectural and lighting designer solutions where the price premium that they receive for their products is at a good level. And that segment, we noticed over the last 3 to 4 months has been subject to the highest degree of project deferrals, project postponements and the decisions to execute on placement of the purchase orders has become longer and longer. And we notice it more in that high-end segment than we do in our other business areas.

When you come to the operating result, we've got 4 businesses in the business area collection. Looking at the year-to-date operating margin is ahead of last year, and so we are pleased about that. So even through a softer summer period on order intake, giving quite a difficult Q3 performance, we're still ahead of where we were a year ago in our operating margin. It is the trend that we have seen since the acquisition of iGuzzini and post-COVID period, and we do fully expect that to continue.

So we see -- Karl, we see the Q3 margin as a 1 quarter sort of a bit of damage to that business area. But I think the longer term, we've been successful in producing a little bit more and a little bit more as we go through. And we have no reason to doubt that, that will continue.

[Bodil Gallon, executive]

And I also think, Karl, if you look into the longer lead times, I think it's because collection is more exposed to new builds than the other business areas are.

[Karl Norén, analyst]

Yes. Yes, that's clear. Very good. And then just a general question on demand for the group, I mean, seems to have softened here during and after the summer maybe, but also sound a bit more optimistic on the fluorescent phase out, I guess. And I mean given what we see now, of course, I think it's going to be quite hard to show growth here in Q4. But I mean, you stated in the report that you see new builds coming back in like 12, 18 months. Just wondering a little bit how you see on the market and when you think it's possible to see a positive organic growth for Fagerhult?

[Bodil Gallon, executive]

I mean for us, by far, our most important objective to start to show growth. And I think that when you look into the construction market has been negative for many quarters in the past. I mean, if you look at the predictions from Eurostat, they're speaking about a more positive 2025 both from renovation and new build. And I think if you look into this year, it has been quite special because I think it has been lower also on the renovation side. And I think there are a lot of things that should drive this positively, hopefully both the market, the general market conditions from an interest rate perspective. But also as legislation is coming closer and closer, there needs to be more renovation done, and that is both in general terms, if you look into, as I refer to the European Building Directive, Performance Directive of Buildings, but also when you see the fluorescence. And we are, as we said, more positive. We thought this would take a long time, but we can see that inventory and distribution is going down very rapidly. And I think in some markets, it's even running out.

And I think we thought this would take longer term. And we don't know if there's stock with the real estate companies and the facility manager, but if there is, that will happen quite quickly. So I think that should bring some positives to us in general. So I think what I said, I mean, we are confident in what we're doing. We've been taking the right actions and that should also bring the right results.

[Operator]

The next question comes from Albin Nordmark from Nordea.

[Albin Nordmark, analyst]

I had some technical issues. So sorry if you already answered this one, but just to confirm, should we expect more of this restructuring cost going ahead? Or have you taken all of these costs now in Q3?

[Michael Wood, executive]

We've taken them in Q3.

[Albin Nordmark, analyst]

All right. And then for the service offering, you announced this quarter, just curious how much would you expect it will be the service offering versus the ordinary product in a few years from here? Yes.

[Bodil Gallon, executive]

I think what you see what we're doing this quarter is a soft launch of it. And so it's going to go market by market. So I think when you do these kind of new types of offerings is always good to dip your feet first. But we're going to have a high focus on it. And if you come back to where our ambition is, we're saying 100% sensors in our products in 2030, and that doesn't mean that it has to be a service offering. That means that it has to be including a sensor. But that is the prerequisite for working with the service offering today, of course, but also in the next step.

So I would see a gradual improvement and a gradual part of our total from a percentage standpoint, it's difficult to say exactly where that's going to be. What we are seeing though is when it's a little bit depending on different markets, this is a very attractive offering for the customer because when they work with this, they will be able to work with their life cycle of their products. So I wouldn't say that it's entirely paying off for itself. It's a little bit depending on the energy pricing, but it is a very, very interesting offering for the customers, both from a total cost of ownership but also from working with their own real estate companies working with their own SBTi targets to take them down, because there is, of course, a big both on the energy side, but also on the CO2 part. So it's an interesting offer for the customer.

[Michael Wood, executive]

Albin, sorry, just to add to that. The word Bodil uses quite a lot there in that response was the customer. It does mean for many of our brands that we have to partner and engage with slightly different customers to deliver this service offering, many engage with engineering consultants, architects, designers installers whereas the important people to get to with this service offering is either the property developer, the landlord or the tenant. So it's a slightly different category of customer, stakeholder, we recognize that, and that's the formulation that we're going through in our businesses on the soft launch that we have in targeted markets.

[Albin Nordmark, analyst]

All right. That's clear. And also, you -- I think Bodil mentioned in -- or you concluded with despite longer decision-making from the customers, you see a high level of incoming business here and also positive signs from the fluorescent ban. So can you give us any sense of maybe how October has started in terms of order intake?

[Bodil Gallon, executive]

I think Michael said it that I would say that it was the summer which was tough. So it was better from when everybody got back and started really to work in September. And I would say so far that has continued. So far, so good. But of course, we are very vigilant in observing it.

[Michael Wood, executive]

We're only 2 or 3 weeks into the fourth quarter. So whilst we're happy with what we see, it's a very short period. Yes. But it's better than being unhappy with what we're seeing.

[Operator]

The next question comes from Mats Liss from Kepler Cheuvreux.

[Mats Liss, analyst]

First, I'd like to get some more color there on the order mix. I mean, could you say something about volume and pricing, I mean, component prices are quite important for you, I guess. So if you could, well, say something about that?

[Michael Wood, executive]

Do you want to cover the order mix, Bodil, and I'll cover the component pricing?

[Bodil Gallon, executive]

Yes. Go ahead, Michael. We can start with the component side of it.

[Michael Wood, executive]

Okay. So what we see, Mats, on component pricing, you're spot on. It is quite important to us. With cost of material being the most significant line item expense in our income statement materials, not surprisingly. We see some good lower component pricing that we're experiencing this year, particularly on LED electronics. We don't see any reason why that shouldn't continue through to the end of the year. And we are about to engage in pricing arrangements for the main volume of items coming into our factories for 2025. We do see some reductions in base metals and commodity products like steel, aluminum, copper. So overall, components and input costs of materials is favorable this year, compared to where we've been in '23 and '22. I don't -- I'm not hearing, Mats, around the group, things going the other way when it comes to pricing of components.

[Bodil Gallon, executive]

And then when you look into the order mix, if we look into what we saw try to illustrate a little bit. I mean it is big differences depending on the markets and the segments. And one market -- one segment can be good in one market and less good than another one. And a typical example of that was that we saw delays and Michael highlighted to the U.K., I think in terms of our numbers geographically, U.K. had a very good quarter in Q3 last year and this year, it was much lower. And part of that was related to that we saw slower decision-making in public spending.

So you know, for example, that we are -- if we take design plan as an example, heavily involved in prisons in the U.K. and we knew that there were things coming, but they didn't come during the summer. So we saw delays I think we have seen that becoming better as we go further out in the autumn. Whereas if you look in Sweden, it's the opposite.

So we see the Nordics country doing a bit better and that is partly driven by public spending. Both for example, I gave the example, I think there is a hospital example in the report, but also when you look into municipalities and outdoor lighting. And then we see a little bit slower Southern Europe in some parts. And we see segments. Of course, we continue to see renovation projects being more active than new builds. But I would say there's renovation, as I said, has been slower in general. So that new renovation activities more driven by the fluorescent ban in the different markets that we've been seeing. So a mixed picture. I don't know if that answers your question, Mats.

[Mats Liss, analyst]

Yes. Okay. Good. And then just about renovation there. I guess you have this different options for the customer to upgrade to LED lighting. And do you see sort of the trend that maybe customers are a bit more reluctant, of course, and delay the project. But do they also sort of trade down and choose a more affordable option for the short term, but maybe not for the longer term.

[Michael Wood, executive]

I think yes, in answer to both of those questions. We do see -- it has surprised us, Mats, the consumption of the fluorescent lamps and now at some wholesale distributions and some warehouses down to 0 for certain lamp types, not every lamp time but for certain specifications of fluorescent lamp. And that came quicker than I anticipated. And that then for us is a positive step in the right direction for renovation. But whether it's costing or whether it's a speed thing, if you're operating a building with an open plan office with 80 luminaires in and 10 of them have gone -- don't work because the fluorescent lamps have failed given end of life than to keep the workforce lit, so to speak, you're going to want to replace that fairly quickly and the very quick dirty and nasty replacement is with LED lamps.

So there's a speed comment to the LED lamps, whilst Bodil pointed out, yet they're not as energy efficient and they don't last as long. So it's a little bit -- some will go the LED lamp speed of replacement, because the office is in semi darkness and some, which is where we come in, some will go the proper more professional LED retrofit, LED upgrades or replacement luminaires. And we are seeing both -- but the LED lamp segment has got to think about a little bit more longer that it's not a sustainable solution, it's an immediate solution is what we see.

[Bodil Gallon, executive]

But it should have, I mean in general, the effect should be positive on us. And like we see that in the markets where it starts to run out.

[Michael Wood, executive]

We see good demands with Fagerhult brand in the Nordic, Scandinavian region. And when it comes to health care, it's obviously quite an important building to relight hospitals. So we're seeing good renovation, resupply of luminaire, LED luminaires in the health care segment in Northern Europe.

[Mats Liss, analyst]

Great. And then, I mean, about the long-term target at 2030, where you -- well, your target is to only supply smart lighting solutions. Do you have the full sort of in-house offering there? I mean coming back to the M&A and maybe you have sort of -- well, you have a good balance sheet now and could move forward, if you like. Do you need to add more assets or are you sort of already in place to deliver on the 2030 targets?

[Michael Wood, executive]

I think it will be both. I think, plus another one that I'll come to in a minute. I think we are busy expanding the application area appropriateness for Organic Response and Citygrid. Remember, Citygrid is outdoor, Organic Response is indoor. And there's some luminaire shapes and sizes that if not suitable for the moment, and we're busy working there to expand the capability of organic response going into a wider portfolio of luminaires, which is positive for us. .

There will, of course, always be an opportunity to buy more assets to expand what we do there because there will be some application areas where organic response technology might be inappropriate, and we might need a new technology, a different technology for that. So we are through Magnus, who's on the call. As you know, we are keeping our eyes open, not just for luminaire branded assets, but also for smart lighting assets.

And then the third area that I mentioned, this is partnering. So we're not discounting a partnering type of approach for smart lighting technologies going forward in particular application areas. So expanding what we do with Organic and Citygrid, adding in new assets where appropriate and where we have got a gap, but also maybe solving that through a partner approach with somebody that's quite specific.

[Mats Liss, analyst]

And just coming back to the horticulture. I mean, you exited that business, but the offering you have today is you have no sort of not overlaps, but you don't have any similar measures to be implemented like that. I mean, to exit the business is better or not sort of?

[Michael Wood, executive]

No, it was a bit of a diversion for our business in Holland over the last 3 to 4 years maybe. So we've taken the pain. We've exited horticulture and we don't have any others like that in the group.

[Operator]

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Magnus Haegermark, executive]

Thank you very much. We have a couple of minutes left in the call. So we can have some written questions asked as well. Yes. So there are significant new EU directives being launched in the coming years related to sustainability. We've got a question around this. And the question is which efforts are you taking to meet these?

[Bodil Gallon, executive]

And I think we spoke about this, I think it was in the Q2 when we went through the European Performance of Building Directive. And I think that we are -- we started with this long before it became a directive. I think this goes very well into what I said before, that we've been focusing on both the sustainability and the smart lighting. And I would say that for us, those are the 2 big important points, which is part of the directive, which, for example, says that in 2030, 16% of the worst energy buildings have to be renovated. And in 2033, it's -- I think it's 26%. So it's ambitious targets for this. And I've seen the first version of the Swedish legislation for this, which goes very much in line with the European directive. So I think this is, for us, this is extremely positive.

[Magnus Haegermark, executive]

And a follow-up question on the same topic. Do you see it as an advantage to be a larger company to manage all the administration around this?

[Bodil Gallon, executive]

I think there is a double -- actually, it's a good question also. And I think there is a double answer to that. I think with all the legislation that's coming, I think it has an advantage to us to be a group. I think that was the reason that we decided to have Organic Response and Citygrid on a group level, because then we can share the R&D cost between all the different companies, but it's also better from a customer perspective because they get access to a much wider range of solutions with the same interface.

But I think what we've done in terms of product development is also using our decentralized structure. So we have an ambitious goal where we want to go, but then we also use the innovation force of the different businesses, and that's how we've been coming up with many solutions within sustainability, but they are different solutions. So I think we combine the best of both words in that with the group and decentralized organization.

[Magnus Haegermark, executive]

We have another written question here about M&A. We touched a little bit on this, but can you just maybe follow up there, Bodil, to start with the M&A activities and how they are progressing.

[Bodil Gallon, executive]

So I'm taking a question for you. So when you look into the M&A side, I think we said it last time, I think it's still holds valid. I think the fact that we have you, who's focusing entirely on it, it's very positive. Because then you can work in a much more proactive part than we have done before. So we're working on our pipeline on that side of it, very systematically depending on how it fits into business areas, but also into different geographical markets that we're scanning completely through. So the pipeline is getting more and more interesting. Too early yet to say what's going to happen, but we're working hard on it.

[Magnus Haegermark, executive]

Maybe we have time for a last question here. This one was maybe to you, Michael, about the gross profit. We touched a little bit on this already, but can you just repeat maybe. So the question is the gross profit has developed well. And can you just explain what the reasons for this is?

[Michael Wood, executive]

Sure. Gross profit has been a key focus. We entered the supply chain challenge period, maybe 2.5, 3 years ago now, and it was always going to be problematic to manage ourselves through that. But we did, we felt in a good way and we came out of an even stronger way. And I suppose that challenging period has taught us new things and new processes and new approaches to pricing management but also portfolio management. Both of those are having a positive impact on the gross profit, the industrial margin development, so pricing and portfolio management.

And then the third area of, I think from one of Mats Liss' questions, was about component pricing. So all 3 portfolio pricing, smart pricing tactics, smarter as in clever, not as in smart lighting, but smart clever lighting -- sorry, clever pricing tactics and managing to negotiate lower prices for our cost of materials input, all having an impact on that industrial margin.

[Magnus Haegermark, executive]

Okay. Thank you. I think we have time just for a follow-up. Here we go, just got this in about the same topic here. Gross margin is very strong. Do you see and experience any price pressure in the market at the moment?

[Bodil Gallon, executive]

I think that, of course, there's price pressure in the market where you have a depressed construction market, I think we quite used to work with it, and we see this continuing. I think for us, it's going back to being good at selling our offering also from a smart perspective, because if you heard what I said before, this is -- you can start with the control side of it, and then it gives you the bridge into smart lighting. And of course, our average sales value is higher on that part, but it's also a shorter total cost of ownership for the customer, because you need to look at the full solution because you don't have to do the cabling, but also you get additional energy efficiencies when you're doing that.

So I think for us, that's the way to go and where we need to focus, which we're already doing. But it's -- I think that's the -- for us, if we succeed in that, also the gross profit side of it will benefit from it.

[Magnus Haegermark, executive]

Time is running out for us. And with this, we are done with questions for today. But before we end, Bodil, just ending comments from your side.

[Bodil Gallon, executive]

Yes, a quick ending comment. So we were impacted by the slower market conditions in Q3. And I think that's you've seen us being very quick in taking important cost reduction measures, and we prefer to do it in that way. So we can see the benefits coming forward. We will continue this focus and we -- on cost benefits to enhance our margin and monitor the market outlook very closely. .

And at the same time, in line with our strategy, we continue to make progress in all our strategic initiatives being its sustainability, smart lighting and people and talent as well as making progress in our M&A agenda. So I would end by saying, although a somewhat tougher market situation, we continue to see many, many opportunities.

[Magnus Haegermark, executive]

Thank you, and thank you, everyone, for joining today's conference call. Next, we will publish our Q4 results on February 19, 2025, and we will host a webcast on the same day. Thank you, everybody, and have a nice day.

[Michael Wood, executive]

Thank you.