Nibe Industrier AB

STO:NIBE B

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, welcome to the NIBE Q1 results presentation. Today, I'm pleased to present Gerteric Lindquist, CEO; and Hans Backman, CFO. Mr. Lindquist and Mr. Backman, please begin.

[Gerteric Lindquist, CEO, MD & Director]

Thank you very much. Good morning to all of you out there. And this particular record is of a certain caliber, when it comes to us because today we also have the Annual Shareholders Meeting. So what we presented this morning is also of course to be presented later on at 5:00 o'clock and we always have a Board meeting here. So with that said, we believe that we have to finalize this call prior to 12:00 or slightly prior to 12:00. But we hope that that shouldn't take away the quality by any means. And if I start, as we usually organize it, Hans and I, and I think the headline describes it, it's a very good start to the year, but the demand has been varying between the different market segments and also between the different business units that we have.The growth is good. Of course, we've been helped by the weak Swedish crown that's no secret but the organic growth is very substantial. So we are happy with that. And the operating result has, of course, also grown in conjunction with the growth. And the operating margin is slightly lower due to slightly lower operating margin in Element and Stoves.When it comes to acquisitions, we don't have anything to report really but [ sure ] we have many discussions ongoing. Unlike in the past, we have actually just recently started a divestment process of Schulthess Maschinen AG in Switzerland. And of course, that is something that doesn't occur that often in our camp as we say. The only time we've sold a company previously is in 1992 when we sold a small subsidiary in France. And we sort of regret that today. Schulthess, of course, was never a core business in -- within the NIBE group. However, we always committed ourselves to being a good owner and invested -- investing fully. And we can say now that when we finally have found a setup that we believe is decent for the future, we're also handing over a company that is in very good shape, ready for growth. And of course we, as a soft should I say transition period, we are to be the majority owner for another 36 months. And then for Helvetica Capital to come in and take over the leadership and us to remain as a smaller shareholder with a successive divestment of the remaining 25%.And we believe that is corresponding fairly well to what we preach, that you should always be a serious long-term owner. And even if a company comes on board that doesn't actually match our profile, it should not be treated as a foster child or anything like that. It should be treated just like our own subsidiaries. But eventually when time is there, you should be ready to divest it in an organized fashion.And we believe also that engaging management now will also fulfill the promise that this company in Switzerland that is having a very decent margin that we have not been able to grow substantially since we took over. But that would be also an important merit of the ownership that the management is a substantial part of the future ownership. So that's on that side.If you just look at the figures, of course, they are pretty much corresponding to what I said initially with 18.5% growth. And the acquired growth coming primarily from, of course, some acquisitions. Last year, Rhoss for instance, and also some on the Element side, is only 5%, a little bit better. And of the remaining 13%, of course, the majority is still organic growth, but it's a substantial part of the organic growth is currency. And as you know, we do not necessarily describe that in detail, how much is currency, how much is organic growth of a true kind. Because we also know that that comes, will come days when it -- going to go the other way. And we just had to combat any condition. Now, it's favorable it might be days coming quite less favorably, but we as the management have to live up to our -- your expectations, our shareholders' expectations disregarding.So the operating margin is, of course, substantially higher, almost 16%. But again 2 percentage units or 0.2 percentage units lower -- lesser than that last year. Again, because of Element and Stove having a slightly lower margin prospectively.And if we just look at the traditional graphs that we took a look at when it comes to sales and when it comes to profit after financial items. They follow the same pattern with the first quarter being typically the weakest, following by 2 fairly decent, and then the of course the 4, being predominantly the strongest one. So nothing is happening in our -- in that profile as far as sales. Same thing with our earnings. That's the strongest one is naturally on the fourth quarter. And the first quarter we typically have something around 20%, 21% if you look at it historically. So it follows a very good trend.Swinging over then to Climate Solution. Of course, we said before that it's a privilege to be in a sustainability sector where heat pumps, of course, are valued very highly now among customers. And nothing or no one can be untouched by the message in the market, of course, that there is some change in the climate and several ideas how you possibly should solve that. We believe that Climate Solutions they're coming up with some viable solutions to that. And of course, that's represented as a growth here that is substantial. And we also believe that we should be able, over the years to come, to bring the same message forward when it comes to the commercial buildings, not only like individual villas and smaller apartments and that's why we acquired Rhoss, a little bit prior to anticipated date really the remaining 55% earlier this year.And again, of course with the organic growth that we've had and practically good markets, both in North America and Europe. We should improve the operating margin, which we've done and also the operating result naturally.Swinging over very quickly then to the result as such. We see that we are now about SEK 3.5 billion just for the first quarter and the operating profit is substantially up naturally and the operating margin, it's like 3 percentage units up compared to last year. Again, it's the quarter where we have typically the weakest demand. So of course, if everything materializes, we hope we have to look forward to even better quarters.NIBE Element also good organic growth, but there we, you see in our report that on the sustainability side and on the Climate Solutions side, we have substantial positive outlooks. Then when it comes to the white goods for instance and also the semiconductor industry, it's of a lesser magnitude. And that has of course, influenced our operating margin. And also to that has contributed the relatively high labor cost increases in what we called -- we used to call low-cost countries. I think that we have to rename that pretty soon because that's not so low cost anymore.But underlying is of course a positivism or an optimism when it comes down to our assortment, following the trend in the market being pretty much -- very much sustainable in all segments, when it comes to trains, automotive industry, wind power, commercial vehicles, everything is pointing today in a sustainable direction. And we feel that we are very well positioned when it comes to their development.So I don't think that we should take this as a trend when it comes to the slightly weaker margin. And we see here and the results themselves that substantial growth, of course, in sales and revenues, operating profit is up, but not enough to fulfill the same operating margin or I mean here we talk about a percentage -- 1 percentage unit and of course, we are not totally satisfied with that, but that's the market conditions presently. We're well positioned with our assortment geographically, so it's just that some segments have been a little bit weaker and we just have to continue to combat that. With other segments there are more, of course, profitable hopefully, but it's difficult for instance and it's the semiconductor industry to combat that, that's a relatively decent margin in that segment and we all know that has been weak now for some 3 quarters.Swinging over then to Stoves, we can say that it's a fairly decent performance there as well. In North America it's slightly better, we believe that is partly due to the weather where they had a much severe -- they had a just much severe winter than we had. And in Europe, of course, we see also a change pretty much from wood, or wood is a little bit lesser in growth now, and it's more like wood pellets and gas. And that's always been the trend in North America.Here we've been launching several new products, so we have had some increased costs for the R&D and marketing. Other than that, the operating margin is fairly much in line with the previous year, as we see on next slide.The growth is not bad in the quarter, and operating profit is slightly up but of course, the operating margin is slightly below last year, but they are more or less stays on the same level. And if we just do a few comparisons to the cost, we can say that, when we look at this pie chart, it's pretty much the same as we've seen the last quarters with Climate Solutions being steadily above the 60%, and Element slightly below 30%, and the remainder is the Stoves.When it comes to the profit line, that is a little bit different due to the difference in margin, of course, where the operating profit then is likely 65%, for Climate Solution and Element now down at 27% and Stoves on 8%. Geographically, we're pretty much keep the same distribution as before, which we find is very healthy, with the Nordics now being sort of a quarter of our total both revenue and sales. The rest of Europe now 40% and North America, almost 30% and then 5% outside these core markets, and that is of course Element predominant in the Asian markets, where they are more present than the other 2 business units.So, I think that's a very quick summary of the first quarter. And I think I hand over to Hans for more perhaps precise presentation of the figures. And of course, we're open for all sorts of questions after that. But we shouldn't drag on too much, I guess. So, thank you very much.

[Hans Backman, Chief Financial Officer]

Thank you, Eric. All right, so before jumping into the individual business areas, I would just like to comment upon the IFRS effects as well as the effect of the Schulthess group then being partly divested. And I mean, it's in the report, so you've probably seen it. The IFRS effect on us is very limited, especially on the income statement side. I mean, since we're not into airplanes or anything like that, it's mainly normal rental agreements that now have been capitalized on the balance sheet. And of course, you have the corresponding liability as well. So the interests have, of course, increased and instead the rent cost has been taken out, so the EBITDA, which is not displayed here is, of course, slightly better. But the net effect on operating profit is like SEK 6 million in the first quarter and on results after financial methods is basically a zero sum game, so the margin has just moved by 0.1, [ one ] unit. And on the balance sheet, I mean, that has of course been increased by some SEK 800 million, but which is fairly limited given the size of our balance sheet today.And then just to clarify, maybe or just make that clear that the effect of our transaction with Schulthess group does not have any major impact at all at this point in time on neither our income statement nor balance sheet. And even if we have sold the whole company and bought into a new company, from an IFRS perspective, we've sold the minority, which means that we're continuing to consolidate the business. So there's no profit or a gain like that being recorded at this point in time. And also the balance sheet remains fairly much the same. We will of course consolidate the new code, which has been capitalized, so the balance sheet grows slightly but there is no real effects after this transaction. The minority will of course be deducted going forward both on the income statement and on the balance sheet side, but the effect is very minimal. Just to have that stated as well.Then if we move on to the business areas, Climate Solutions. As Eric mentioned, we've had a very good organic growth in this business area, we are in the green sector, you can say and it has developed quite well in all of the regions. North America has continued well; Europe, mainland Europe, if you like very well; and the Nordic has also been strong.And then we've taken on board, Rhoss, as mentioned in the report and which gives us the full flexibility you can say to develop that business in our own hands being the majority owner. And of course, that company has a lower profit margin at this point in time. So we're -- we'll be working on bringing that up to a decent level over the coming some 18 to 24 months.All in all, Climate Solutions has grow with slightly more than 20%, almost 7% coming from acquisitions and the remaining chunk organic with a large portion of currency. But the organic part is the major contributions to the growth, which is very pleasing to see. And pleasing to see is also that we've been able to grow the profit more than sales volume, which of course shows that we have a robust organization behind it.But then as Eric mentioned, it's a seasonal business, and this is the start of the year, we will be doing more, so to speak, during the months and quarters to come.From a geographical point of view, the strong and good development that I mentioned in mainland Europe is in a way displayed in the pie chart here, although it's not seen, but if you would take out the corresponding pie chart from last year the sales in Europe would represent some 38% and they have now increased to 41%. So growing slightly more than both Nordics and North America, although both of them also have developed quite well.If we head on to Element, it's also been a good organic growth, up some 15%, so well past the SEK 1.7 billion in sales. A fairly small portion coming from acquisitions right there and then a good organic growth, but of course also here a help from currency, which in this case has been slightly more than the organic part. But of course, this is where we have been fighting and are fighting against, what Eric mentioned, the former low-cost countries, we see some substantial salary increases and wage increases in several of those countries, and we've seen a fluctuation in the demand per segment. So the product mix has been changed which then has led to this slightly lower gross margin. And also 1% less in operating margin. It's been -- mainly been in the semiconductor business; the white goods having performed slightly less favorable than last year. The automotive is going through a big change, of course, moving away from diesel and petrol in a way to electric, although not yet there, so it's a lot of change going on.But then also many interesting segments, and Eric mentioned them before. But I think what we can see there is that the world is becoming more and more electric, so it's very interesting business to continue to develop, of course.From a geographical standpoint, it is very stable compared to previous quarters, with the Nordics being roughly 20%, Europe slightly more than 1/3, North America still being the largest. And then also compared to the other business areas, with a pretty large chunk of business in Asia, in -- also in Australia, and to that part of the world. So it's a very, very good spread across the globe.And last but not least, we have our Stoves business area. It’s -- I think, Eric said it was a decent performance, I would say it's actually very stable; it is in a way a sideways move. But it's a very stable developing or being very stable and developing as we have seen over the last quarters. The latest focus on R&D and marketing has led us to come in slightly below we are on the operating margins but we're hovering around the same level as last year. And really Q1 and Q2 here are the ones where we used to be around 2%, 3%, 4% in operating margin maybe. Now we're up to 8% because everything basically happens in the latter part of the year.From a geographical standpoint it's North America 21%, thanks to FPI in Canada, serving both Canada and North America or the U.S.; Nordics 1/3, and then Europe the rest.Moving then quickly to the balance sheet not dwelling upon that too much, but just mentioning that. This is where we see the effects of IFRS 16 and especially on the tangible assets side because that's where we have activated our rental agreements, so to speak, with some SEK 800 million. And then, of course, Rhoss came on board, which also has had a small impact. And on the non-financial current assets, you see an increase there due to receivables and inventory coming from December 31, we are again now approaching a growth period, where we are producing more for the seasons to come.On the liability side, it's the long-term liabilities the interest bearing ones and the short-term interest bearing ones that corresponds to the lease holds from the other page. I mean, they have to be split up, of course, depending on how long the contract lasts. So that's the reason for the increase in those numbers. From a cash flow point of view, there is also a slight effect from IFRS 16, it's slightly less than SEK 60 million, which then is taken out again on the financing activities the IFRS 16 has been introduced.But apart from that we've generated a very good cash flow for the first quarter, some SEK 800 million up from SEK 492 million of last year. We've had a slightly less negative effect from changing working capital, we built much more last year, you can say, we've still been building this year, as I just mentioned, but not quite as much. And then we've continued to invest in our current operations in expanding our business.So all-in-all, we've had a very good operating cash flow. I would say and in line or even slightly below our depreciation still.And just looking at some key financial numbers. They are of course also influenced by IFRS 16. Now the first one being the investments there, which are seemingly much lower than the ones last year. And that's of course related to that last year they included the acquisitions that Eric mentioned initially, especially within the Element business area where BriskHeat and [ MI Heating ] and those were acquired.But looking at the interest-bearing liabilities in relation to equity. That has had an influence slightly by IFRS 16, as has net debt to EBITDA, they would have been 1.7 had we not had that change the equity assets ratio would have been 48 and the interest-bearing liabilities they would have been 57. So that's just pure math from that change in accounting principle.Working capital, an area of constant focus, you can say, in a way it sits in the walls to some extent what we have were basically around the same level as last year. And also since year-end around 20%, it's a decent number it can always get better if you ask a finance director.And yes, and then the very last number, so we open up for some questions as well. Return on capital employed 12%; return on equity 13.6%, unchanged due to the IFRS effect. Net profit per share up from SEK 0.67 will for the full-year be slightly influenced by the minority share being deducted then for the Schulthess business but that's like a percentage and a half, as we estimate it right now. And that will, of course, be influenced by both currency and the actual performance of the business.I think that sums up a very quick walk-through of the numbers both balance sheet and the business areas. Let's see how clear we have been exactly.

[Gerteric Lindquist, CEO, MD & Director]

All right. I’ll take the horns. I think we'll open up for questions, then?

[Operator]

[Operator Instructions]. We now have our first question from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, Analyst]

I have a few questions. Could you please first talk about the wage inflation situation and what you're doing to offset this especially within the Element segment? And can you also comment a little bit about the weakness in the semiconductor industry, as well as the automotive industry? And what we can expect going into Q2 from those segments?

[Gerteric Lindquist, CEO, MD & Director]

Clearly, with the wage, If I understood a question there was the wage situation in the [indiscernible]. What I mean how do you combat that when a sudden salary increase occurs? I think that we just have to continue to automate and in some instances, of course, we might have to transfer production. And that's why it's so favorable to already have production sites established. You don't do that from a month to another month. But we have a fairly good experience when it comes to combating a salary increase by robotizing, automating processes. And if that isn't sufficient then, of course, we would have to transfer certain segments. That’s what we'd been doing in the past. But there was -- when you have -- when you get double-digit increases like in the Czech Republic for instance or even in Mexico, of course, that's not something you can cure overnight. So I think that was the answer to your first question. And if you don't mind, what was the second and third do you know?

[Carl Ragnerstam, Analyst]

And the second is regarding the semiconductor industry and automotive industry?

[Gerteric Lindquist, CEO, MD & Director]

Yes, the semiconductor well --

[Carl Ragnerstam, Analyst]

What we can expect going into Q2 if you have seen the improvements or if you --

[Gerteric Lindquist, CEO, MD & Director]

Well I mean forecasting is -- it's of course not allowed to do. But I think that we've been taught over the last year that it is a cyclical industry because it is very expensive to invest in a new factory. And we've been of course more active looking into the market now. And we [ were ] totally aware of the cost establishing a new factory around USD 11 billion. And of course if the telephone manufacturers or whatever it is, if they see a question mark in demand they slow down in their investment processes. So there I think we just have to follow suit, we can't change that industry. Of course, we have to be more cautious with our costs. And we cannot the hammer us out of this situation with -- on our own, we have to just follow the market. Being a sub supplier to a sub supplier we don’t -- because we are supplying the machinery companies in this industry. So I guess we just have to follow suit there and be cautious with the cost, knowing that that always comes back and we are just being aware of the cyclicality of the industry.And the third question was again?

[Carl Ragnerstam, Analyst]

No it was not a third question, but it related to that. Should we expect increased CapEx levels due to the optimization of manufacturing footprint, automation and so on, or should we just follow the Q1 level or how should we see that.

[Gerteric Lindquist, CEO, MD & Director]

Well I think that the depreciation rate is pretty much where you should take your guidance from, from the group. I think that -- that's where we are. Of course to automate one particular industry or one particular segment is -- doesn't cost you SEK 100 million, of course it's of course that cost there, but I don't think that we can foresee a dramatic jump, but just stick to the deprecation rate.

[Hans Backman, Chief Financial Officer]

Over the last years would actually have been slight below that for many years but just slightly and now we will be around it, so there are no dramatic changes.

[Carl Ragnerstam, Analyst]

And one more if I may. Given the consolidation of Rhoss during the quarter, with pretty low margins compared to the segments. I mean Climate Solution for project pretty good EBIT margin, what was behind the improvement year-over-year and have you seen or have you seen improvements for the acquired units such as CCG and Enertech? Have you been able to turn them around?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that without giving you exactly the figures, so we typically give, it harms I think to just give you now 18, 24 months is typically what we find reasonable to bring it up to around a 10% margin area. So when we -- I think that Enertech that we got on board, they are there now. Of course, that is not sufficient if you think that the rolling, of course, margin is rather 13%, between 13% and 14%, so there's a still a fight. Same thing with CCG but that's the immediate target they get. Not necessarily though they always arrive at 15% or 20% but 10% that's just like Element, Stoves, that's where you have to arrive off the -- a decent period. So now Rhoss has been given that precise target. We have a new management on board, a very experienced fellow that is from the industry. And he is gathering a good team around him. So we feel clearly confident about that we're going to fix that, but nothing in a quarter. Our experience is now over the last 6 or 7 years we launched acquisitions it takes 18 to 24 months. We'll be very disappointed if we wouldn't arrive there in 2 years.

[Operator]

Our next question comes from the line of Douglas Lindahl from Kepler Cheuvreux.

[Douglas Lindahl, Analyst]

I have 3 questions from my side. If you were to break down the drivers behind the organic growth in Climate Solution for Europe, what degree of the organic growth we see now would come from new building construction and what would come from a change or a phasing out of current installed fossil heating equipment and replacing this with heat pumps would you say?

[Gerteric Lindquist, CEO, MD & Director]

I would say the major drivers now that you are replacing older equipment and also that countries are going through a different period when they are more organized in changing older equipment on the fossil fuel side rather relying on new build because they're going to take forever. I mean it's no secret that the industry in Sweden for instance, new build is slowing down. But we've always been forecasting the last year in similar information situations like this that we believe that the refurbishment or the change over from one system to another going to be the main driver. So I think that's the question, that's the answer for the first question.

[Douglas Lindahl, Analyst]

And now -- you mentioned now that you're starting to roll out new heat pump products. Can you comment on the gross margin levels here compared to previous levels in the short term and in the longer term, how we should think about this?

[Gerteric Lindquist, CEO, MD & Director]

Would you like to have a forecast precisely per quarter or just the --

[Douglas Lindahl, Analyst]

No. Will there be a material impact basically?

[Gerteric Lindquist, CEO, MD & Director]

No, I am -- so of course. No, the new generation they are going to roll out here at the end of this quarter and onwards country-by-country, and that's of course an assortment that we view very, very positively. And I guess some of you might have been down in Germany earlier this year to look at the S series, where we are now fully, we have full connectivity. And I think that's something that the customers been asking for. And there's also of course that the face lift design wise but the connectivity side of it is, I think, extraordinary and that is by far, as we can judge now, exceeding the industry standard. So we are looking forward to that very positively. When we launch new products as a -- in general, I mean we always try to -- for them to come out with at least the same margin as the previous level and perhaps even better. But you also have to take into consideration when you launch a new product, of course, it takes a few quarters before you're -- really have streamlined everything. So even if the margin is thought to be slightly higher, the pressure models of course they have a margin that we've been polishing and polishing and polishing and in comes a new generation. So I think that we shouldn't expect too much of a change with that said.

[Douglas Lindahl, Analyst]

So a final question from my side. I wanted to see if you've done any price adjustments for the Climate Solution business area in the quarter?

[Gerteric Lindquist, CEO, MD & Director]

I think it was the smaller one at the very beginning of the year.

[Operator]

Our next question comes from the line of Max Fryden from Danske Bank.

[Max Fryden, Analyst]

So I have a question more long term on Climate Solutions, and the best commercial offering. You now have Rhoss on board, you have Climate Control Group in the U.S., you have the smaller company [ Air Site ], you have some commercial exposure in Alpha-InnoTec if I'm not mistaken. So going forward, do you still need to do a larger M&A deal in order to get the footprint necessarily to get to your targets?

[Gerteric Lindquist, CEO, MD & Director]

Well I -- of course, we'd like to be larger but it's always a matter of being civilized, though. Being a little bit cool, if I may use that expression, it's like, I'm cool now. But if you're stressed, I mean we are in a good position in a way that we have sufficient amount of cash to carry out a large acquisition. I think that should be monitored also by knowing that we are entering a new segment. Of course, we like to see that we have now achieved what we aimed at achieving, when it comes to margins and market penetration. So we know once we acquire a larger chunk, we shouldn't find too many surprises. So I think that we are not stressed, in a sense. Of course, there're some targets out there we would love to have on board, but it takes 2 to tango as we say now in March then in the movie. So I think that's all-in-all we are very much geared up to acquisition but we are not stressed, we're going to do it correctly. We have the greatest respect for changing our company also being commercial. We see how many years it's taken us to go fully residential as we are now and rolling that out. And we know that we need further acquisitions. Perhaps it is more like 2 or 3 half size ones rather than a gigantic one to get the right geographical presence, to get the right set up product wise. And also to reduce the risk, quite frankly. If something would go wrong, if you buy a large, large chunk in an area where we are relatively new in, you of course, you would increase the risk. So I think you would find all the facets of [ need this ] personality in the future growth here.

[Max Fryden, Analyst]

And just given the recent deals you've done, I presume you have started the [ test ] commercial custom base, maybe differently, and if so how is the response?

[Gerteric Lindquist, CEO, MD & Director]

Hello? Something happened to the line there?

[Max Fryden, Analyst]

Can you hear me?

[Gerteric Lindquist, CEO, MD & Director]

Now we hear you, again.

[Max Fryden, Analyst]

Can you hear me again? Yes, I was just wondering, first you had Rhoss on board for a while now, even though it's just a bit for the company and you had -- you've been -- the commercial exposure you already have in the sample of your underlying companies. So just maybe talk about the organic growth opportunity. Because I presume you have had a different way to market compared to your traditional residential offering, so you must have assayed the commercial customer base differently.

[Gerteric Lindquist, CEO, MD & Director]

Yes.

[Max Fryden, Analyst]

And following that, how was the response?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that when we acquire a company typically on the residential side or in any, or in any segment, we pay such an attention to the management being the right. And we see what have they done in the past? Do they match our personalities and stuff like that? And once we feel comfortable there, then we go ahead.On the Rhoss side, why we hesitated was of course partly they're developmental margin, but also that the management without being too brutal, they were more administrative rather than commercial. And now having brought the new management on board, now we dare to start to consolidate. Now we have -- now we started the race, you can say.So I mean, it's only 1 quarter into the business. But the livelihood, the vigor and it's -- of course it's totally different with these new people on board without -- I don't like to badmouth anyone, but it wasn't as strong nearly as we have now.

[Max Fryden, Analyst]

All right, but it is not that you have organizationally set up a commercial business unit or anything like that?

[Gerteric Lindquist, CEO, MD & Director]

Yes, that's correct. I mean that is -- the people in Rhoss, of course, they are totally geared towards this. And it is very different from selling a residential in Italy and Southern Europe, as it is here. That is not a wholesale business, that's a project-oriented business with something -- you have to be established in the construction bases and the building -- in the building industry. And that's something you'd have to have people doing that, that are familiar with that.

[Max Fryden, Analyst]

But last one, on Element, and thank you for the answers but on Element if you look at your -- the majority of exposure and markets, looks like it's declining quite a lot actually and you seem to be defying that market growth. And you talk about other such as rail, aerospace et cetera. Is this the reason why that you're growing in new markets for you?

[Gerteric Lindquist, CEO, MD & Director]

I don't know whether I fully understood the question. Sometimes like, we are very strong on rail like gear, or heating the switches on rail roads. Now, for some reason the maintenance has been very low in the 3 or 4 countries where we typically would see a totally different demand. And we don't believe that's a coordinated action. We believe that -- that is a more or less a coincidence because at the same time every politician in the world or at least in Europe they talk about the importance of railroads.So I think they are slackening there, it's more of a coincidence whether that's a quarter or 2 they're going to come back. If that's supposed to answer to one of your questions.Then of course, we have to increase where we are successful. And there, there's no secret that of course on the Climate Solutions side not selling to NIBE Climate Solutions but in that area and also the sustainability side. There of course, we have to hire more people, we have to be more active to follow the demand because now we see that the potential demand is very, very great and we have to follow that. But at the same time defending those segments that are slightly weaker right now because also the [indiscernible] if we take that as a total market.I mean, customers in Europe and all over the world, they've been frightened because for a year now when we're talking about rate increases and now we are facing a downturn in the economy. Politicians and forecasters they have been crying wolf for a year. Now of course it's no wonder that people are worried. And then now when Fed came out and said "Well, perhaps we shouldn’t have increased the interest rate so much." We hope that and we also feel that customers say, "Well, perhaps I dare to buy my house or dare to buy my dishwasher."So I think that the ones crying wolf, they are also to be blamed for the negativism that's been around in the world. I don't know whether I've answered some of your questions. It was philosophy-ing.

[Max Fryden, Analyst]

Not really. The question was actually -- I mean, you talked about declining markets throughout your statement and if we look at the automotive and white goods, which is the majority of your sales that's down. And if I adjust for currency, you seem to grow roughly 8% organically. I'm just trying to understand --

[Gerteric Lindquist, CEO, MD & Director]

Okay. Well, then I think that we -- you have misread or we have to rewrite the report. We are not saying that all segments are declining. We are saying that the automotive industry is standing in front of a transition from a traditional automotive industry into electric and hybrids. And there we see hesitation from the customers' point of view: what am I going to invest in? Is it a hybrid, is it a electric vehicle or is it like a fuel cell car?And when it comes to that segment, of course, as we're mentioning several times, when you walk into that market area, the market is phenomenal. Because you have cameras and sensors that have to be heated. So I don't think the report should be read to say, now the world is crumbling. But we shouldn't at the same time give too much of a rosy picture. Of course, the segment that we have been mentioning here, they've had a weaker or a flatter demand. But is not saying now -- well now the world is falling apart.

[Hans Backman, Chief Financial Officer]

And I think the reason for us experiencing a downturn in the semiconductor industry is that we are in it now. It's a very interesting industry for us. A year to a year-and-half ago we were not even in there. So I mean there is a tremendous potential going forward as well. Fluctuations occur.

[Operator]

Our next question comes from the line of Klara Jonsson from SEB.

[Klara Jonsson, Research Analyst]

I have a follow-up question on Max's previous question. You talked a bit about demand for commercial properties that side is increasing in Europe and in U.S. in the report and I guess the same part was driving your growth right now. Could you explain a bit how much this affects you? I mean, how much is commercial out of total computations right now? I didn’t really catch if you answered that before.

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that if you look at it, we don't give those figures. But I mean in the [ Air Site ] when we acquired that there is less than SEK 50 million. And then of course Rhoss is no secret, that they're around SEK 770 million there when we acquired the company. So that makes it like SEK 750 million. And then of course in the Climate Control Group, I don't know where -- we haven't divided that. That's another chunk of some SEK 2.5 billion and the majority are more than 50.So of course out of the Climate Solutions rolling turnover to some SEK 16 billion, you'd say that it's more than 10% already. But it's not like 30%. But just as a rough figure.

[Klara Jonsson, Research Analyst]

So the 8%, 7% organic growth is on Climate Solutions was basically commercial -- or sorry residential [indiscernible] both in the Nordics and U.S., correct?

[Gerteric Lindquist, CEO, MD & Director]

No, I think the -- I don't know whether we heard that we had a 7% organic growth though, I think that all-in-all had some --

[Klara Jonsson, Research Analyst]

I mean excluding -- at currency of course.

[Gerteric Lindquist, CEO, MD & Director]

Yes well, I understand. It's slightly more than that. But no, I think it's the overall growth that's -- it's not that the commercial is slackening. But since we are so much exposed to the residential side and there the change is very obvious, there the private individual decides, "I am going to go for a more sustainable solution." That is -- so we're in quick but I also see growth in the commercial one. Perhaps you should ring clear on that and report I don't know but that -- there's no contraction.

[Klara Jonsson, Research Analyst]

Then I have a question about another thing that you wrote in the report. That's the efficiency measures you're taking in Climate Solution you are reaching out on costs there. Is this already helping the margin in Q1 or will it -- that increase throughout the year and could you say something about how much you expect this to see from this?

[Gerteric Lindquist, CEO, MD & Director]

Well I mean there's no secret that we have an engineering team that we send out to newly acquired companies and also in companies that we like to see the efficiency increasing. And that's typically a process that takes anything from 6 months to 18 months to see the result of such a thing.It's a very obvious first phase where you sort of take plainer or the larger caliber you take something out and then you have a more like a sandpaper period when you find it -- or you file it off to a very nice shape. So I think that's the time span that you will see when you talk about that. It's no secret that we try to utilize time to the maximum. We would pay in most countries, 8 hours and we like to get the work out of those 8 hours all the time. It's not always that you have to work so much harder every hour, but you have to work those hours. And I think that's a Western world phenomena, it's a world phenomena that we do not work our 8 hours. I don't think that's any criteria for us, a symbol for us. So I think it's the same thing all over the world where you've seen that little thing and we have to have. We are so addicted to the telephone and that's no difference from an office and a workplace. We try to get people to work 8 hours. If they like to smoke, they have to punch out. If they like to use the telephone, they should do that on a different time of the day or they have to punch their card and talk, and then they come back again.So that's what we call efficiency, it's old fashioned, you might say. But I think that -- with -- for the Western world to survive -- hope I am not philosophical again. I think we have to go back to the old way of working full time. Not being paid full time, and working half time, I think that's a wrong avenue. So that's where we're work with -- mean with efficiency.

[Klara Jonsson, Research Analyst]

And then just a last question on Element. There has been quite a lot of questions on that element. You mentioned that you're seeing some increased uncertainty among global customers and you've talked about conducting [indiscernible] about this and all the industries but I mean looking at your organic growth, we don't see any risk yet. So all of this weakness we are talking about if this is -- that is going to come in the second quarter? Or when are we going to see that?

[Gerteric Lindquist, CEO, MD & Director]

No, what we say is that the demand has been not -- has not been so favorable. Let's say that we continue to grow in the segment that has a relatively seen weaker demand. And then of course, we see some flatter demand in the segments that has the better margin of course. Let's say, I talked about railroads, where we have a very good growth and we have a decent margin. Of course, if that is contracting or flattening out that is hurting the margin without sales being dramatically down because you grow in the segment that has lesser margin. And I answered the question previously, say okay, heat pumps coming from the same manufacturer like NIBE in that particular case, of course, we try to have the same margin. But here we talk about different companies. One company supplying, let's say, switch heaters coming from one company, and another company in another country might be another continent supplying components the demand is pretty good, but they have a totally different margin setup.So that answers the question that all the elements 50 companies, of course, you see a summary when you look at the 10% or 11% margin that we've had the last year. But within that group of companies, of course, we have varying margins. That is not one company that would have exactly the same. We're striving for the 10%. But some, they have not quite arrived there and some that have far exceeded that. So if they start -- if the demand starts to move in between them, although the overall more revenue is still up. I mean, that is affecting your margin. That's the math behind that.

[Klara Jonsson, Research Analyst]

To sum it up, we're going to see continued growth ahead likely but the margin is still going to a bit --

[Gerteric Lindquist, CEO, MD & Director]

Well, that's -- it's not the target they have lower margin.

[Operator]

Our next question comes from a line of Marcela Klang from Handelsbanken.

[Marcela Klang, Analyst]

My questions have been answered, but I have 2 more. One that you mentioned obviously the wage inflation and the raw material prices causing problems, but do you expect further issues with this in the coming quarters or have the raw material prices stabilized for you? And is there any room for increasing your prices more following the small increases we're getting on the year?

[Gerteric Lindquist, CEO, MD & Director]

Okay, so I'll try to sort that out. When it comes to raw material prices, I think that we've seen some -- very dangerous to say that, but the -- some stabilization, I guess, we would have to say. When it comes to direct labor, we don't know, it's politically driven, of course, when they now have increased the salary levels let's say in Czech Republic 15%.We don't know what that means for the coming years. And we also know in Mexico, it's a political decision, the same thing in Poland. We have to live with that. We have to combat that with the reactions that we have given and also other companies they are active, I think it might be difficult for politicians to drive those issues so much harder in the future because I think that might cause the transfer of industries to other countries. So I think they're also sensitive to that. But I can only guess in that regard. So I don't know whether I answered your 2 questions there.

[Marcela Klang, Analyst]

And any room for more price increases towards your customers?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that we're always cautious with price increases, as we've said in the past then. I think that we have to also to hammer back on our suppliers that been giving us, in some instances, we think, unfair increases. And we also have to protect our customers our end customers. So we don't become ridiculous when as far as having too high of a price on our products that could also be a hindrance for the growth. So it's a delicate balance. But we don't have any immediate thoughts of that but rather combating it with the measurements that we've explained earlier here today.

[Marcela Klang, Analyst]

And the final question from me. You mentioned conversion to more environmentally friendly refrigerants. I know that [ Systemer ] is cooperating with Panasonic on developing something new. Are you also developing your own refrigerants or are you basically testing which refrigerants you could switch to with your product or how are you working with this issue?

[Gerteric Lindquist, CEO, MD & Director]

No, I mean, we are too small to produce our own chemical composure, that's far beyond our size. But we try to be independent when it comes to refrigerants. There are several out there, and of course, the ultimate target that we are working towards will be to use propane or the R-290 as it's identified chemically because that's of course, has a drawback being flammable, but it has very good characteristics both for heating, cooling and producing tap water and also a very low GWP, the global warming potential factor. So I think that's what we are striving for, rather than again, being dependent on chemical companies, if I may say. Because today all refrigerants, they are produced by chemical, large chemical giants that we have to say. And we try to -- propane, it's something that's fairly easy to produce and easy to handle, as far -- other than the flammable thing. So that's our target to arrive there.

[Marcela Klang, Analyst]

This switch towards more environmentally friendly refrigerants, does it also mean that you need to choose more expensive refrigerants does this mean increasing raw material prices for you?

[Gerteric Lindquist, CEO, MD & Director]

Well, we do not -- I mean typically, without being too technical, it's pretty much a matter of oil that is sustainable when it comes to protecting the ball bearings and the moving parts in a compressor from wear and tear. And propane of course, has in the past been known for requiring a certain kind of oil, but we have very good experience with propane. Now I'm technical again because we've been using that in some of our heat pumps for 20 years. We had some initial issues, but they are cured and we are very satisfied with that. It's more on the flammable side, but we had issues when the authorities say when you can only use so many grams per unit, which we think is ridiculous, considering that natural gas is pumped into most of the houses in Europe in cubic meters and they are trying to limit the usage per unit XXX cubic meters and we try to limit the usage per unit to have the 50 gram when it comes to propane. So something is rotten in Denmark as Hamlet would have said.

[Operator]

Our next question comes from the line of Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, Analyst]

I have 2 very quick questions. I mean, do you see any risk with the increasing tariffs? And I apologize, if you mentioned it in the beginning of your presentation.

[Gerteric Lindquist, CEO, MD & Director]

A risk of what?

[Hans Backman, Chief Financial Officer]

Increased tariffs?

[Gerteric Lindquist, CEO, MD & Director]

Tariffs.

[Karl Bokvist, Analyst]

Yes, tariffs.

[Gerteric Lindquist, CEO, MD & Director]

Okay. Well I mean it's hard to predict and I guess that I try not to be political about that, but the whole idea we need to set up is not to be dependent on one production site and on one currency. So we feel that we have spread ourselves, to our ability as far as we possibly could have because we have our facilities in Europe. Naturally, some components will come from other continents. We produce, of course in North America. We produce on the Element side in Asia.If we come -- it comes to a standstill. I mean, it's just like electricity being cut off because you can't foresee the consequences. But I'd say that we are fairly well equipped when it comes to combating currency, some production difficulties by being so fragmented, if I may use that word, or dispersed all over Europe and North America and also Asia when it comes to Element.

[Karl Bokvist, Analyst]

Okay. And then the final one. When you talked about the acquisitions earlier, but I am more interested in the -- from a regional point of view, where do you see the most attractive acquisitions as of now, throughout the world?

[Gerteric Lindquist, CEO, MD & Director]

Well I think that -- we don't look at it like that because theirs -- it isn't that we've come to a point now, where we are almost then out of the possibilities. I think it should be viewed from the other side. We are such a small place there. And the world is going through such a phenomenal change. I think we've never seen more possibilities than we see now due to the change and the sustainability thinking all over the world. You don't have to be a fundamentalist to notice this. And we just have to spend our money wisely. If it's an acquisition popping up in fine. If it's money in Spain, good, America, Asia and within the 3 business areas. I think we are, it's rather difficult to say, well now we have to be cautious because otherwise you're going to spend too much.The acquisitions are there. You just have to be the right ones philosophy wise. They have to be of course fulfilling our 3. Or one of our 3 quick areas geography, products and also production efficiency. Those are the 3. We have [indiscernible] and now we're going to invest in Austria or in Italy or in Canada. We're very open to that. The opportunities are just phenomenal. And you shouldn't abuse words but what we see today compared to what we saw 25 years, 30 years ago, the world is changing phenomenally fast now. And we definitely -- to be part of that. Just looking at our connectivity products coming out with the heat pumps now. If you look at that product compared to what we had just 15 years ago. We are now part of the smart society. And when you have that attitude, the sky's the limit. I hope I don't promise too much. But that's how we feel here in [indiscernible]. I hope that wasn't too much of a political answer. But we also apologize that we have no time for any further questions. I don't know whether that is impolite to say that.All right. Thank you for all your questions then and I hope that it hasn't been too much hide and seek. We try to be fair to the extent then as possible. Sometimes, we cannot, for political reasons, answer everything, but we hope that we've given you some guidance.

[Operator]

Thank you. This now concludes our presentation. Thank you, all for attending. You may now disconnect.