Nibe Industrier AB

STO:NIBE B

Earnings Call Transcript 2023-Q1

[Operator]

Ladies and gentlemen, welcome to the NIBE Q1 report. [Operator Instructions] Today, I'm pleased to present Eric Lindquist, CEO; and Hans Backman, CFO. Please begin your meeting.

[Gerteric Lindquist, executive]

Good morning, everyone.

[Hans Backman, executive]

Hi, everyone.

[Gerteric Lindquist, executive]

Eric speaking here and Hans, of course.

[Hans Backman, executive]

Yes, I'm right here. Good morning.

[Gerteric Lindquist, executive]

And we're going to pursue the usual path when we comment ourselves upon the report and then we allow for some questions, which we will try to answer as expediently as possible. Then, of course, we have to go for other issues here no later than 12. So we don't like to be implied, but that's the time schedule we have today. And we think that it's been a fairly strong start to the year as we say. And most of the segments of the market segments that we deal with have shown a good growth. And we've also seen some improvements in the supply chain, which is very pleasing, but not necessarily all the way, but every week, that's better than the previous one is, of course, pleasing to us.

And again, it's primarily driven by the sustainability profile of our company and the 3 business areas we have. And of course, energy price is going up and down, that's also a worry to customers and also becoming more independent or totally independent of the gas and oil supply from the East that we will talk about. And of course, everything is around investments here now that we are into trying to cope with the growth that's at hand. And the result is also coming around in a good way. It's overall a healthy margin. The acquisition so far this year haven't been extraordinary. We've only had one acquisition that's in Canada, and that happens to be in the same province where we have 2 other entities of legal in nature. So from a practical point of view, it's very good to have them concentrated in one province when we travel there.

And if we just have a quick look at the figures that you have in front of you, and of course, the growth has been like 33% and the gross margin has recovered, and I think Hans is going to come back to that, which is very pleasing, of course. And there are a number of factors behind that. It's sales naturally where you always get a slightly better margin and then increased productivity. Then obviously, they were better balanced when it comes to our own prices and the prices we are paying to our sub-suppliers.

And the operating margin has taken a great leap from those 10.8% to 15.1%. But in all fairness, like we also point out, last year, we took a hit when the invasion or the Russian aggression on Ukraine was a fact. Then we said, okay, let's write off everything as far as values are concerned over there, and that meant SEK 140 million were written off or written down. That means that the margin operational last year was 12.1%. So it's still quite a bit of a jump, but it's more like a 3 percentage units rather than the 5 indicated. The same thing with the net profit margin goes from 10.4% to 14.2%. But in all fairness, it should have went from 11.7% to 14.2%, if you recompare apples to apples.

And then we have the graph or the graphs that are coming here, indicating that we are on a pattern that we know since before, we still have some seasonality, but it's more a growth pattern less seasonal than it was in the past. And we also see that in the past 12 months, we are now approaching SEK 44 billion in sales. So nothing really to comment more about that and also on the profit after financial items, it's the same thing. The borrowers are following the usual pattern. And of course, the past 12 months have a healthy direction when it comes to the profit after the interest.

If we just have a quick look at the pie charts that we typically look at. The Climate Solutions, typically around 65%. So it hasn't changed that much and Element grow in the quarter, installers like 10%. And because of the margin, of course, the Climate Solution, they represent some 75% and the other 2, 16% and 9%, respectively. Geographically, of course, Europe has had a strong growth due to primarily the Heatron growth. In North America, is now around 27%, and Europe, of course, we include the Nordic countries, also in Europe, but outside the Nordic countries like 46% and the Nordic themselves, 23% and outside North America and Europe, it's 4%. And that's mainly Element, of course, that's represented there.

If we just dive very quickly into Climate Solutions, they have strong growth. And of course, it's like before, a lot of people would like to get away from gas and oil as quickly as possible. And we also have new attractive products that we've been able to present to the market. And there are also clear improvements in our supply chain, but not to the level where we would like it to be. But we hope from the promises we've been given and from our work with alternative supply routes, we believe that during the second part of the year, we'll have a -- if we can call it a more normal situation. Investments, of course, are ongoing to be able to cope with the coming growth. The growth right now, we were able to cope with, but the growth we anticipate to continue. So we feel that we are well in line with the market growth when the new facility is going to kick in.

And the operating margin, of course, on Climate Solutions has also increased due to the volume naturally or the sales volume. We've also been prepared or we've been able to have a better productivity since raw material and components are coming in at a better flow, not satisfactory, but still a bit better. That has increased productivity and also the price situation is more in balance. So you can see that it's a healthy growth, some 38% and the operating margin is up naturally from 11% to 17.5%. But in all fairness, again, there, we have to add back the SEK 114 million to compare it operationally, and then it would have been like 13% last year. But still, it's a substantial step in margin.

On the Stoves side, it's particularly the wood burning side that is expanding. And for the same reason, as on the final solution, of course, people are not so willing to invest in gas-burning stoves, and there's a shortage of wood pellets. So that's a hindrance on the other main category of stoves. We spent quite a bit and continue to spend quite a bit on the -- on the R&D side, when it comes to improving the emissions. We like to get rid of all the protocols to have a totally clean combustion, and we feel that we are now coming to or we are not launching anything as far as partners are concerned, but we are launching our concept now, as you saw in the report. So we feel we are getting closer to the actual product launch.

Also here, of course, we are in a very ambitious investment program. We're opening up a new factory in Britain in a month's time, for instance. And of course, we're also in an ongoing investment here in Markaryd. And here, for the same reason on the Climate Solution, better sales volume, we've been able to also increase productivity and to better price leverage than some 12 months ago, has given us a healthy growth, but also in operating margin that is like a considerable improvement from 11.5% to 13.2%.

If we just dive into Element very quickly, we can say that here, we have a market, some market segments that are not, of course, are prosperous, particularly when you talk about consumer goods segments, whereas on the sustainability side, there, we have the opposite. So there, we have sort of 2 worlds. And the semiconductor industry, as we explained in the fourth quarter, took an unexpected dive in the fourth quarter due to restrictions from the U.S. to China, but we assume that will pick up because everyone is striving now to build factories in America and even in Europe. Of course, we also invest quite ambitiously in this area. But due to the product mix, the margin has somewhat went south from 10.1% to 9.3%. So I think that's very quickly the headline for the first quarter.

And of course, I forgot to mention that this is a very special day here at Markaryd. We have our Annual Shareholders Meeting, and we're going to have that meeting in one of our factories that has been erected for producing heat pumps. So we're just in the process of moving in equipment there. We kept one sort of, yes, room, we can call it or area. We kept that open for this particular event. So it's like a really Noble Price dinner that's wonderfully set, we can say. Weather isn't so cooperative here today. It's a little bit grayish, but we just pray that around 1,700 today, everything is going to be very, very sunny I guess.

So thank you for that. I hand over the words or the microphone to you, Hans. Please.

[Hans Backman, executive]

Well, thank you, Eric. And some more than 1,000 shareholders will be visiting us this afternoon as well. So that's quite pleasing being able to show also what we're building all around here before they head into the factory. Anyway, let me just take you through the business areas here quickly on a slightly more detailed level and then open up for the questions.

Climate Solutions then has continued its very strong growth, you can say, from previous quarters, driven by the sustainability and also cost awareness amongst customers wanting to shift away from oil and gas. And with improvements in our supply chain, although we're not fully through there, this has had a good impact on the numbers. So as Eric mentioned, growth has been some close to 39%. A portion of that, a small one, you can say, is acquired. What's a little bit hidden in the numbers there is the divestment portion of the Schulthess part. So in the growth figure there, there is like 5.5% of that portion of business leaving us, so to speak. But with such a good increase in sales, that has a good impact on the profitability as well.

So gross margin has taken a jump there from 32.5% up to 36.2% coming then from sales, improved productivity and of course, a portion of price as well. And the operating margin has then landed in at the 17.5% from the 13% adjusted for the write-off we made last year. So it's, of course, almost a doubling in absolute terms. And on top of that, we have also continuously been investing in both increasing our manufacturing capacity, but also in R&D facilities and new marketing center.

In terms of geography split or geographical split of sales, the picture has slightly moved in favor of North America, you can say. Last year, at this point in time, they made up some 19% of the chart and are now up to 22%. So the Americas there in North America, in particular, of course, has shown a nice increase compared to last year. So the sustainability message is coming across also over there.

If we head into Stoves, NIBE Stoves has shown a very strong Q1. And those of you who have followed us for some time know that Q1 and Q2 typically have been the weaker quarters. But now since some time back, wanting to shift away from oil and gas, the picture has changed, where the Stoves product has moved from being a decorative item, so to speak, to a security product.

So sales have increased there quite substantially as well, up some 39%. But of course, a good portion of that is the acquisition that Eric mentioned. But even if you take out that, we have an organic growth, including a small portion of currency of some 17% or 17.5% even. So sales have gone up from SEK 900 million to SEK 1,250 million. And also here, we've seen a good improvement in the gross margin moving from 34.5%, up to 38.3%. which then has had a good impact on the operating profit as well, taking a jump of almost 62%. And it's always pleasing to see, of course, on the growth and the profit exceeds that of the growth in sales. It means that we're doing something right at least.

And also here, just like in Climate Solutions, we have an ambitious investment program that's being carried out both in the forms of increasing capacity, but also in R&D of developing new and even better products. If we then move to the pie chart for the geographical distribution of sales, we also here have a strong increase in the North Americas, of course, and this is where the pie chart has really changed. It's up from 19% up to 29% following the acquisition, meaning that we have a more even spread of sales per geography than before between the Nordics, Mainland Europe and North America, making the whole business area more balanced, you can say.

Then heading into NIBE Element. NIBE Element has, during Q1 seen a somewhat varying demand, you could say. I mean, clearly, the segment with the sustainability profile have continued to develop quite nicely and driven the whole business area, whereas those with more consumer-oriented focus have experienced a varying demand and weaker in some spots as well. And on top of that, the ban from the U.S. on exporting semiconductors has continuously had an impact, although we think that is more of a onetime effect in the sense that capacity will be needed to be built elsewhere, but it will, of course, take some time to achieve that.

But all in all, the growth for NIBE Element was close to 22%, with only a small portion being acquired. Then this is our most global business area with a larger exposure also to North America. So here, the currency impact has helped us slightly more than in the other business areas, but the majority of the growth comes from pure organic growth. But due to the product mix change, you can say, with semiconductor being reduced slightly, we've seen a small shift in operating margin here going down then to 9.3% from the 10.1% in previous years. But also here, we are investing and keeping up a quite ambitious investment program. This has been and continuously is our most global business area, you can say, and there have been no large shifts in the pie chart here. Nordics, some 17%; Mainland Europe, 38% and then North America being basically just as big and then with a portion of some 9% over in Asia.

Then just quickly move on to the balance sheet. There is nothing that really sticks out here. It's stable and sound. The one part that perhaps sticks out a little bit is the nonfinancial current assets, and we will come back to that. It's our inventory that has continued to increase, which then also has had an impact, of course, on the cash flow a little. But whereas we during the post-pandemic period, we're increasing our inventory for the reason that we're getting hold of components, it's now more a matter of building finished goods inventory, which has traditionally been done by us during Q1 and Q2 for the sales coming after the summer break.

If we look at the -- we jump to the cash flow analysis. We have actually generated quite a healthy amount of cash, some SEK 1.4 billion compared to SEK 900 million last year. But then the change in working capital for the reason I just mentioned has, of course, consumed a portion of that and then the ongoing investment programs that I also have mentioned. So there is a slight negative change in the operating cash flow, but we know where the money is, so to speak, and we are generating good cash from the underlying business.

And this results, of course, in the number of key financial figures, and we don't need to go through each and every one of them. But if we look at some of them, I mean, we continuously keep a good portion of cash on the balance sheet, like SEK 4.5 billion. The interest-bearing liabilities have continuously decreased. The net debt-to-EBITDA is below 1, and we have an equity asset ratio of well above 50. So I think we're ticking many of the boxes here for being in a position for further good growth.

I think the next picture shows the working capital that I just mentioned. So it's, of course, high and higher than where we wanted to be, but it's now much more a matter of building finished goods for the sales that we need to perform both now and after the summer. And on the last piece of paper or picture here, the return on capital is coming closer to the 20%, which we have and the return on equity to the 20% target that we have, up from 14.2% and 15.6%, respectively. So it's a good development. The net profit per share has basically been doubled since last year. So again, I think we're very well positioned for further growth organically and through acquisitions. Although there are, of course, always rooms for improvement.

And I'm sure there are going to be questions around this now. Things we have not told you about, so to speak. Would you like to add something, Eric, before we...

[Gerteric Lindquist, executive]

No. I think it's fine. We are ready for questions. So please shoot?

[Operator]

[Operator Instructions] And our first question comes from the line of Brijesh Siya from HSBC.

[Brijesh Siya, analyst]

I have 2 questions. The first one is on the growth. So if I understood correctly, in the Climate Solutions business, you think 5.5% was the divestment. So if I do the math, then the organic growth is around 40%. And so previously, I think you said prices are up somewhat 15%, 20%. So would it be sad to assume that the volume growth is close to 20% or above in Climate Solution?

[Hans Backman, executive]

Sorry, it was quite difficult to hear you through the system.

[Gerteric Lindquist, executive]

It was sort of echoing. Could you please repeat that question if you're closer to your microphone or something?

[Brijesh Siya, analyst]

Sure. I'll try to be slow, I think that's helpful. So it was around the Climate Solutions business. Could you please tell us what was the growth number in Q1, excluding the price effect? Was it close to plus 20%?

[Gerteric Lindquist, executive]

Well, I mean, we don't necessarily disclose that. But as Hans mentioned, the organic growth has been or the growth if you deduct -- you don't have to be so, should I say, analytical to know that currency, if you take the Swedish krona versus any other currency and put them in the bag, is like difference of some 5% that we have gained. And then, of course, we've lost the sales of Schulthess. So then saying that the growth has been like on the 40% or 39% level organically, even if you take away the price instrument, it's a phenomenal growth, considering also that not everything is heat pumps in the Climate Solutions business.

So of course, the heat pump sales is well above the 40% organically. And then, of course, we have water heaters, and we have other products in there that are not growing at the same rate. I don't think that we can be more detailed than that since we also have our competitors listening in here, and we have to have some secrets for ourselves.

[Brijesh Siya, analyst]

No, that's clear, Eric. And the second one is on the heat pump development pipeline. You talked about R-290-based heat pump which you launched last year has been quite successful. So if you could give a little more flavor of how the development pipeline is looking like and how is the R-290 kind of if it's something, what's the set of sales studies overall to heat pump sales?

[Hans Backman, executive]

How we are developing in the heat pump portfolio with R-290?

[Gerteric Lindquist, executive]

No, okay. I mean that's totally clear that all our exhaust air heat pumps and air-to-water heat pumps, they're already there with the -- where the R-290. And we are in the process of also launching the water to water or ground source ones or geothermal ones. So we are very comfortable with that deadline as it looks now into the December '25 or 2025. And we -- of course, we demonstrated that during the show in Germany like 2 months ago. So that's no secret where we are there. That doesn't mean that all the present model is going to leave instantly. They -- we're just going to phase those out as the other products are being introduced on every market. So I guess that's an attempt to answer your question.

[Brijesh Siya, analyst]

Yes, that's helpful.

[Operator]

[Operator Instructions] And our next question comes from the line of Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, analyst]

My first one is just on a comment that you made there, Hans, regarding the working capital situation. I mean just receivables against payables, that's nothing major. It's kind of net negative, so the main driver being inventories. But on the comment you said there about finished products or semi-finished, how should we think about this? Or how do you kind of plan for it ahead of this year given perhaps what you hear from suppliers in terms of demand, et cetera? Is that your -- are you waiting for like 1 or 2 critical components and then they can be shipped out or when you're saying finished products, how -- just how finished are those, so to say?

[Gerteric Lindquist, executive]

No. I mean, I'm going to avoid to say it was a good question. I should say, we understand your question. All questions are relevant. When it comes to the issues we have with suppliers, I'd have to say that a year ago, we had at least 150 supplies. They were sort of uncertain or being viewed very negatively. Today, we have less than 10, which is a tremendous achievement. But nevertheless, there are some crucial components, and we don't like -- going to name anyone because of being a little bit discrete here. But the promises we've been given are, of course, that they will be, and we'll be right towards -- or during the second half of this year, they're going to be up at speed to deliver at the rate which we think we should be delivering at.

And to build up inventory, of course, there are some products that are not totally finished yet that are missing 1 or 2 crucial parts. That's one other thing. We also have ready finished goods, which we haven't had in the past. It's been totally empty. And to be able to service a customer to a 5 that are absolutely in desperate need for a heat pump 5 or 8. We have to have some service inventory. We understand you are in a very desperate need of it, we can help you.

And the third part being still being fairly flat, if I may use the word, on components still. When those crucial components will arrive, of course, we have a number of people already waiting here to start to assemble and then it might be too late to ask all the other supplies because now we finally got that crucial component. Could you possibly help us now? So it doesn't work like that. So we have to have an oversupply also of components and staff to be able to cater for those products coming in at some date not necessarily knowing exact date and then also producing those or making those ready-made products. So it's a threefold really explanation. I hope you got that.

[Karl Bokvist, analyst]

Yes, that's clear. And my second question is on -- I realize you don't disclose it per se, but is it possible for you to give any kind of comments on orders and what you hear from distributors, installers, et cetera, based on kind of the demand right now. I would guess that you're still working through a very strong backlog based on already placed orders.

[Gerteric Lindquist, executive]

Yes. I mean the only thing we hear is that some countries are waiting for further information as far as subsidies and things like that, whereas where the market has been living without or there's no change in the subsidy programs, I mean, it's full speed as before. So -- but of course, that's a year ago might have been in, as always, a little bit of air in the backlog when you can't deliver. We all like that. We all remember how it was when people started to buy toilet paper when the pandemic came, not necessarily did we need all that toilet paper, but there was like a human phenomenon.

But to your question, we -- we do not see any slackening in the demand for heat pumps. But of course, on the consumer side, on the Element side, we see that, that people are concerned that we don't think that furnace is doing a great thing. We don't think that the white goods sector where we are involved, of course, we see that people avoid buying new fridges and stuff like that, unless they are broken down and new construction is going down means that also white goods sector going to take a downturn along with that. But on the other side, the sustainability growth seems to sustain the weakness in the other sectors.

[Karl Bokvist, analyst]

I see. My final one is just on North America Climate Solutions, still very, very strong growth there. Is it from any kind of particular segment?

[Gerteric Lindquist, executive]

No, we see both on the residential and on the commercial side. Of course, they come from a very, should I say, weak market or a small segment of the market for heat pumps. But with this program with this strange abbreviation IRA, we feel that the entrepreneurs have been given a very clear signal. It's going to be in now for a number of years you can go. And that has really come across well as we can interpret that. People are very interested in this. But of course, it's not to the point where we are in Europe because they have still a lot of gas -- North America has a lot of gas and oil on their own. So it's less dramatic.

But the awareness of climate change, if you like to call it, or the need to get rid of or reduce the CO2, it's also there, but not so dramatic, of course, as it is in Europe, where the whole continent is asked now to change by the authorities in Brussels, and we also see the brutality in Ukraine. We just have to do something else. So that is a very positive development, but of course, not so dramatic as it is in Europe. I think that's the best way we can answer that.

[Operator]

[Operator Instructions] And our next question comes from Phil Buller from Berenberg.

[Philip Buller, analyst]

And congratulations on another strong set of numbers. I'd like to ask a slightly broader question, if I may, on the evolving competitive environment, specifically around Climate Solutions, I think we all understand that the market is increasingly attractive. So I'm curious to hear what you are seeing in terms of the behaviors of your competitors, both in terms of M&A bidding or lobbying or on list prices on the organic side. I guess, I'm keen to just understand if we should expect to see any material market share changes in any key markets? And if not, are you comfortable with the long-term margin resilience?

[Gerteric Lindquist, executive]

Yes. Yes. We understand the question as you say. Yes, of course, when the market is growing like it is, of course, that attracts a number of also new players and also results typically in mergers and acquisitions, everyone wants to become stronger. So that's a very natural phenomenon in the market economy. And I think that's why the EU authority is so specific, we have to change the continent into more heat pump solutions. And of course, that's a very, very positive sign for a company that's been with heat pumps more than 40 years. And we certainly have the ambition to even increase our share.

But most of the other companies, they might say the same thing. So of course, they're going to be a competitive race out there, where the market growth, as we see it, we think that the bigger players, they have a little bit of a, should I say, positive situation because if you start from scratch, of course, you're going to have to build a brand name and all that. So the well-established companies, we believe, will have a good start into this competitive future that we see. It is not like a year or 2 or 3. We foresee easily 10 or 12 or 15 years when you're going to rebuild the continent like when you're doing because it's very important also to emphasize that everything has to be done with quality, everything has to be done in an orderly way. Otherwise, the customer is going to be disappointed. I went from gas to heat pump and it didn't work.

So I think we all have a responsibility to carry out large or small whatever we installed, we do it in an orderly way. And as far as mergers and acquisition or acquisitions, we are certain that, that will also quicken. We saw a large one here with an American operator came in Carrier and they acquired Viessmann. I think there wasn't a surprise to most of its been in the business for many years. And -- but well, how that will turn out, I think that a number of companies just going to continue as before.

So what does this boil down to? I think that the company is out there, we're all trying to make money, but you have to do it in a rational way. And in a growing market, we don't foresee any constraints or margins anything. We feel that, that's going to be -- that's years ahead possibly, but not when the market is growing like it is. I mean I'm philosophizing -- that's a long answer to your question, but I'm trying to respond.

[Philip Buller, analyst]

Yes, it's very helpful. I guess as a follow-up to that, it's quite hard to rationalize sometimes when others are being irrational. Maybe they're not being irrational. But I guess the question is, internally, are you changing in any way how you engage hurdles in terms of the payback period for M&A? And I'm asking as your M&A growth relative to history has moderated a little bit. So I'm wondering if that requires a competitive response because of potential and irrational behaviors for your competitors or perhaps they're just taking a longer-term view in terms of the payback period?

[Gerteric Lindquist, executive]

I think we've explained this before. I don't know where you have been following us. But to make a successful acquisition, it takes time. It's not something like we do in a quarter. And I think that our more regular pattern was up until the pandemic. And then for some reason, we were just able to close 2 or 3 prior to the pandemic that we have been talking to perhaps during 24 months. And now we've lost 24 months or some 30 months. So the acquisition rate that you've seen recently is not back -- I may call it normal because we have not been able to visit until mid-'22.

And typically, it takes longer for us today, if I may call it and do the proper analysis before we actually sign on the dotted line. So it's not that we are shying away from acquisitions at all. It's just that we like to do it as methodically and accurately as we've done it in the past. Not just running into it and say, well, we haven't bought some companies now for some time. You'll still see the same pattern in the future as in the past.

[Philip Buller, analyst]

Very good. And just one final quick one for me on Stoves, so a different topic. But obviously, this is a business which has been doing incredibly well for a while. And as you say in your presentation, it's moved from being almost a nice-to-have product to a security one. And I take that as it is. I think it makes a lot of sense. I guess I'm wondering given that we've had a couple of years of very strong growth and I don't know whether or not the security issue is starting to moderate. But are you seeing any signs of demand softening here? Or do we expect kind of Stoves demand that we've seen more recently to continue for, let's say, another 12 months or so?

[Gerteric Lindquist, executive]

No, as we say, we see a slightly weaker demand on the gas because I think that that's also natural that people like to go for wood that is also in a way depending on how to define it more sustainable. And I think that people would have liked also to invest more in wood pellets had there been wood pellets around. So there's also a shortage of that that is partly driving the wood burning stoves demand. I think it would have been also a quite higher growth rate on the wood pellet stoves side, had there been wood pellets at a decent price, but it is a shortage and the prices were just ridiculous.

[Operator]

[Operator Instructions] And our next question comes from the line of Viktor Trollsten from Danske Bank.

[Viktor Trollsten, analyst]

I hope you can hear me loud and clear, Eric and Hans?

[Gerteric Lindquist, executive]

Absolutely.

[Hans Backman, executive]

Yes.

[Viktor Trollsten, analyst]

Super. So first, I would like to follow up on something that you mentioned during the call, Eric, you said that you're able to cope with current growth rates in your current structure, but you're obviously investing for the growth rate that you are anticipating going forward. So just follow up on this, and please correct me if I'm wrong, but you said that heat pump growth was, let's say, 40% in the quarter. So is that basically implying that you are able to grow 40% going forward and that you're even anticipating higher growth than that?

[Gerteric Lindquist, executive]

You took out your math look, didn't you. Well, yes, we can cope with the growth then is, of course, margin-wise, when you produce practically 24/7, of course, that's a relatively expensive way of producing. So we like to come back to a situation where you produce more ordinary shifts and not necessarily over weekends because you cannot do that in the long run. And of course, they're leasing off now when we open up a factory here in Markaryd already this quarter about producing during the second part of the year. And then we foresee another rate of should I say, direct labor.

But as you say, I think that we have to be able to grow quite quickly in the future to be able to cover the demand. And I think that the 40% growth is, of course, pretty substantial. But you also have to remember that -- in that, we also include the North American entities that are now coming from a lower level to be included there. But we also think that historically, we've been more used to hoping year after year organically with some 25%. To grow 40% year after year, we have not experienced that in past, so we can't say that. But we said, well, we'll do our utmost, we're even confident. But we think that there might be other hindrances on the way there.

I mean also the whole industry has to be able to cope with this growth and I shouldn't say that we hope for bottlenecks. We just know from history that the organic growth of 40%, that's tough. But having experienced that we have not had factories ready to expand. We've taken that out of the already existing premises and we have leased premises. Now we are investing more orderly suggesting that, okay, that should not be a hindrance for us. Then of course, our supply is still going to be a question mark, not only ours because they supply our colleagues as well. And they're going to be also an installation constraint possibly.

Can installers all over Europe, all of a sudden do all this? We believe in their ability to change, but there's also a number of new installers that have to be educated and move into this. So yes, we cannot promise. We can grow, we believe, like we've done now, but we are working or investing in the direction of being beyond the 25% organic growth, a very precise number. Well, I'd like to leave that out for end but it's certainly something we would like to participate. And we've been waiting for this opportunity for some 20 years, and we're certainly going to participate now. That's why you see those investments coming in.

[Viktor Trollsten, analyst]

That's clear. And then the -- as a good follow-up then because it sounds like you're obviously investing for profitable growth. And maybe on the margin profile in Climate Solutions. I guess I'm just trying to understand how much is perhaps temporary to a term lag effect and how much is structural? And you mentioned 3 factors that was driving the margin. It was an efficiency gains, volume leverage and then also price cost. Is it fair to say that those 3 were quite, what should I say, equally drivers for the margin or...

[Gerteric Lindquist, executive]

Yes. Of course, when we get products in, I mean, we are at the end to say, very rational. But then, of course, I mean, there are always going to be some kind of competition naturally. And I don't think that we can promise to just increase margin every quarter. I think that you've seen a healthy margin on Climate Solutions quarter after quarter and year after year. Some years, we went down a little bit. But I think we have established ourselves around a healthy margin, more like if you look at on a 12-month rolling basis rather than being -- taking one exceptional quarter. Because you also have to remember that this quarter, of course, last year, we also had a growth because that was the -- then everything really started.

But we will have to remember that these quarters have been sort of extraordinary, although we don't -- we are not satisfied. But of course, last year, we grow with some 29%, and now we grow with 38% or 39%, even 44%, if you exclude the Schulthess, those figures are extraordinary. And that is, of course, from a base that was relatively low. Now, of course, when you are at the level where we are now, 40% means something totally different. So we also have to have respect for the math in itself for the denominator and the nominator. So we, of course, never developed our company in the direction of growing for just growth and not making money, then it's used -- it's meaningless.

We always try to make a decent margin. And that's why we came to the stock market, but never be below 10. And I think we've been there once in 26 years. So you've seen a fairly steady development and fairly good, if I may say, to ourselves, we kept our promises. And we're going to be out there, and we're going to hustle and we're going to do our damn, excuse my language to participate and grow.

[Viktor Trollsten, analyst]

That's clear. And maybe just a final one. I hope it's okay. But Q1 is the smallest, smallest quarter, obviously. But looking at gross margins, I think in Q4, mentioned that looking historically in the period, let's say, 2016 and 2017, you had a gross margin of, let's say, 35%. You are now at 33.5%. So just maybe some commentary if I guess you're up to speed with price versus raw materials, but efficiency-wise, do we still have some way to grow on the gross margin?

[Hans Backman, executive]

Yes, of course, I mean.

[Gerteric Lindquist, executive]

If we get, as I said before, if we get products and can produce orderly, then we have a very nice running machine, but we are not there. But we don't like to overpromise either. But you can imagine when you always have stop and go, stop and go, and you have all the staffing is not only that you have stop and go, you had all the staffing because all the factories, we have more than necessary operators to be able to cope with a situation where new components are coming in that we've been lacking.

And then those extraordinary staffing is going to produce what we missed yesterday. But the ordinary staff, they're going to produce what's already planned for today. And that is a heck of a situation for us and also to motivate people because they say, okay, now I have to wait 4 hours and then a new component crucial one arrives. And then everyone has to work like crazy, perhaps even work over time. So well, I didn't work in the morning, why do I have to work 2 more hours now in the afternoon. And no one's going to make a productivity here out of that.

So of course, when we get components, then we're going to be more efficient without question. But we also assume that we are not the only company in this segment that is suffering. Sometimes it's almost like we basically are the only ones suffering. I would be surprised if we've been penalized more than anyone else in the industry. We assume that our suppliers are fair, just like we are fair to our customers. We cannot put priority on anyone. We know that our customers are not satisfied. We know that they are angered sometimes that we cannot deliver.

Obviously, well, we cannot favor any one in front of the other. And we just believe that our competitors are treated in the same fashion. So they are not up -- employee speed up and therefore, efficiency, we would assume. I mean we don't have daily control, not even yearly control because -- and that's why we are a little bit to say secretive, but not so often with everything because we are not the only company being listed. We get our margins and ambitions and everything. And most of our colleagues but for the Italian company now, Ariston, they are not so open with their information. It kind of keeps the company at the edge. All right.

[Viktor Trollsten, analyst]

Yes. No, I see, but well done during the circumstance and exciting to follow you in the coming quarters.

[Operator]

[Operator Instructions] And our final question comes from the line of Douglas Lindahl from DNB Markets.

[Douglas Lindahl, analyst]

I wanted to come back to the sub-supplier topic, and I realize Eric, you wanted to be a bit secretive here, but is it possible to share some sort of insight on what components you're missing specifically? Because I know that fans was something you missed historically. And from my understanding, fan manufacturing capacity has been built out quite a lot. Also semiconductor should have improved quite a lot. So just if you can comment a bit on that would be interesting.

[Gerteric Lindquist, executive]

Well, as we say, I think it's a gentlemen's agreement or a ladies agreement that you do not sort of name or bad mouth anyone. But it's a correct observation, that fans being a problem in the past, they are in that group or the manufacturers are in that group where we say they have built up their capacity satisfyingly. And on the semiconductor side, we are not saying that we've returned to the price level where we'd like to be. But due to our own ability or abilities to reprogram semiconductors, that's not the major issue as far as availability is concerned.

But as far as price, it's still a concern, but we never very seldom stand still because of lack of semiconductors, but prices have not returned to where they were before. So it's still a hit to the margin. I don't think that we're going to -- well on those suppliers, again, not being at the speed. I think that would be out of your question. That's not our style. But as I said before, if you were sitting here and reading our papers, you'll find less than 10 companies that are causing us a problem now.

[Douglas Lindahl, analyst]

Okay. That's interesting. And on pricing, how are you thinking now going forward in 2023 for Climate Solutions? Are you in a position where you will continue to raise prices, you think? Or will you stay at these levels?

[Gerteric Lindquist, executive]

I mean our idea has never been to increase prices more than necessary. In the past, I think if you've been listening in, you've heard that we on the contrary, have been very cautious saying, well, we try to absorb some of the costs ourselves, but the last 6 or 7 quarters prior today and to a lesser degree, of course, quarter 1 this year, we've been so brutally hit by price increases ourselves. There's no way that we could have absorbed that ourselves without increasing our own prices. And on top of that, as I tried to explain earlier here, having so erratic supply chain that has hurt our productivity on top of that.

So we are not after price increases just for the sake of it to say now we're going to increase our margin. Our philosophy is really to be as efficient as possible ourselves and try -- still try to absorb some of the costs on our behalf here. And of course, if we are not able to do all that, then we might tend to increase, but that is -- that's not our style. It's been extraordinary that we've been -- that we have been forced to increase prices like we've done the last year or so.

So we're not aiming for that because we follow the market. I mean we can't be a solitude -- or a solitaire. We are, like any other company exposed to price increases or price decreases, but we just hope that we are out of -- going to be out of this terrible crazy inflation act where everyone takes a chance to dig in a little bit. That doesn't correspond to our philosophy at all.

[Douglas Lindahl, analyst]

But I guess you're still -- I mean, the Climate Solutions margins are very, very strong, record strong, right? So I guess...

[Gerteric Lindquist, executive]

Yes, of course, when you spend like we do, I mean, you don't need a new Managing Director, starting it myself, even if you sell 40% more. Of course, that is typically a very good example. And you have so many individuals that can still cater for the same or a lot so much more volume. So of course, that means that your gross margin improves. That's a whole business to grow and then your overhead becomes lesser. That's a pretty clear natural.

[Douglas Lindahl, analyst]

Yes, that's obvious, of course. But historically, the operation leverage hasn't been as strong, which was sort of why that...

[Gerteric Lindquist, executive]

No, that's true. And neither has the market been so buoyant and neither has the growth been so quick. As we said before, we've had growth of some 25% over some years, but not to this degree.

[Douglas Lindahl, analyst]

Yes. Super strong.

[Gerteric Lindquist, executive]

You sounded disappointed in your voice there. You would...

[Douglas Lindahl, analyst]

No, no, no. Not at all. No. That's excellent.

[Gerteric Lindquist, executive]

All right. I believe that we have to rush to another meeting here now, if we are not impolite.

[Operator]

Thank you. As there are no more questions registered, I'll hand back to our speakers for their closing comments.

[Gerteric Lindquist, executive]

Okay. All right. So again, thank you for calling in and listening to us. And of course, we don't answer every question fully, although we could, but that's a little bit of our edge to keep some of the information to ourselves. We appreciate always these discussions and that keeps us in our toes. So thank you very much.

[Hans Backman, executive]

Thank you.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.