Nibe Industrier AB

STO:NIBE B

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Operator]

Ladies and gentlemen, welcome to the NIBE Q1 report. At our customers' request, this conference will be recorded. [Operator Instructions].May I now hand you over to Eric Lindquist, CEO; and Hans Backman, CFO. Please go ahead.

[Gerteric Lindquist, executive]

Good morning, everyone. Thank you for calling in.

[Hans Backman, executive]

Good morning, good morning.

[Gerteric Lindquist, executive]

It's a wonderful setting here in Markaryd today. The first quarter report always coincides with the Annual Shareholders Meeting. And there are some 1,150 people on their way in here today. And I must say that they will be proud when they see our facilities the way they are now, and I hope that you all could be here and have a little bit of a view on what we have accomplished here in Markaryd. And the nature is, of course, as beautiful as it possibly can be. It's almost like when you quit school and you went there with a bouquet of lilly of the valley or some lilacs, a typical setting for a graduation day.Having said that, welcome once again to listen in to our presentation of Q1. We are pleased to be a bit clearer perhaps about the forecast and the future. We know that it's been difficult for us to present everything in the past, what's happening out there in the market there, particularly on the heat pump side. And of course, it's a weak start to the year, unusually weak, we write. And it's been difficult to really analyze the inventory adjustments in the distribution chain, particularly in Europe, of course, on the heat pump side. And we feel that we have a slightly better idea about that now. And it's been a fairly dramatic decrease in pump production output almost cut in half the first quarter.And the difficulty there is, of course, that the statistic provider from each country is not on the level, where you sell [ to ] the end customer, but rather on the production level. So the entities they report what they have shipped out an invoice. And then, of course, it has been an absorption of too many products out there after, if we may call it, the hype '22 and greater part of '23 even and now that has to be digested and for the manufacturers to come back.Not only that, of course, we've had -- we've seen a dramatic increase. And when I say a dramatic increase in interest rates, of course, that's from a level that was perhaps artificially low, but still, the increase was quite sufficient. And that has also raised question marks, of course, around customers' willingness to invest. And one very certain sign is, of course, that the new construction is down in almost all countries because people react with the uncertainty, with the level as such of interest rate, but also where it's heading. And it's pleasing now to see that at least in Sweden, they started to decrease even a few weeks ago or just a week ago. And that's the same idea, as we understand it to interpret it in the rest of Europe.And then, of course, on the other side, we shouldn't complain too much of the politicians, but we must say that there is a little bit of indecisiveness regarding the phase out of fossil fuels. But I think that's why we are here in business. We have to counteract, and we have to attack, but that is also important to know for you out there that if we're now going to leave the fossil fuel, that should also be something that we all strive for, not necessarily only the producers of heat pumps.There have been some trade barriers and now we talk more about the Element group, where it's been a cumbersome situation for particularly the producers of equipment components rather for the semiconductor industry. And it seems like the new factory is going up now in North America and also in Europe. They will sort of bridge over the cumbersome time, where we see that industry will start to lift towards the end of the year.And of course, we initiated this action program, as you call it, that was announced 3 months ago. It's cumbersome and painful, whether you've been growing as we have for many, many years, it's difficult to comprehend even for us to start with that's, okay, now we have a little bit of a headwind. Now we have to do something. And coming from a very, very strong '23, actually the strongest year ever, and a few months later, we're right in the middle of this action program. That is now, of course, taking place, and we are practically through that as far as people being redundant is very sad, but had just a few agreements still to be signed, as I say, 95% is through there.But then we also feel now that through interviews and through research that there will be improvements in the second half of the year, and we didn't really have that clear vision only 3 months ago. And we see now that in most cases, the inventory levels are diminishing. And that, of course, will bring back the industry, not only us, but the industry as such on the heat pump side to a more normal level, if you call it.We are perhaps not known for showing statistics, and we definitely do not -- don't talk about. Our colleagues are hearing, but we thought it would be appropriate just for educational or clearness purposes to show this picture. This is illustrating deliveries from the heat pump producers in Q1. And that is, of course, the situation, where we are sitting right now with a quarter that is going down between 40% and 50%, and that's very dramatic compared to where we've been in the past. And that is, of course, also a sign that something has happened in the market that's not only linked to the immediate demand at the customer level, but there's been, for the second time now, a congestion, if I may call it, too many products in inventories of installers and distributors.So of course, the revenue is down dramatically. And sometimes, you always have to pinch yourself when you see the figures being down 18.5% on revenue and operating profit is down so much, and the operating margin is [ split in 3 ]. But at the same time, we also feel encouraged internally that we were bold enough to take the decision. It's always difficult. We hate to see our working friends leave the company. But when you're in the middle of it and when you're on your way out of it, then you see that we have a better suit that's better fitting us than when we entered into this constrained period.And the result you've read, I shouldn't dwell too much about that. We already noticed that it's down heavily, of course, with minus 18%, and that's even helped by the acquisitions, as you see. There's been a difficult quarter for us and to come up with an operating profit of that magnitude, it's something we hope will leave behind us and also the operating margin.And we can only refer to the years, where we've been passing through similar passengers in the cost '92, '93 and 2007, and we went through similar processes. Every 15 years, we hope that this will not occur that frequently or more frequently than that. But we went through that severe bank crisis without losing any money and '92, '93. And we also went through the Lehman Brothers crisis, slightly below 10% margin, whereas '92, '93 will be down to [ 5% ], but we were totally different company. So of course, the bar chart here illustrates itself. It's not going up right now, but that's something we eventually will change, of course.And the same thing on the profit of the financial items, I mean that's -- no one likes to see that curve, and that triggers the fighting instinct in all of us that we're going to bring that back because we still believe that we are positioned in the market that is very, very buoyant, just giving it a quarter and then to show that this curve in a changed direction.If we just have a few comments about Climate Solutions, I've already commented upon that really. I mean, that's where we've seen the most dramatic adjustments in inventory. And we believe that we are going another quarter that we -- quarter we're in now, and we see that now we are on the way out of that. But that doesn't mean that everything [indiscernible] just because of that, but we believe that the high interest rates that we've seen during the first quarter will help now when we have rumors and even some clear indications from the National Bank, [ The Riksbank ], whatever you call it in English, and that's a good indication because that is something that the people react to, we all react to that. That's a positive sign.Possibly we can do some investments, and we can maneuver a little bit more freely when interest rate is going down. It's been tough now for some time something that is. The cumbersome for us that is the price differences between gas and electricity when it comes to kilowatt hour prices. So that's something that we really urge the political side to be more fair on that side being more -- a little bit more decisive, okay, let's go now. We have to change this.Action program, of course, that might be a short coming in our report. We apologize for that. And we think we're going to be -- Hans is going to be more precise, how is that divided. It should have been in the report. I think that we should put that on the web later on today, where we've presented in a fair fashion. So that's something we're going to report to you here during this presentation.And again, the action program, well in progress, sadly enough, but that's how it is and there will be improvements, we feel in the second year, not that everything is going to turn 100% July 1st, but [indiscernible] progressively in the right direction. And here we are, operating margin [ 5.7% ] might not be that severe if we hadn't had [ 17.5%] a year ago, then it's very, very severe.And if we just have a quick look at the stoves because they've also had some stocking issues in the distribution chain, but to a lesser degree. And that's the same pattern there that we couldn't deliver, or the industry couldn't deliver. I take us as a group, the producers. And of course, there's has been a cumbersome time, where the installers or our outlets, they have bought so much equipment and that's now being sold out.And as -- just as with Climate Solutions, interest rates, of course, they hurt the willingness to buy stoves or to invest in homes, where you then will install stoves. So it's pretty much the same, say, pattern within stoves. And of course, action programs, they are underway in all the different business areas, although Climate Solutions, of course, will have the biggest one.And yes, the profit margin is down to [ 6 ] that's cut in half. That is, of course, suggesting that it's not -- it's bad or weak, but it's not as dramatic, as it was in the Climate Solutions. Bad enough that the operating profit is going down and the operating margin cut in half. But that's also an illustration that it's quite -- it's a little bit different, I should say, than it is on the Climate Solutions side.And then coming to Element, there, we've had a decent development in several segments of the business. But of course, being exposed to the HVAC area, has been burdensome for Element. And that's not only supplying internally, but also supplying the whole industry, not only on the heat pump side, but also on converter side, on the heater side and so forth. So that is -- that's the major drawback. The semiconductor market hasn't been that buoyant. But there, we also see now a recovery during the second half of the year, and I referred to that earlier.Automotive and rail develop in a positive way. And as we said before, action program is initiated there as well, but percentage wise, to a lesser degree, of course, than Climate Solutions. And there also, for reasons already mentioned, we are on the right track, we believe, for the second half of the year. And of course, the program that is meant to come in full effect during 2025. And of course, there will also be some effects naturally already during this year.So Element, as we see here, they go from [ 9.3% to 5.1% ] in operating margin, and that is suggesting that they have parts of that business that is fairly buoyant, as we said now for the second time. And that distribution of sales, yes, that's pretty much as before. Climate Solutions is slightly lower than before. And on the next pie chart, you'd see that, of course, it maintains the [ 61% ] typically. When the margin is up, they would have a larger portion of that pie chart when it comes to operating profit.Internationally, of course, Europe has contracted, and that means that North America has grown up to 30%. If I recall it correctly, it was like 26% or 27% to full year '23 -- 2023. And now, of course, the North American market is more stable. And that's an illustration also that it's good to be distributed more evenly not only in Europe, but also in North America. And to some degree, and that is primarily Element, which is also present quite heavily in Asia.And I think was that my last slide.

[Hans Backman, executive]

I believe so.

[Gerteric Lindquist, executive]

I tell you, I hand over to Hans, and now he is going to shoot. Thank you.

[Hans Backman, executive]

Thank you, Eric. All right. So I will take you through the next part of the presentation. Hopefully, without repeating myself too much, but still giving you some more color on the business areas, and then, of course, the balance sheet, cash flow, key figures and the action program as such. And then to leave room for you all to put some questions.If we then look again at Climate Solutions, I mean, Q1 is weak or very weak even for the reasons mentioned before. And it's a little bit of a perfect storm now, you can say, going downwards, as it was going upwards in the other direction, not too long ago. So all of these factors now coinciding giving us this for us very poor development.Sales contracting thereby some more than 30% since the acquisition there has helped us with some 7%. And with such a quick drop in sales, it's hard to counteract on the profit side. So the gross margin is down from the [ 36.3 to the 31.2 ] and the operating profit has, of course, taken hit as well since the SG&A costs are too high, if you like, for which reason we are running the action program. And then we come in at the [ 5.7% ] operating margin.If we look at the split of sales per geography, this is -- I mean, what happens in Climate Solutions, very much [ colors the ] group. And what Eric just mentioned is that North America has gained this year, having a more stable business in general, but also a more precise and long-term subsidy scheme, you can say, when it comes to sustainability. At least that's part of the reason. So North America is now 26%, it was 22% last year. So that has gained nicely. Of course, then on behalf of Europe, including the North.Within stoves. I mean, after 2 consecutive strong periods, if you like, we're now facing, of course, some challenges here as well. I mean, first, we had a period, where that post-COVID, where people or during COVID even, where people spent a lot of time at home and they began to renovate their homes, which had a very good effect on the sales of stoves, which we then thought would come to an end when people could travel again, but that's when this brutal attack on Ukraine occurred and oil and gas prices rise quite substantially and people were looking for alternative or complementary heating sources, where the sales for stoves picked up quite nicely again.But now we're into a phase, of course, with, as Eric mentioned here, some products in the system, also the high interest rates, less willingness to invest at home. So we have dropped some 18% basically in sales. There have been some help from acquisitions there as well. Gross margin is also down, although it's not as dramatic as in Climate Solutions. And we then came in at these 6.2% operating margin, which, of course, is cut in half compared to last year.But if you know us from previous years, you can say this is a little bit more of a traditional pattern as well, where Q1, Q2 typically are weaker and where most of the business takes place in the second half of the year. In terms of geographical distribution of sales, there has not been too much of movements here, a slight increase in North America.And then last but not least, in terms of the business areas, we, of course, have NIBE Element, which, as you all know, is our most global business area. It follows the GDP trend in most parts of the world, sort of speak in geographies and segments. And if we would exclude for a second, just the HVAC business and the semi business, the business area is performing on target basically. But with a strong presence in HVAC and semiconductor and with the profitability levels we have seen there, the area is, of course, hit as well. But the drop is not as dramatic as in the other business areas. Here, we talk about roughly 12% of a drop in sales.The gross margin has also dropped and it's on another level than in the other businesses given that it's a B2B business, but they also have lower SG&A. And here, the operating profit came in at SEK 137 million, representing a margin of 5.1%, which of course, is far from where we want to be, but we know fairly well where the issues lie, so to speak. And as Eric mentioned, there are some positive signs or several positive signs within individual segments like the automotive, like rail and with the prediction that semi should already be coming back during the second half of this year and where wind looks positive for next year.In terms of split of sales per geography, this is again our most global business area. And here, the other pie chart there or a piece of the pie has increased and that is our Asian business. It was 9% a year ago and is now up to [ 16% ].Leaving the business areas and looking at some group numbers again, there is not really much to comment upon the balance sheet, neither on the asset side nor the equity or liability side, it's very stable from where we were at the end of 2023.More interesting to look at is the cash flow. And of course, it's not pleasing to see that the cash flow generated from operating activities is minus SEK 300 million, where it was SEK 1.4 billion last year, but it's a direct consequence of what we've just been talking about. A little positive sign in this is that we've had a positive change in working capital. It's not big, but it's still there and a little signal that we have really been addressing this.And it's, quite frankly, not that easy to reduce inventory when the market is almost at a standstill. But that has come in, to play. And we've also been able to put a break on the investments you can say, well, both put a break on them. But as Eric mentioned, we're basically through our big investment program as well. So we will not see the same levels or amounts of investment going forward, as we've seen in the past.And then with some small finance activities basically from some of our subsidiaries and a positive effect from exchange rates when we translate cash out in the companies into Swedish krona, we have had a less negative change this year in liquid assets than last year.But nevertheless, looking at the key financial numbers, of course, they are affected as well. But as I said, the balance sheet has been stable, and interest earned liabilities in relation to equity is almost on par with the end of this year. Net debt to EBITDA, which, of course, is a critical and important key figure has jumped up from [ 2.1 to 2.5 ], but it's still at a reasonable level, I would say. And also, the equity assets ratio is very stable.I mentioned that we've had a small positive effect on the working capital, yes, that's true. But of course, it's still too high. I mean, obviously, we're still sitting on finished goods inventory, component inventory and also with not purchasing as much from our suppliers. There is not much to obtain from the countable days, so to speak.And the second to last picture, I believe it is the key financials here. I mean, return on capital employed adjusted is [ 11.7 compared to the 17.7 ]. So of course, it's a drop there of [ 6 units ]. Return on equity is also down at [ 12.7 ]. And the net profit per share is not much to brag about at this moment. But overall, a stable balance sheet, I would say.And then just ending up with this last picture, which we will include in the report that's been published, we realized this should have been included, of course. It gives us a little bit more color on the program. I mean, what we announced on February 16th was that we would have onetime costs of around SEK 900 million, leading to savings -- annual savings of some SEK 600 million during the last 3 months, where we've been deep diving into this in all business areas, although it is more of a European heat pump issue that we are addressing.But we're taking the opportunity to address costs in all 3 business areas. And while doing that, we've actually come up here that if we spend a little bit more money on making these adjustments, the SEK 1,095 million instead of the SEK 900 million, we will be able to save some SEK 750 million on an annual basis instead of SEK 600 million.And here, what you see what's missing in the report, is the split between the different business areas So for example, in Climate Solutions, we will be spending some SEK 794 million approximately. I mean, of course, the SEK 800 million as well and where we expect them to save some SEK 570 million on an annual basis and the corresponding numbers for stoves and Element.And you can possibly ask why is -- why is this some so much lower in Element. But I think this has to do with -- this being the more global business, Eric mentioned before, it's only a few segments there that are now heavily impacted. But also, they have, for decades, been living under a very tough business climate in their B2B environment, where they have been chased, if you like, by automotive suppliers, by the white-goods industry, so they are quite skilled at maintaining a healthy cost level.I think that was my last picture.

[Gerteric Lindquist, executive]

All right.

[Hans Backman, executive]

I don't know if you would like to add something before we open up for the Q&A.

[Gerteric Lindquist, executive]

Well, I'm sure that we could add a lot of things, but now it's the floor is yours out there. We try to answer you as expediently as possible. And we just have to say that at 12:00, we have to break if we are not impolite because then we have interviews with the other parties. But please floor is yours out there.

[Operator]

The first question comes from the line of Carl Ragnestam from Nordea.

[Carl Ragnerstam, analyst]

It's Carl from Nordea. A couple of questions here. A bit curious to know more about your statement on sort of Q2 demand, where you said that at manufacturing level, the demand will [ trough ] out during that quarter. So should we necessarily expect Q2 sales in Climate Solutions to be sequentially lower? Or how should we interpret that message?

[Gerteric Lindquist, executive]

Right. Well, you always have very delicate questions. I don't think that we can forecast any more detail than we've done or indicate. I think that it's not fair. But I think this is coinciding with what we said already at the break of the year or start of the year that the first 2 quarters would be weak. And I think that's pretty much what we maintained in our thinking, in our assumptions here, knowing that the inventories were not at a level of a year or 2 or 1.5 years, they were lower. And we're fairly certain that they will diminish now. But to give any more precise figures, I have to -- have to obey that, if you don't mind.

[Carl Ragnerstam, analyst]

For sure. And you also talk about the gradual improvement of demand during the year. Could you help us with the components to that guidance? I guess, you have consumer sentiment with the rate cuts, you have subsidies in, for instance, Germany materializing comps, obviously, the inventory level? And also, if you, at some point during 2024 expect to return to organic growth or maybe is that is a bit too optimistic still?

[Gerteric Lindquist, executive]

Well, I think that what we tried to explain here is that we we're going to see improvements. I know that everyone wants to have more precise figures. I think now we've come one step further. We feel comfortable or relatively comfortable anyway with our forecast given 6 months ago. And now we dare to say that rather than painting the second half in grayish tone, we now feel that there could be some improvements there. And of course, for us to give anything more clear than that. But it's our sincere opinion that, that will improve. But specifically quantify that more than we've done, there we are a little bit cautious.

[Carl Ragnerstam, analyst]

And the components to the improvements, I guess, it's everything that I mentioned? Or is it a specific thing, I guess, inventories must be one of the more important factors, I guess.

[Gerteric Lindquist, executive]

You mean, components like on the Element level or what you're thinking...

[Carl Ragnerstam, analyst]

No. I mean, components behind the improvements of the demand in Climate Solutions.

[Gerteric Lindquist, executive]

Yes. Well, we believe that, of course, when the inventories have been normalized, then of course, the rate, where we are going at now will not only be absorbed by the installers and the [ distributors had ] to large inventories, but that will pass through to the manufacturing level. So that's one factor.We also believe that when it comes to refurbishment in houses, that becomes more of a -- the customers are more willing when the interest rate is on its way down. Perhaps you're waiting that well, should we really replace this. But then you see it won't be more expensive. If you can't finance it strictly to yourself, then you could possibly borrow some money. And we also know that, of course, the house builders, they are very eager and ready to sign contracts and families out there waiting for the signs that we're just now seeing in the markets, and that's the third factor.Politically, I mean, we know that won't be an immediate help, but we still like to address that because we've been giving such clear signals from Brussels and everywhere that this industry, particularly the heat pump, we have to be ready for the big change or the big leap, if you would like to make it very clear. And we say, well, we are ready. We say that the industry is ready, please, is your turn really to fulfill that. So I guess that's in a quick way to answer your question there.

[Carl Ragnerstam, analyst]

That's very fair. And the final one from my side, if I may, is around the margin for Climate Solutions in '25, where you guide for sort of a normalized margin level for that business. Would you say -- when you talk about normalized margin, is it the past 5 years when you had obviously very good volumes and good margins in '23 include that is it since -- is there an inception or when we could track it 2000 -- early 2000 or what -- what should we compare.

[Gerteric Lindquist, executive]

[indiscernible] we've been given a pause, the sort of spectrums of something, anything from [ 13 up to 15 ]. I think that's what you find in our long-term views. And that's more statistically proven. And of course, last year, we came out with a relatively good margin. I think that was the highest ever and to predict that they're going to be the average in the future, there would be no one could stand behind that. But I mean, history speak you some own language.And if you go back since we introduced NIBE share on the stock exchange in Sweden, I think you find the answer there. And as we went through, as I said before '92, '93 and 2007, and those have been indications that we are not standing above difficulties, but our way to counteract and come back, that comes without saying is pretty good.

[Operator]

The next question comes from the line of Viktor Trollsten from Danske Bank.

[Viktor Trollsten, analyst]

Thank you, operator. HI, Eric and Hans. Perhaps firstly, on the gross margin, obviously down. But could you help us or remind us how much of cost of goods sold is fixed for you guys? Just to understand sort of the volume leverage in that?

[Gerteric Lindquist, executive]

Well, we -- I don't know whether we disclose any analysis of our calculation. I appreciate the question. I don't know whether fully comprehend it, but you mean that we should disclose what's material and what's direct labor? Or what were you saying?

[Viktor Trollsten, analyst]

Yes. I guess, that's one way of looking at it. What's direct labor because I guess, that's fixed cost in COGS?

[Gerteric Lindquist, executive]

Well, I think all -- with all respect, I think that's something you really have to expect -- a respect that we don't answer in full term. But I mean, you know what kind of -- if you read our annual report, that's there, you see the group direct material. So there's no secret. And you also see the direct labor, but that is, of course, on the group level. That's as far as we report when it comes to being a public company. But to go into each individual calculation, I mean, that goes beyond what we typically would answer.

[Viktor Trollsten, analyst]

Yes. No -- but I guess what I'm after is, of course, how much of the gross margin decline would you refer to volumes going down? And would you say that there's any pricing in the gross margin being down.

[Gerteric Lindquist, executive]

Yes. I'll tell you. We've said that before, and that we are not in a market, where we like to decrease prices, and no one wants to decrease prices. We have an assortment in all our 3 business areas, where, of course, we respect prices, and we are not out there trying to circumvent the difficulties. The difficulty that we have in demand will not be cured by cutting down prices. What we sell is value for money and we're going to continue that. Of course, when you hold the stock somewhere in the distribution chain, there might be some kind of offer -- offers, but that's -- we don't stand behind that. We had a very solid price structure. So I think you have to take it from there.

[Viktor Trollsten, analyst]

That's very clear. And just finally on the gross margin, sorry for that. But a couple of quarters back, I remember that you sort of had the ambition to get back to 36% gross margin, which you have been 2014 and 2016. And now, of course, the short-term issues we all know. But is that still sort of the ambition when things normalize, would you say -- was anything changed?

[Gerteric Lindquist, executive]

Well, very much about the future now. I mean, we are all fighters, aren't we. And who wants to see figures deteriorating. We of course, have the greatest ambitious idea to counteract difficulties. So that's why we are here. That's why we have these jobs that we have. But that said, we're now going to be back to that in that figure, you just have to believe in us, who we are, and how do we counteract, and no one is satisfied at the margin level, where we are now. I mean, it's more like a reflection of our identity or DNA setup.

[Viktor Trollsten, analyst]

No, that's clear. And sorry, just one final on my side, and sorry for pushing a bit perhaps.

[Gerteric Lindquist, executive]

Do you know one thing? You had now 3 final ones, but this is the final one, please, because the other guys, who would like to come in. Okay. We take that one because you're such a nice guy. Come on.

[Viktor Trollsten, analyst]

Then one final. But you referred to the statistics of Climate Solutions margin historically, and then you have done a lot of M&A, which is dilutive. Just should we -- is it in a [ 13% to 15% ] normalized level, which you think of with or without M&A?

[Gerteric Lindquist, executive]

Well, I think that you've seen our history, and our target is to arrive at SEK 80 billion turnover. Of course, we're going to have acquisitions on the path forward as well. So to say now individually on that, on the organic side, on the acquired side, of course, the -- what you've seen in the past is a fairly healthy average of what we've been able to do. And I think that's the way we have to perform also in the future. You have to bring up acquired entities to the level, where the original body is, and then you take it from there. So the figures statistically shown in our annual report, I mean, they are a good blend of organic and acquired.

[Operator]

The next question comes from the line of Vivek Midha from Citi.

[Vivek Midha, analyst]

I'd like to start with a follow-up to Hans, if I may, on the balance sheet. So you mentioned that the net debt-to-EBITDA has crept up to 2.5x below your target -- sorry, beyond your target of the equity to assets ratio of 30%, are there any other metrics or levels we should have in mind, as to what you think is an adequate balance sheet?

[Hans Backman, executive]

Well, I think we've had this -- I mean, if you look at our financial targets that we've had for quite some time, I mean, you have the growth target in there, [ 10 plus 10 ], you have the operating margin, and then we have the equity assets ratio, which should be at least 30%, and then we have return on equity. I mean, those have followed us for a long, long time. And when we can meet those targets, we see that we have a healthy growth in the business in general.Then, of course, we can deep dive into individual targets like the net debt to EBITDA or return on capital employed and so forth. And I'm not sure if you're getting at something specifically. But of course, ever since we, in a way, acquired Schulthess and paid 40% with shares, and then, we made a right submission several years later. Of course, the balance sheet has been very strong in that sense, but then showed some slightly lower key figures, so to speak. But that's why we are pretty solid and in a good position to continue the M&A growth.

[Vivek Midha, analyst]

Understood. Could I -- my question was ultimately getting at where do you see as an upper level for where that net debt to EBITDA can go and that you would be comfortable with? Are you still comfortable with doing deals and so on if there's temporary upward pressure on that net debt to EBITDA because of the weaker profitability that you're seeing?

[Hans Backman, executive]

Well, of course, I mean, we need to balance, of course, everything we do. But if you look back at our history, we've had -- as an average, we've had a net debt to EBITDA of around [ 2.3% ] or even below that over the last 10 years. But from time to time, when we have made acquisitions, we have been [ above 3% ], even up to almost [ 4% ], but then being able to amortize our loans and our debt back down again. But having bonds on the market. I mean, we indirectly say that [ 2.5% ] is a -- is an average level that we should stay within.

[Gerteric Lindquist, executive]

Now we have at least 10 individuals that would like to have some answers. And I would suggest, without being impolite that we at least give one individual, one question per individual, that it would give it like at least 10 answers if that's fair. So you guys that happen to end up in the line up, and placed 13, you should also be able to put at least one question. Sorry for rationing it, but also trying to be fair. Please.

[Operator]

The next question comes from the line of Christian Hinderaker from Goldman Sachs.

[Christian Hinderaker, analyst]

Eric, Hans, thanks for the opportunity. Having to be selective here. So I guess, let's focus on the margin, if I may. Rather than talking about guidance forecast or anything else, can we just talk about the mechanics and how we should calibrate our expectations for drop through margins for the Climate Solutions business. I believe 20% to 25% is the range historically. Does that still hold given the capacity investments you've made and also the offset potentially in terms of cost actions you've recently announced?

[Gerteric Lindquist, executive]

Well, I think that we are fairly flexible with all costs. If, of course, revenue goes up, then we try to stay a bit below that to get a bit of leverage. What we cannot avoid is, of course, the fact that we have invested relatively heavily. So the depreciation is coming in, where the volume goes up or not. But that's -- of course, that's in the cards. But we've done this gradually over the 4.5 years, where we paid primarily our investments from own generated cash. But of course, depreciation is higher than it was in the past. That's what we have to calculate with.But of course, the idea is that the growth, as such, will be the leverage to even that out. I don't know whether I answered that question correctly, but that's the adjustment that we make now on the cost side. You can argue we should have done that 2 months ago or something like that. But -- you also have to have some time. It was a little bit of a surprise, a very big surprise that this happened. Otherwise, we are -- we always [ praised ] ourselves being fairly good at adjusting cost. But of course, the depreciation, we cannot avoid they're there due to the investments we made.But on the other hand, now we are ready. No one can say that NIBE isn't ready for the growth, for the leap. And we are there with the product, we are there with the facilities. But as you see now, when volume is stagnating, of course, the depreciation comes up to [ 11 ], that's not actually what we were likely to see. All right.

[Christian Hinderaker, analyst]

Okay. So a higher incremental margin perhaps?

[Gerteric Lindquist, executive]

Well, I pass on that. All right.

[Operator]

The next question comes from the line of Alexander Virgo from Bank of America.

[Alexander Virgo, analyst]

Yes. Good morning, Eric. Good morning, Hans. I guess, my one question would be, you made a comment in the report that growth rates in the market will not match previous expectation levels in the medium term. So I just wondered what you actually mean by that given your broader optimism and the comments you just made on the backdrop of demand and the context of your own 10% target -- growth target. Maybe you can give us a sense of what you think that growth market growth outlook actually end up being?

[Gerteric Lindquist, executive]

Well, it's another $10 million question. But I guess, what we saw during last year, for instance, Climate Solutions, I think for the full year, we had a growth of some almost 20%. And of course, that is something that we cannot promise by any means, unless we have to get some help, but we believe that this industry is going to continue to prosper. So we stand behind that.But we also have, as Hans mentioned before, that the war sadly enough, of course, made people panic and that was not in our favor really, as we see now. Neither did the pandemic did work in our favor in the long run, although people stayed at home and installed all sorts of equipment like wood-burning stoves and even heat pumps. So I think that we've said in the past that if you are able to grow 10%, and Hans indicated that before, then you're on the healthy side. And if we exceed that, that's a pretty good year. I think that's -- we haven't changed our targets in any way. So I don't know whether that gives you some comfort in your question or in the answer we are giving you. I hope so.

[Operator]

The next question comes from the line of Carl Deijenberg from Carnegie.

[Carl Deijenberg, analyst]

So one question from me then. And I just wanted to follow up. I really appreciate the picture you showed in the beginning of the estimated deliveries here in Q1 on the individual countries. And I just wanted to ask you if you could provide any sort of quantification of what the actual installation development have been, i.e., how big is this inventory drag been for the OEMs? Are we talking 15 percentage points to 20 percentage points? Or do you have any good sense of that?

[Gerteric Lindquist, executive]

That is practically impossible. The only thing we can say is, of course, that if the inventory is gathered up from, say, during the third -- fourth quarter, more or less, and it's been time to digest that. That's a substantial buildup of inventory. And now we say that where the market is down like 45% that gives us still a healthy portion out there just provided by the installers or by the distributors.But to do any guesswork there, we -- I think we refrain from that, if you don't mind. But that is, of course, a little bit of a surprise as well that the inventories out there were that large, but that's also indicating is coming back to that our installers and the distributors out there, they are also business people. They saw the shortages that we will not make our customers disappointed, so they started to stock, and you can't really blame them.We're all in that way, we start to stocking even privately like toilet paper they did in Sweden during the pandemic, which we laugh about now. But I think you see that instinct in businesses. So it's impossible. But as I said, I can't answer it more precisely, then we can also -- we can have an idea about it. But to say, well, I believe it's like [ 25 or 35 ] or anything like that. I refrain from that. We do. We, I don't use the word we too much. Yes, I. Yes, please.

[Operator]

The next question comes from the line of Douglas Lindahl from DNB Markets.

[Douglas Lindahl, analyst]

I wanted to circle back to the Climate Solutions margin comments there for 2025. It would just be quite interesting to hear what your sort of base case assumptions are for the heat pump industry by 2025? Are you assuming sort of volume back to 2023 levels at that stage? And the competitive environment, do you assume any sort of -- sort of macro or a heat pump -- heat pump specific commentary would be quite interesting to just hear how you're thinking?

[Gerteric Lindquist, executive]

Yes. I think that -- we don't have that clear equation. But we know that there were at least 6 quarters, they were sort of unrealistically good, and that was like'22 the 4 quarters and '23, the first 2 quarters. And I think that as said as it is, having a war on our doorstep here in Europe and Ukraine is, of course, part of Europe, but that means that, that boosted the demand because of people panic. And I think we have to be realistic and say, well, for those 6 quarters, a little bit too buoyant, and now they are a little bit too mellow, you can call it, because we are again, getting rid of inventories.But to state this year, it's a normal year, and now we expect that, that would be $10 million answer, and I cannot provide you with that. But again, we have to look at history, how we've been able to maneuver, how we've been able to grow. And one very important factor substantiating this is, of course, that all politicians, we might criticize them, sometimes they are aware of the fact that particularly in Europe has to get back on track. And you certainly don't do that with higher interest rates. They have to come down. That would stimulate new construction because new construction is relatively low from a historical point of view. We believe that will be restored, as the years go by. They are going to come now.Of course, more and more people, no one, but they don't have adequate apartments or houses and that's very important. And I think also that people are becoming more aware of the fact that we have to do something about the change in climate, if I might be a little bit dwelling on that. But it's not only that we sell a heating device, we sell a climatizing device, a climate control device. It's heating, cooling and ventilation. And on top of that, you feel that you're contributing to the assistance of making the world better.I think that we shouldn't be too one eyed. It might well be that they had a very positive, young generation growing up, so we like to be part of the new green era without being a fundamentalist. We have great hopes for the new kids growing up and forming families. They had a different attitude, and they are willing to look into the future for their children, and their upbringings.Now I'm philosophizing, but I think that's something we have to bear in mind when we discuss about the future. And I understand it's difficult for you guys out there and you just have to follow us, and we try to be as transparent as possible, guiding you, as we've done here today, and as we're going to continue. But for us to look in the crystal ball, it's very difficult. We indicate that we try to come back to old historic levels. I think that's a pretty bold and forecasting statement.

[Douglas Lindahl, analyst]

Okay. So just summarizing, you don't expect any sort of changes in the industry dynamics from a competitive standpoint or anything like that in your base case for 2025, right?

[Gerteric Lindquist, executive]

Well, I think that any market that's growing is, of course, attracting new actors. That's like that in any industry. But we believe that we've been here a long time, and it's our duty to be part of that and even be a leader of that. Competitors or colleagues, they're always going to be there. And we find -- we cannot hide anything. We cannot [indiscernible] this market is ours, of course. If we improve things, someone else is going to come and say, well, we do it a little bit different and what do you think about that? That's how the market is operating, and we are full of confidence that we will match the demand out there.But of course, the business dynamics or market dynamics is such that it attracts new companies, and we've heard that now for the coming -- for the last 8 quarters what is going to happen. And I mean, now everyone realizes that it's not that easy possibly to just come in and say, now, we're going to take over this. It's also an indication that the market dynamic is there.Okay. Christel is indicating that we shouldn't dwell too much [ in it ].

[Operator]

The next question comes from the line of Axel Stasse from MS.

[Axel Stasse, analyst]

In the past, the firm has stated that products sold are at the high end of older heat pumps out there, and this has enabled NIBE to protect its pricing strategy. The problem I have and the question I have is that all the other players are pretty much the same -- saying the same thing, and as a result, everyone is expecting pricing to remain quite stable for the next year or so. So what is the risk here on your 2025 EBITDA guidance for Climate Solutions that we see some pricing cuts. So long story short and put my question in another way, what is the risk that we only see volumes recovery with potential pricing cuts next year rather than volumes and pricing on this specific guidance of 13% to 15% EBITDA margin -- EBIT margin, sorry?

[Hans Backman, executive]

Well, I mean, that's again, a very complicated question. But in general terms, we can say -- what we say is that, of course, we have products in the upper end of the market. And that's our legacy. And you cannot depreciate the value of those by saying, now we're going to sell it for a 10% lower price. Then you have to come in with a product, where they have a lesser specification, and we also have that. So that doesn't mean -- but it still has to carry the NIBE brand name. I mean, just like the -- if I may call it, the automotive industry, of course, they have smaller models, so they have models less specified and that's how we act in the market. And I don't -- you see that in our homepage where you go in and look at the different categories of heat pumps. I don't know whether I answered your question fully, but that's how we act. It's not [indiscernible].

[Axel Stasse, analyst]

So you don't see any risk from the excess capacity and the competitive landscape on your guidance for '25 in Climate Solutions EBIT margins?

[Gerteric Lindquist, executive]

I think that's a question that we should be very cautious answering, but we don't see any risks. I think that when risks occur, you have to counteract. And the immediate reaction to us would, of course, be that when the market is as it is, then you don't gain any profitability by decreasing prices. And I think that's the best way I can answer that for anyone that would like to enter the market, who will be present in the market, who have been in the market for a long time. Everyone wants to make a decent margin, and that's also including us. All right.Okay. Do we have anyone else?

[Operator]

The next question comes from the line of Bhawin Thakker from Bloomberg Intelligence.

[Bhawin Thakker, analyst]

Thank you for squeezing me in. So I was just wondering about European Union was kind of planning to implement something called as heat pump action plan, which was kind of aim to incentivize heat pump installations in the Europe. So -- but it was kind of sidelined given the upcoming elections next month. Just wanted to hear your view, if you're expecting to hear any update on this action plan once the elections are over next month?

[Gerteric Lindquist, executive]

Yes. Well, what politicians will do after the election and prior to that, I think the difficulties in Brussels as in every individual country. But -- we have a saying here in Sweden that they are very much opposing one another, the political parties prior to a -- when you go to the polls and where you vote finally. But once the voting is done and the new government comes in, it's not that often that they start to change everything. They rather had to groom other issues.And I would assume the promises given so solidly since so many years back, I think it would be difficult for anyone to change that attitude in Brussels now because we understand it's a big [ anchor ], difficult to change direction of. But if even someone who is totally new come in, we believe that promise is given, and now this is just an old experience that we have, they do not very commonly or yes, change things that have already been decided. So I think that's perhaps my personal view, and that's how we reason among ourselves. Let's see what is going to happen. But that's a very straightforward answer. And we have a last question here, if you allow me.

[Operator]

The last question comes from the line of Brijesh Siya from HSBC.

[Brijesh Siya, analyst]

So I'll just -- the previous question or the question before about competition. So if you look at in the market, there are competition, who are kind of talking about growing 40% this year or early into next year. Given you're talking about recovery, and you do expect that to be a slow and gradual, as we move. How NIBE is positioned to kind of fight this competition out because the competition is talking about having a wider distribution reach or having -- making the installation easier. So just wanted your thoughts to understand what NIBE is doing in the marketplace to fend off competition, it's probably not a kind of a number wise question, but anything you can give us on a qualitative term what NIBE is doing differently, and the customers can rely on NIBE products versus any other competitor products.

[Gerteric Lindquist, executive]

Well, we -- I don't know whether we should disclose that. Now jokingly saying, of course, we see that we are very personalized in the market, meaning that we work with different brands, they are well-known in the markets. And all the relationships have been established over the years, and we feel that's very important to reach customers with a well-known local brand. That's our ambition.Not disqualifying anyone else that's we're doing it differently. But that's how we've been so far, fairly successful in keeping the brands, keeping the management and maintaining our philosophy from here, but grooming things together, but having a face to the customer that is a combination of what you've had in the past and hopefully, hopefully, some improvements by injecting some of our philosophy. So local presence with local brands and of course, doing and working together as much as possible when it comes to new R&D and so forth, not disqualifying any of our colleagues. But that's how we have been able to handle the market so far. And if things have to be changed or modified likely then, of course, we are open to that. But we are not fearful. We are respectful.

[Brijesh Siya, analyst]

Understood. Eric, just can I stick in a follow-up on that last point you make it about -- you're very confidence of where you are. How do you see competitors thinking about the distribution being edge and would NIBE consider that as a strategy going forward to be more focused on distribution, so that you own the value chain and, hence, you can control the market and understand how the inventory cycle is running and all?

[Gerteric Lindquist, executive]

Well, I think that you -- as I said before, we are not deaf or in any way, we look at, of course, the market and we do it in a respectful way and things -- if things have to be modified, then we will do that. But we are not so fear, but the, oh, no, someone is doing something else, and they talk about it. But we are known for viewing, analyzing, and if things have to be changed, then we do that.But we do not say -- look on say, oh, now we have to do that, and now we have to do that because then you lose absolutely speed, you have to have confidence in what you do yourself, but at the same time, you have to be open enough if things could be improved in some fashion that we'll do that. All right.Thank you for all the questions. I hope we haven't left anyone without an answer, not perhaps fully satisfied. But as previously, we took another 10 minutes. Thank you once again. And perhaps some of you are going to attend the Annual Shareholders' Meeting, and we look forward to that here in Markaryd. As I said initially, that's a festival in our little community here. So thank you for calling in.

[Hans Backman, executive]

Thank you.

[Operator]

Thank you. Ladies and gentlemen, thank you for your attendance. This conference has been concluded. You may now disconnect.