Nibe Industrier AB

STO:NIBE B

Earnings Call Transcript 2021-Q2

[Operator]

Ladies and gentlemen, welcome to the NIBE Q2 2021 Results Presentation. [Operator Instructions] Today, I am pleased to present Eric Lindquist, CEO; and Hans Backman, CFO. Please begin your meeting.

[Gerteric Lindquist, CEO, MD & Director]

Yes. Good morning, everyone out there.

[Hans Backman, Chief Financial Officer]

Good morning from Hans as well.

[Gerteric Lindquist, CEO, MD & Director]

Thank you for joining us, and we're going to proceed as usual by going through the report fairly quickly and then allow for questions. And we would also appreciate if we could be ready by noon because then we have other engagements due to the report. So with that, we're just going to dive into the slides that we have prepared for you. And although we are not so keen on bragging, I guess, we are at least, this time, willing to stay that is a fairly strong first 6 months. But it's important also to remember that we are comparing ourselves to a relatively weak period last year. It's important to be humble enough to admit that. We were right in the middle of the pandemic a year ago. And so, of course, the figures are very strong, but we also had, of course, a tailwind when it comes to comparing ourselves to that period. What's very pleasing is that all 3 business areas are developing or have been developing very well and strong during this period. And it's very obvious, as we mentioned so many before, that the sustainability trend is really helping us in all 3 business areas. And also, the COVID effect has had the effect of, should I say, repairing and renovating your home, remaining pretty much at home where you live rather than traveling and it has also been a tremendous help in installing heat pumps and installing wood-burning stoves or gas-burning stoves for that matter. So there have been a number of factors in our favor. And of course, on top of that, we believe that our products and our assortment is of high caliber, and we are well positioned. So all in all, the outer conditions have helped us, but we also have a very strong own position. And if we look at the growth, it's very pleasing naturally to see that the organic growth is back to a very, very pleasant level, which we're going to dig into in a while here. And also the results, of course, when we look at the result figures, they are very, very strong and also the margin improvement. One negative effect of the pandemic is, of course, that we haven't been able to sign that many on the dotted line when it comes to acquisitions. But that doesn't mean that we don't have contacts, it's just that there's been a hindrance that we haven't had any physical contact for quite some time. But of course, there are a number of acquisition lined up. So we just feel now that the world is opening up, and we are ready. We're certainly ready when it comes from a financial point of view, and we're also ready when it comes to which company we would like to team up with. And then the figures themselves, the growth of the 16.3% in the first 6 months, and that is quite a bit above 10% organic growth. The gross margin remains healthy. And I guess that's been 1 issue, of course, with all the price increases that we have received and all the shortages of products has been a concern. But so far, we've been able to handle it relatively well. We mentioned in the report, of course, that we have not been able to build up our inventory as we normally do during the first 6 months. And so that is, of course, a little bit of an issue as we move forward. And when we have stop and go production, you all know, understand that the productivity is not at its peak. But still, we've been able to remain at a fairly healthy gross margin. The operating profit is naturally considerably higher than last year. And you see it as a star there, and that means that we talk now about all figures, excluding the reevaluation of additional considerations. That's something that we entered last year, really. And just to make that very clear, they stem from the fact that when we acquired companies, we typically acquire them in 1 or 2 or 3 tranches, suggesting that we pay 1 initially -- 1 initial amount of money and then eventually, we pay the additional tranches based on performance. And during the pandemic period, of course, there have been companies that have not performed 100%. And when we -- we're at the point of paying, of course, the amounts have come out slightly below what anticipated in the business plan that has not been so obvious in the past. So in that sense, the pandemic is -- it causes to pay a little bit less. We've been very civilized we must say. We have not penalized our partners. But to some degree, it has lowered the prices of the company. That doesn't mean that the acquisitions as such have been -- have had any question mark. It's just that all companies have had a slower period. And in this particular period, we're talking about SEK 37 million. Of course, first year of -- last year, it was a considerable amount for the full year was like SEK 353 million. So all the figures that we're talking about here, they are excluding those, just to make that very clear. The operating margin, considerably higher than last year. It's a major step. And of course, the net profit margin is also considerably higher than last year. And we are very stubborn when we talk about the period Q1 and Q2, but we also understand actually, we have to comment also on the last quarter. And that has been very strong again with a growth around 27% or 25% mark, meaning that the organic growth is around 24%, and that is still including the negative effects of the currencies. We all know that both the dollar and the euro had totally different than a year ago. But there we are a little bit cautious in explaining how much is that. We think we have to sort of combat currencies. We have to combat all difficulties in the market. It shouldn't be a benefit or a disadvantage. We just have to combat whatever happens. And there, again, we see that the gross margin is remaining fairly healthy compared to what it was a year ago. We are, of course, very cautious with costs. But what our suppliers is -- or are doing, we can't do anything about that. And as we all know, there have been considerable price increases. The operating profit is, of course, up close to 75% compared to last year, and that's a considerable jump. And there, we have, of course, excluded the SEK 37 million. So all in all, the second quarter came out very favorably. And we just like to mention once again that the second quarter last year was perhaps the most dramatic quarter that we have had or the world has had in many, many, many years. We're very pleased now to note, of course, that vaccines, they've been around now for at least half a year, and that's very pleasing to note that technology and advanced medicine can produce vaccine so fast compared to what it was just a few years ago. I'm old enough to have experienced the polio pandemic many, many years ago. My parents were petrified until we were getting the first shots. And that took like 20 years before they developed an effective vaccine for polio and that's a tremendous, should I say, step forward for mankind, if we are a little bit philosophical here now. So then we typically would look at the bar charts, again, illustrating how our sales typically develop. We have our strongest quarter typically in the third and fourth quarter. And that pattern is pretty much the same even 2020, you can see that it's lacking a little bit here in Q2 2020. But this year, it's very pronounced as we've always been. And the third and fourth quarter, typically, if everything goes on right, it should be stronger without giving a forecast. It's just the pattern that you see here. And on the results side, it's the same thing, even more pronounced. When volume is really assisting us then, of course, the profit goes up. And here, again, we are calculating the profits and the bars you see excluding the additional considerations. So nothing is suggesting that we would be on the wrong track as far as these graphs are concerned. Just a few comments about the business area. Climate Solutions, of course, it's been very strong and the particularly note that Europe is going gangbusters all when it comes to volume increase. North America is starting to move, but not as positively as in Europe. We've been waiting for this for many, many, many years. We started with heat pumps, as you all know, some 40 years ago, and it's taken a long, long time. And now we are there with the larger countries in Europe really moving ahead like Germany now are really coming to a very, very strong growth. Netherlands, we talked about. Britain is just under brink of starting. France has been growing for many years. So we are in the European world seeing a very, very positive atmosphere. And of course, that is influencing the operating margin as well as the operating results in numbers. And if we just have a quick look, it's been a good growth there of some 14% the period in the operating margin in the first 6 months has increased from 12.4% to 15.6%. And we all know how difficult it is to increase operating margin even with the percentage unit, not to mention when you move it upwards like 3 percentage units. And Hans' going to come in more into the Q2. But of course, that has continued growth-wise, even more pronounced than the full period here, and also the margin increase. On the Element side, we can say that there, we have a feeler or whatever we would like to call it the thermostat for the whole economy. When the world is accelerating, we notice that in all individual sectors. And we now see that the world is coming back to an accelerating stage and practically all market segments are moving in the right direction. And we are very positively in position, both in Europe and North America and also in Asia anymore. So of course, we have that tailwind from all of the sectors. And we are well positioned with our products. And as I mentioned on the Climate Solution, of course, Element, we are supporting the sustainability profile company. And 1 very obvious sector is also the semiconductor industry, that is a hindrance to many other companies, but they are being a sub-supplier to the semiconductor manufacturers or the machinery industry. That is, of course, something very, very prosperous at the moment. In industry that we hadn't really paid full attention to until 5 or 6 years ago, but now that's major part of Element's business, and we foresee a good growth pattern for years to come. And again, with the volume development and with the cost control that we maintain and have maintained, of course, the operating margin has both -- has increased and the real numbers in operating profit. Just look at -- have a quick look at that. The sales growth is very impressive, if we dare to say it ourselves, with some organic growth here around 13%. And the jump from 8.3% to 10.7% in operating margin. As you all know, we've been struggling for years to arrive at the 10%. And we took a little bit of a dive when we had the most difficult quarters last year due to the pandemic. I'm very proud now to be back on the right track again and having all these different market segments being very prosperous. And Hans, again, going to dig into more the second quarter, which is extraordinary when it comes to growth, particularly since Elements and for that matter Stoves, they had relatively weak second quarter last year, whereas Climate Solutions maintained during those conditions a pretty healthy margin after all. So Stoves then, when we look at the figures ourselves we heard a voice, what a growth. And that is, of course, a reflection of a good position in the market again and also the trend of consumers spending more at home. And that is also stating to us that a stove is important in a home: it brings comfort, it brings sort of security. And like the relax, it's piece of furniture, many factors when it comes to a stove. And we struggle and we fight and we work so hard to continue developing a more effective dose and also being even more environmentally friendly, particularly when we talk to the particles. And again, here, number-wise, when you look at Stoves been a tremendous growth with some 42% organically in the period and in the second quarter, it's beyond 70%, and Hans is going to come back to that. And of course, with a decent margin compared to what we usually have in the first and second quarter. It's almost on really high figures. And just a few other pie charts before we let Hans get in how sales is distributed and that's pretty much like before Climate Solutions around, almost 2/3 Element a little bit better than 25% and Stoves slightly below 10%. And then when it comes to the distribution of profits, it's again, Climate Solutions that's dominating with a little bit better than 70%, Elements 21% and Stoves some 80% -- some 8%, I'm sorry. Of course, we're going to see that pattern to change a little bit, particularly on Stoves, having their best quarters during the second half of the year. And the last graph or pie chart on my side before Hans steps in, it's how the sales is distributed. And we can see that Europe has gained here is almost 46%, the Nordics some 24% at our home market. In North America, although it has grown in real numbers, Europe and Nordic have grown faster. And of course, we've also had some currency headwind there. So that's pretty much a quick overview, and Hans, I'll hand it over to you now to present the business areas more in detail and also the balance sheet.

[Hans Backman, Chief Financial Officer]

All right. Thank you, Eric. Yes, we will do the same procedure as last quarter. And it's actually amazing how quickly a quarter or summer passes. It feels like yesterday that we were present in Q1. And talking about Q1 and Q2, really, the pattern is very much the same in terms of development with the exception that Eric mentioned that the comparables for Q2 are quite different, given that Q2 was the weak -- was such a weak quarter last year. That was, however, not fully the case for Climate Solutions, which managed to take care of that or yes, come through the pandemic in a decent way. It is, again, Mainland Europe and the Nordics that have been the drivers with North America lately picking up, but not at all being where the European side is, so to speak. In terms of sales, we came in at SEK 9.5 billion, up 14% from last year that Eric mentioned, which then also contains a considerable amount of negative currency effect in there. And then a small help from acquisitions on top. But such a good organic growth generates a good gross margin, up more than 2 units from last year. And then, of course, together with a good cost control, landing in a margin as high as 15.6%, which on a 12-month rolling basis right now brings us up to 16.4% and sales, which are just below SEK 20 billion for the business area alone. Taking a quick look at the quarter as such. It was, of course, a good quarter with the organic growth that we have 26 -- well, 20.6% and just a small help from acquisitions. And then again, a negative currency effect there from the Swedish krona. But nevertheless, a good -- very good growth, bringing us to a gross margin of 36%, which means that we've been able to cope with the supply of material fairly well, although it is a daily struggle and we are, of course, facing price increases just like anyone else, but have also become better in trying to compensate ourselves for that through own price increases. So in the quarter, we landed in a margin at 17.3%, up from the 13.6%. So a very strong quarter for the business area. In terms of distribution of sales, it is just as Eric mentioned, that Europe and the Nordics have gained more than North America or the North American total numbers also has grown. But where we now came in at 51% share for Europe, we were at 47% a year ago, and the Nordics jumped up a percentage even if you can say. And then the remainder there is North America, where we had 24% of sales a year ago. Coming to NIBE Element then. They have shown a very strong demand in all markets and segments really, although it is the HVAC-related segments and the semiconductor that have been the strongest. But the whole electrification that is going on, so to speak, is a good driver. And within automotive, there are numerous interesting projects in the direction of electrification. But as I said, it's a general trend, you can say. But also here, we've been, of course, fighting raw material price increases and just getting the deliveries into the factories. When we landed in sales here, we came in just below SEK 4.1 billion, which is up almost 15% from last year. And this is the most global business area and the 1 that's most affected by the currencies. So the underlying organic growth is, of course, even higher. And here, despite the challenges with material and also personnel for that matter, getting people on board to manufacture everything, the gross margin jumped up to 23.4%. And also here with the good cost control on the SG&A side, we came in at a margin at 10.7%, which for the last past 12 months then brings us up to 10.3%, up from the 9.1% that we landed in at a full year of 2020. And in Q2, if we take a look at that, this is where the -- it becomes evident that the comparables to last year are relatively easy, so to speak, landing in the sales there at close to SEK 2.1 billion, an increase of 25%. The underlying organic growth was even higher than that given the currency again then. But last year, in the second quarter, we had a drop of 15%. Gross margin, again, healthy at 23.5% and a very healthy growth in the operating profit as such, up close to 90% and making it possible for us to land a margin, which was 3.7 percentage units higher than last year. In terms of distribution of sales, there have also been a slight movements, not so much that the picture is, in a way, fairly stable. But Europe has gained a little coming up to 33% of the total share, up from 30% last year and North America dropping 1%, so to speak. And then moving on to Stoves. As we said initially, this is where we've seen really an unusually strong growth for the first half of the year. As most of you know, this is our most seasonal business where most of sales and profit is generated in the second half. So what we see here is really unprecedented for us, in a way. And it's been across the board in all companies and geographies. So for the first half year, we were able to grow sales by 43%, again, affected slightly negatively by the Swedish currency. And also here, of course, it's been a struggle to get material on board and to be able to meet the demand. But so far, we've been able to manage that and also land in a decent gross profit. And in general, I mean, an organic growth gives the best effect on the numbers. So here, the gross margin came up to 36.9%, up more than 3 units and the profit as such, I mean, it's up 400%, but up from SEK 33 million to SEK 167 million and an operating margin of 11.9% which is higher than we landed in the whole last year. And as Eric indicated, the quarter as such for Stoves, I mean we've fell off our chairs ourselves almost seeing organic growth rates here of 70%. And just a very small portion which was acquired. But then last year, this was the business area where we had the largest negative effect. We lost some 18.5%. But as a result of the good organic growth, gross margin jumped 10 percentage units and the operating profit jumped to several thousand percent. It's amazing numbers anyway. Operating profit then at 11.9%. And just a quick look at distribution of sales, it is really Europe and the Nordics that have -- or Europe that has gained here, up -- and taking a larger share of the pie chart. The other ones with just minor movements, you can say. But then, of course, the business area, as we also indicated, is positively driven by the COVID effect, if 1 can say that in the sense that people have spent a lot of time at home renovating their homes and houses. Coming quickly to the balance sheet. There are not so many movements here really. It's simply a consequence of the performance. The thing we did during the early part of Q2 was to issue another bond replacing 2 short-term loans that we took to -- we can term replaced 2 bonds that were up for replacements, so to speak, a year ago during the pandemic when it wasn't impossible to issue bonds. But the financing has just rolled on under very good conditions, you can say. We'll jump the liability side. It's purely a consequence, as I said, of the performance, no major movements. Looking at the cash flow. I mean, the operating activities have generated a very good cash flow, up from SEK 1.5 billion, up -- well, up from SEK 1.5 billion up to SEK 2.4 billion almost. But where we have had a change in working capital of close to SEK 1 billion negative we see. And that's not so much that we have been mismanaging working capital in any way. It's just that the drop last year was so much larger coming down from the '19 level, where we had working capital of around 20%, which came down to 15%, and it's around a 15% mark where we have stayed. And then we've continued to invest in our current operations, slightly more than we have been over the last years given the expansion plans that we have. So overall, a very healthy cash flow after all. And then just looking at some key financial figures. We have a large portion of cash ready for the acquisitions that Eric mentioned and where we are in discussions with several parties as always, in a way. Interest-bearing liabilities have come down further. Net debt is at 1.1 and a healthy equity assets ratio. I think we're very well positioned for both many midsized acquisitions, you can say, and larger if that would come across. Working capital, what I mentioned there, was 15.5% last year, 15.6%. And we landed in actually in the full year at 12.9%. And of course, that generates good results on the numbers. But it is also a very low number for us, reflecting actually the situation we're in with a very high demand and a need to meet that demand. So our stock levels are actually lower than what we think would be the ideal position to meet the demand for the fall. Last, but not least, a few more key figures and then we open up for the Q&A. Return on capital employed, return on equity, both have come up quite substantially now. Return on equity is at 17.3%, it's an old target we have to meet the 20%. Would we consider the revaluation considerations that we talked about, we will be close to 19% actually. And that's in a way the official number, but it's not something that we follow since it was not generated in the normal sense, you can say. But nevertheless, these are moving in the right direction as well. Like net profit has come up from SEK 45 to SEK 76 per share. Equity per share is also increasing. I think overall, a very strong results. Thank you.

[Gerteric Lindquist, CEO, MD & Director]

All right. I guess, we are ready for questions. That's about 28 minutes for those, so please.

[Operator]

[Operator Instructions] The first question comes from the line of Carl Ragnerstam from Nordea.

[Carl Ragnerstam, Analyst]

It's Carl here from Nordea. A couple of questions from my side. Firstly, I mean, first, in terms of the organic growth in Climate Solutions, obviously, quite impressive. Could you give some flavors on the current growth rate in some selected markets? I guess, Germany is performing well, Netherlands and so on. But could you give us some flavor on that pie market performance?

[Gerteric Lindquist, CEO, MD & Director]

Yes. Well, they are, of course, Netherlands, they've been growing tremendously over 3 or 4 years now, and they still grow very healthy. Germany now would be perhaps the quickest growing market. Some figures would indicate that they're absolute as some 35%, 40% growth. That's even quicker than Netherlands at the moment. So that's, of course -- but from relatively low levels. It's not like a mature market like Switzerland or Sweden, that would be totally different. The Swedish market will grow with some 35%. There would be a tremendous growth. So it's very pleasing to see that customers are really willing now to change. Of course, there are subsidies in place. And when we talk about subsidies, there's a long history, I can tell you about that. We are really trying to introduce heat pumps to combat the bad, should I say, results. So the consequence of burning fossil fuel. And some argue that you get subsidies. In real terms, of course, the gas and oil are incorrectly priced because they are not priced according to the damage they do when you -- in the combustion. So that's why heat pumps are compensated for that at the customer level. But that's a philosophical question.

[Carl Ragnerstam, Analyst]

Yes, I guess so. And could -- you gave some flavor, but if you could elaborate a bit on it? On the U.S., you said that the development is still a bit slow, but you have seen a pickup. Is it correct?

[Gerteric Lindquist, CEO, MD & Director]

Yes. That's true. And of course, we had the new administration in now. And as you all see, and he has been busy doing other things in other parts of the world. But of course, it's a clear sign that they are now going to go in a more sustainable direction. And we are. I mean, there's no other way. It's just that -- just as we mentioned a few minutes ago here. Why haven't we changed sooner in Europe? Why are we sitting now doing all the changes and talking about it? We should have changed there from fossil fuels 25, 30 years ago. We've seen the symptoms. There's no way back. There's no way back for the U.S. either. It's just that consumers have to be educated. And I think that in Europe, at least, we've been educated every quarter more or less like say 4x an hour by all this, the floodings and all the fires and everything, that's not normal. I mean, that's a great concern to us. Of course, that has to come in other parts of the world as well, particularly in democracies in other countries where they had dictatorship more or less, of course, they can continue to suppress people. But in the long run, we can't accept floodings and fires and unreasonable temperatures and increase of water when the Arctic ices are melting. So we believe that we are well positioned. Of course, we would have liked to see quicker growth in North America, but we believe that we acquired those companies at a very good moment because once the market starts to move, everything is going to be so much more expensive. It's just like in Germany, of course. We acquired a company there 11 years ago and said, okay, why did you do that? You have to need it there now. And on a combined level, and now we also have vast across on board together with our Sinotec and NIBE it's been there for many years. It's a tremendous foothold we have. So once the flames are in front of your door, it's a little bit late to react. We feel that North America will go in this direction. Won't perhaps be so pronounced in the coming 1 or 2 or 3 quarters, but they certainly go in the same direction as Europe is going right now.

[Carl Ragnerstam, Analyst]

Perfect. Very helpful. Just 2 more quick questions. So on the cost inflations or the raw material cost inflation, you obviously presented a quite good gross margin, as you mentioned. But would you say that you managed to offset it through price increases or primarily through internal efficiencies, i.e., have you seen the full impact of the price increases or is it more to come?

[Gerteric Lindquist, CEO, MD & Director]

Well, it's difficult. I mean, we don't know whether there are any manufacturers of steel or copper listening into this call here. So we wouldn't like to motivate them and saying, well, you can increase prices. We were not prepared for these price increases. We've been surprised, and we are surprised. And the indications are that some of the price increases will continue, and we have the combat that by a combination of being more efficient internally and also increasing our prices. Increasing our prices, we are fairly cautious doing that. But of course, we've been forced to do that. And that's exactly how we're going to react during the remainder half of the year. If we are hit with price increases, we have to some extent, compensate ourselves by increasing our own prices. But there are 2 factors there, what you can do internally and what you cannot compensate fully internally, of course, you have to compensate yourself by price increases because we are not a bank. We are producing units that should produce profits in a reasonable manner. So as Hans mentioned and I mentioned initially, it is a very, very cumbersome period, perhaps it's -- we indicate that we've been able to go through this, and that's true. But of course, our productivity could have been better had it been those stop-and-go situations. And of course, the price increases in some materials like steel, if I just mentioned that's unheard of. And you can't just sit there and take that in the long run. So we don't -- unfortunately, we don't think it's over. But perhaps we passed the peak, if I dare to say that, it's difficult to say, but there are still indications of some components and shortages, but we hope that the further we walk into the forest, as the saying goes, I mean, the closer you get to the other side. As far as shipments are concerned, of course, it's been a shortage of containers. That's an indication you know that they have to produce more containers. And when there is a tremendous price increase of components or materials, of course, as in the market economy, everyone with some kind of a common center, that's the market for me and they're going to increase prices -- production. So hopefully, we go towards a situation with it's going to be more balanced. But we don't think they're going to be in the coming weeks or coming months. It's going to be cumbersome for the remainder part of this year, we believe.

[Carl Ragnerstam, Analyst]

I have 1 final 1 from my side, sorry for that. I mean...

[Gerteric Lindquist, CEO, MD & Director]

You're taking up the whole questionnaire.

[Carl Ragnerstam, Analyst]

Yes. Okay. I get back in line. Let's take it offline.

[Gerteric Lindquist, CEO, MD & Director]

No, no, no. We will take that one. I'm joking with you. Just for fun.

[Carl Ragnerstam, Analyst]

Yes, I guess it might be a difficult question. So -- but in terms of the EU renovation wave and the Fit for 55, I mean, we have seen your our trade association, European heat pump association saying that you need to create the installed base in order to reach the EU target. I mean, what's your view on that? I think could you sort of just give a view on your organic profile and how it might look like the coming sort of 3 to 5 years? What's -- yes, it might be difficult question.

[Gerteric Lindquist, CEO, MD & Director]

No. I think it's difficult. There's more math. If we talk about every year, some in the past, some 7 million or plus/minus 7 million boilers of all categories been sold. If you are to replace those, that's on an annual basis, and there are some 250 million dwellings or individual homes in Europe. So I mean, if you're going to change that, and we talk about perhaps heat pumps today being having a penetration in Europe of some 5%, 6%, I'm talking the broad numbers, they're going to be a phenomenon, of course, volume increase. But everything takes time, not only producing the heat pumps. You have to install them and you have to have all sorts of logistics looking after this. But we are very positive. As I said now, as I've said many times, we are disappointed that it hasn't gone quicker. Now we see the flames. Now we see the flooding in front of our doors. Now we say, we have to do something, oh boy, and we are a little bit too late. And that's why everything has to go so quickly now. So we understand that we have to increase our capacities like all our colleagues in this facility or this sector. But we see no other solution. You cannot continue to use gas or oil or even coal. That's just 1 way. We have to replace what we've got out there. And there's going to be a phenomenal challenge to do that as quickly as possible, but also with the quality that's necessary because consumers don't like to have a faulty products in their utility room in the basement. And neither do they want to have an installation as such that's not done professionally. So the whole sector has to develop together. All right.

[Operator]

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

[Douglas Lindahl, Analyst]

A few questions from my side as well. First of all, congratulations to a strong report. But coming back to margins. I wanted to -- I guess, it's a difficult question, but I wanted to give -- or see if there is some sort of possibility to answer if -- can you give some indication on by how much the underlying gross margins in Climate Solutions improves over time as your mix change and you sell more and more of your latest heat pumps? And this is, of course, assuming that raw materials are stable and comparing it to your older products in Climate Solutions. That's my first question.

[Gerteric Lindquist, CEO, MD & Director]

Yes. That was a heck of a question. Thank you.

[Douglas Lindahl, Analyst]

I'm sorry for that.

[Gerteric Lindquist, CEO, MD & Director]

No, no, no. Of course, we try to come up with products all the time that is less costlier. But that is a balancing act because we don't like to come out with a product that are faulty or have a lower quality. As should we indicate now, we are just on the brink of introducing new families on based on different refrigerants and particularly on going from the ones we have today to the propane ones. And there, of course, there is a saving there and the refrigerant as such. And -- but compressors, they are about the same. So we can't say that they're going to be a gigantic leaps as far as being on the raw material side. But then, of course, we have the volume as such, that's the only volume, of course, the benefit. When you buy more series, you buy more compressors what have you expansion valves, of course, volumes means something. But perhaps more important is the productivity. When you can go for longer series, of course, the productivity will increase. That's very substantial. That's why the raw material shortages that we've talked about here. And not only caused us cost increases, but also productivity decreases since it's been the stop and go and that is competent to solve. But we have been fighting and we are fighting now to have a healthy margin. And the Climate Solutions, we've had -- our legacy is between 13% and 15%, 13% when the economy is struggling and in general and around 15% mark when the economy is more let's say, friendly to us. So where we are now is pretty much coming back to where we were a few years ago before we had all these difficult surroundings in the world with pandemic and stuff like that. And also demand. I mean, demand is picking up now, and we mentioned to call that I understand here, totally different situation. When the Paris treaty was signed, so it's almost like, no one understood but really was signed. Of course, the individuals that signed and is on in line, they understood what it meant. But perhaps not everyone understood, in general, what does it mean to us? It's a tremendous change we are standing in front of. And we can't wait as a society yet has to move. Okay. I don't know whether I answered your question, but that is a difficult one.

[Douglas Lindahl, Analyst]

No, no. I guess it's a difficult question to answer, but I guess you're constantly trying to lift gross margins by new product introduction as well. But coming back...

[Gerteric Lindquist, CEO, MD & Director]

Yes. We are, every time. Yes, when you specify new product is always, the cost effect is always there for the cost factor. Could we do that less expensive without compromising quality, without compromising on performance. So that -- yes.

[Douglas Lindahl, Analyst]

Just coming back a bit more to the short term. I see that you're write in the report that you expect now that markets open up to have more marketing activities in Europe and North America and I guess a bit more detailed question for Hans. And is it possible to give some sort of indication on how -- by how much marketing costs will come up in the more short term?

[Hans Backman, Chief Financial Officer]

That's also, I mean, a difficult question. I mean, we have, of course, made savings here in 2 areas. You can see, it's marketing costs and also traveling cost and traveling is to some extent related to marketing. I mean we're also looking at new ways to reach out to the customer. So I think you saw in our Q report there, we have this truck driving around Europe now in various locations, which is a very cost-efficient way, but also a good way to reach out to the customer and meeting them where they are rather than everyone coming to a huge exhibition. So we're also contemplating new ways of doing this. So probably, we will not come back to the old levels neither on exhibition costs more traveling. But of course, they will increase from where we are today of giving any numbers on that, it would be impossible.

[Douglas Lindahl, Analyst]

And will that already be seen in the next quarter, you think or too early to say?

[Hans Backman, Chief Financial Officer]

Yes. It's a little bit too early to say. I mean, if you look at those big exhibition fairs like the Frankfurt or Nordic they are not fully backed either with their whole activity.

[Gerteric Lindquist, CEO, MD & Director]

I think that the pandemic has given us a perspective in that sense that fairs without criticizing the organizers of fairs, of course, that's -- it's an old way you're marketing a product. That was before the digital era. You have to go somewhere to look at product. Now any new product can be exposed in the tenth of a second. And you can really evaluate that product and the trailers that Hans was talking about, now you can be generous enough to go to Hamburg, and say, "We're going to be in Hamburg for 3 days, please come and board here installed it" rather than them traveling to Frankfurt. And how many would travel to Frankfurt and then they have to divide their time between us and at least 200 other exhibitors from tubing to valves and what have you, it's so inefficient. And traveling and Hans as mentioned, I think, we've been traveling so extensively just to mention Hans and myself, we have not been turned environmentally friendly, right? And when you look at it, out of 225 days we're easily been gone for 100 days out perhaps 50% of the working day. And you really have to consider what that so efficient. I mean we really have to look ourselves in the mirror, and we will not come back to that, particularly not to regularly -- or regular business meetings with companies already on board. It's a different thing with the acquisition there, you have to have physical meetings. So I think we are as bad as the pandemic has been, it has also changed or will change the pattern of traveling and marketing products, definitely.

[Douglas Lindahl, Analyst]

Yes. It's clearly a new reality for everyone. But on that your remarks there on M&A, always interesting to hear. You mentioned it a bit, but what can you say about your M&A pipeline in terms of geographies and technologies you're most interested in? Are you looking at large acquisitions or bolt-on mainly, smaller maybe?

[Gerteric Lindquist, CEO, MD & Director]

Yes. The whole Kaboodle as we'd say, everything. So I mean we always have minimum 10 to 12 discussions going on. Of course, we have our wishlist with Christmas gifts. That's always like that. So it hasn't slacken. It's just that some companies just say we can't really participate now, we have to come back when things are more clear again. Fine. We accept that, of course. So we expect that to accelerate. And as far as technologies, we are not going to change. We have our 3, should I say, business areas. But it's interesting to see for Element, for instance, how we've been able to enter now the semiconductor industry through 3 acquisitions than in North America, Heatron, BriskHeat and Therm-X.And how quickly that develops, and how important it is to have your eyes open in such a field. And the same thing with Climate Solution and Stoves naturally. We are always looking at newer -- new twists on what we already have, coupled with naturally geographic coverage. And if there are also interesting people that we would like to bring on board, regarding specific businesses. When you get new management's on Board. I mean they cross-fertilize our organization in such a nice fashion. So they are all aspects on that. We are not saying now we're only going to expand in Europe, now we're only going to expand in North America. We are large enough and we have a coverage and service is enough to be able to be in each respective market. And we also are, of course, approached by M&A advisers in most instances when the acquisitions are coming up. So we don't see that we're going to lose out. Of course, it could be some of -- we don't like either. We wouldn't say that there could be such an instance. But in general, we are very generously invited. And yes, please.

[Hans Backman, Chief Financial Officer]

No, and we -- I think we also have the financial strength here to look at bolt-on acquisitions, as you mentioned, but also larger ones. I mean, we could take on board fairly large ones purely on our own. But if we will use our share, there's not much of a limit in a way. So all doors are open.

[Gerteric Lindquist, CEO, MD & Director]

Yes. Yes. I don't think that we've been better positioned in for many, many years than we are now, both from a cash point of view, from all the banks willing to help us and also using our share as long you are saying that we are ready.

[Operator]

The next question comes from Pam Liu from Morgan Stanley.

[Pam Liu, Equity Analyst]

Question number one, please. Could you please share with us how you think about capacity planning and CapEx investment? I know that your guidance has been equal or just over the depreciation rate for a while. So I'm just wondering whether that is sufficient for you in order to meet the strong demand that you are seeing and hopefully will sustain? The number 2 question is thinking about Germany -- sorry, the German market for Climate Solutions I know that the local manufacturer valve end have said that their heat pump business grew by 50% last year, they doubled their capacity and expecting well over 50% growth this year. So could you please share with us how do you think about your potential upside in this market? What are your plans, strategies to gain more market share? And again, what could be the bottlenecks such as production or installation capacity, et cetera? Very similarly, finally in the U.S., could you please give us some examples of the strategies, the initiatives your team has implemented in order to drive demand as the market has recovered?

[Gerteric Lindquist, CEO, MD & Director]

That's -- well, I'm surprised that you didn't have more questions. The only 3 easy ones. Anyway, investments, of course, there, we're going to see an increase in investments, not only in heat pump production, but also in the other areas. So of course, we are increasing our production capacity, for instance, now with products for the semiconductor industry. That's a major field for us. And we've been, let's say, alerting the market by suggesting that there will be an increase in investment. The exact numbers, of course, we will not release, but there shouldn't be a surprise to the market. We've said that for several quarters.

[Hans Backman, Chief Financial Officer]

Exactly. The guidance has been there.

[Gerteric Lindquist, CEO, MD & Director]

Yes. And in Germany, of course, we are in such a position that whatever the German market grows, we're going to participate at the same rate, at least because we have a very, very strong foothold in Germany with our 3 brands. We have the greatest respect for all of our colleagues in the industry, but we are so well positioned. So we are respecting our competitors, but we have no anxiety whatsoever when it comes to that. In the U.S., because there we have very much focused on the geothermal side of it due to the fact that, that is the most economical way of also climatize your home rather than using electricity just in a regular air-to-air situation or a regular carrier or whatever you call it, the air conditioning equipment. So there, we are very persistent when it comes to utilizing the ground source by, of course, having a tremendous saving on heating, but even more so when it comes to the cooling side of it. All right? We have 3 more questions, is that right or 3 more minutes?

[Operator]

The next question comes from the line of Gustav Österberg from Carnegie.

[Gustav Österberg, Research Analyst]

I just had a quick question. You talked about the strong foothold in Germany. And then you also mentioned that markets like France and the U.K. are seeing better momentum. Could you please tell us a little bit more about your foothold in these markets, perhaps compared to Germany then?

[Gerteric Lindquist, CEO, MD & Director]

Well, in France, we are not so strong. Here, we have the subsidiary since 7 or 8 years, but we are not so strong there. In Britain, we feel we're well positioned or better positioned. So of course, we -- there haven't been any acquisitions to talk about in Britain. So there, you have to more rely on your own presence, building up an organization and growing organically. So in France, we acquired a company some years ago, and that's where we're building our efforts around. But there, of course, we have particularly 1 strong French manufacturer. But that's also a focus area naturally for us. It is just that we concentrated on the DAC speaking countries many, many years ago, Austria and Switzerland and Germany, and of course, also neighbor Holland since we've been active there for so many years. So there, of course, we had our strongest footholds in the DAC countries and in Holland. But Britain, we are strong and in France, we are relatively seen a little bit weaker or more of a newcomer.

[Operator]

The next question comes from the line of Karl Bokvist from ABG.

[Karl Bokvist, Analyst]

Hopefully, this will be quite quick. The first one, do you think that seasonality will be normal this year, i.e., Q1 smallest, Q2 a bit larger than Q3 and so on? Or has anything happened during this year that might have disturbed a normal seasonality pattern in terms of sales? Then the second one, just as you mentioned, the optimized refrigerants. Are you mainly talking about propane or any other forms that you've been able to successfully implement into your heat pump portfolio? And then just finally, we've talked a lot about Germany and those countries in terms of efforts made to accelerate demand. I was just thinking you mentioned Eastern Europe. Are there -- have you seen any similar sort of government initiatives to promote these products?

[Gerteric Lindquist, CEO, MD & Director]

Okay. The first question was quickly again?

[Hans Backman, Chief Financial Officer]

Seasonality.

[Gerteric Lindquist, CEO, MD & Director]

Yes, seasonality. Of course, I mean, we try to answer that question by saying that the first -- second quarter last year, they were so relatively weak. And now it's coming back. So it's almost like the demand from last year spilling over to this year and it continues a little bit. So I don't think that we're going to see such a pronounced perhaps happen as we've seen in the past because on the Stoves side, of course, we expect growth, but with a tremendous growth now we've had this question with the installation capacity to continue that pronounces has been in the past. So it's very difficult to really predict Climate Solutions came through Q2 last year relatively well. So we expect that to continue, but we will be a little bit more humble about the tremendously strong development for Elements and Stoves, whether they would be able to accelerate that again during 3 and 4, I think we have to be more humble there without being negative.

[Hans Backman, Chief Financial Officer]

Refrigerants, of course, we are aiming at just like EU suggested that we should go towards 1 or 2 or 3. And with the propane, you are down to a very low GWP. And on the ground source heat pumps, we are looking at other refrigerants, bringing it down considerably. The present level is like 675 or 680 GWP. And I think that was a compromise. We are not satisfied with that. We are trying to arrive, in general, below that on all our products, not necessarily -- to propane, that's 1 thing, but we have other refrigerants that would have a slightly higher GWP but considerably lower than the 675.

[Gerteric Lindquist, CEO, MD & Director]

And the final question, you said about Germany and East Europe, yes, of course, I mean, Poland and Czech Republic, the whole Eastern Corridor, they are, I mean is it is the old fashion perhaps to talk about Eastern corridor because that's like 30 years ago now since they came on board. And in our world, they are equal to the partners, like I talk about the Eastern corridor of Europe they are as eager as we are to get going and they also subsidizing heat pumps. They are part of Europe, but they've also signed the Paris treaty. There is no way back for them either.

[Operator]

The final question comes from Emanuel Jansson from Danske Bank.

[Emanuel Jansson, Research Analyst]

I will not take too much of the time before your meeting. Just a quick question. You're talking about internal efficiency work combined with careful cost control are these margins sustainable ahead, you think? And could you give us some flavor of the different measures you have been doing recently? You mentioned, for example, less marketing costs, et cetera. But could you give us some more flavor of both the efficiency measures?

[Gerteric Lindquist, CEO, MD & Director]

Well, I mean, I think that on the white collar side, you cannot naturally expand that as quickly as the volume goes up. There are so many other ways of marketing new products. And you can't have -- if you have like 250 salesmen before, we don't necessarily believe that you should have 500 salesmen if you increase volume with 100%. They have also to be more efficient, they have also to use other tools of marketing and selling the product. So that's 1 very blunt example how we look at that. So of course, the volume increase should not be followed by the same amount of increase in fixed costs. That's because in production, you do it differently. There, you look at productivity, you measure and you go through investments and you try to minimize the manual time. And the same thing on the white collar side or fixed cost side, you cannot allow yourself to expand the fixed cost at the same rate as the volume increase. So -- and that's, of course, a arm wrestling all the time. So I think that's the best answer to that right now.

[Hans Backman, Chief Financial Officer]

And I can just add on, it's not that we're driving, how do I put it, global projects on cost reduction that are steered from the headquarter. This is very much linked to the business model where our companies are very well aware of the targets they have. They're very target driven, you can say. So initiatives are taken on a company-by-company basis, knowing what they need to achieve, and just as Eric said, is very much linked to the growth rates we have and not expanding our organization in the same pace. So it's done on a very local level.

[Operator]

We have no further questions. So I will pass back for any closing comments.

[Gerteric Lindquist, CEO, MD & Director]

Well, we'd just like to thank you all for participating and calling in and putting all these questions. Some questions, of course, from a tactical point of view, we didn't answer fully, but we'd like to be as transparent as possible. We always look forward to this session. It's always interesting to hear your questions. And we'll talk to each other if no sooner than in November again.

[Hans Backman, Chief Financial Officer]

Absolutely. Another quarter will quickly go by. That's right.

[Gerteric Lindquist, CEO, MD & Director]

Thank you very much.

[Hans Backman, Chief Financial Officer]

Thank you.