Nibe Industrier AB

STO:NIBE B

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, welcome to the NIBE first 6 months' results presentation. Today I am pleased to present Gerteric Lindquist, CEO, and Hans Backman, CFO. Mr. Lindquist and Mr. Backman, please begin your meeting.

[Gerteric Lindquist, CEO, MD & Director]

Thank you very much. Good morning, all of you out there, or good afternoon possibly. Hello to everyone.And we're going to perform as we typically do by presenting the figures, and then we're going to open up for questions, of course. And we thought that we should be finalized just before lunch, so we are not announcing any cut offs, just prior to lunch. But we hope that we can answer the questions prior to that. With that said, let's jump into reports. And I think the headline says or conveys the message by the best, saying that it's a very cautious market, and we all know why. I mean we are in a transitional period here in the world, we can say. Everyone talks about sustainability, which is very good, of course. That is right up our alley. But at the same time, for industry to change, like the automotive, we see it's going to take some time. And then, of course, we have political issues all over the world, and that doesn't really motivate, I guess, consumers to be very buoyant. And sometimes, we are fairly positively surprised that they're still out there shopping as they do with all the negative news coming out. One thing that has been negative and that is slightly turning, we believe, is the interest rate that has been sort of demotivating for some quarters, but now fairly recently and during the fall here, we have seen the banks or the federal banks indicating that now we're going to release a little bit on that pressure. And we feel that in the longer run, that's going to be a positive situation for the consumers. So that's the world we are living in and, of course, our duty is to navigate in that world, whether good or bad. We just have to sail along in this sea that is fairly wavy at the moment. And if you start with the Climate Solution division, of course, it's a very good atmosphere for that particular business, whereas the 2 other ones have had it a little bit more grumpy, you can say. But nevertheless, it's been a stable growth the first 9 months. And here, I think it's important also that we are realistic and compare our growth with the growth of previous years. And of course, the first quarter 2018 was relatively weak, and we came in, of course, with a formidable growth. But I think it's also important that we compare quarter-by-quarter and see [indiscernible] really how it's [indiscernible] you're doing relatively to the previous quarters last year. And of course, the operating result is bigger, but on the other hand, we can say that the operating margin is naturally a little bit lesser, mainly due to Element and Stoves struggling a little bit. But it doesn't, in any way, mean that we are nervous or cautious in that sense of what's going to happen now. We are very positive and charging ahead with their R&D and their product developments. And I think that's a good illustration that we have 3 divisions that sort of carry each other right now. Climate solutions, of course, has a tailwind, whereas the other ones, they have to tack a little bit more if we go into sailing terms. And when it comes to acquisitions, of course, we always have, like, 10 or 12 ongoing discussions. And that's something we've been explaining quarter after quarter. And we've seen some irritation in the markets that, well, they're never going to acquire anything more. And we've also said that if that would be the case, we would always be honest and tell the market that now we have stopped acquiring companies. But of course, we can't dictate when an acquisition is going to take place. That takes 2 to tango, as someone said in a movie, same thing for us. And all of a sudden, we saw 2 acquisitions coming about, and that's a good illustration of how it works when you sit at the table. You can take months and months and months, and finally, you have a breakthrough. And of course, when you have several discussions, it can be breakthroughs within a week and 2, which we have here. So that's the environment in larger terms. If we have a look at the figures we see here now that we've had a growth of some -- accumulated growth of some 13.7%. And that's, all in all, a little bit less than 9% organic. And here, of course, we have had held by the currencies. So in broader terms, we can say that they have a 50-50 split but more, of course, during the first part of the year. And then the operating margin is half a percentage down. And it's also important to see -- compare the quarters here because this is the accumulated figure, and we can kind of comment upon that when we come into the quarter. And of course, we would have liked to see the growth of the EBIT line as much as on the top line, not to arrive in that -- the -- a little bit lesser and, of course, the 8.9% profit after net financial items. So of course, we are just charging ahead, trying to be constructive. And I think that's what we see in the third quarter if you jump into that picture. The first quarter this year was, of course, very strong in growth. And -- but then again, just if you compared it to last year, that year was not so particularly strong. So actually, when you go back and look at the first quarter '18, it was only like 2.2% organically. It was mainly driven by acquisitions. So then, of course, quarter one came out very, very strongly and with a 13.3% organic growth, and all in all, some 1 8.5%. Walking into the second quarter, there perhaps we should say that we were a little bit taken by surprise that the downturn came so abruptly, and we couldn't really defend our margins as well as we should have liked perhaps. And particularly the May and June figures were not so good. And -- although the growth was fairly decent, but then again, we were comparing ourselves with a quarter 2 '18 that was improving tremendously from the first quarter, having an organic growth of 11.4% actually. Now we are coming into the third quarter this year, and we see that we had a formidable growth this year with 24.6% '18, and this year now is 9.7%. And the organic growth is here, of course, only 6.5% -- 6.2%, really. And I think that, that should be presented in relationship or in relation with the tremendously strong quarter '18. And there, now we see that the operating margin for the quarter is, of course, still lesser than the previous year, but here, we have taken up our usual mechanism. Now we start to trim our costs a little bit more. So the deviation from the previous year is lesser than, of course, the second quarter where we were like almost 1 percentage unit below the previous quarter. So I think that now we have our antennas up and we follow the market very closely. And as we said initially here, we are very constructive when it comes to being cautious with money. We're never going to cut down on sale efforts, we're never going to cut down on R&D, and we don't feel like the situation is so severe that we should, by any means, harm our future growth potential. The graphs that's illustrating our typical sales development, they follow the usual pattern where the first 2 quarters are relatively weak. And then, of course, the other quarters, the quarter 3 and quarter 4, that's where we make most money. And that's probably a very typical graph. Same pattern and even more pronounced is, of course, on the financial side where we have the pickup in sales. And of course, that immediately influences both our margin and, naturally, the EBIT line. So that's a very traditional graph, as you see here. Nothing really differing from the past. If we just look at the business unit Climate Solutions, that's, of course -- there, we are benefiting from the overall positive attitude that we have to do something about the way we are living. We don't have to be fundamentalists, as we've said so many times, to see or to notice that weather conditions are changing. We just -- all of us noticed, I guess, the Venice situation this morning with tremendous floodings. And I think that we all have to be realistic about changing our lifestyle but in a way that is still enjoyable to live. And I don't feel that anyone is suffering by having a heat pump in the utility room rather having an oil-burning boiler. I think that -- on the contrary, I think it's pleasant. It's less noisy, no smell, and you spend less money on your energy usage. So there are only positive things. We often compare ourselves in this regard with the LED bulb. No one has experienced any discomfort using a bulb like that. Rather, it's a more pleasant glow to that lamp, and you get 95% light out of the bulb rather than 5% at the very beginning of the bulb.So we believe that we are working without embracing ourselves to ask too much. We are working along the right lines, and now we also have tailwind because of the discussions, both on the public and also politicians. And we've also talked about going more into commercial buildings. And one of the first steps there was, of course, when we acquired at the time the Control Group in North America in 2016. And then we acquired a smaller entity also in Gothenburg in Sweden. And then we fulfilled the acquisition of Rhoss in Italy earlier this year. And just a few days ago, we bought 50% of the Üntes Group in Turkey, which is -- which has an axle with Italy since many, many years. They also have a joint venture together where they produce chillers in Turkey for their same channels. So we feel that's a very natural step. We have a good axle, they have a good body now in the southern part of Europe with now antennas out in Middle East. So we're going to continue this journey, as we've said many times. We're going to take it step by step. We are very determined that we're going to do the same thing with Climate Solutions on the commercial side, as we will do on the residential side. With very high-quality products, white and using the digital possibilities that we have now that we see the potential of, not the least with the Climate Solutions, new family S series that we are introducing since some months back now. And of course, all in all, that is also generating a decent operating result and also an operating margin that is slightly higher than before. And that is a combination, of course, of growth, of new products coming to the market and always polishing on productivity. Today, we feel it's -- we're fulfilling our promises, both to ourselves and to the market. If we look at the figures. I mean, they speak for themselves. It's a decent growth, and the operating margin is up from 13.2% to 13.4%. We also -- we all know that the margin on the commercial side is slightly lower than in the residential side. So here, it's a delicate balance that we're still going to maintain our relatively healthy margin from the past when we bring more commercial products on board. And that's why we try to bring fairly profitable companies on board like Üntes now. They have a very decent history of profitability. Swinging over to Element. We see, of course, that there, we have so many new potential customers that it's taking time. We mentioned automotive industry, but so many other sectors are now moving in a different direction. The fossil fuel era is not gone, but it's been very seriously challenged by other technical solutions, and we find ourselves here in a very, very interesting market position. Unlike Climate Solution, while we already have the product here, of course, we have to wait for the customers because it's their products. When they hit the market, our products indirectly also hit the market. And no question that on the traditional white goods and stuff like that, it's been a softer market due to the reasons that we mentioned initially here with interest rates, the need to increase, but it's on the contrary now, and political uncertainties. And we also stepped into the semiconductors gradually through a number of acquisitions. And of course, we also experienced that mid- last year or spring last year, that market is starting to soften. And that's a good sign, however, that -- it seems like that has started to go in the other direction now. And we feel that the timing of acquiring Therm-X of California is very good presently. Because they're coming in now, fulfilling a gap in our product portfolio, and they're coming in at a time that we feel is very, very timely, if we play with words. Still, the operating margin is naturally lower due to the changes in product mix because when we launched the semiconductors ranges and a number of other, the train industry and the maintenance of the tracks, they have most unexpectedly gone down. Of course, that has hit our margin. And we've also seen the increases of political time. The new governments have just dictated now we're going to increase salaries 24% to even 100% in some countries. And we haven't really been able to counteract fully here, of course. But Element is very persistent when it comes to maintaining their presence in all the different segments and in all the geographical markets where we are, and we just have to continue to polish on productivity, automate and monetize at even a higher rate than we've done in the past because we believe that being in -- present in every local market, that is very, very beneficial for us and that gives also our customers a comfort that the NIBE Element is present. Wherever they are, we are with them.And looking at their figures, of course, '18 was one of the better years in many, many years, you can say, when we arrived at 11%, and now we're at 9.1%. And of course, we are not pleased with that. And hadn't we seen the potential of so many new segments coming in now, I guess, we could have been a bit more concerned. Now we are more anxious to get the new segments going. So we are full of optimism when it comes to coming back in margin and also increasing sales more aggressively than we've done here. And if we just swing over to Stoves, then here we are, of course, also in the sustainability part of the world, but there have been discussions without the particles, and that has not been an assistance to ourselves. And although we need the requirements, there are still discussions in the market if that's sufficient enough, and we're working very hard to get a solution to the market where we reduce the particle waste even further. And here, we see that the pellet stoves and the electrical ones, they are increasing, whereas the wood-burning stoves are slightly going down and gas is remaining fairly flat. But that's varying between the continents as well. In North America, it was weak during the beginning of the year, but it's coming back. In Europe, we haven't really seen that uptick yet. And it could also be so that we have to facilitate when you use wood. Younger generations are not so used to using an axe and splitting woods out in the -- or down in the hallway somewhere. So I guess that, as difficult as that might sound, could also possibly alter woods to consumers, but that's something we're going to discuss a little further on. And of course, when a market is flat, as always, there's extra -- some price competition, and we've mentioned that, not it's so severe, but we've noticed in some markets. When the market is a little bit down, that's the -- no matter how many years you spent at university, then you try to buy market share or buy presence in the market by reducing your prices or at least not increasing prices, even if it would be necessary. So the figures here, of course, they just illustrate what we just said. We're down SEK 17 million in operating profit, although sales is up slightly and the margin -- operating margin is down from 8.2% to 6.6%. Here, we're not satisfied either, naturally, but we are convinced that we have so much in our arsenal of new products and new solutions that also here, we are anxious to see some quarters move on where we can launch our new solutions.And just a few charts -- pie charts before Hans steps in here. It's a fairly typical distribution of sales where Climate Solutions is almost 2/3 and the other ones are 27% and 9%. Of course, that picture will change a little bit when we come into the fourth quarter, which is stronger for Stoves than it typically is until the first 3 quarters. And profitability wise, naturally, here, Climate Solutions with increased margin and increased sales of the magnitude that we just saw has even a bigger chunk than we typically would see with almost like 3/4 of the EBIT. And geographically, as the final chart is illustrating, we are fairly pleased with this, with our home markets with the Nordic countries where there's only some 25 million, 26 million people, there, we have 25% out of sales. Of course, Sweden could be considered our home market, but we paint it in broader terms in Nordic ones where we have such a good presence with our platform. Rest of Europe, some 41%, which is a very solid one. It's been like that for some quarters now. And North America, 30%. That is going to change the last 5, 6 years, and we're very happy to see that chart so well distributed. Element is also outside Europe and North America, and with their 4% following their customers predominantly to Asia. So it's a totally different group than just 10 years ago when it comes to geographical spread. So Hans, do you have some nice comments about the performance -- the figures? Or could you improve them up a little bit? Or...

[Hans Backman, Chief Financial Officer]

Well, I will comment upon them. So just like before, I will go through the -- each business area quickly and then a few words on the group balance sheet as well and key numbers. And then we'll, of course, open up for questions. So looking at a bit more detail into Climate Solutions then. Just as Eric said, it's continued stable growth within the business area. Heat pumps being the largest portion of the business area is pumping on, so to speak. The U.S. has come back very nicely, and the Netherlands is another country sticking out in the sense that it's also keeping on growing following the political decisions that were made there. And Germany's on the right track, you can say. They're still behind in a way in terms of growth and size of penetration at this point, but today, as we spoke, actually, the Klimapaket was just approved by the German Bundestag. So that's a step in the right direction, although it still includes a large portion of hybrid products where we would have preferred more clean products, so to speak. But nevertheless, it's moving in the right direction. And we're, of course, we're looking into more commercial sectors, just as Eric mentioned, and not the least through the acquisition of Üntes that would come in then later -- well, in the beginning of the next year, I would say. Looking at the numbers, we've increased sales here with 17.1%, up from SEK 10.1 billion to SEK 11.8 billion, which is a fairly even split, you can say, between acquired, organic and currency. Well, actually, the currency part is the smaller portion of this share. The gross margin has been stable, you can say, and what you don't see on the picture here is the SG&A portion, but that has been kept under control. So the combination of increased growth and a good cost control has led us to the increase there in profit of some 18.9%, so more than the growth in sales, which, of course, is very pleasing to see, landing then at a margin that is slightly higher than last year. In the third quarter, we grew with some 12.5% where we acquired [indiscernible] as you can see on the page there, and a fairly even split between organic and currency. And again, here, gross margin is stable or slightly up even, and the cost control side on SG&A has been good, leading to an operating margin there up from 15.7% to 16.1% in the individual quarter. In terms of geographical split, it is rather similar to the situation we had a year ago, but where Europe is sticking out in the sense that it has grown a few percentage units coming up from 38% to 42%. And we also see that in the export that we have from NIBE AB there in Sweden where we sell our products into that portion, that is growing quite nicely. And then, of course, with our own -- other companies in the region, they have also taken a step up. And then the North America, also slightly higher this year than before. So overall, very solid performance, you can say, from the Climate Solutions business. In Element, as Eric mentioned and as we've specified in the report, it's a softer demand in certain segments. You can also say varying demand in a way because there's been a quite strong and good growth in the ESG-related sectors or the sustainability-related sectors like the HVAC business, wind business, they have been performing nicely. The automotive sector is at cross-roads, but opening up with interesting opportunities since that part or that sector is becoming more and more electrified. But whereas white goods and also semiconductors have had a slowdown, and that's what we see in the numbers turning to them. The net sales have gone up from SEK 4.7 billion to SEK 5.1 billion, which is an increase then of some 8.6%. 2.7% come from acquisitions, and then a fairly small organic growth, and then helped by currency for the rest. And then the gross margin is down a couple of percentage units, and that is, of course, a result of the slowdown in semiconductor, for example, being a healthy and profitable business but also the white goods, which has a lower margin but where we are a quite important and good player with an efficient production, you can say, given the size that we have. So when that also slows down, that has an effect on the margin. So there's a change of mix in that number, bringing the profit down from 11% to 9.1%. But as Eric said, we're quite confident in the business area, as such, and the sectors that it operates in, given the -- that the world is becoming more and more electrified. The third quarter in itself is really a reflection of what's happened in Q1 to Q3. So there's not much of a change there with small organic growth behind the numbers, helped by currency, of course, and a small portion of acquisitions there. A slight improvement in gross margin from good quarters before. So we're on the right track, although we are not satisfied, of course, in any way. But with signals that semiconductor, for example, is coming back and with the timely acquisition of Therm-X, I think we're well positioned for the coming months and quarters. In terms of split per geography, this is where we have the most global split, as we've mentioned several times, Nordic being around 20%, the rest of Europe some 33%, North America slightly bigger at 36%, and then much of Asia in -- behind the others number. So we have a very good split between geographies and also different segments here, giving us stability, you can say. Coming then to Stoves. It is a flat development, or you can even say stable, actually. The Nordic region has been stable. Sweden being one of the most important markets, given the history that we have, has been stable. Norway has actually shown a nice development, both because the market has been developing nicely and our company, Nordpeis, there has been successful in launching products, which have been very well accepted by the market. And Denmark has had a boost or help, you can say, through a subsidy to replace old wood-burning stoves. And then there's been a slight positive sign from Germany also actually with an increase for wood-burning stoves. And in the U.K., electric stoves are continuously developing nicely, and North America has been stable as well, you can say, and actually increased its share of the overall pie there from some 20% to 22%. Looking at the numbers, we've increased sales in total by 7.3%, up from SEK 1.58 billion to SEK 1.67 billion. Organic growth of some couple of percentage units, then helped by currency, of course, for the rest, landing us at a gross margin there which is 0.8% lower than previous year. But behind that, and as I think Eric mentioned, there are some very interesting R&D projects ongoing to develop the next generation of stoves. And we've continued also in the -- in marketing and with those types of costs, then landing us at the 6.6% as opposed to 8.2%. So not -- we're not satisfied, but we're not either worried, I would say. Looking quickly at the third quarter. We had a small growth there of 3.2 percentage units, again, a combination of organic and currency, stable, flat you can say, slight improvement in the gross margin from the first 9 months or the first 6 months. So we're keeping the costs under control. Landing at 7.8%, which, of course, is below expectations in a way, but again, not being worried given what we have in the assortment, so to speak, going forward. The split there has been drastically changed since we acquired FPI in North America. So we have some 22% coming from that unit. And that market, as I just mentioned, has been decent, so it's been -- it increased slightly from last year. And then the other ones being very similar to before, the Nordics and the European part. And if we leave the business areas and just quickly jump into the balance sheet and so forth, there are no major changes here, you can say. There's, of course, a currency effect in the numbers as well, given the way they are calculated. Then another item that is affecting the balance sheet is the IFRS 16 change, and you have all the details to that in the report. It's not a major change for us given the type of business we have. Intangibles being the biggest portion, of course, just as before, which is a natural result of us acquiring companies, but we do all the impairment tests by the book, and we have no issues there, you can say. On the equity side, it's just a reflection, in a way, of the asset side. So some effect of the IFRS 16, and not really much to mention. From a cash flow perspective, we've had a good generation of cash flow, some SEK 2.7 billion, up from the SEK 2 billion for the same period previous year, with a considerable smaller change in work of -- working capital, generating a much higher operating cash flow. And in a way, that number could have been even better because also this year, we have been building inventory. But last year, we built much more due to the fact that we, in 2017, had some -- or some demands there actually in the latter parts of the year that we hardly were able to meet. So we stocked up in '18 to really make sure we had the product on board, and now we've been able to balance that out. But what sticks out maybe is the next item there, the investments in current operations. They are up from SEK 460 million to SEK 804 million, and that is a reflection of some interesting investments that we are making at this point. We have invested in a factory -- or new factory in Finland, another one in Poland is on its way. We're building a logistic center in Czech Republic. We are building quite a lot of factories for expansion purposes here in Sweden. So there's a lot going on. In the long run, though, with the investments and the depreciations, we'll be fairly on par. The previous years, they have been slightly below the investment, so I think this is balancing out in a nice way. And of course, this generation of cash flow does give us a good portion of cash for further acquisitions. And that's both seen in the balance sheet that we just passed quickly but also on the next page with the unappropriated liquid assets, which are at SEK 4.3 billion. So with the current credit facilities we have and the cash at hand, we are definitely positioned to continue to acquire, and that's also reflected in the net debt-to-EBITDA ratio that is at 1.7x, giving us considerable room for expansion. And also, the equity assets ratio is, of course, healthy at 47%. I briefly mentioned the working capital there when going through the cash flow. This is now at 19.5%, so a small, small improvement from the year-end figures and a clear improvement from the same period last year. So that is on the right track. It's, of course, a number that always can be better, but I think, it's -- it reflects fairly much where we are and how efficient our operations are. Some last key financial figures. Again, given the cash that we have on hand and following the right submission we've made late 2016, the return on capital and return on equity is not quite where it should be, but there's a good explanation for that, if you like. So it's a matter of getting that money, so to speak, working in the operations and through acquisitions. But nevertheless, net profit per share has increased, the equity per share has increased. So overall, very stable balance sheet and key financials, I dare to say. And by that I think -- I rushed through it so that we have an opportunity for questions, of course. And I don't know what you decide to...

[Gerteric Lindquist, CEO, MD & Director]

I'll be surprised if there aren't any questions after that. All right.

[Operator]

[Operator Instructions] The first question is from Douglas Lindahl from Kepler Cheuvreux.

[Douglas Lindahl, Analyst]

A few questions from side. I'll try and limit myself to three. Can I do them one by one? I guess, it's easier. Starting off with currency impact here on sales in the quarter. I would appreciate some sort of indication on how much you've been helped by FX for the group in the quarter.

[Gerteric Lindquist, CEO, MD & Director]

Well, didn't we sort of mumble about that already?

[Douglas Lindahl, Analyst]

I guess so. But...

[Gerteric Lindquist, CEO, MD & Director]

We're ready to give it out, but I mean, we don't pronounce that per decimal pro forma. But we say that it's roughly 50-50. Isn't that what we said? Then probably let's repeat it again if you didn't listen in carefully enough. Okay?

[Douglas Lindahl, Analyst]

Okay. Roughly 50-50. And underlying growth then for -- adjusting for currency in Climate Solutions seems to soften, and for Europe more specifically, any specific countries that stand out here? And also, I was wondering if you could talk a little bit about the growth rates in commercial versus residential market in Climate Solutions.

[Gerteric Lindquist, CEO, MD & Director]

Well, as I said, if we start with comparing ourselves, of course, quarter 3 '18 was extremely strong. So I think we have to have that also in mind when you compare the first 3 quarters. So everything is relative. And where we have -- where demand is, of course, we're -- we've taken the steps now politically to go for heat pumps in a broader fashion like, Holland and like Norway, for instance. Whereas here in Sweden, we've always had a positive attitude. But now new construction is down, so that is dampening the market a little bit. Now it's the refurbishment part that is up. But you can say that in Switzerland and Austria, they're also very positive through heat pumps, also in Eastern Europe. So it's a very, should I say, clear trend. And as Hans has mentioned, I think we are waiting for Germany because that's the biggest market and that's where we really need to see a political determination that now we're going to go in this direction. I haven't read the report or the decision that Hans mentioned that Bundestag took earlier this morning, obviously. But I'm sure that's also a step in the right direction.On the American side, I mean, now we are still fairly small, but I think that it's -- in America, it's fairly stable. There hasn't been any dramatic improvement there in volumes. We see that the new management and Rhoss on board, it looks fairly positive. And also, we have now Üntes coming on board, we have a very strong unit there. So we expect that to have a healthy growth. I mean that is as clear as we can be at this moment

[Douglas Lindahl, Analyst]

And the final one for me. On Stoves, Hans, you mentioned that the margin in the quarter was slightly weaker than expected. Does that mean that we shouldn't expect a strong Q4, which we typically see? So margins above 16%? Or...

[Hans Backman, Chief Financial Officer]

Yes. I mean in Q3 -- sometimes we say that Q1 and Q2 hardly matter for the business area. And some years ago, they were actually around 0. Since a couple of years back, they are actually also profitable and on a reasonable level, then everything happens in Q3 and Q4. And usually, we have come a little longer, so to speak, in terms of generating profits after Q3 than we have in this year. Nevertheless, we expect a fairly good quarter 4 coming back -- well, not coming back, picking up again to the higher levels that we are used to.

[Douglas Lindahl, Analyst]

Okay. So nothing that really deviates from last year from what it seems then?

[Gerteric Lindquist, CEO, MD & Director]

Well, I mean I think it's important that we are fair to say that if you look at, I mean, the sort of figures here that we are now, and the operating margin on a running 12 month basis is 10.0%, and the full year last year, it was 11.2%. I mean we are not implying, saying that we're going to kick it back to 11.2% in a quarter, but we don't expect any dramatic issues either. So I think that has to be taken with a grain of salt after all.

[Operator]

Next question is from Carl Ragnerstam from Nordea.

[Carl Ragnerstam, Analyst]

It's Carl here from Nordea. Regarding the positive margin development within Climate Solutions year-over-year, I mean, how much of that is driven by gross margins, I mean, the new S line you launched a couple of months ago or a month ago? And how much of that is driven by price increases, as you mentioned?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that the S series now -- it's been out now for, well, like a couple of months. I don't think that, that has influenced those 2 percentage units. I mean that's still in the process of being launched. Price increases, we always try to match our price increases. We are not trying to be unreasonable. I think that -- we have demonstrated that in the past. And sometimes, we're even a little bit slower in increasing prices because we don't necessarily like to put everything on the customers, on the consumers, but rather use our own abilities as well with productivity. So I think that we should rather look at productivity and the revenue growth in itself as the 2 major drivers for the improvement.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And in terms of Netherlands and Norway, could you talk a little bit about the growth rates in the quarter? And also, I mean, is it fair to assume that the early adopters in these markets has already switched to a more sustainable alternative in order to comply with the new regulatory landscape? I mean should we therefore look at tougher comparisons in, let's say, H1 2020 from these markets?

[Gerteric Lindquist, CEO, MD & Director]

Well, I mean, listen, you're touching upon an issue that is a little bit sensitive to us because we are the only company in our industry really reporting so openly as we do. And that is, of course, in itself contributing to a number of colleagues, if you call them, to enter the same markets where we talked about Britain being buoyant some years ago and then we acquired Stovax. I think that the increase in number of competitors is phenomenal in our world. They were -- it wasn't like 3 or 4, there were like 30 competitors trying to enter the market. And in Holland, of course, when the government has come out so clearly and stated that we're going to switch away from gas but still in an orderly fashion, actually. I mean, they're not going to stop gas supply. But new houses will be not disconnected, but new housing will be heated in other fashions. Of course, everyone is looking at that. But I think it takes too much time really to describe all of this at a phone conference. I think that everyone should [indiscernible] and read about the legislation. But there are also, of course, issues and hurdles. It was very clear that the market was going in this direction. And all of a sudden, they talked about NOx values being too high. And now the construction stalled a little bit because there was a whole package doesn't add up properly. And now, obviously, they just decided a day or 2 ago that they're going to reduce the speed on highways during daytime to meet the NOx values in this [indiscernible] treatment in the way they interpret that. So there are hurdles and there are positive things, and now they anticipate the construction industry to move ahead again. And that's definitely a recent report. Less than 48 hours that it came to our awareness. So where should we put this? We believe that it's a good example a company -- of a country that is concerned about the environment, concerned about sustainability, concerned about the earthquakes and really the fracking, and we hope that they're going to set the standard for other countries. But of course, many competitors are in there now, trying to, of course, take their piece of the pie. And we, of course, could say, well, we would love to be alone. We have a very strong presence in Holland and the fact is that the more competitors get in a market that's buoyant, the more of an illustration that customers get and other countries get, okay, it's possible to move in another direction. I think Sweden has proven that, Switzerland has proven that, Holland is going to prove it, Norway has proven it. And I think it's not a landslide, but it's a very, very clear trend, and this sets a good example. And as far as competition and where we are heading, I think that we have to look at the experience year-by-year and see what happens now.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And the final one for me, it's regarding Elements. I mean we have seen contracting margins in the past few quarters. Are you planning on implementing any larger cost reductions in order to adjust to the current market volumes? Or do you expect the market to turn gradually in Q4 or in H1 2020 and therefore will maintain the current cost level?

[Hans Backman, Chief Financial Officer]

Well, as we said before here, we believe that the upside in so many segments is so great, but we have really -- we struggle with saying that we're going to cut costs. Of course, we are very aware of -- that the margin is sensitive to downturn in revenue, naturally. But I think the fair answer is that we will continue to try to solve the customers' needs, and we feel that we need the capacity and we have an R&D on same side to be successful in that because we are now building alliances of sizes that we have never seen before, larger entities, without going into more details of names and such. And they've come to us, they've seen our development, they know it's tough as a subsupplier to arrive at 10%. They're very pleased to see that. And we've also given them promises that we're going to fulfill our commitment when it comes to being present in a market and also having the necessary R&D people. And of course, if we had seen that the market is -- the bottom is out and there's no future, of course, we would have reacted totally different, but that's not the way we look at it. It's a time lag. We just have to live with that. But the world is changing in a direction that is going, after all, fairly quickly now, and we'd like to participate in that rather than be shortsighted.

[Operator]

And next question is from Klara Jonsson from SEB.

[Klara Jonsson, Research Analyst]

So I have two questions on Element and then one on a little bit more long-term M&A. So starting with the Element questions. I mean looking at the end market exposure for this segment, you should really have seen a worse development in Q3 than you did in Q2, but it was the other way around. And if I did my calculations right, your volumes actually grew year-over-year in Q3 after falling in Q2. So what drove this sequential improvement? Is it returning demand for -- from your standing customers?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think, as you said, without going too much in detail, I think we're a little bit surprised about the Q2, the magnitude of the lower volumes hitting us. And it might have been an overreaction as well in some sense of our customers because it's like when something is happening in market, you both have -- they stock the orders and then they like to reduce the inventory, and then it kicks back again. So it's a very volatile demand. And of course, when we saw that, we also -- not contrary to the answer to the previous question here, but as soon as we see something happening like this, of course, we try to counter that. There are always things to be done on the cost side, and that's why Q2 is not as dramatic perhaps as -- Q3 as Q2 would have indicated.

[Hans Backman, Chief Financial Officer]

I think we mentioned at the time that it was a combination of unfortunate events all coming into the same quarter by happening in a way. I also think that days played some role there in terms of Easter and things like that.

[Klara Jonsson, Research Analyst]

All right. So if we just focus on profitability again, and then you did say in the report that you're seeing a positive trend for your semi business and this should help improve mix ahead, right? So I mean if we continue to see volumes returning here to levels you saw last year, will this help you get back above 10% margin for the Element division, you think?

[Gerteric Lindquist, CEO, MD & Director]

The 10% percent margin is always ahead of ourselves and the management of the Element group. And I think that we can't promise you that quarter, that quarter. But if we did believe that we wouldn't come back to 10% solidly, we would tell the market. We have no reason to lie to anyone. But I think that we have not arrived at a level of around 12% solidly, there you can take a downturn in demand and go down to 10%, and then up to 14% perhaps when times are super. So we had landed around a 10% or slightly above. And now when we have a little bit of an issue with volumes and stuff like that, then, of course, we go down. But the target is still 10%, that's not changed at all.

[Klara Jonsson, Research Analyst]

Yes. Okay. And then my last question is a bit more long-term and the -- about the acquisitions within Commercial fitting and ventilation for Climate Solutions that you've done over the past couple of years. So I was actually wondering how -- if you could comment on how Climate Control's group in the U.S. and Rhoss in Europe are performing, for example. And then also touch upon are there different challenges for these kinds of businesses towards commercial -- towards the commercial sector than the residential market where you have most of your background?

[Gerteric Lindquist, CEO, MD & Director]

No. I mean it's a learning curve, no question at all. And the most difficult part is perhaps that it's project-oriented. We don't build like with the heat pumps or water heaters or Stoves or Elements for that matter, here, you talk about projects. And you have tenders, let's say, okay, now you have that many units of rooftops or that many chillers, of course, everyone is there, and then they have to be built more or less to the customers' -- respectively to their demands. That's of course...

[Klara Jonsson, Research Analyst]

So it's just more lumpy, I guess?

[Gerteric Lindquist, CEO, MD & Director]

Yes. But at the same time, I mean, a chiller or a ventilation unit, of course, you can always compare it to, say, a heat pump or a ground source that's a compressor. You try to make things more efficient. Size, naturally totally different. It's not so easy to ship. You have to have a different geographical spread, but just a few comments about that. It's different but still a common denominator. It's very much alike, it's the same thermodynamics that we use. So the customers...

[Klara Jonsson, Research Analyst]

Sorry for interrupting, but I mean, the Climate Controls group in the U.S. and Rhoss, are they performing according to your expectations right now, you would say?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that the commercial side, I think they are. If you look at their competitors and their colleagues they have, they are between 7% to 12%. And of course, the commercial adventure here is no exception, they of course have to be at 10%. And ClimateMaster in America is very successful, but they don't have a margin of 20%, but they are at the margin that we anticipated, 9% to 10%. So in that sense, it's -- on the commercial side, it's decent. And whilst, of course, it's struggling a little bit, but there, we are improving margin now. And you saw Üntes, that's a relatively profitable company with margins well above 10%. So I think that's as clear as we can answer to that question.

[Operator]

And next question is from Marcela Klang from Handelsbanken.

[Marcela Klang, Analyst]

Actually, only one question for me. You mentioned a turnaround for the semiconductor industry around the corner. Could you explain a little bit more what you see? And are there any indications of orders as well?

[Hans Backman, Chief Financial Officer]

Well, I think that we are not any oracles in the world when it comes to that. I think that [indiscernible] of course, they also serve this industry. And they also reported in their Q3, we believe, that this industry was turning now and becoming a little bit more buoyant again. Without going too much into details, of course, now we have through a number of companies, BriskHeat, Heatron, Marathon and now Therm-X. Of course, we don't just read those figures but our customers have solidly told us that we have to be prepared now for better volumes, so that's what we are reporting. It's not that something we hope now, but we have solidly been exposed to our customers' demands that now we need more product. How much that is? Well, we will -- we can't really tell. But again, we believe now the downturn has stopped, and it's going to go in the other direction. At what speed? That is to be seen.

[Marcela Klang, Analyst]

So your customers told you to be prepared, and I guess that you are?

[Gerteric Lindquist, CEO, MD & Director]

Absolutely, yes.All right. Only two more questions, and then I think we have to go for lunch, right?

[Operator]

And the next question is from Fredrik Moregard from Pareto Securities.

[Fredrik Moregard, Analyst]

Hans, Gerteric, a follow up on the previous question on the semiconductors. Do you have any insights to, so to speak, what reasons your customers have for indicating higher volumes? Is this related to capacity being built? Or are you, so to speak, exposed to new production technologies? Could you give us some more insights into this?

[Gerteric Lindquist, CEO, MD & Director]

Well, I mean, everyone is talking about 5G and that, and I think there's an increasing demand in awareness on that. So it's a very cyclical business. And of course, it's very, very expensive to build a factory of this kind, we've been told. If you talk about building a new semiconductor factory, we talk about $12 billion to $14 billion. So of course, obviously, now our customers, they are the ones supplying machinery to these factories, the factories typically being erected in Asia. So it's a long chain, but obviously, the demand for new chips, particularly on the 5G as one example, is very solidly there and we have to respond in our end to that.

[Fredrik Moregard, Analyst]

Okay. And on the rail side, you continue to say that rail has been, I guess, softer than you had expected. When you talked about the rail market a few quarters back, you said that you thought it was very temporary and that you expected investments to pick up. Have you gained anymore insights into why this has not materialized?

[Gerteric Lindquist, CEO, MD & Director]

Well, the only reason we can see is that the maintenance budget for some reason have been cut down. I don't -- we don't know why they've been cut down. But typically, the rail structure is state-owned or state-controlled in most instances. And obviously, the maintenance is not kept at a healthy level. It might be dangerous to say, but that's how we experience that. It's not healthy the way it is. But we can't give you any further information because that's -- someone has said, we have to put money elsewhere. So that's a little bit of a sad situation where we had a very good position.

[Fredrik Moregard, Analyst]

Okay. So no real, so to speak, hard feedback from your sales companies?

[Gerteric Lindquist, CEO, MD & Director]

No. We haven't seen any competitors out there on the tracks doing something that we should have been installing instead. It's just that we are told that there's no money for -- or lesser money for maintenance.

[Fredrik Moregard, Analyst]

What markets particularly is this related to?

[Gerteric Lindquist, CEO, MD & Director]

Well, it's Northern Europe.

[Operator]

And the final question for today comes from Karl Bokvist from ABG Sundal Collier.

[Karl Bokvist, Analyst]

I will be very, very brief here. So just a technical question here from my end. The Schulthess acquisition here, could you just shed some insight into perhaps noncontrolling interest going forward? And also, just a more subjective question perhaps. Do you feel that the investments you have had into R&D, that this has actually given quite nice returns? Or do you think that it has become more challenging to achieve earnings on the R&D money that you're putting into the business?

[Gerteric Lindquist, CEO, MD & Director]

Are you talking about Schulthess now? Or...

[Karl Bokvist, Analyst]

No. The first one was about Schulthess, but the second one was more just conceptual that everyone is investing more and more and that it might be more difficult to get paid for the investments that you're making.

[Gerteric Lindquist, CEO, MD & Director]

Well, I mean should we start with the Schulthess?

[Hans Backman, Chief Financial Officer]

Yes. I can take the Schulthess first. You don't see much of an effect on the Schulthess side yet. I mean it's on Page 10 in the report. You have the act in there, net profit attributable to noncontrolling interests. And the reason why it's fairly small at this point in time is that it came on board, in a way, in portions, you can say, during the year. We divested the 49% in 2 steps for technical reason as well, you can say, where we took on board 60% of the 49% between May and July, and afterwards it's been the remaining 40% of the 49%. But then also, there have been, of course, acquisition costs and stuff related to that, meaning that there has not been much of a controlling stake to hit that line at this point in time. It will increase and stabilize, so to speak, during the latter part of the year. And as for next year, I think we will have a cleaner figure there, which should be around some CHF 4 million perhaps on a yearly basis.

[Gerteric Lindquist, CEO, MD & Director]

Okay. R&D, I think you have to split that up to answer the question that when it comes to -- on the Element R&D, they have no speculative R&D cost. I mean they are always done together with a customer, and, as said, of course, there are some R&D costs. But in general, when a big customer comes to us, then we agree on how to finance that and what the potential is. And once you sign agreement, then typically, you have to have a delivery situation over 3 years perhaps to be able to absorb the costs. So I'd say that on the Element side, very seldom do they have any speculative at all investment in R&D. On Climate Solutions, it's a steady R&D natural progress or process. And of course, now when you go into the digital part of the world, it is a bit more costly, it's not so well-known as just to develop a new mechanical thing. But again -- so you see that we are wasting R&D costs, we don't have that feeling at all. And I think that if we compare to other industries, I don't think we are sticking out. But of course, with the growth target we have, both organically and also changing or participating in the change of going more into sustainable way, of course, that is costing us and costing our customers money. But when the volume arise, as they will do, we don't see a major risk or any major changes really. I don't know whether I answered your question by that, but...

[Karl Bokvist, Analyst]

No. It was interesting to hear.

[Gerteric Lindquist, CEO, MD & Director]

Okay.

[Christel Fritiofsson, Head of Investor Relations]

We appreciate your patience. Thank you very much.

[Operator]

And that now concludes the conference call. Thank you all for attending, and you may now disconnect your lines.

[Hans Backman, Chief Financial Officer]

Thank you.