Nibe Industrier AB

STO:NIBE B

Earnings Call Transcript 2020-Q3

[Operator]

Ladies and gentlemen, welcome to the NIBE interim Q3 report. Today, I'm pleased to present Eric Lindquist, CEO; and Hans Backman, CFO. Mr. Lindquist and Mr. Backman, please begin.

[Gerteric Lindquist, CEO, MD & Director]

Thank you. Thank you. Good morning. It's Eric here.

[Hans Backman, Chief Financial Officer]

And Hans, too, of course.

[Gerteric Lindquist, CEO, MD & Director]

Yes, and we're going to present the result in 2 sections like we do typically. And I start and then Hans continues. And afterwards, we'll have the questions. And we hope that we could finalize at noon at latest, if we aren't rude by saying that. So once again, welcome to this conference. And of course, we like to just present the weather at Markaryd. It's a little bit rainy here today, but we hope that the number is going to warm you a little bit when it comes to the presentation here. And as we all know, it's a very peculiar environment we're living in, not only the weather, but of course, the pandemic is, of course, something that everyone is living through one way or the other. And neither one of us really have ever experienced such a situation. And we thought that perhaps it was a little bit of a betterment and now we see that deteriorating again. Nevertheless, our company, we have continued with a fairly robust trend ever since this started, and we are very happy to present that. Of course, it's been a varying demand also for us. But all in all, it's been a pretty good development. And that is mainly due to 2 reasons, we can say. We have an assortment that's been less affected. The sustainability trend is really helping us. Plus, our decentralized model is really proven to be a very successful one. We are very proud to note that all management around the world in our subsidiaries, they've handled this very, very professionally. We've been hit in the different ways. Of course, some units have been forced to close down, whereas some others have not been affected at all when it comes to closing down. But in summary, I think that the sustainability profile and our ability to gather our forces, that has taken us this far. And the profitability, of course, is always very important to our company, but also the way we treat individuals. And when you have a situation like this we've been going through, of course, in some instances, we have reduced staff. We've been trying to do that in a very civilized way. And also together mobilize, as we call it, all our employees around these 2 targets, trying to maintain our business as normal as possible, but at the same time, showing each other tremendous respect with the hygiene and staying home, if you have the slightest cold and so forth. And so far, we've been able to handle that very well, we must say. And on top of that, of course, the acquisitions that we carried out, particularly during the first half of the year and also during the latter part of last year, they've come in very handy because we've been able to monitor those very successfully during these first 9 months. And of course, they have also added quite a bit to our revenue. If we just took a quick glance -- or take a quick glance at our figures that you've been through already, we have grown now with some close to 7%. A little bit more than that is acquired. And it's pleasing to see that the gross margin is on a trend now slightly upwards. Not much, but we can see also in the third quarter that, that is improving. Of course, the operating margin is also up. Very pleased to note that. And of course, when the pandemic hit us hard in March, no one knew where we were going to end up. And we typically say that we have a fairly good resilience, but no experience with an environment like this, of course. So once again, I think we've demonstrated that we can handle the situation like this in a fairly decent manner. And we just have a quick look at the quarter as such. And there, of course, we have had a growth now of some 8.5%, not the required 20%. But given the conditions, it's still a considerable growth. And of course, now we've been hit by currency, it's been more favorable until the third quarter. And now it's going the other way. But we've always said we have to combat currency fluctuations, whether it's good or bad. It's something that the management have to conquer and combat. So of course, we've had quite a bit of an organic growth during this quarter, but it's been taken away by the stronger Swedish currency. Again, you can see that the gross margin is slightly better than the corresponding quarter last year. And the operating margin is also quite a bit better, on the 13.4% to 15%. And if we just look at the typical graph, following the 9 quarters, like we typically look at, you see the trend continues. But you also see in this graph that something happens in Q2. And there, we have a contraction. That breaks the pattern that we've had for so many quarters, and we see that it's a slight dent in the development there. But then Q3 comes back with a similar trend as we've had in the previous years. And we can also see the running 12 months still having a healthy trend upwards. And if we look at the profitability side, we see that it's the same trend, but we do not see the dent. It's not as pronounced perhaps as it should have been during the second quarter, but it's coming back now in the third quarter. And I think that not only NIBE, but other companies have also seen the Q3 bouncing back from the lockdowns, as I call it, in many countries during the Q2. So of course, the Q3, to some point is, of course, compensation for what did not happen during Q2. We just spend a few words on each of the business areas. Of course, Climate Solution being, by definition, you can say, very sustainable. Of course, it is an impressive resilience that we also -- we demonstrate once again during the whole period. Of course, it was a tougher even for this business area during the second quarter. But overall, it's been a very steady development. And the acquisitions, of course, are coming in very handy, as we already said. And we've been able to grow both the operating profit and the operating margin. And that is naturally a result of the revenue improvement, good cost control and also, as always, polishing on productivity. So it's a very strong performance on the largest business area. And the figures, Hans is going to come in more in detail. But just to summarize the first 3 quarters, it's gone from SEK 11.8 billion to just under SEK 13 billion, with an operating margin almost 1 percentage higher from 13.4% to 14.2%. I guess that itself demonstrates the strength and the development of Climate Solutions. And the Element has also bounced back, and that is perhaps, for outside of service, a little bit more of a good surprise. And -- but there again, we have such a broad presence in the market. With traditional heating elements, they really suffered during the second quarter. But there again, the sustainability profile of some of the segments and also the semiconductor industry, they have really helped the business area to bridge over difficult times into Q3. So again, we say very often that we have a broad assortment, and we have a very good geographical spread and we also have production units almost everywhere in the 3 industrialized continents. And I think what you see as far as result, and particularly the operating margin, is a demonstration of our strategy. And of course, the operating profit is up a little bit and the margin is still below last years. But given the conditions that we've been living under, we dare to say that we are fairly satisfied. It's an acceptable level as a subsupplier living in an environment like this. And now when we see that not only sustainability products and the semiconductors, but also the white goods sector is coming back. And even the automotive industry, naturally more so the hybrid vehicle industry and also the electrical cars industry, there we have a number of very impressing projects that we will materialize during the quarters to come. And if we just run into Stoves, that again, we had a hard hit during some months in the spring time. We call it a really roller coaster development. It's a good, decent start and then relatively dark for some months. But then since June, it's pretty good recovery. And we believe that, of course, it's our assortment and, again, our presence geographically and so forth. But we also benefit, we believe, from people staying home and looking after their homes and finding pleasure and comfort in renovating their own properties rather than perhaps traveling as much as we've done in the past. So that's 1 or 2 reasons for this quick recovery. And of course, the figures, they're also demonstrating that, although sales did not fully jump back during the Q3 to compensate for the first 2 quarters, we are very close, and operating result is back on the level where we were like similar time a year ago. And the operating margin is just slightly above last year's. So I dare to say that the development from Element and Stoves, they -- it's very, very healthy improvement and it's hard work behind that. Not saying that Climate Solutions, we haven't -- we're far there, but I think that it's more remarkable perhaps that these 2 sectors being so severely hit during the first part of the year are now back in business for real. And if we just take a quick look at the spreads or the pie chart that we typically talk about, the net sales. There, of course, Climate Solutions is even slightly bigger than it typically is during a period or year. It's almost 2/3 now, 65%; Element, 27%; and Stoves is 8%. And when we look at the, of course, the operating profit, Climate Solutions being up at the improved operating level. Of course, now they represent some 76% of the operating profit. And I think that's a, let's say, a demonstration of strength that we have these 3 businesses, although different in size, they sort of carry each other over time. And they all have a sustainability profile, but when something is a little bit weaker for 1 or 2, the others kick in. So it's a good balance as we see it in between the 3 business areas. And for these first 9 months, of course, it's been Climate Solutions that have been carrying the results, but we also see now that we don't have to overreact when something is severely hitting the market like we are going through now. But Element and Stoves, in this particular case, they can work very orderly, very organized to come back to their profit levels without being stressed. And just the last pie chart before Hans comes in, the distribution of sales. It's the typical development here in Nordic countries, slightly less than 1/4. Europe has grown considerably, and North America is 27%, slightly smaller than we used to see it because there, with America and North America particularly, it's lagging a little bit when it comes to the pandemic. So I think that's, in short, our first 9 months. And I hand over to you, Hans, to perhaps present more in detail the business areas development and some balance sheet development, please.

[Hans Backman, Chief Financial Officer]

Thank you, Eric. Yes, I will do that, and then we open up for the question session, of course, afterwards. So if we jump into Climate Solutions and look at the income statement there. I mean, as Eric mentioned, this is the most resilient business area, of course, driven by the ESG focus that we have and the sale of heat pumps and the demand for those types of products now. We've seen a good growth in the Nordics, except Norway that is. And then in Mainland Europe as well, where the DACH countries have picked up nicely and the Netherlands have continued with a slightly weaker demand in North America, especially on the commercial side. But then we have compensated any shortfall there, you can say, by acquisitions. So the growth here was some 9%, up from the 11.8 to the 12.9, which means that we've had an underlying organic -- positive organic growth during the first 3 quarters, which has been very pleasing to see, and that we have been able to maintain a gross margin at the level of last year despite some juggling in the beginning of the year to keep the supply chain up and rolling. And lately, actually, also to staff our factories to meet the demand. So this, together with the strong cost control also on the overhead side, we came in at SEK 1.8 billion in operating profit, up from the SEK 1.586 billion last year. And then the margin level up to 14.2% from the 13.4%. And the third quarter was a very good quarter for us in a way with a good underlying organic growth. But then, as Eric mentioned, the currency has, during the latter part of the year, worked against us. But that's something we simply have to face regardless of which way it goes. But then also with the acquisitions contributing well. So we grew by some 8.8%, up from the SEK 4.2 billion to the almost SEK 4.6 billion, and with a considerably improved gross margin, which then have made it possible for us to land in an operating margin there of 17.6%, up from the 16.1% in the quarter. In terms of geographical sales, they are very much representative of what I just mentioned earlier, that mainland Europe has picked up nicely. So they are up from some 42% a year ago to the 49% and have taken a larger share of the cake, so to speak. Element, if we move on to that business area. It was a fairly stable Q1 despite signs of weaknesses already in Q4 in the automotive industry and the white goods industry. But then, of course, the pandemic hit us brutally in the second quarter, where we saw some sales decline of 15%. But then Q3 has come back nicely, although not compensating enough, so to speak, for the shortfall in Q2, but clearly showing improvements again. And that, coupled then with the acquisition of Therm-X, which has proven to be very well timed, we have been able to grow the overall business by some 4.4%, up from the SEK 5.1 billion to the SEK 5.3 billion. And also here, we have been able to maintain a good, more stable gross margin and a good cost control. But it's really been a fight within this business area in some instances, you can say, to keep businesses going as well because, as you know, this is our most global business area. And in some areas, we were close to close -- forced to close down, but then we're able to reopen again since we deliver essential products for the med tech industry, ventilation industry, which has been very much needed during the pandemic. So we landed in an operating margin there of 8.8% year-to-date, down from the 9.1%, but fairly stable, I must say, given the circumstances. And due to Q3 coming back very nicely, we have been able to come in there also with very decent operating margin at 9.7%, up from 8.6%, due to good cost control and -- well, with businesses coming back, especially -- I mean not only have the HVAC business continuously been decent and also the semiconductor, but actually white goods and, to some extent, the automotive business has shown signs of recovery. In terms of geographical sales, there have not been many changes here. It's the most global business area with the most balanced spread, you can say, between Europe, North America, Nordics and Asia being the rest in that chart. Stoves have shown a similar journey as Element in the beginning of the year. The first quarter started relatively flat, but stable, you can say. But then the second quarter hit us rather severely. We were down some 17%. But then the business area has come back very nicely in Q3. And of course, not traveling, staying at home and remodeling your home and so forth has definitely helped, we believe. But probably Q2 and Q3 should be viewed together. But for the first 9 months, sales have been basically flat. It's been a decline there of 0.9 percentage units. We have not had any acquisitions there. The gross margin, slightly down, but thanks to savings on the overhead side, we've been able to land the margin basically on the same level as last year. In the third quarter, as I mentioned, it really came back nicely, and we grew there from the SEK 580 million up to the SEK 676 million. So it's up some 16.5%, despite also here a negative currency impact. But whereas we believe that people were looking into functionality of their homes during the first part of the pandemic, the second part where people have been home, it's been more into designing and remodeling, which seems to have helped us here because the demand has been good. And with such an organic growth, you can say, and where you're looking into savings on the overhead side, you get a very good gearing, of course. And the operating margin here lifted from 7.8% up to 11.5%. And as you all know, this is our most seasonal business. So the most profit is generated in Q3 and Q4, while it's pleasing to see that we came in well here in Q3. In terms of geographical split of sales, there has actually been no change at all compared to a year ago. So it's a very stable portion here was around 50% in Europe, and then slightly less than 1/3 in the Nordics and in North America. If we then just quickly jump into the balance sheet, there have not been any major movements here. Of course, we've made some acquisitions in the beginning of the year, which have had an impact, if you like, on intangible assets. They go up, but it's all natural movements. I think pleasing to see is that the cash side has constantly been growing during the year. As all companies, I think we were a bit cautious about where the cash would take us in the financing. But due to the responsibility taken by our companies to protect their sales and results, we have been able to also safeguard the cash position. And equity has continued to grow and the liabilities have been stable. And then coming into the cash, I mean it's very much a matter of having been able to protect the result as such. But then also, we've had a positive change in working capital. As you can see here on the cash flow analysis, we've generated just about as much operating cash flow as last year. But due to a positive change in working capital this time and investments on basically the same level as last year, we came in at some SEK 2.1 billion in operating cash flow, whereas it was SEK 1.2 billion last year due to a negative change in working capital. Now we could possibly argue that we were a bit careful and so were our customers during the start of the pandemic, lowering the inventories and being careful there, which has helped us. But could also be a bit of a risky situation now to meet the demand should something happen. But anyway, cash has been very well managed. And then just looking into some of the key financial figures, I mean, due to this development of cash and profitability, we've been able to bring down the crucial key figure there, our net debt-to-EBITDA, to as low as 1.4. Equity assets ratio is fairly stable at 45 despite the acquisitions made. So it's overall good numbers. Yes. And on the next page, you see the development of working capital, excluding cash and banks, because that's typically what we look at internally and that's what the companies can influence, the inventories, the receivables, the payables. And just a year ago, we were at 19.5%, and we're now at 16.1%, which also is down than 2 units from the beginning of this year. And last, but not least, we see that return on capital, return on equity are fairly stable or not moving so much. That is, of course, a consequence of the strong balance sheet, you can say, and the right submission we made now several years ago in a way, but which gives us the room for further acquisitions that we were addressing at the time. Net profit has increased from SEK 2.97 to SEK 3.28, and the equity per share has also increased. So it's a fairly -- or it's a stable balance sheet, I dare to say. And by that, I think we're ready for some questions.

[Gerteric Lindquist, CEO, MD & Director]

You better shoot now.

[Operator]

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

[Carl Ragnerstam, Analyst]

It's Carl here from Nordea. I have a few questions. Firstly, if you could give some flavor on the current growth piece you are experiencing in the German market. That's the first one.

[Gerteric Lindquist, CEO, MD & Director]

Okay. Well, I mean, it's very obvious that the Climate Solution, there, we have a tailwind definitely. And it seems like they have really decided, the authorities, to not abandon gas but totally go for renewables. And of course, they also have subsidiary programs. So that's very positive. Both -- all our 3 companies, of course, WATERKOTTE are now being on board and Alpha-InnoTec in NIBE. So it's a very solid change in attitude. If that's the question you were -- if I answered that question correctly.

[Carl Ragnerstam, Analyst]

Yes, exactly. And I guess it's double-digit year-over-year growth in Germany?

[Gerteric Lindquist, CEO, MD & Director]

Yes. I mean, we don't give you, but I think that we explained it fairly clearly. When something goes up like a few percentage units, we don't address it. So -- but of course, it's such a big country. When they change, it's a major move. And we are very pleased, we've been talking about that. We've been talking and thinking about that for years. And we thought that Germany would have been driving along this road many, many years ago, now was actually Holland or the Netherlands have started. And I think that has also sort of forced or influenced, perhaps, is a better word, other countries. So all the DACH countries, as Klaus said -- Hans said here, they are going in that direction. Switzerland, of course, started years and years ago. But now also Austria, of course, being a smaller country, they're also going in this direction. But we are very cautious with precise figures. But it's a very nice change in attitude and political behaviors supporting our business.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And in terms of your sort of outlook, I mean, you sound quite optimistic for full year. Should we interpret that as you see no major changes in demand at the end of Q3 or even probably when entering Q4 as well?

[Gerteric Lindquist, CEO, MD & Director]

Carl, you have these particular questions. But we are always cautiously optimistic, and without giving any figures, I think that when you've been through the first 9 months like we've been now with a fairly decent result, as we judge it ourselves, perhaps that's not correct to do, but that's our judgment, we believe that we can endure also the remaining quarter unless something very dramatic would happen. We're not so concerned about demand. If something would be a threat, it's like you have complete lockdowns of factories, like we had in Italy during several weeks in the springtime and also in Britain several weeks in the Stoves factory. Demand wise, we feel it's pretty good. But if the politicians would say that, well, now we're going to close down factories there and there, then you come to a standstill. So that, I guess, would be the largest threat rather than demand.

[Carl Ragnerstam, Analyst]

Okay. Perfect. And probably a final one from my side, it might be a difficult one, but at least I try it. I mean could you perhaps give us some flavor on to what extent temporarily cost savings boosted your margins in the quarter? And by that, I mean, obviously, canceled fares, traveling and so on. And to what extent, I mean, a higher share of German sales, for instance, gave a sort of a favorable product mix? And also, will you take the opportunity to take more structural long-term cost savings?

[Gerteric Lindquist, CEO, MD & Director]

Well, productivity wise, we always polish. But I think it's a dynamic situation when -- of course, you can look at saving money, of course, there, we have been saving on in traveling and so forth. But why have we done that? Well, we've done that because we are selling less. Of course, had we been out there, we applaud ourselves that we've had a decent growth. But of course, we're not satisfied with the growth. The target -- or I mean, the market has been difficult. So had we been out there hustling, we would have, of course, spending -- we would have been spending more money on that side, but we would have had a better revenue. So they are communicating vessels. I don't think that if we were to enter an even more prosperous market during next year that we would say, well, now we will not continue to travel. Of course, you need that. But you can always also, say, monitor your behavior. Perhaps you don't have to travel that much. Perhaps you can have every other board meeting on video rather than visiting each respective company each time. But having said that, with our decentralized model, it's not so easy just to have only video conferences. You can have them. But when you have those, it's more sterile, you can call it. You don't visit offices. You don't visit the production units. There's no, should I say, visibility of us as owners or managers from Sweden and that is dangerous in the long run. So we might cut down on some traveling, but our presence, without overestimating our own abilities, it's important that employees see, okay, they are the owners, they are here, they're willing to support us, they're willing to invest. That's what we are missing now. And that's worrisome, I'd say, on the other hand, that we have not been visiting most of our companies now for 9 months. So of course, we have saved quite a bit of money without going into the precise dollars or sterling or euros. But we have also lost sales due to the market conditions.

[Carl Ragnerstam, Analyst]

Okay. Perfect. Sorry, I have one quick one as well. Regarding acquisitions, I know it's difficult for you to enter the installation space in Sweden. But would it make sense for you to start acquiring installers in sort of less mature markets?

[Gerteric Lindquist, CEO, MD & Director]

Yes, yes. We are very cautious about doing that. And you should never say no, naturally. We are a producer and we market our products. And once you start to do that, you also cut away certain customers or installers because you can't buy everyone. So we don't have any really company in our group that would make the installation. We have, of course, service fleets doing this service, but that's a different story. But as far as installation being able to cover a whole country, whatever size the country is, that's a major task. And we like to have that entrepreneurial drive without diminishing our ability to possibly have installers. But they are all entrepreneurs out there, anything from 1 owner being employed up to 25, 30 employees in an installation company and a few change, of course. And they're all driven. And we have the greatest respect, just like we have a drive for what we are doing. And to substitute that, we question that.

[Operator]

Our next question comes from the line of Fredrik Moregard from Pareto Securities.

[Fredrik Moregard, Analyst]

Touching on the previous question on cost savings, I was hoping you could help us understand the major gross margin improvements. I appreciate what you're saying about traveling expenses and less fares and so on, but I would assume that, that does not impact the gross margin. So any elaboration on that would be helpful.

[Gerteric Lindquist, CEO, MD & Director]

Okay. Well, I think that we haven't really seen any price deterioration to start with. And I think that it's been cumbersome enough for almost all manufacturers to keep up the output of products. I mean, the supply chains, like Hans mentioned, they were severely hit in the spring time. And I think that we've been more concentrated on that rather than anything else. And so there hasn't been a price war. And on the material side, we have not seen any rare increases, rather on the contrary. So of course, that's been helping the gross margin. And on top of that, polishing the productivity like we do in our factories. I think that's -- and I don't know if you like to fill in, Hans.

[Hans Backman, Chief Financial Officer]

Well, yes, I can just fill in slightly. I mean, the gross margin improvement has been there, but it's not been huge in a way during the first 9 months. But you see an effect, of course, in Q3, where we get a volume increase and we can keep the manufacturing costs fairly stable. That's where we get a positive effect. But overall, they've been rather flat.

[Fredrik Moregard, Analyst]

Okay. But so nothing very temporarily boosting that margin increase, so perhaps even sustainable over the coming years. I appreciate you will not be guiding on that, but still that's the way I understand it.

[Gerteric Lindquist, CEO, MD & Director]

Yes. I think that we -- of course, we always like to improve the gross margin. Now that's also when the new products coming on board, we try to really make them as efficient as possible because it starts on the drawing board, if you're coming back to both material and direct labor again. And of course, also trying to rationalize in the sense that we do not necessarily add more people, but we try to robotize and automate our production as much as possible. So that's the main reason. But as Hans was saying, it's not like jumping. But it's moving in the right direction.

[Hans Backman, Chief Financial Officer]

And there is an element of product mix in there as well, with slightly less sales in North America now and more in Europe.

[Fredrik Moregard, Analyst]

Okay. Sure. So perhaps more residential, less commercial then?

[Gerteric Lindquist, CEO, MD & Director]

Yes, in Q3 for sure.

[Hans Backman, Chief Financial Officer]

Yes.

[Fredrik Moregard, Analyst]

Yes. Okay. Just secondly, could you perhaps remind us a bit how lead times look for Climate Solutions, split perhaps by sales that you do via dealers and projects? So if interest is strong at the moment, when -- or what is the lag for you to recognize that in sales?

[Gerteric Lindquist, CEO, MD & Director]

Dominantly, Climate Solution is still not commercial. Commercial, of course, you have a longer view because that's project oriented. That's a smaller part still. Whereas when you sell to residential, that's an everyday business. There, the visibility is not at all, you can say. It's -- we deliver typically from all our entities within 2 or 3 weeks at the most, sometimes shorter. And that's really the visibility we have so -- but then, of course, we have our surveillance out there, all our salesmen and service people, they're out there giving or feeding us with information. But it's not like a wholesaler would order quarter's demand. It's coming in every day. Knowing that we are fairly robust on deliveries, they try to minimize their inventories. But then it's different when you supply like hospitality vendors and things like that. Then of course, you have another visibility.

[Operator]

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

[Max Fryden, Analyst]

Two questions, please, the first one on recent M&A. I presume that Nathan and WATERKOTTE, if I'm pronouncing that right, should have diluted margins some. Should we expect the margins in these 2 companies to be able to reach group margins over time? That's my first question.

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that the target that we set for all companies at the start is 10%. That's the unifying or the common denominator. So that's very clear when we acquire a company, that within a certain number of quarters, then we are to arrive there with common efforts. Then, of course, if you, let's say, come into the Climate Solution, and they have a margin of 14%, then the next target would be to possibly strive towards that. But depending on the setup, we can never really say that you're absolutely going to arrive there. WATERKOTTE in this particular case, they are supplying more larger units and they are more one piece at a time, not particularly so much to residential industry. So it might be a little bit difficult for them to arrive at 14%, but definitely 10%. And of course, Nathan, they supply both residential market and the commercial market. Plus, they do the drilling as well. So they sell it system. So they should have a better chance of meeting the average profitability on the other business there. Just talking in general terms, but we don't set a target for a company coming in, being clearly below 10% and say now we're going to arrive at 14%, if you talk about Climate Solution, because you might lose enthusiasm. You have to be enthusiastic about a target that you can really arrive at. That's why we have this 2-step approach.

[Max Fryden, Analyst]

No, that's clear. I just wanted to know -- to hear how you're reasoning and some dynamics behind it. And then just a question on U.K. and Climate Solution's exposure. I don't know if you have some legacy exposure there, because if I go through your acquisitions in Climate Solutions in the past 20 years, I assume it's primarily only Enertech and that's also a minor part of Enertech since they have a big part in Sweden. So what is your Climate Solution exposure in U.K.?

[Gerteric Lindquist, CEO, MD & Director]

Well, there, we started a subsidiary many, many years ago on the Climate Solutions side. So we haven't acquired. We started there as a greenfield. Well, I don't think I recall. It is more than 15 years ago. So we haven't really acquired anything. And then Enertech came on board then, of course, they had a subsidiary there. So we feel like, just like in Germany, when we established ourselves, that's even more -- that's more -- that's 25 years ago that we started our own subsidiary when we acquired a small entity in 2003 outside Hanover and Celle. So they're pretty much the same development there. So it's not only Alpha-InnoTec and WATERKOTTE that we have in Germany. We also have NIBE actually through its own subsidiary, starting from a very, very tiny company. And in Britain or England, it's just started from, yes, forming your own legal entity and driving for there is taking a long time. But there has been no -- there's no really manufacturer of heat pumps in Britain. So there hasn't been too much to acquire. I'm not saying that derogatory to Britain, but it's been a gas market more than anything. And we never attempted to, should I say, enter that market. I guess that's the main reason why we haven't acquired anything there. Of course, we acquired Stovax and that was a big market for stops. And we did that some 2011 or whatever it was. And on the Element side, we prior to purchasing the Element side, I need companies that have even added on over the years. But it's bracketing to greenfield operations since 15 years in the. [indiscernible] It's been a relatively small market, but it's catching on now. So we are very pleased to be there.

[Max Fryden, Analyst]

Yes. The reason I'm asking is, of course, because of the green home grants that are starting now in September. I mean it's almost equivalent tax backs as you can get in Germany, depending on the outcome, at least that's the plan. And I just wanted to know if you had a setup in U.K. in order to potentially -- or to be part of that if you're getting traction. Because I know -- I understand the majority is gas, so there's no real competition, except for the traditional German and [ Dutch ] companies.

[Gerteric Lindquist, CEO, MD & Director]

We are there.

[Operator]

The next question comes from the line of Marcela Klang from Handelsbanken.

[Marcela Klang, Analyst]

A couple of questions from me as well. Maybe on a little bit different topic. There's major development happening with refrigerants. And we have Systemair teaming up with Panasonic and now even looking at the propane that you're using in your heat pumps, but also water cooling with 0 GWP. Are you planning any new launches? How comfortable are you in your taxonomy requirements ahead when it comes to your portfolio?

[Gerteric Lindquist, CEO, MD & Director]

Well, I guess we can pitch in both. When it comes to refrigerants, that's a -- that's quite a task, if we just cover that issue. And we, of course, would love to come down to a level where we practically wouldn't harm nature at all by having a leakage. Not that you plan for leakages, but there's always a risk at some point, during the lifespan of a heat pump, that the -- there would be a leakage or at least there could be an error when you repair something. And we feel now using like the 410 and 307 and those refrigerants and going to R-32, we believe that is just a stepping stone towards something else. And we were using propane, you are down at a GWP level some 3 or 4. So that's why we practice that. And of course, we do that together with compression manufacturers because we don't produce our compressors on here. So it's very crucial that the oil, particularly in the compression, can withstand a refrigerant like propane. I don't know whether I answer your question there when it comes to how we look at it in the long run.

[Marcela Klang, Analyst]

Are you comfortable with your product development and planned launches and so on since there is this major development happening in this segment? That was the question basically.

[Gerteric Lindquist, CEO, MD & Director]

Well, okay. Well, if one is very comfortable, then you're almost complacent. We are never satisfied. We also like to -- we always like to do things quicker. But we are fairly certain that we're going to match, of course, the development in the industry and we like to be in the forefront. And we'll see where we end up, whether more companies going to follow our path, whether they stop halfway. So it's a constant battle. But we, of course, are never satisfied, but we are not scared either. We're just cautiously optimistic about everything, like we always say. But it's -- I mean, fright doesn't take -- being scared doesn't take you anywhere. Of course, we have the greatest respect to what others are doing. But had we been scared about the size of competitors or contenders over the years, we wouldn't have been where we are today. We're going to have arrived here. We respect customers, but we have our own idea, in all 3 business areas, where we like to go.

[Marcela Klang, Analyst]

And then when it comes to the commercial properties and large properties, when do you expect to see this segment make a significant contribution to your portfolio? When do you expect this to maybe even be larger than the residential segment?

[Gerteric Lindquist, CEO, MD & Director]

Yes. That's -- now it's a 3 million dollar question, right? Of course, we -- if we talk longevity, Marcela, I think that when we arrive at 2025 with SEK 40 billion, that will be definitely a substantial part of our business. But other than that, I don't think we can give you a more precise answer. We don't like to force things today that they know are going to be of that size or that proportion. I think that it comes naturally like we've acquired these companies and we have naturally other projects ongoing. So it'll take step-by-step, a larger portion, but I don't -- or we don't foresee that in our number of commercial in the short run -- in the residential in the short run.

[Marcela Klang, Analyst]

But it's growing stronger than maybe the residential exposure. And then a final question...

[Gerteric Lindquist, CEO, MD & Director]

Now I mean, it's not -- hasn't been so prosperous now when we have this virus running around. So as we said, the America is hit very hard now and a lot of cities in there, they've been forced to more or less stop their construction work. So that has, of course, hit us, whereas we've been more relatively seen up in the northern part of Europe. We've been allowed to continue, not us, but the construction sites. Of course, Rhoss was also hit fairly hard in the springtime. We can't give you a figure now, that will be 70-30 or 15-85 or 50-50. It's premature.

[Marcela Klang, Analyst]

And then a final question. There is also a lot of development happening within Stoves and the discussion about the particles. Have you had any new launches that helped you already in this quarter? Or are you planning them for next year?

[Gerteric Lindquist, CEO, MD & Director]

We haven't had any introductions of that kind of product this year. That is to come. But I mean, we have a number of products, both in Europe and in North America meeting the new standards. So I guess, the customers, to some degree, have been a bit hesitant. The new standards came about really in May this year in North America. And there's been a struggle to get all the units tested, and some of the units being rebuilt. And here, we have the equity signed for 2022 and now all our models are approved for them. Of course, customers knowing that, okay, will they pass that? Some of them have been hesitant to buy a product until that -- you have that certificate. But as far as particle emissions, that is to come. But we are hopeful to introduce a model or models like that relatively soon, without disclosing the date today.

[Marcela Klang, Analyst]

So strong performance this quarter and more to come. That's all from me.

[Operator]

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

[Karl Bokvist, Analyst]

Yes. So 2 questions. Let's see if we can have time for them both here. My first one, have you seen any sort of -- or do you believe that there will be a change in behavior in the market going forward when it comes to sales channels and marketing efforts and so on, whether there will be any sort of structural change in your and your competitors' go-to-market strategies due to less fairs and things like that when it comes to how you work with distributors, how you work with marketing in different channels and how they order heat pumps and so on?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that now you talked about -- I really think that, of course, the digital era is here. So fairs, they've been sort of outdated for a long time. That's not very efficient, to travel to a large city, spending an enormous amount of traveling time and traveling costs and then walking around on a gigantic fair, only spending perhaps 10 to 15 minutes on a stand and then running to the next one and then to the next one. Now everything is, of course, available on the -- in the digital world on the home page or whatever you call it. So that is, of course, tremendously much more efficient. And we can see that, that in the big German fairs, for instance, they are contracting, not only due to the pandemic, but a little bit smaller booths and it's a terror balance. No one really wants to abandon, say, we are not exhibiting. So you scale down, you are there. But the change is really in the digital world, both presenting products and selling products. So that is definitely here. And where this is going to end up, whether some parties might lose their ground, it's difficult to say. I think that we are, so far, obliged to protect our present channels. We don't have any reason to circumvent a dealer outlet when it comes to stoves or an installer because someone has to install the product. So we have not driven anything in that direction. But of course, if you compare our advertising budgets now or marketing budgets to where they were 5 years ago, I mean, the paper side of it is quite small and it's only digital. So that is a revolution there. And I shouldn't be the one really presenting this. Hans is much younger than me, but I just noticed how different it'll be. But the manufacturer is still going to be around, of course. And whether this is going to force new distribution patterns, it's hard to predict. But the installation seems to be necessary. And I think that's a hindrance in a way because someone has to install the heat pump, both for the, let's say, insurance point of view and also for safety point of view and security point of view. And then how it arrives in the doorstep of a customer, whether that is through wholesale and then an installer, or whether that is directly from the manufacturer to installer, and whether the private individual has decided I like to have this one, or are you still going to rely on the advice of the installer, I think that's very difficult to judge. We try to be as modern as possible. We are not known perhaps for being in the forefront of that particular chapter. We've been observing and we're observing and we move along in a very structured way. Was that a long answer to your question?

[Karl Bokvist, Analyst]

Well, it might take some time for me to digest, but let's stop there.

[Operator]

That ends the Q&A session for today. I'll pass back to the speakers for closing comments.

[Gerteric Lindquist, CEO, MD & Director]

All right. Well, thank you for listening in. And again, some of the questions you put, we can't just answer them. We can answer them, but we can't precisely, due to respect to other shareholders and potential ones, that, well, it's like this and that's the precise target or that's the percentage.

[Hans Backman, Chief Financial Officer]

Yes.

[Gerteric Lindquist, CEO, MD & Director]

Well, that's -- I think that's all for today for Markaryd. We'll charge on and that's -- there are only possibilities out there. And of course, we have the greatest respect for the pandemic, and we have to treat each other continuously so in a very good manner. But the demand is certainly out there. So thank you.

[Hans Backman, Chief Financial Officer]

Thank you, everyone. Thank you.