Nibe Industrier AB

STO:NIBE B

Earnings Call Transcript 2017-Q4

[Operator]

Ladies and gentlemen, welcome to the NIBE Q4 Results Presentation. Today, I'm pleased to present Gerteric Lindquist, CEO; and Hans Backman, CFO. Mr. Lindquist and Mr. Backman, please begin.

[Gerteric Lindquist, CEO, MD & Director]

Thank you.

[Hans Backman, Chief Financial Officer]

Good morning.

[Gerteric Lindquist, CEO, MD & Director]

Good morning. This is Eric, and I think I will start with the usual procedure like I present a few general comments, and then Hans is going to present more detailed figures. And as we mentioned in the report, the business environment for the year has been, to say the least, quite challenging. But despite that, customers have been fairly demanding. They've been out there buying our products, which is very pleasing. So it's not always coinciding the buying mood with the political situation. And just in general terms, we can say that the growth, of course, more than 20% in 1 year is primarily driven by the acquisitions, but it's -- we've also had a stable organic growth. And results, of course, have improved and are mainly coming from the acquisitions, but it's also been a strict control of the fixed costs then, actually and always, focused on productivity. As we said -- as we have said for almost 4 quarters now, of course, it has been influenced the result of the larger acquisition, primarily Enertech Group in Britain and also the CCG Group in America, that has reduced our operating margins somewhat, and also the discontinued subsidies in the U.S. for residential heat pumps. But I'm going to come back to that, which looks a little bit more promising as of a few days back. And acquisition-wise, of course, we have acquired some larger ones and some smaller ones. I think it's, all in all, like 9 acquisitions the last 12 or 13 months. And they're coming in, in a steady stream, I can say. There are several companies for sale out there, it's more a matter of screening it correctly so we find the right ones, both product-wise, chemistry-wise and also, naturally, outlook-wise when it comes to how it looks in the future. Very quickly into the figures. And when we see the SEK 19 billion, we are pleased that we just passed. Of course, it's always an internal challenge and the competition, that we're going to arrive at a certain target. And the SEK 19 billion was, of course, need to arrive at, which is considerably higher than '16. And also, the operating profit being like, being SEK 350 million more than the previous year, we are quite pleased with that. But there, we all see that the operating margin has taken a hit for the reasons that I just mentioned, being like 0.6 percentage units down from the previous year. And Hans is going to come back to the tax and the financial items later on. And the margin there is also -- the profit margin is slightly lower, which Hans is going to cover. If we just dig into the Climate Solution again, of course, there've been some 4 strategic acquisitions, as we mentioned. Enertech has already been mentioned, that's more in the residential side. Of course, it's neighbor here in Sweden, only 45 kilometers away. And we see a good potential for them to primarily increase their sales abroad. And then the CGC Group in Canada came in at the beginning of the year adding some commercial heat pumps to the business unit. And Tempeff out in Winnipeg, they're adding to the ventilation -- which are a competence that we have in North America, adding to the CCG Group. And then we also acquired 45% of Rhoss in Italy, adding more in the air conditioning side of our large units. As it's -- we mentioned so many times in the report that we are really aiming for the climatization also in larger buildings. And we are gradually building up a knowledge within that sector, and that's where the Rhoss acquisition should be seen. And of course, acquiring companies like Enertech Group and CCG Group, with somewhat lower margin that we are used to, that takes quite a bit of an effort to bring it up to the desired level. And now, CCG Group has been onboard for some 5 quarters and Enertech has been onboard for some 4 quarters, and that means that we've given an internal target of 18 to 24 months. So during the year, they should be up and running at the desired levels. And I won't dwell too much more on the operating margin because it's very obvious that it is slightly lower due to the reasons that I just mentioned. We were positively surprised, we must say, that last Friday, when the American budget was taken by their Congress, that the tax credits were reinstalled on a -- on another full year basis, working retroactively, actually, as of January 1, '17. And I think that's very nice that the customers that still board during last year, they'll also be -- will be remunerated. So we hope that, that give us another bridge into the future, which we believe they're firmly going to come also in North America and the U.S., it's slightly delayed compared to European standards. And we can also mention that also in Ontario, in Canada, it's been installed, tax credits, quite recently. So it looks more promising from that side. But in the long run, of course, we have to stand on our own. But it's a hint to the customers, it's important to have that. And we've mainly been arguing that since the PV sales have had the same tax credit and also the wind, we thought it was fair that also the heat pumps would have a chance to compete in the same -- on the same level. And just very quickly then on the figures. Of course, there, again, passing SEK 12 billion was a landmark for the business unit. And the margin more than 1 percentage unit down, we're not very pleased with that. But we also see that, gradually, the margin is now coming up again. And Hans is going to take more of a comment on that. Looking into heating element. Of course, that's the business area that's come back from a lower operating margin. And the last 2 years, have been very pleased to see that they are solidly above the 10%, now around the 11% mark rather. And there, we have also acquired some strategic partners over -- during the year. HT in Italy was, of course, a very important acquisition for us since our coverage in Italy was not really satisfying. And then Gaumer, or Gaumer in America, in December was another very important acquisition, more in the process and energy petrochemical side of the heating element. And then, just recently, actually in the beginning of this year, BriskHeat, that is more concentrated on the heat pads or heat jackets, as we call them, primarily in the semiconductor industry, which is very interesting for us to also participate in industries that are growing just like the automotive industry, going electric, like the rail traffic on trains, that's going more -- and growing more and more. So semiconductor, of course, everything is going digital and we are now participating even more actively. And there, we also have some add-on acquisitions that we've not necessarily present in press releases, but we have a small acquisition in Holland, in switch point on the railroad, and we have Grand Heater in Thailand, to be able to meet demands locally. And of course, the organic growth is very impressive. Perhaps we shouldn't judge ourselves. But internally, we are very pleased with the organic growth. And that, again, is a demonstration of -- that we are participating in sectors that have an organic growth far exceeding the GDP that we have in the past viewed as the typical growth ratio for this business unit. And since we have good spread, and geographically we have good spread product-wise, and we work very, very determinedly when it comes to productivity, we've been able to keep the margin at a healthy level. I think at some suppliers, exceeding 10%. And not being facetious and not being brutal to our suppliers, I think it's a decent level to be. And I think that gives respect both among customers and suppliers. And the figures, of course, here again passing SEK 5 billion is another landmark for this business unit, and remaining on the 11% EBIT level. That is also very pleasing, internally at least. And then coming to Stoves. Here, we haven't acquired any companies. We acquired a major body for the size of the business area at the end of '16. And that has taken us some, of course, efforts to coordinate and to bring that onboard. It's moving ahead fine. And we are always pleased with the performance that the Stoves is producing. It's between 12% and 13% margin, and it's the same this year. And we also mentioned in the report that we are focusing now also on the combustion, to further improve combustion, and also to further reduce the particles. We are already at a level where we have passed the levels for the EU 2022. But we think, believe, that as a market leader, we should really lead the industry into even better performances when it comes to combustion and reduction of particles. And then we come to a few, perhaps, braggish pictures or slides. And when we look at the turnover, since '93, of course, now we are approaching the SEK 20 billion mark, as we mentioned in the report. And had we said in '93 that we were going to approach the SEK 20 billion, it would not have been realistic naturally. But as we've taken it in steps, 4 or 5 years at a time, sometimes 3 years at a time, we've been doubling sales. And then we have instilled a mechanism, a thinking among our employees that growth is absolutely fundamental. Of course, it can't be driven just by Hans and myself, it's driven very much by each individual company in the group. And also, the mentality is growth-driven, and not only the growth, but naturally, also, to make the money or to have a decent margin. Anyone can grow, but the trick is to be able to grow and to generate money. So I think that's also, on that diagram, we can say that we've had 1 year when we slackened a little bit, and I think it was 2009 there and -- where we came out, or possibly '08. And I think that is also something that is an illustration of where we are, where we're coming from. Even if times are tougher, we're going to -- we never surrender, as Dr. Churchill said or Mr. Churchill said. We're always charging ahead. If something will go a little sour in the market, then we just have to counteract. And we are never -- we never fear for something, we are -- we're there to counteract. We're there to act as a market leader. And I think this illustration might be a little braggish, but at the same time, I think that's showing the whole heart of NIBE. It's not -- it doesn't matter where you're located, as long as you have the right attitude and the right passion and the right ambition, you could do that. And I'm very proud of, I must say, the organization and the people onboard they've been able to contribute to this. And I notice, of course, that some articles are written about myself in the newspapers jokingly saying I've been onboard for many, many years. But I'm just one little pin in this machinery. It's actually all the 15,000 people out there working so hard, being so proud, being so determined, that's the whole thing when it comes to NIBE. It's not a one-man show at all. And then some further graphs just illustrating our seasonality. That has not changed. If we look at the -- or perhaps I'm jumping too quickly here now, I'm jumping into the picture of our performance when it comes to the years that we had been listed. And that's showing that we are steady about the 10% market. Of course, the equity ratio is somewhat lower than it was in the past since we had that injection of capital in the end of '16. But it also means that we're very solid when it comes to further acquisitions and whatever is going to happen in the future. So now we have an equity ratio, of course, far above the 40%, really about 45%. And that's not our aim to remain there. Our aim to utilize the capital that we have onboard. But this graph is just to show that when we went public 21 years ago, we promised the shareholders to really be about 10%, and we kept that pretty much over the years. And the equity ratio, I just commented upon. And of course, the return on equity is a function of the equity as such. But that's the -- that's our legacy. Okay, Hans, should you possibly dig into the next pictures here or should I comment a few things over -- yes. Okay, so I think we've been driven more or less into the situation that we also comment in Q4. You remember that we very seldom commented upon the one particular quarter. But I guess, that we have to adhere to the rules. So that the fourth quarter is slightly better than the previous quarter in a sense that our operating margin is now improving compared to what it was the previous quarters. And again, an illustration there, we're slightly moving up when it comes to margin compared to where we were last year, not quite fulfilling the previous year, but again, you have heard about the reasons. And we can also say as a general comment to that not that we like to increase our prices more than necessary, but we have been somewhat lagging in our price increases. They are in place, but not necessarily have had full momentum even at the -- during the fourth quarter. So I think that's most companies have been living in an environment that has not been sort of painted with inflationary marks. But now I think it's more a situation where we see some increases or some dramatic increases in some material, and we have to compensate some of that with our own price increases. But we work very hard and determined to also increase productivity and try to absorb as much as possible internally. And a few more graphs before Hans comes in. It's the quarterly sales, and we see that the seasonality remains. The fourth quarter is always the strongest quarter. We've been trying, over the years, to counteract saying, well, couldn't you possibly buy stoves or heat pumps early in the year. But it seems like you buy barbecues in the springtime and you buy stoves in the fall, and so forth. So we just have to live with that, and we just have to be able to counteract when it comes to the product delivery performance. And we must say that during the fourth quarter, if you ask any market, there might have been some smaller disturbances. We were just on the verge of not being able to deliver everything because of a decent demand. Profit after financial items, they're pretty much showing the same pattern, and it's even more, perhaps, pronounced quarter-to-quarter. And it's been the same, practically, the last 25, 30 years, which we're going to show you in a few graphs possibly in a little while here. So if we just look at the distribution of sales, that is just to rationalize all the figures earlier shown. Of course, Climate Solution, it's well above the 62%, and 26% and 20% (sic) [ 12% ] are the 2 other business areas. And the result level, it's slightly more pronounced, where Climate Solution at 66%, and now Element is up at 23% and Stoves is 11%.And the geographical distribution, we talked about that a lot in the past because we were so dependent on Sweden and the Nordics in the past. Eventually, we grew into Europe. And now, we also have a healthy portion outside. So you can say it's like the Nordic, 1/3, well, a little bit than 1/3; and then Rest of Europe, slightly more than 1/3; and then outside Europe as such is like another 1/3. And that gives us also stability and a robust structure, more for expansion but also for sudden occurrences in the market to counteract. We are very pleased to have this distribution. Now it's more a matter of growing all the sectors, not necessarily changing the balance, but rather having, of course, this pie chart to grow. When I promised this diagram, I think it's just phenomenal if you look at it. The first quarter -- at least now I said 30, 35 years. But since we were listed, we can say that, typically, we are bringing 20% to 21%, 22% when it comes to the first quarter. And then that goes up to some 45%, and then it's 70%. And then the last quarter, it stands for some 30% of the total sales. Could be some deviations from year-to-year when we've had an acquisition earlier in the year, like last year when Enertech came onboard. But they're very transparent when it comes to where we sell and how we sell per quarter year-after-year. And then having a look at the result, it's the same again, that the first quarter is typically quite weak and then it adds on. And the last quarter is always more than 30% of the total profitability for the year. So I think it's fairly easy to follow us. It doesn't change from year-to-year. We have no reason to hide anything. This is a guidance more to those who've been following us, that it's very -- not very, perhaps, but it's transparent, it's relatively easy to follow our development. With that said, Hans, it's your turn.

[Hans Backman, Chief Financial Officer]

Okay, thank you. Thank you. Yes, and when it comes to following us, I just like to state that the company Rhoss is not part of the consolidation. I think that has been the case in one or the other analysis that have been made. But we neither have the majority nor the chairmanship of that company, even though we have an option going forward. But at this current state, we don't have the controlling stake, so to speak, to consolidate it. Just to be clear on that. And then we before we jump into Climate Solutions, I would just also like to comment upon the group's result here following on what Eric said and the U.S. tax reform. And as you can see in the report, we have come down to a tax rate for the group for this year of 21.95%, roughly, as a opposed to 26.5% of last year. But that is, unfortunately, not the level where we will be going forward because that is, of course, an effect -- first, a onetime effect of U.S. tax reform, where we have revalued the net of the deferred tax assets and liabilities given this SEK 58.7 million in a positive effect on tax. And that's all taken in Q4. So I mean, even Q4 was very low from a tax point of view, it was below 18%. But going forward, we'd rather be a couple of percentage units below where we've been before. So as opposed to 26.5%, we should roughly end up at 24%, 24.5%. It, of course, also depends on how well the U.S. market for us develops. Because if that geography, so to speak, continues to generate good profits, the tax rate over there is still higher than it is here, so that will have an effect. But that's just to comment on the tax, I hope I was clear. Coming back then to Climate Solutions. If we just quickly look at the fourth quarter, we came in at SEK 3.4 billion sales. What might look a bit strange there is that we grew with 10.5%, which is not strange, but that the acquired part was even bigger than that. So that means there was something deducting the growth rate, and that was currency. I mean, we had a positive currency effect up until midyear, you can say, and then it went the other way following the weakness or the weakening Swedish kroner. So we had a weak or a negative effect of the weak Swedish kroner there. And of course, another portion of that is organic growth. But there was a slight positive organic growth also in Q4. What has affected us continuously throughout the year, and Q4 was no exception, is the slightly lower gross margin, though, and for the reasons that Eric mentioned before, mainly integrating the new companies, but also seeing some effects of raw material increases where we did not compensate ourselves fully. Nevertheless, we managed to increase our result there from SEK 465 million to SEK 523 million, ending up an operating margin slightly better actually than last year. But for the full year, you see the effect of these reasons that I mentioned, the newly-acquired companies and, to some extent, the raw material prices there, leading us to operating margin of 13.3% as opposed to 14.6%. But it was indeed a landmark to come up with sales above SEK 12 billion. And in terms of organic growth, I mean, we had a very good organic growth in Europe for sure and the Nordics, specifically, compensating well for the fallback, you can say, in North America following the seizing there of the tax credit, but which now has come back. So that should be a positive thing for the future. In terms of the sales split per geography, we had a very good balance now also within Climate Solutions, it used to be the Element division having this. But with basically having 1/3, 1/3, 1/3 in our major markets, the Nordics, mainline Europe and North America, which gives us good balance if something goes sour, so to speak. So this year, clearly, Europe has compensated for the slightly weaker development in North America or more than slightly, you can say. Whereas not too long ago, the U.S. was doing tremendously well, helping up some of the European markets. So we're very pleased with this, that if we dare to put these words in our own mouths. Then jumping over to the Element division. As Eric said, I mean, we have continued this trip here of being able to deliver operating margins above 10%, which has taken quite some time to achieve. So the whole year landed there at basically the same operating margin as last year. But also here, a landmark change coming through SEK 5 billion of sales. So we had a growth there of 20% on sales and 19.1% on profit. And as Eric already mentioned, the organic growth here was clearly above the GDPs in various regions where we are active. So it was a very good combination of organic and acquired growth generating a good profitability level. The currency effect at the end of the year came out at plus/minus 0. The fourth quarter was really no exception, it also showed a very good organic growth. The acquired part was higher, but it was good organic growth. Whereas here, the currency did pull us down. As I mentioned before, it was the latter part of the year where we had this negative effect. Also here, where we saw further -- or more some effects of the increased purchase prices, where we now have come back or are coming back more and more with price increase. But it was pleasing to see, also, in the fourth quarter that -- I mean, we did come in lower than last year, but we have been able to hold up the business fairly well despite the one-off project that we have mentioned before, which now definitely is gone. In terms of geographies, this is the business area, as we've mentioned a couple of times before, which is the most global of the ones we have. We have a good spread of both products and countries throughout the world, giving us a balance to compensate if something is not developing as good as before, so to speak. And we're also able to follow our customers where they are out in the world.Then last but not least, NIBE Stoves. Also, as Eric mentioned, it's a stable business, constantly delivering good profits. We came in at 12.3% mark there, operating margin, down from 12.7% last year. So of course, we're not in a way pleased with that. But the overall performance of the business area is still very good. And a lot of focus has been put on the major and very strategic acquisition that we made by bringing FPI onboard. And that has, of course, contributed very much to the growth there of 26.6% versus last year. Also here, we have had some negative currency effect for the full year, mainly coming from the British pound following the business we have through Stovax. The quarter, as such, came in at or close to SEK 750, million, up from SEK 680 million last year, with the combination of -- well, mostly acquired growth, but also organic growth and a slightly negative currency effect. Gross margin, down a little also here, again the raw material prices have had an influence. But overall, a profit margin there of 17.4% as opposed to 17.9% last year. And here, through the acquisition of FPI more than a year ago, I mean, we have a very broader split of sales now between the geographies. But of course, there's room for more improvement. And as we've said, FPI is really the basis for our North American focus now. Then just jumping over to income statement for the group, looking back over 5 years. I think the headline there is a very good description, it's a very robust performance. And since 2013 up until 2017, we have more than doubled sales from the SEK 9.8 billion up to the SEK 19 billion. And been able to maintain the profitability levels there, both on net profit and operating margin profit. And although I've been around now for 6 years, I'm still newly employed compared to many people here, but this gives me, as a CFO a very good confidence in the business and that we're able to take steps going forward to grow from here as well. And of course, an important part of this being able to grow is that we have a stable balance sheet. And if we look at this, if we just compare the last 2 years, '16 and '17, I mean, they're very stable. There was a slightly larger change taking place in 2015, both following the acquisitions we made around that time, but of course, also, as a result of the rights emission. But really, the balance sheet very much reflects our growth both organically and through acquisitions. And on the equity and liability side, you see the effect of the rights emission of SEK 3 billion that we made in 2016. You see the equity takes a jump from SEK 7.4 billion up to SEK 12.1 billion. But over this 5-year period, we have more than doubled the equity there from SEK 5.6 billion up to SEK 12.8 billion. And I think the relations of the key financial figures, which we will see in the moment, are quite good. And an important part of this, as we also typically mention, is our cash flow. I mean, generating a healthy cash flow is key for us to keep the balance sheet in order and the interest-bearing liabilities especially. So we were able to generate some SEK 2.3 billion of operating cash flow, then we had a change in working capital of SEK 184 million, landing then at SEK 2.1 billion, which you see on the picture. And that was a considerable improvement from last year where we generated SEK 2 billion and had a negative working cash flow effect of SEK 274 million. Then we had invested some more this year with the SEK 536 million as opposed to SEK 412 million. We are expanding and investing in both factories and machinery. But still, we're keeping the investment levels below the depreciation level. Typically, we are around 75% to 85% of depreciation in investments. So the operating cash flow landed at close to SEK 1.6 billion, up from SEK 1.35 billion last year. And looking again -- then just at a few key financial numbers. I mean, you see the depreciations that I mentioned from the previous picture. But really, the 3 last ones are some that we follow closer, the interest-bearing liabilities in relation to equity. They have come down here from 120% almost in 2014, down to 70% despite the acquisitions that we've made. And of course, the rights emission had a good effect on this, but also the cash flow that I mentioned before. And the net debt-to-EBITDA is now at 1.9. And if you include more -- 1 more decimal, it would be 1.86 I think. So that's also below the relation or the ratio that the bond-taker, so to speak, would like to have. And also the equity asset ratio is very solid in a way, 45.8%, 46% roughly. And as Eric mentioned, it's not so that we have an ambition to increase this for the sake of increasing it, it's rather a matter of having a sound balance sheet for -- which gives room for further acquisitions. And then over the years, looking at the last pieces of key financial figures here. Net profit per share has constantly increased here. It was at SEK 1.80 in 2013, moving up a step every year. And this year, for 2017, as we're concluding upon, came in at SEK 3.38. And of course, also the equity per share has increased. And what we typically follow as well is, of course, the working capital. Now the picture you see here is, of course, a little hard to analyze in a sense that it includes -- I mean, it's a snapshot picture of what it looked like at year-end at each time. And that includes part acquisitions, full balance sheet, only half an income statement and so forth. But the trend is still that we're moving down here. The working capital, excluding cash, came in at 16.3%. And on a like-for-like basis, when we make our internal comparisons without effect of currency, without effect of acquisitions, we have been able to bring it down. And only this year, we were able to release some SEK 150 million, SEK 180 million, thanks to a tighter or smaller working capital. So I think, overall, the balance sheet is -- looks fair and gives us of the fundamental for further growth. And that is really the topic for the next slide because we're very close to the current intermediate target, which stated that we should be able to reach SEK 20 billion of sales at the latest by 2020. With having landed this year, or 2017, on SEK 19 billion, we're not too far away. But as said, that's an intermediate target, which was a very ambitious one when it was set. But I think we have ambitions beyond that, Eric?

[Gerteric Lindquist, CEO, MD & Director]

Well, I mean, thank you for allowing me to comment upon that. I think it's very important to be transparent when it comes to targets. We've been transparent every day, every quarter since we went public. And now approaching the SEK 20 billion, of course, it's very important internally perhaps by -- or the foremost, since we are not supposed to calm down or anything, we see the potential, of course, the possibility of arriving at SEK 20 billion prior to the 2020. And then it's important to say, "Okay, what's the next target?" And then it's SEK 40 billion. And again, coming back to what I said previously, it would've been impossible '93 to say we're going to arrive at SEK 40 billion. But having had this voyage of continuous growth, the whole DNA setup is built around continuous growth both organically and, of course, through acquisitions. So nothing has changed, and that's why we're saying to investors, to internal people, to potential companies out there potentially joining us, we are very much charging ahead with a solid aim of arriving at SEK 40 billion no later than 7 years after the arrival at SEK 20 billion. And then, I guess, that should explain why we mentioned that. Typically, of course, you could double sales solidly or you add 20% every year, then you double sales in 4 years. But now, we had the experience with Lehman Brothers coming across, so they've delayed the process, that took us 7 years. But typically, the voyage has taken us, let's say, 3 to 5 years with that exception, that's why we mentioned now 4 to 7. It's a little bit of a -- to stick out your neck, but at the same time it's not something we've just been dreaming about. The market is there. The companies are there. We have a different setup. We are more experienced, but still humble when it comes to our company personality. And we've just put up a few words here, Hans has mentioned and I've mentioned before, financially very strong. And the chances for us or the opportunities out there are -- it's not unlimited, they are very, very big. But we have to remain -- we have to keep our company personality because that's the whole thing. It's built on us working as a team, going to work every day, having fun. And not saying, "Oh boy, now I have to go to work again."Of course, we can have a do headache a day or 2 during the year, but it's joyful, it's tremendous joy to participate in this voyage. And did we have another bragging picture here? Yes, perhaps this is the one that we -- just explaining in figures that I just mentioned. Of course, now we are at the brown or reddish level there at SEK 19 billion, and 3 months to go. And of course, you can never forecast, you can never foresee what's going to happen, but it seems realistic to arrive there prior to 2020. And then the target is SEK 40 billion. And I think we have all chances to arrive there, as said before, if we just stick together, stick to our values and continue to love NIBE. So with that said, please add some questions to there, if there could be any questions after this.

[Operator]

[Operator Instructions] And our first question comes from the line of Olof Larshammar from DNB Markets.

[Olof Krook Larshammar, Analyst]

Hans and Eric, a couple of questions from my side. Firstly, if could you please elaborate a little bit about the development on the U.S. residential heat pump market? How much was the market down in 2017? And the tax incentive, how large will that be in 2018? And would it also be possible to -- if you could quantify the group sales exposure towards this market?

[Gerteric Lindquist, CEO, MD & Director]

Well, I mean -- okay. Well, I mean, it was, of course, down considerably as you know. I don't know whether any figures have really been released regarding this, so we don't like to have a hide and seek. But of course, it was a substantial decrease during '17. And whether this is going to bounce back so quickly now with the tax credits are installed, we don't know. Of course, the market was perhaps a little bit exhausted, that's why I'm a little bit hesitant to say it was down or up. I think that when we look at the markets '16 and '17, I think they should be viewed together rather than looking at '16 individually and '17 individually. And the reason is, of course, that some people were speculating -- dealers, private consumers, well, we better utilize, you'll never know whether that's going to be discontinued or not. So '16, there, we have an overconsumption. And '17 was, of course, again, exhausted of that fact. I'd say, if you compare the 2 years in a fair way, perhaps it took it down to some 20%. That's as much as I think I can comment on that. Now with the coming back, of course, all -- our strategy from the very beginning has been that not only rely on geothermal, but rather to have the whole assortment of heat pumps, and not only to rely on residential but also rely on the commercial. But that's why CCG came onboard. So of course, with the tax credit now being installed, that gives us, as I said before, a bridge into the future where we have time also to broaden the assortment and to widen the knowledge of this technology, which isn't so well known in North America as it is in Europe. That was a political answer, but I think that's as far as I can go now. Well, I...

[Olof Krook Larshammar, Analyst]

And regarding a little bit exposure to U.S. residential market, would it be fair to assume it's 10% of group sales? Or is that too much?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that when we acquired WaterFurnace, I think that turnover was some SEK 120 million, if I recall it. Right. And they, of course -- the majority is -- was, by far, the residential. CCG has a minor part, where they had SEK 280 million. So I think the equation is fairly clear.

[Olof Krook Larshammar, Analyst]

Yes. And secondly, if I remember correctly, you had a quite positive impact from calendar in Q1 2017. And given that some part of this is now in Q2 this year, have you made some calculations on that and how that will affect your sales in Q1?

[Gerteric Lindquist, CEO, MD & Director]

The number of working days, it deviate like 3, or whatever it was here, like last year, from the previous year '16. I think we're perhaps 1 or 2 days -- 1 or 2 -- 1 day up or down, that's one thing. But if I say -- I mean, when we talk about the growth of 4%, and then you have 60 days versus 63 days, then you talk about 5% deviation. Of course, that is influencing a quarter. I mean, it's thing when we have a growth of organic of 10%, 12% in a good old days, as we would say, then it didn't play much of a role, but it should be considered.

[Olof Krook Larshammar, Analyst]

Yes. And finally from my side, you elaborated a bit on this with your target of SEK 40 billion in sales. But would you say that maybe -- apart from building bigger, twice the size compared to now, do you expect -- how do you expect the business to evolve in terms of new product areas, et cetera? If you could please elaborate a bit on that.

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that we've got to grow old our segments. And that is saying that when you're talking about SEK 40 billion, I don't think that we're going to change much of the structure as such. We're not going to bring on any change or any -- like automotive. It's not that. But of course, going into more of the commercial side of Climate Solution, that's no secret. And then on the Elements side, I think it's also important to know and to recognize, as we broaden the assortment, the market is also growing like those heat jackets that we just entered on the -- with the textile base. There, we haven't been in that sector. And all of a sudden, we're a large player there and there's more to be done. So it's a moving target at the same time. Now we identified, perhaps, the market is SEK 50 billion or SEK 55 billion, that could well be SEK 70 billion when we -- as we grow into that with a wider range. But our competence is, of course, within the Stoves and the Element and the Climate Solution. And when we took a step in Britain on the Stoves side, it was -- gas was added, and that broadened the assortment. So I think that's how we should view it.

[Operator]

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

[Max Fryden, Analyst]

It's Max Fryden from Danske. I just want to follow up on the previous questions in the U.S., but rather focus on the margin development. It seems to have been developing slightly weaker the expectations throughout the year, and now it looks to be substantially better here in Q4. Was there anything special that you want to highlight and now focusing here on the U.S. primarily?

[Gerteric Lindquist, CEO, MD & Director]

On the margin in the U.S., I don't know whether we'd see that. I think it is like on the margin as such, of course, when we entered '17, the CCG Group have been onboard only 4 months. And it took us -- it has taken us gradually some time to improve things there. Enertech came onboard January -- oh, yes, February 1 last year, so of course that took down the margin. And then, as I said, there was an overhang slightly there in '17 from the heat pumps situation in North America. But then weakened during the second quarter, primarily. And of course, now we've been restructuring or, should I say, we've been taking away cost in the residential side of heat pump organizations in North America. We're gradually been working with the 2 larger entities very intensively, and that is starting to show. And we've taken some hits on the raw material prices. We have not been so quick as we possibly should have been. And I think that we are going into a situation in the fourth quarter where we see that our work is more -- is crowned with some success, if not complete success.

[Max Fryden, Analyst]

Okay, that's very clear. And secondly, on the topic again, just to get this right, the margins in the WaterFurnace are still above the Climate Control Group and the Enertech in the U.S. despite the substantial fall in the residential market?

[Gerteric Lindquist, CEO, MD & Director]

Yes, too much into detail, WaterFurnace has a phenomenal endurance when it comes to margins. So of course, sales has taken a tremendous hit or a hard hit, but they have also very quick pattern of reacting.

[Max Fryden, Analyst]

Okay, I'll take it with me phenomenal. And just a question for Hans, because I lost you there on the line, and you mentioned the U.S. tax reform. And just a clarification, the effective tax rate in 2016 was 26.5%, and now it was 22% here. Is this representative going forward? Or was there a onetime item there as well?

[Hans Backman, Chief Financial Officer]

Yes. No, it's not representative going forward. That's what I'm trying to say. Because the whole net effect that we have to make as a result of the tax reform come from the balance sheet on deferred tax assets and liabilities. That was all taken in Q4. So I mean, that's where we had a positive effect of SEK 58.7 million, bringing down the tax rate to 22%. We would rather be at 24% maybe, 25%.

[Max Fryden, Analyst]

24%, 25%, that's very clear.

[Hans Backman, Chief Financial Officer]

Yes.

[Gerteric Lindquist, CEO, MD & Director]

I mean -- and it depends [ what ] the U.S. portion of the business will be for the group.

[Max Fryden, Analyst]

But you don't have any substantial tax deductions or anything currently in the U.S.?

[Hans Backman, Chief Financial Officer]

No, there was this change of 59.

[Operator]

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

[Marcela Klang, Analyst]

A couple of questions from me. The newly restated geo tax credit in the U.S., is it exactly the same extent of this compared to the previous years' subsidies looking at your product? And what kind of discount do customers actually get in the U.S. using this?

[Gerteric Lindquist, CEO, MD & Director]

It's exactly the same. It's a 30% tax reduction for residential installations. And it's actually also a 10% tax reduction on commercial installation, just as before. Just as it was until December 31, '16.

[Marcela Klang, Analyst]

And then, if I may, a curious question, Gerteric. Obviously, you have impressive 30 years behind you as the NIBE's CEO, do you see yourself as leading NIBE towards the SEK 40 billion sales target?

[Gerteric Lindquist, CEO, MD & Director]

If I didn't have that thinking, I wouldn't announce it. But health permits, of course, that is also always the question. But the other folks around, with the board and my colleagues, of course, they have to tell me and my wife, "Eric, you are too old, get out of it." And as much as I love this company, I would never be a hindrance for the growth or the success.

[Marcela Klang, Analyst]

But they are not...

[Gerteric Lindquist, CEO, MD & Director]

As long as I can judge myself, that's how it is. When you're starting to think about things, then you're worn down, you're going to get worn down. If I start to think perhaps I should leave, I think that I should leave that very moment or a week later because then you start -- just like so many other things that you start to think negatively.

[Marcela Klang, Analyst]

Crystal clear.

[Operator]

Our next question comes from Anthony de Larrinaga from WYT Ltd.

[Anthony de Larrinaga]

I had a couple of questions you could help with. First, perhaps could you just help me understand some of the movements in depreciation and your selling costs in the fourth quarter. Depreciation dropped 50 basis points relative to sales, and selling dropped by 160 basis points relative to sales. And secondly, on the outlook into the first quarter. You'll be cycling against some fairly strong comparatives into the first quarter versus last year. You're getting some of the sort of U.S. geo tax credit benefits as well. I'm just trying to sort of get a feel of whether or not the comparative issue weighs down what we should be expecting in terms of organic revenue growth in the first quarter and how much that will be offset by the tailwind from tax credits?

[Gerteric Lindquist, CEO, MD & Director]

Okay. Well, the second question, that -- it will take me a long time to answer that. I mean, we -- I can't really give you, for natural reasons, any forecast for the first quarter. And as I said a little while ago, quarter-wise, we never give any forecast for the quarter. I think you have to view us as a long-term growth mechanism or organism very determinedly going forward. And if some quarters or a quarter would be a little bit sour, that doesn't mean that we're going to change our attitude. So when we say now that we are cautiously optimistic, that is, of course, for the full year, not necessarily counting 1 or 2 quarters to come. And perhaps I'm playing hide and seek you think, but that, I think, is how that's as precise as I can be when it comes to the second question. The first question, I'd be really happy to hand over to Hans if you understood fully that.

[Hans Backman, Chief Financial Officer]

No, I didn't quite catch it. If you could repeat that, please.

[Anthony de Larrinaga]

Sure. The fourth quarter, if you look at your depreciation and your selling costs, you essentially clawed back over 200 basis points of margins from the reduction or the nonmovements in the period. So perhaps you could just explain what happened in that fourth quarter to lead to those movements? And to what extent that provides an indication of those items moving forwards into the current year?

[Gerteric Lindquist, CEO, MD & Director]

Okay. Well, I apologize for not being able to answer that myself. I just have to run because I'm going to catch a plane. I have to leave this conference. I apologize for that. But Hans, I'm sure, you're going to dig into -- or if you don't, if you weren't prepared for that question, we'll just send you an email and respond to that issue, if that's all right.

[Hans Backman, Chief Financial Officer]

We can do that.

[Gerteric Lindquist, CEO, MD & Director]

I apologize, but I just have to leave. Thank you very much. All the best.

[Hans Backman, Chief Financial Officer]

Yes. And I think we will come back to that question to you instead because Eric had to leave now, as he said. And we will be happy to answer questions on the next telco. But if there is anything, we're also to reach here. Thank you, everyone.

[Operator]

Thank you. And that concludes today's presentation. Thank you all for attending. You may now disconnect your lines.