Nibe Industrier AB

STO:NIBE B

Earnings Call Transcript 2018-Q4

[Operator]

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

[Hans Backman, Chief Financial Officer]

Thank you.

[Gerteric Lindquist, CEO, MD & Director]

Thank you. Thank you. Good morning, everyone, out there or wherever you are situated. Good afternoon. We'd like to present the results in the ordinary way, where we start. And we have some slides each here. And then, of course, we'll open for questions.So just starting with the business environment for the year, we can say that it's been a very decent overall demand, but we all know that there are political tensions and talk about trade barriers, some already in existence. So of course, we just have to navigate in the more traditional field of those. On the positive side, we can say that the interest rates are still relatively low, and people are becoming more and more aware of the sustainability or the importance of living in a different way. And I think that our product assortment in all 3 business areas are well positioned for the future because that is really hitting us every day from newspapers, media, what have you, that we have to act more sustainable. So that's the surrounding. If you just look at our own performance, we can say that it's been a very good organic growth, the whole year, and of course, combined with acquisitions. So almost hitting the 20% EBITDA, south of odd 20% all in all for the year. And the operating margin has increased. And that is, of course, due to growth organically, but also, that we have, as always, looked at productivity. And we're cautious with costs. And also that the largest business area, Climate Solutions, of course, they have improved their operating margin, and that is affecting the whole group naturally. And as always, the number of acquisitions that we have carried out. If we just have a quick look at the figures that you all are familiar with now. We'd rather talk about the year, of course, with the growth in like 18.5% coming in like operating margin of the 12.6%, which puts us sort of in the mid-range of the last 5 years. So we've been within 12% and 13% the last 5 years. And I think that's a very solid development. And the last quarter, and Hans is going to dwell more on that when he comes to each business area, it's also slightly better than last year. The growth is then 21.3%, which is quite considerable, considering that the environment as we've said, has not been, in all aspects, so positive from the issues that we just talked about.And on the next slide here, I think we demonstrate the pattern that we see every year, where the growth is increasing over the year and it's very pronounced '18. '17 was a little bit lesser pronounced. But the first quarter, that is accelerate as the quarter goes by. So we have a very strong seasonality. And we have a slide later on where we can show that more precisely. And that is, of course, also affecting the profit after financial items or the EBIT as well naturally. So same picture here, starting very modestly during the first quarter, and then growing gradually over the year. It's a healthy picture. We think that good direction of the line, as you see up there, so it's a good 12-month development.If you just quickly look into the business area of Climate Solutions. First, we've had a good organic growth. And it's always important to compare the previous year. And the previous year, of course, was slightly affected by a lesser positive environment in America regarding with the U.S., regarding heat pumps. So that is helping us. But also, the overall demand in Europe, particularly for heat pumps, has been very good, we can say. And then we acquired 2 companies. And in the past, district heating has been a little bit of a competitor. And rather than compete, we said, "Okay, let's bring this onboard." And that's something I already told you about like in the quarter 2 report. And that is well-received in the market. And then we also felt that we might as well go ahead and acquire the majority of Rhoss rather than being a minority owner. So now we own Rhoss since 1st of January, this year 100%. And that, of course, is going to be the platform or one of the platforms for the commercial business with chillers and air-handling units.And last year, with the 2 major entities coming in as acquisitions, of course, we -- we've spent quite some time in integrating those companies. And we also write about it that our model is fairly successful by enhancing procurement and production experiences and eventually also R&D experiences. And of course, the organic growth is always a driver of improved operating margin. And then Hans is going to come back to more specific figures, but we can just look at the growth there from SEK 12 billion, 17% to 14.2% last year, with the operating margin goal of 13.3% to 13.8%. And of course, we've been up to 15% in the past, some years. And that also has to do when the company comes in, sometimes we've acquired companies, very profitable ones in the fall, and that is, of course, due to seasonality also enhancing the margin that particular year. But we are certainly on our way back on the margin side of Climate Solutions. So we quickly swing over to Element. There, we have a very impressive, we like to say, continued organic growth. Of course, here we are a subsupplier, always under pressure pricewise. And the operating margin is somewhat lower. And that is, of course, due to the fact that we are located in countries now that used to be low-cost, so-called low-cost countries. And there we see huge increases in salary, more politically-driven. And that, again, sort of emphasizes how important it is to increase productivity wherever you are. And in some countries in Eastern Europe, as we used to call it, like Poland and Czech Republic, with dramatic salary increases on the labor side and also in Mexico. And we just have to cope with that. So we just mentioned that. It's something that our shareholders and investors should be aware of. Of course, we're going to cope with that. And you see, a slightly higher investment rate that we hold for the group, and that is, of course, to combat that. And we also mentioned some projects in 2017, that brought the margin up to 11%, and perhaps that was a little bit almost too good. So that should be mentioned also when you compare these -- for the figures this year with the previous year. But we have parked ourselves the balance with the 10% line. And we've been striving for that for so many years. And of course, it's a totally different group of companies now covering, we can say, the world with our heating element of various kinds. And of course, we're selling a other -- also here, a sustainable level -- a sustainability level. And we notice that the market, and when it comes to hybrid cars, wind turbines and trains, those category of products, I mean, that is truly also moving in the sustainability direction.A few comments about the -- perhaps I forgot to mention the acquisition there of BriskHeat and EMIN Group on the Element side. And BriskHeat, of course, puts us in a totally different category of products in the semiconductor industry where we supply those heating mats or heating jackets for the suppliers or the manufacturers of these products. And EMIN Group, that is again a subsupplier that we feel are going to enhance our system delivery possibilities, producing like braided hoses and flexible hoses, and particularly in the HVAC industries, big category, important category of products.So with that said, Stoves, of course, we've had a more modest growth on the Stoves side. We all remember the warm summer in Europe. That has affected us. But nevertheless, we kept our market shares and even enhanced them. So we -- although we've been losing a little bit on the operating margin side, we are fairly comfortable that we're going to continue and we're able to bring that up again in the coming years. And the thing is, of course, that we are spending quite some time and quite some money now on R&D to even enhance particularly the wood burning product to reduce the particles, and also marketing to train our, should I say, dealers to be more loyal to us. Rather than participating in many shows, we have quite costly educations, for instance, where we gather all our loyal dealers, which we think is you get more for each spent kronor or pound or whatever currency we are talking about. And one interesting strategic acquisition is the one in Britain, CK Fires. And a few years ago, we thought, well, that is phenomenal if they're going to prevail, and absolutely, CK Fires is really charging ahead like some other competitors. And that's particularly a product for larger cities where you don't have chimneys. And that is not just like a TV screen. Those are physical products that are very, very real in the flame picture. And also you have the possibility to add some heating features to those stoves. So that's the picture of the growth from 2.2% to 2.4% almost. Operating margin, as I explained, is slightly lower due to the reasons that I just mentioned. And to also mention where we landed for the full year, we have this graph. And I think this graph is very important. And we're going to come back to it in even more detailed one in a little while. Of course, we set the target for SEK 20 billion when we came out of 2013 where we had just passed SEK 10 billion. What many thought -- many people observed this thought that, that would be too aggressive of a target. We've been very transparent with our targets, not necessarily quarter-by-quarter, but certainly once we have passed every set target. So then we allowed ourselves, 5 to -- or 4 to 7 years, and now we crossed the line of the 5 years, so just north of SEK 22 billion. And you can see that's been a solid growth for some 25 years. I think there's one exception, and I think that's the 2008 where you can see a contraction of possibly 2009. And that has naturally also affected the profit line. It's almost the same structure or picture or graph as you see here. There've been some money set aside in 2005. And of course, 2008 was also then affected by Lehman Brothers. But it's been a very solid development. And if you look at that in a more detailed fashion, we can say that the seasonality that I just talked about previously looks like this. So we can say that the first quarter, I should say, is the -- very clearly the tiniest in turnover. And as the year progresses, it's the fourth quarter always comes out as the strongest one. And it's kind of interesting if you look at this graph because whenever we acquire a company, more or less, in Europe or North America, the same pattern occurs. And of course, that is due to the 3 business areas where we're in. They have obviously the same pattern. And it's even more pronounced we can say, when it comes to the profitability where you see on this picture here. So they are sort of shadowing each other. And before Hans comes in, just a few pictures of how sales is distributed between the business areas. Very solid, Climate Solutions, just north of 60%, it's 62% here. And in 2 others. Just about as before, Element, of course, has had a good growth on our 28%. And when we talk about operating profit for the distribution there, is slightly to the advantage of Climate Solutions since their margin is slightly higher than the other 2. So this picture is fairly, fairly stable, looking at it the year-after-year. The change, of course, for our group is this graph here, the pie chart, where now the Nordic countries is about just a bit better than the quarter. And the Rest of Europe, South, of 40%; North America, 30%; and outside, 5%. So that gives, as we've mentioned several times before, a very robust structure of our company. The sales distributed over so many countries and continents. If something slackens in one country, it very often is compensated somewhere else. And in Sweden, some 30 years ago, representing like 85%, is now just 15%. And that is, of course, not that we had outsourced anything, but that we have grown more abroad. So 30 years ago, the turnover here in Sweden was some 250 million. And now, it's like 2.75 billion. So we have not left our home base. But the Nordic countries, we view is our home market. And then, of course, we like to grow it even more outside these 25 million as a customer base. So I think I'll stop there, Hans, for you to come in.

[Hans Backman, Chief Financial Officer]

All right. Thank you, Eric. So I will take you through the business areas and then come to the balance sheet and some key numbers before we open up for the Q&A session.If we start looking at the income statement and for Climate Solutions, as Eric stated, we've had a very good organic growth there during the year. And it's been an overall good demand. In Europe, some countries sticking out, although they're not so big, which means that the impact on the group is relative, but still a very good development in countries like The Netherlands, Norway having had political decisions to really promote environmentally friendly and sustainable heating solutions. But then, of course, a major contributor has been North America, coming back very strongly during the year. And the growth that you see there for the full year of 18.6% is, to a large extent, organic due to the weakening Swedish currency will of course, have helped in that respect as well. But the majority of that growth is actually through organic growth. And that also goes for the quarter itself, as you can see where the growth was even 20.7%. So all in all, over the 2 year -- or well, from '17 to '18, we've increased sales by some SEK 2.2 billion and the operating profit by some SEK 370 million, and then coming up from the 13.3% in operating margin to the 13.8%. The one area that might be sticking out there where you might have a question is the gross margin, which is -- have come down from 37.2% to 35.3%. Well, that is a result, of course, of acquisitions coming onboard having a different structure. And when we take onboard acquisitions, they don't always have the same profitability as we do, so we give them the 18 to 24 months to get up there. There's also mix effect in there. But then also, we've had and we've mentioned it several times, our material cost increase during the year which we've not been able to fully compensate for. And even if we have raised prices now, there is, of course, the time lag before it hits the P&L, not the least due to the FIFO method in accounting, you can say. But overall, a very strong and good performance of our biggest business area. And with the spread in geographies, we also have a stability there. If one market is weaker than the other, it could be compensated for by stronger development in another area. Now this year, basically, all areas have been strong. But last year, when North America was a bit weaker, we had a very good compensating factor in Europe. But here, we have about 1/3 in North America, Europe and the Nordics.If we switch to the next page and look at the development of the operating margin over the years. We have basically, since -- well, we have since '99 been above 10%. And basically, since then, also been on an upward journey, you could say, stabilizing the business area well above the target for the group there. There's been a slight decline, you can say, here the last 2 years. But that is really an effect of taking onboard rather large companies, which we then are working very hard with to, of course, get them up to the same level that we have within the group. And that's what you see in this year that as a result, we have come back again. And the one drop there in the middle is, of course, the effects after the Lehman Brothers crash, you can say.If we head on to NIBE Element, it's been an overall impressive organic growth also in this business area. And this is the truly global one, you can say, where we are present in basically every part of the world and in a fairly tough market condition, given that we're a subsupplier, but that there also are competitors in each corner, you can say. And with the global business there, of course, also issues with trade barriers due to political issues that Eric mentioned. And right now in the world, also, we have this issue, you can say, with lack of personnel, and as a result, increase in salary costs or wage costs in several countries, which we, of course, have to fight on a day-to-day basis. Nevertheless, we have been able to grow the business area here with 24% over the year, increasing it from the SEK 5.1 billion to SEK 6.3 billion, so an increase of SEK 1.2 billion and with the profit that has also come along very nicely. The drop from the 11% operating margin to the 10.2% is, to a large extent, related to the one-off projects that we've had that are no longer onboard. But of course, there's also an element of these personnel issues here, lack of personnel and increases that Eric mentioned before. In terms of the true organic growth, we've also, here had help of the currency, of course. But the majority has again been a very nice organic growth. The last quarter was no exception. And that's continued to grow very nicely, and weakening there at an operating margin of 8.2% compared to 8.9%, so basically in line with our expectations.In terms of sales per geography, this is the business area that has been the most global for the longest time with a spread that is more even across the globe compared to the other ones, although we have made several steps in the right direction also for Climate Solutions and Stoves. But here, we have now as much as 12% being basically in Asia, you can say, but also some other pockets in the world, Nordics being some 17%; Europe, 1/3; North America, slightly more; but a very good balance there between over the globe.And looking at the operating margin for this business area from the year we were listed in '97 up until today. We have now, over the last 2 -- 3 years, been above 10%, which we have been striving for, for quite some time. The major step was taken in 2005, really, when we took a restructuring reserve, which is, of course, the reason for the bar going in the negative direction there. But since then, we have restructured and worked out synergies more than the years before when we started the acquisition phase of that business area. So we're 3 years in a row being 10 -- being above 10%. We're quite proud of that and also determined to keep it at that level. Last but not least, we have our Stoves business area, which has had a stable performance in a somewhat tough market. Eric mentioned the weather. And of course, this is also an area where we compete with other -- completely other types of products or travel, so whatever it maybe that the end customer chooses to buy. So here, it's a matter of also being in fashion, so to speak, have attractive products. And that's why we have allowed ourselves to continue to spend money on R&D and marketing, which has brought the operating margin down slightly. The gross margin is basically stable. In the Q -- in the fourth quarter, it was definitely stable. It was up a little. But over the year, it's been stable. So the difference then now to the operating margin is that we allow ourselves to continue to invest in the business. And even if it's been stable, we've actually had some organic growth in here as well during the year. But the -- not the majority, well, the majority, yes, but there is a combination of currency and organic growth in there, of course, as for all the other ones. And here, it's a little bit more weighted to the currency. But beneath that there is an underlying true organic growth. And we added on a very interesting company, CK Fires, with electric stoves, which clearly is a coming area. In terms of sales per geography, I mentioned it before, we have taken steps here to, also here, become more evenly spread. And it's basically the same picture as before when we brought on FPI in Canada serving the North American markets. So that's about 1/5 of the business coming -- or being made over there, 1/3 in the Nordics and the rest in Mainland Europe. And I mentioned that it is another stable year for Stoves. And this is the business area where we, ever since the listing in '97, have been above 10%. And it's -- there's an extremely diverse picture in the industry for Stoves. Some companies, if they're niche-oriented, they can make a bit more, but many being below. So having this stability of 10%, we're quite proud of, and, of course, also determined to both keep and improve. And summarizing the group in terms of income statement, we have this chart showing the development from 2014 to '18. And since then, when we launched the target of reaching SEK 20 billion, we have, in fact, doubled in size and slightly more than so. And of course, the last year has helped with a very good organic growth for the whole group as such. And combining this strong growth with a very stable margin, of course, gives me, as Finance Director, the confidence in the business and the goals that we have going forward. And Eric will dwell upon that a bit more later in the presentation. In terms of balance sheet, that has not quite doubled since 2014, which, of course, is good. The equity has, which, of course, is very good. But really, this reflects the development of the business and the growth in proportion to how we take onboard companies and grow with our existing companies organically. The one largest asset item on the income statement -- on the balance sheet is the intangible assets, of course, which is a result of acquiring companies. But that is, of course, impairment tested according to all the rules and regulations every year with a very good headroom.On the liability side, there's not so much to comment. The one step that we took, which sticks out a bit, is the equity between 2015 and '16 when we made the rights emission. But even without that, we would have had a very nice development of the equity. And as you will see a bit later on in our key numbers, we have a very good equity assets ratio. A quick look at the cash flow as well. The cash flow from the operating activity before change in working capital is actually up some SEK 350 million compared to 2017. Then we've had a more negative development, you can say, or change in working capital than we had last year. And I think there are 2 reasons for that. Last year, we were delivering basically each and every product, product that we could deliver because we were not fully staffed, didn't have all the components and products onboard to meet the demand, which led to a natural reduction of the inventory to an extent that was, in a way, too low. So in order to avoid that, we built up inventory and stock and capacity this year to be able to deliver out and meet the demand. And we've taken down the inventory very nicely during Q4. If you remember the numbers from the Q3 conference we had, the change in working capital which was much higher at the time. So we've done a good job there. Still more can be done, of course, to generate even more operating cash flow. But we know where the money sits, so to speak. And we've also allowed ourselves to invest more in the current operations, this year, about SEK 100 million or SEK 80 million more than the depreciations. And the prior years, we've actually had investments slightly below depreciations. So seen over time, I think we're basically on par there. But we are investing to meet demand going forward.And then just highlighting some key financial figures on the next page. Yes, we have a lot of cash sitting there, the unappropriated liquid assets as you see, 3.5, 3.6. And those of you who know us know that we -- it's the way we are structured in a way. We have a lot of money sitting on the balance sheet there in cash. And it's also a result of us growing quickly, not yet having a cash pool, you can say, North America. But of course, we take home the money and use it for acquisitions or amortizing loans. Interest-bearing liabilities have come down very nicely as a relation to equity from 120% in 2014, and consequently, coming down 98%, 70%, 70.1% there and 60%. Net debt is also well below the rating level, you can say, of 2.5 where the bonds [ take us ] would like to see us not come above. And then the equity assets ratio being close to 50%. And of course, you can say that is perhaps on the high side. And again, it's a result of the rights emission we made in 2016, which took a jump there of some 7 percentage units, which makes us in a very good position for further acquisitions.Just continuing with some more key financial numbers. Return on capital employed, we've been able to increase up to 13% from having been around 12%, 11.5%, 12% the previous years. Return on equity is still below our target of 20%. It's also, of course, influenced by the rights emission, but also due to the large acquisitions that we'd made. But it has come up nicely and we've not given up on our target, but it's a constant fight. And as we typically say, we never give up, so we're working on that as well. Net profit per share has improved over the years being now at SEK 4.11 as well as the equity per share. Capital -- working capital, again, I don't think I need to comment upon it. I mentioned it before. It's a little on the high side. We're working on it and it's still a reasonable number, and we're still generating a good portion of cash. And the last picture before I head -- hand over again to Eric, we really have the receipt of our development here since our stock listing in 1997 where you can see the bottom 2 lines there, the operating margin, the net margin have been basically above the 10% on a slightly upward journey over the years. During the time that we also have taken acquisitions onboard having had a weaker margin, but where we consequently work on bringing them up to our level, utilizing the synergy possibilities there are in the group. Return on equity, I mentioned being affected by larger acquisitions and also, of course, strong balance sheet, you can say. And then equity assets ratio that is very strong, which makes it possible for us to continue our growth journey. And by that, I think I hand over to you to maybe mention a few words about that, Eric.

[Gerteric Lindquist, CEO, MD & Director]

Yes, well, I mean, I think I can comment both on that. Until very recently, we had a current intermediate target of some SEK 20 billion. And now we've passed it, so now the -- what we used to mention, the next intermediate target, that's the -- now the current target. And I think we'd like to mention this because this is more our forecasting for the future rather than going into each quarter, saying now we're going to be growth of so and so or things are going to be so difficult. We believe that we are in a voyage or on a path very solidly towards the SEK 40 billion. And of course, it's a long-term approach as we are taking as a company, as investors, management to be very transparent but naturally unable to promise each individual here where we're going to arrive. Some of you might say, okay, now I'm coming out with the same forecast as the previous years. It's true to a point. Of course, we feel that we are positioned correctly in the market. We've said that before. And Hans mentioned here, we have a capacity of acquiring fairly large entities anymore. And our internal program, who are becoming more efficient and in launching that into new companies coming onboard, that has given us the robustness and strength. So when we say where we are cautiously optimistic, I mean, that is reflecting our behavior now and since 25, 30 years back. Of course, we have to combat difficult situations if they are to come. But we also have to benefit from good conditions if they are there. But the robustness, again, internally, we believe are going to carry us all the way up to the SEK 40 billion. And we have a picture or a graph, I think, that's quite illustrative that when we mentioned to double sales, '93, very few people thought that would be possible because it has taken us some 40 years to arrive at the level we were at then. And even internally we said is that possible? And then, we very clearly said that we had to do it in a different way, we have to acquire companies, we have to grow more methodically, organically. And it took us 4 years to arrive, and that's a story we had to double the sales. That's the story we told the stock market where we launched ourselves in the stock exchange in Stockholm. And I guess, some people might have had some doubt. And it took us 3 years to double and then 4 years then the 3 years and 7 years and 5 years. I think that's the background that you should view NIBE at. What we've said and Hans mentioned before that we never surrender. I like that saying. We face difficulties. We don't shy away. And of course, yes, we're tremendously proud of presenting the graph that you have in front of you here. And that's more the forecast that we are giving. We will materialize the SEK 40 billion. We will make that come true. That will not come easily, we know that. But we have a phenomenal organization around this. I just had a cup of coffee this morning, and they said, "Oh, congratulations to the result." I said, "Well, it's a joint effort. I'm just -- Hans and I are just the spokesman for the results. And of the 17,200 people, they should have a great, great thank you from all of us, the way they are working all year round, all the world around. So that's a profile, it's a DNA profile of NIBE you see right in front of you. Of course, we are on top of just a graph. If we switch over to another picture here or slide because we are larger. And Hans has mentioned that, the way we can create the economy of scale. Of course, we had international experience. We started with very, very minor experiences some 25 years ago. And good balance, we've been through that, sustainable mindset, that's something we've been preaching and living for many, many, many years. And we are financially strong. Hans has showed you the balance sheet. And we have been through some 120 acquisitions. Every acquisition is unique. So we shouldn't just lean back and say we are so good at this. We always have to be in your toes. But knowing that every acquisition is individual, I get -- that's a strength in itself. And also, our strong decentralized management structure. I think that the pride in our organization is just phenomenal. So I think that's pretty much what we're going to show. And of course, there's a math behind this. The Climate Solutions will arrive at some SEK 25 billion, still a minor stake at the world market. The Element would arrive at some SEK 10 billion, still a fairly big chunk. But we also know that, that market is growing. And on the Stoves side, we feel that we could be able to arrive at the SEK 5 billion. So that's the equation. And that's not an equation that Hans and I made up just prior to this broadcasting. That's a target that is well distributed, discussed, and everyone is putting in the shoulders to arrive that. So I think that was a longer presentation perhaps than usual. But of course, we will allow questions now for some 20 minutes or so to make the picture complete. So please shoot.

[Operator]

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

[Carl Ragnerstam, Analyst]

It's Carl from Nordea. So I have a couple of questions. First, on Sweden. You have historically performed really well, of course. But the new single housing outlook seems to be weakening somewhat in 2019, 2020. I mean, some negative growth. Can you quantify on your Swedish newbuild small housing sales development in Q4 2018? Could you see some weakening there? And also, can you give us some outlook for that specific market for 2019? And also, did you expect the replacement cycle, which should kick in, in 2019 perhaps to offset the newbuild decline?

[Gerteric Lindquist, CEO, MD & Director]

Well, I mean, without being too much into decimals, we can mention that -- the market in Sweden where heat pumps is slightly more than 50,000 units. I think that's something that's fairly well-known. And of course, out of that, I'd say that new construction is perhaps 16%, 17% of that. So of course, the majority is the refurbishment. And even if those still would go down, at some 20% that's forecasted, that, of course, is percentage-wise not nice. But we believe that, that'd be compensated by refurbishment. Because we started many, many years ago selling the exhaust air heat pumps, and they are the ones that you install in newbuild. And now the boom of the renovation really started some 20 years ago, and we believe that they are the ones now to be replaced. So we are fairly confident that, that going to balance the decrease in new construction. And that's pretty much the same in all -- on all countries, that you start with heat pumps and new construction. Eventually, you enter the refurbishment market. Of course, if the market would totally contract, I mean, that would not be nice. But I think it's representing roughly the percentage as I said, that can be overcome.

[Carl Ragnerstam, Analyst]

I have a couple of more. I mean, you're trying to establish Climate Solutions on the commercial properties and market. What steps are you taking to increase your exposure? And could you do it organically more or just via further acquisitions?

[Gerteric Lindquist, CEO, MD & Director]

I mean, we ideally, we like to sell systems also there. And I think our strength, or we believe that our strength is the heat pump side of it. And I think by combining the heat pump with air handling units, then you would recapture more energy, just like you do in an exhaust heat pump. So I mean, the comparison between the heating models we have in our country, in Sweden, prior to, you can say 1980, was slightly ahead. The mechanical ventilation, and you had electric boiler and you had a separate water heater. And eventually, we started to ventilate our homes due to health reasons. And even now we ventilate the home or house every other hour, making it a perfect condition or setting for an exhaust air heat pump residentially. But we have not come that far in -- well, we're fairly far ahead when it comes to Sweden. But in many countries, they still open the window when they like to ventilate a meeting room or even a hospital. So there, of course, we see a gigantic market that has to be more refined. And we do not have, as you correctly say, footprint. But we believe that combining a place in the market with someone that is perhaps producing air handling units and we come in and combine that with our heat pumps, that's the growth pattern that we believe in. If I explain that shortly to you there.

[Carl Ragnerstam, Analyst]

Okay, perfect. And final one for me. I mean, in terms of raw materials, did you expect a more flattish situation in 2019? And should we still expect you to continue with the price increases in 2019? And if so, where are you going to implement them?

[Gerteric Lindquist, CEO, MD & Director]

Well the thing is that I had a short, someone called me this morning, short interview. And I said our immediate reaction is not always to just push the price increase that's hitting us onto the customers. We like -- our task is also to monitor that, to some extent. We also have to think about our productivity because we like to present product ranges that are competitive, but also gives the consumer a good value. That's why we are lagging a little bit. When the price increase hits us, we have to evaluate. Is that for long term? Can we anticipate more? How much could we combat that internally by redesigning and doing things differently internally? And of course, then we balance up with the price increase in our -- on our side. So it's not black and white. And it might sound like a little bit Boy Scout-ish or Girl Scout-ish to act like that. But we believe that acting in that fashion, the customer is going to appreciate that we do our very best. And of course, when we feel that now we've taken our caution, then we also have to increase our prices. So they're lagging a little bit, but they're coming in very, very, should I say, in with a great consequence. So they -- it's very difficult to predict how much they're going to increase '19. I think it depends on how the economy is developing. And we are there to monitor whatever changes we get in the same way that we've done in the past. I mean, that might be almost a political answer to you, but that's exactly the way we react.

[Carl Ragnerstam, Analyst]

Okay. Sorry, just a follow-up on the productivity. Can we expect you to increase CapEx more? I mean, allocate it to automation, and so on?

[Gerteric Lindquist, CEO, MD & Director]

Yes, that's true. Okay. And we also mentioned that we're going to be above, as Hans said, or some years even slightly above the depreciation rate. So -- and you know the increases that we mentioned, of course. When you get prior-year salary increases of some 15%, 18%, that you can't hardly work 18% faster manually, then you have to look at a totally different setup with -- to be robotized, for instance.

[Operator]

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

[Max Fryden, Analyst]

Max from Danske. I have a question if you could just help me give the share of Climate Solutions division sales towards commercial and large property customers.

[Gerteric Lindquist, CEO, MD & Director]

Well, we -- that's something we do not release. That's -- because -- of course, we are relatively small yet. Then I mean you can come -- you can -- if you are to just broadly get an indication, I mean, Rhoss that comes in now has not been consolidated. It's like SEK 70 million. And the Oklahoma boys, they're like, of course, residential, but primarily commercial. That's another $250 million. And I don't think we can be more specific than that. And then, of course, we have some additional. But that is suggesting that that is still a fairly small chunk. I don't think we're going to be more precise than that.

[Hans Backman, Chief Financial Officer]

But big potential.

[Max Fryden, Analyst]

Yes. Big potential. I get it. But if I take Rhoss as fully commercial and 1/3 of WaterFurnace, and I believe it was 80% of Climate Control Group, I get to roughly 20% of the division Climate Solutions and 13% of group. Is that just in the ballpark?

[Gerteric Lindquist, CEO, MD & Director]

You want the black ball, you could have assumption.

[Max Fryden, Analyst]

All right. And also just mentioning in the report here, at your strategic investments in the U.S., and these are taking account -- into account significant resources. And I just want to understand a little bit if -- I mean in the next report, are you going to write in the likes of that the margins in Climate Solutions business area has been burdened by strategic investments in the U.S.?

[Gerteric Lindquist, CEO, MD & Director]

No. But of course, now the market is reasonably good. And we don't -- we don't think that we could perhaps even increase the margin. But we feel it's fair to try to educate the U.S. market or the North American market with some of the profits coming in. So you should -- you shouldn't view that in a negative sense. I think that we -- we are rather, again, modest to when it comes to perhaps increasing the profitability even further, but rather using some of the margins already produced for that or that we see can be produced for that.

[Operator]

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

[Karl Bokvist, Analyst]

And my first question concerns geographical markets. I mean, you mentioned that The Netherlands and Norway have been going well. I'm a bit curious on development in perhaps Germany, U.K. and the U.S., if we -- if you could talk a bit about that.

[Gerteric Lindquist, CEO, MD & Director]

Yes, well, of course the -- if we start the other order, I mean, the U.S. is still a very small portion. But we believe that that will be also enhanced and improved there. We all know that they are lagging, if I may say. I mean, America shouldn't be criticized. But of course, it's the -- heat pumps is known, to a lesser extent, in North America. But I think it's growing even more on a state level. On a Federal level, we shouldn't dwell on that. But that's always an arm wrestling paris treaty and stuff like that. But on state level, it's very much promoted. And there are subsidies. And there are light utilities, they're very positive to heat pumps. Utilities, for obvious reasons, that they can have a more even distribution of electricity rather than just having a peak in the summertime where the air conditioning is starting. So they have -- they can gather more customers. So I think that's where we're standing there. But as said, when we answered the previous question, we also have to address the market. We have to sort of, re -- I mean, educate them. And that -- I mean, that is, of course, a gigantic task. But that's pretty much what we've been through in Sweden and Europe. Of course, leaving oil and -- to a large extent, that's been an educational process, but again, assisted by politicians, assisted by utilities and so forth. Swinging back to Europe, Germany, I think they're on a steady pace towards heat pumps. And now, clearly, more than 50% of homes being erected, they utilize heat pumps. And it's the renovation market that is -- still needs a little bit of a kick, we believe. And gas is very, very strong. And now where Nord Stream is being built in to Germany. Of course, gas is not a phenomenon they're going to leave. We hope and believe that electricity will be generated, to a larger extent, by gas rather than by coal because of the criticism that's in the market right now, that Germany and Poland are generating so much CO2. So in Germany, we believe that the steady pace towards a growth, not we believe with such political statements as in The Netherlands and Norway, they're going to abandon it. I think they're going to be more balanced. We would like, of course, to see a very stern statement. We believe they're going to be more subtle way, but a very clear pattern. In Britain, they are lagging behind. I hope I don't offend anyone calling in. But there, of course, gas is very much the phenomena. And we are fighting, and they are behind the Rest of Europe when it comes to heat pumps. I hope not that. I hope they won't be turned against us. We've been talking about it and -- because the climate is such also that's relatively mild in Britain, so the market is slowly growing, and we would like to see it grow even quicker. But I think now with the political discussions going on, I think that's not on the top priority list for Mrs. May and her colleagues. I think that the Brexit situation has taken away quite a bit of the focus from that. There was some initiative, some green initiatives, but I think they have been sort of set aside for a while. That was a long answer to your question.

[Karl Bokvist, Analyst]

No, it's very good. And then a final quick question from me then. When it comes to EBIT, I noticed that in turnover, group costs were positive during the quarter. It's quite deviation from historical numbers. I was just wondering what's behind that number, the plus 5?

[Hans Backman, Chief Financial Officer]

Yes. It's a combination of many things, you can say. I mean, everything ending up on that line in the income statement relates to nonoperational cost for the business areas, you can say. So it's a combination of the group cost that we have for running the headquarter. It's acquisition costs. It's project costs. Also of course -- and that's why it comes in as an effect in Q4, both this and last year and every year to make the adjustments for the anticipated purchase prices that we need to pay going forward for the stakes that we still need to buy in partly-acquired companies. And it's when we come into the latter part of the year when we make the forecasts and the budgets for the next year that we recalculate the values. So that's an ongoing process.

[Karl Bokvist, Analyst]

Yes, sure. And so if we should just take a long term average estimate of this, would it still be around perhaps 20 -- SEK 20 million? I know it's hard to predict from quarter-to-quarter, but if we take a more -- if we draw a -- take a pencil and seem to draw a line to get a sort of a trend?

[Hans Backman, Chief Financial Officer]

Well it's very hard to say because it really depends on the development of those companies and the auditors come in and audit those projections that we've had. But during the year, we don't make recalculations there. So there, you can stick to the values that you see in there, around the SEK 20 million.

[Operator]

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

[Marcela Klang, Analyst]

I have a couple of questions myself. So basically, a clarity on the previous question. In the first quarter, since you don't have these adjustments on -- for anticipated purchase prices, we should expect a normal level of eliminations, first, second and the third quarter. Am I right?

[Hans Backman, Chief Financial Officer]

Yes, that's what I just confirmed to Karl, I think, or hope I did.

[Marcela Klang, Analyst]

Great, great, then it's clear. Another question, you mentioned that within Climate Solutions, now the 2 major acquisitions from 2016 and '17 have helped the operating margin. Does it mean that the margins for these previous acquisitions are now in line with the Climate Solutions average? Or is it just developing positively?

[Gerteric Lindquist, CEO, MD & Director]

No, no. They're not up as where we would like to have them. But of course, we set an immediate target for them, like within 24 months we expect them to be there and they have achieved that. And that's not that we have arrived at the final target. Because just like everything else, when we put the full year targets and for growth for the group, it's a pretty long or distant target, I should say. So it's important that you give the companies kind of a broad and realistic target 18 or 24 months ahead. And then you say, okay, you tick that off, and now they're in the group, they know how to cooperate with us and then we set a new target, more related to the business area level.

[Marcela Klang, Analyst]

And yes -- and if I may -- maybe for clarification, the target set for them, is it the 10% that you have officially for your business areas? Or is it may be closer to 13%, 15%, which is previously the margin for Climate Solutions?

[Gerteric Lindquist, CEO, MD & Director]

Marcela, you're coming back with your short tongue. You've been on maternity leave now, and now you're really stressing us here. No, you're correct, of course. The first immediate target is like the 10%. Because I think it's proven that you can arrive at 10%. Then, of course, above that, you have to have a certain product range, you have to have a certain set up geographically, so that becomes more individual. But of course, I mean, not only 2 or 3 companies can carry the burden of being above 10%. All of us, company should be, ideally. But we also are reasonable when it comes to a company not having a geographical spread, not the product range necessarily at the moment. But everyone is there to strive for a better margin and at a better volume. All right?

[Marcela Klang, Analyst]

Yes. So if I understand it correctly, do you still have a little bit to go to reach the 10% target, the first target?

[Gerteric Lindquist, CEO, MD & Director]

Marcela, you're so precise. I think I'd like to invite you on the Board.

[Marcela Klang, Analyst]

In your experience, you mentioned that every acquisition is unique. But in your experience, which steps in the integration process are the most important to kick profitability up?

[Gerteric Lindquist, CEO, MD & Director]

Well, that is to be -- both distinct, but not an emperor. If you come in as an emperor and start dictating things, you're never going to get any help. That's our experience. That's why we have the decentralized organizations. So you have to come in willing to assist, but not being mediocre and say okay, it's fine. But saying -- and that's why we are so clear the targets in our annual reports, in our quarterly reports. It's not the secret when someone comes in or enters, I should say, as a company, they know what kind of a behavior we have. Just like when we employ people, it's not a secret. With the media we have now, it's totally known. And that we like to build a relationship. We believe in the management. And we've been discussing with the management when we typically would acquire a company. And during that process, we've set the targets, and then the goal. And of course, a handshake is a handshake. If we have a handshake with the management and also with the rest of the employees. That's what sticks to us. So it's confidence on both sides. That's a whole trick.

[Hans Backman, Chief Financial Officer]

And it's attitude, as you say, because the whole smorgasbord or whatever you want to call it, is there to work in all different areas of production, purchasing, admin.

[Marcela Klang, Analyst]

Speaking from impressive experience, it's a very good answer. Moving on to NIBE Element, the productivity or the profitability was negatively affected by the large orders that you had last year and also less favorable product mix. Do you see any chance of improvement of this in 2019? Or are you happy to stay just slightly above 10%, which basically is above your target?

[Gerteric Lindquist, CEO, MD & Director]

Well, we are never happy to remain where we are. We always like to improve, you know that. But we also know that as a subsupplier, it's -- we are always -- we have to be on our toes. And if we were able to -- 2017, there were some successful projects that came in. That's something you can't really count on every year. You have to be more on a stable level. And there, of course, we have worked so hard and determinedly over these years. So that's really the target for the business area, leadership to remain there and concentrate on growth, concentrate on new products. I think that's very important to mention when you say where -- what are we happy with. The world is going electrical again. It's electrification of the world. You're talking about hybrid cars. You talk about the wind turbines. We talk about the trains. And those are products in there that we are very well suited to develop and enter the market with. But we need a good corporation with the customers out there, like hybrid vehicles or something. Listen, it's a totally new phenomenon since like 3 or 5 years. And there, we are so well positioned. So I think we have to have an understanding. We have a balance with the R&D cost that we have to put in to call us -- to qualify ourselves being a sustainable, good partner for these companies, producing the products that I just mentioned. So we are -- we try to look after the margins. But as a subsupplier, I think that the region where we've been the last 3 years that's where we're going to try to remain, but with many more products coming around, developed together with customers that we didn't necessarily have before and will replace older products.

[Marcela Klang, Analyst]

And in terms of visibility regarding the large orders with this higher margins, what kind of visibility do you normally have? Do you see these coming along a couple of months before they do? Or is it the question of couple of weeks?

[Gerteric Lindquist, CEO, MD & Director]

Well, what should I say. It's -- when a large customer of ours is bidding a project and then they say well we won the project, of course, there is more immediate. And particularly, if it's a customer that is selling some kind of an application more seldom like perhaps every other year, then they are -- then they know that we are fairly ready to produce because it's something they had from us previously. If they are bidding in a situation where a new product, then we are contacted naturally before. So we anticipate you to kick in and say, a quarter or 4 months after we get this. Otherwise, it wouldn't work. I hope I give you the correct picture there.

[Marcela Klang, Analyst]

Yes. And this type of -- now I'm squeezing you here, but this type of contacts, you have not seen anything yet regarding 2019 where you are contacted before?

[Gerteric Lindquist, CEO, MD & Director]

You mean it's not squeezing. We have contacts all the time. But perhaps we should be more open about bigger project. I -- perhaps if -- we don't like to have hide and seek here either. So we might -- at least you're stirring the thoughts here around the table how we should report that now. At least you got that from us today.

[Marcela Klang, Analyst]

Yes, because obviously it has an impact. And final question for me regarding M&A. Would you see a need to fill any blank spots today? Obviously, you have a very strong financial situation, but where do you see a need operationally?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that -- as we said here on the Element side, of course, with the diversity that we have and if we can shortcut some of the R&D by bringing some very skilled company onboard, that would be a great benefit wherever they are located. Just mentioning BriskHeat again, of course, to develop such a product for the semiconductor industry, it would -- that would take us years. And once you have the product developed, that would take you another quite considerable time even to approach the customers because they are used to being supplied with a high-quality provider. So I think technological skill, that's where we act on the -- and system thinking that's where we act on the Element side. And of course, on the Climate Solutions, very obviously, both geographical spread and adding to the commercial side. And on the Stoves side, we are weaker on the wood pellet situation, whether that is Europe or North America, that would be a great add-on rather than producing it ourselves being relatively small like we do now. All right. Should we allow for one more question, and then we go for lunch if that's all right.

[Operator]

The last question comes from the line of Klara Jonsson from SEB.

[Klara Jonsson, Research Analyst]

Just fast -- what visibility do you have on the Element side? I mean, how long does it take for you between you get an order and we actually see in revenue?

[Gerteric Lindquist, CEO, MD & Director]

Yes. I think that everyone -- all large customers that we have onboard, they are forecasting. And ideally, they stand for their forecast at least 6 weeks ahead of us. But then they're -- they had the right to change the forecast after 6 weeks. So there's a theoretical, of course, transparency for a number of weeks, a number of months ahead of us. But then it's their market, and they are not -- as soon as they see something, either increases or decreases, of course, they like to react. And so we -- I shouldn't say it's frozen. But 4 to 6 weeks, that's really the visibility with substance. But of course, we have guidance beyond that.

[Klara Jonsson, Research Analyst]

All right. But I mean, do you have any large -- do you have many large orders? So you have a quite a significant share, there are orders that you know you're going to deliver in the coming year? Or is everything just 4 to 6 weeks?

[Gerteric Lindquist, CEO, MD & Director]

Yes. I know you could -- there are relatively few of those where you can have like something being produced. We have, of course, customers that we are fairly -- let's say that we have a demand of let's say, 500,000 year after, year after, year just to talk about numbers. And then you can, as we did this year, we can allow ourselves producing some of the -- or having them on stock knowing that there's going to be a bigger demand towards the fall. But at the same time, we do not dare to have too much in the inventory if sales were dropped because that would have been on our own risk. So our customers do not help us in that sense. We have to look after that ourselves. Thank you. All right, so I think that we're running a little bit -- Hans and I are literally here. We appreciate all the questions and of course, if we've been answering politically, to some extent, we apologize. We can't release everything. But we certainly appreciate the challenging half an hour we had -- we have with you out there. So thank you very much.

[Hans Backman, Chief Financial Officer]

Thank you. Thank you.

[Operator]

Thank you. This now concludes our presentation. Thank you all for attending. You may now disconnect.