Nibe Industrier AB

STO:NIBE B

Earnings Call Transcript 2018-Q2

[Operator]

Ladies and gentlemen, welcome to the NIBE first half year results presentation. Today, I'm pleased to present Gerteric Lindquist CEO; and Hans Backman, CFO. Gentlemen, please begin your meeting.

[Gerteric Lindquist, CEO, MD & Director]

Well, good morning, everyone out there. It's Gerteric here and Hans as usual.

[Hans Backman, Chief Financial Officer]

Absolutely. Good morning to everyone.

[Gerteric Lindquist, CEO, MD & Director]

And we won't change the order. It's like before. We're going to present the results with a few slides, and then eventually, we're going to open up for questions. And we've said that 50 minutes, we think, would be appropriate to have present the report and also to have answered the questions. So that we aren't unfriendly mentioning that.So once again, welcome to this session. And of course, we've had an extremely nice and warm summer behind us. And now it's back to more normal weather, we can say, in the Markaryd. Still a very brilliant day down here, but we've had some rain. And I think that's been a very good period, we can say, for us the last month. Despite that, of course, those suffered somewhat from the warm weather. Perhaps, it hasn't been so inspiring walking into a Stoves shop when it's been like 30 degrees. But we think that the overall demand has been decent, as we mentioned in the report. And we think that despite the hot spots, as we also geopolitically that we described the previous time, we think that the customers are fairly positive, and of course, the low interest rates all over the world is the main driver when it comes to demand.We also mentioned that sustainability is becoming more and more of a driver when it comes to demand. And I think that's becoming not only the experts sort of issue talking about, but that's something that's steadily growing among all of us that we have to revert to a sustainable way of living all over the world. So I think that's right up our alley when it comes to that kind of living.And if we just talk about the -- what we have done on our own side, of course, it's been an acquisition-driven growth but also a substantial organic growth, particularly now in the second quarter. And we also mentioned that the first 6 months, they have been fairly neutral from number of working days, and also, they've been a -- currency-wise, they have been neutral. So the figures we see now, they are as they are, so there's no hide and seek. And I think it's very good that we can present that in a very open daylight.The results, of course, we have improved both the margin and results. The growth, of course, is there, is a good driver. We are very cautious when it comes to the cost control, and we also have, as we always do, a focus on the productivity. And we have also wise from the previous experience, the first 6 months, and in particular, the third quarter last year where we're not satisfied with our delivered performance. Of course, we were delayed. We could not get accurate delivery messages. So that's why we have built up some stock during the first half year here, both on ready-made goods and also on raw material, to be able to now fulfill our commitments to the customers out there in the market.When it comes to acquisitions, it's been fairly evenly spread when it comes to dividing them between the 3 business areas. Of course, we have the BriskHeat, the U.S. acquisition very early this year, and then came the district heating operations from Alfa Laval. And then just on the brink of the third quarter here, we acquired a British company producing electric fires, and we're going to come back to what that means.So that's what we've been pretty much done on the broader scope. And if we just look at the Climate Solutions, more precisely, of course, we had a dip '17 because we brought onboard a couple of larger acquisitions, and we feel now that the performance is steadily improving. We also believe that the acquisition of the district cooling and district heating operations of Alfa Laval is important to have onboard, it broadens our scope. It is also in line with what we have said regarding commercial buildings. Of course, that's a major issue when it comes to major cities and towns, so we are fully fledged to when it comes to the product assortment.And we -- as we said, the integration continues and reports when we acquired CCG group in America and also when we acquired Enertech Group here in Sweden, we said we need some 18, 24 months to come up to a satisfying margin, and we feel that we are well on our way fulfilling those promises.And on the Element side, that's, of course, a very nice story to be able to continue to present our success there. I remember for many, many years or during many, many years, we were a little bit ridiculed, saying, well, should we really keep on having that. And I think that the comeback of Element is just phenomenal. As we said in some reports earlier, the world is going electrical. And that, again, is right up our alley. And of course, when we combine the Element with the sustainability thinking in our society, anything from hybrid cars to the promotion of trains and wind turbines and so forth, and also we have our position on the big global side on the Climate Control group, and of course, we feel that's a very good match. And again, we made a strategic acquisition, as we mentioned, in America early this year, and that positions ourselves very much in the semiconductor industry, which is an industry that we have not had such a strong presence. But again, with the world going more and more into digital or the digitalization, as we call it, of course, that is, again, a very important acquisition, builds a platform for the semiconductor industry.For the Stoves, outside, we think that their performance, as such, has been very solid. The market has been, mainly according to the weather, we believe, relatively flat. And we also believe that the acquisition of this British company is very important for us because in some cities, it's cumbersome to bring [ out ] board or even there, sometimes they are not connected to gas, so the option of having something in the corner of your living room making a cozy atmosphere, the alternative of having electric stove is very obvious. We've got onboard a very nice fellow, and his company and his team, very entrepreneurial. So really, we believe that they're really going to enhance Stoves' presence, also in markets where we have not been so present before.And as we mentioned on previous reports, we are now also starting to address the [ pellet ] market, which is relatively strong in the southern part of Europe. And we are producing our own now. And I guess, it's no secret that if there would be a company for sale in this particular segment, we wouldn't deny that process.So having said that, the more overall terms, I think we can just dig into the figures. And there, we have what you've already read this morning, and the growth is up 20%. There's the target, but still, it's up 12% to 14%. And the organic growth for the first 6 months is just south of 7%, which we think is pretty good. And that is, of course, also reflecting the operating margin that is now up from 0.6% to 11% and also for the running 12 months. And it's also worth mentioning, of course, like you know, sitting around the telephones out there that now, we are approaching the strong period of our year for the coming 6 months. So that's an indication, we hope that, as we mentioned, that we are cautiously optimistic also for the rest of the year.If we just dig in very quickly into the Q2, we can see that the overall growth has been decent there. And it's always worth mentioning, when you look into the quarters, we are not so fond of doing that because there are also the difference between working days. In this particular quarter, there's 1 more working day. It's about a 59 versus the 58. And that is affecting those figures in some 1.6, 1.7 percentage units, so I think it's worth mentioning that we rather look at a longer periods when currency and number of working days are of lesser importance. Nevertheless, it's been a very healthy organic growth, of course, during the second quarter. And again, the operating margin is up from 11.4% to 11.8%.If we look at the graphs that we typically have, of course, we see that dotted line of the SEK 20 billion, which, of course, has been the target and is a target for us. And it's -- now we have 6 months on a rolling basis. We are approaching the SEK 20 billion now. But of course, it remains to be seen that we also pass that on the 12-month basis, of course. But when we look at the graphs, it pretty much follows the pattern from before where the Q1 and Q2 are followed by 2 stronger quarters, typically. There was not so pronounced 2017 due to the reasons that we mentioned earlier, but the graph is illustrating a right development, we think. And we also know that once we've hit the dotted red line in a solid way, then we also already have the next target chiseled out for us. So there's no rest. We have been resting now for a few days during the hot summer. And now it's back to work, and we are approaching that with a lot of joy.And then again, profit after financial items, of course, that's following even more pronounced, the sales, which, again, is much, much heavier or more extensive during the second half. So the graph, I guess, is more an illustration that we follow the same pattern as in the past. But the 2 first quarters, they are relatively weak when it comes to gross numbers, and then the 2 ones to come are the strongest ones.And we also have, there's some pie charts that we typically look at how we distribute sales or how sales is distributed and also how the operating margin -- and there's been no major change. Of course, if we would compare this pie chart with the pie chart like 4 or 5 years ago, Element would have been a much, much smaller part. But now since Element has established itself over the 10% level, it's a healthier picture that we see where all 3 different -- the 3 business segments are above the 10%.And if you just swing over to the operating profit, of course, here, it's even more pronounced that Climate Solutions is still a bit bigger due to their larger margin. But again, we are very satisfied that the 3 business areas are so solidly placed above the 10%.Geographically, just to sum up my session here before Hans comes in, it's, again, a very solid, we think, presence where the Nordic countries now represent 27%, and we, of course, view the Nordic countries as our home market and as where we always should be present and be very clear market leader in all the 3 segments that we're working with. And then, of course, rest of Europe and then North America. It's also a pie chart that's totally different from what we showed you some years ago. And others, of course, that's predominantly Asia, and that's more Element, which Hans is going to come back to that -- have gained significant ground in that sector. But I think we've grown in a very orderly fashion, but we started with the Nordics, continued in the rest of Europe, into North America and now, of course, we like to broaden the geographical scope in a gradual way, in a systematic way even more.So with that, Hans, I think it's your turn.

[Hans Backman, Chief Financial Officer]

All right. Thank you, Eric. I will, just like previous quarters, continue with the individual business areas, and then we'll look at the balance sheet and some key numbers before we come to the Q&A session.So if we start with Climate Solutions, just as Eric said in the beginning, it's been a continuously improving performance that we've seen from the business area. And of course, there is a strong underlying business cycle. And North America has definitely come back during the year, following the reentry, so to speak, of the tax subsidies. And then also, we have very nice development in certain countries like the Netherlands where there is a deliberate aim to phase out fossil fuel, which, of course, fuels our business. And then not the least, the integration of the Climate Controls group and the Enertech Group are paying off now more and more.So this has led us to reaching this operating margin of 11.7%, up from the 11% of last year. And then we've grown with almost 14%. And as Eric said, the currency has not had any major impact so far this year. So we're looking at a very strong organic growth in the business area and meeting our target there with slightly above 10%.Of course, we're not quite satisfied with the gross margin. The material price increases that we have experienced are still affecting us, although we have started and are continuously trying to compensate for this by raising our prices.If we look at the individual quarter for Climate Solutions, it is a strong quarter, for sure, where the organic growth has been even higher than during Q1. But also, as Eric mentioned, there is 1 more working day included in these numbers. But all in all, we have been able to land there the result, which is SEK 80 million above last year and an increase of almost 23% and very close to a 13% operating margin. So all in all, a very strong performance for Climate Solutions.And if we look at the split per geography, it is a picture that is very similar to the one we had last year where roughly 1/3 is in the Nordics, some 38% are from the rest of Europe and the remaining part is in North America. But as Eric mentioned, we like to mention these pictures because those of you who have followed us during the years know that the pictures look quite different, only some years back. So we have now been able to expand into more geographical areas, and that should also broaden our -- or become more stable, should something happen in one part of the world but still focusing on what we're very good at.Moving on to Element. It is an impressive, stable underlying operating margin that we see in this business area. It's not so long ago that we were hovering around a 5%, 6%, 7% mark. But now we've been up above 10%, the target for quite some time. And we've mentioned this one-off for a couple of times -- sorry, several quarters, but that is gone, and we're still being able to deliver this operating margin of above 10%.And if you look at this picture, I mean, this is, of course, the first half year, it says Q2 in the individual column there. That's a mistake from our side.However, we have grown with some 20%. A lot of it is through acquisitions, BriskHeat not the least being a very important acquisition in the U.S. But of course, we've made several acquisitions here, most of which we have announced. And then, as always, we have some very small but important add-ons that contribute as well. All in all, operating profit has increased by some SEK 52 million, up 17%.And actually, the first quarter here was slightly weaker than the second quarter if we move on to that. And here, there's 1 more working day, which, of course, helps. But here, we had an organic growth, which was basically twice as strong as in the first quarter. The currency has helped us a little bit more here than in the Climate Solutions area, but it's been a good underlying performance. And we've also been able to improve our gross margin and the result more than sales.And this is the most global of our business area. So when we look at the distribution of sales per geography, we have this split, as you can see, between the Nordics, 18%; Europe, 35%; North America, 35%; and then others, 12%. And only 1 year back, the distribution was slightly different. It was almost 1/3 in the Nordics, or at least some 25 -- 27%; the rest of Europe, some 45%; and then a good chunk in North America. But what had grown now, and as Eric mentioned, is the Asian part, which we are expanding and increasing. It used to be more China, but we have moved into several countries in the region over there, giving us an even broader spread of our sales.Last but not least, Stoves, solid, stable performance in a relatively flat market. And of course, it's flat also due to the warm summer that was mentioned. We don't think that many people have been thinking about buying a fireplace during this summer. But they might be now during the fall. And of course, this is where it all happens. I mean, the first half of the year is always weaker, and basically, all of it happens in the second quarter -- sorry, in the second half of the year. The organic growth here has been positive, and we have grown. It's been driven from North America, then also the gas market in the U.K. has increased. And the rest of the business have been basically stable, you can say. Nevertheless, an operating margin of close to 7%. And it's not so long ago that we could be around the 2%, 3% mark, for the first half year.In the second quarter, the picture is very similar. The numbers are very small in a way, of course, from a percentage point of view. The deviation might seem larger, but we earned SEK 23 million in the quarter compared to SEK 31 million last year. It's, again, everything -- I mean, everything is going to happen in the second half of the year. And also here, if we look at the geographical spread, and I mentioned it in a way, it's North America that has been partly driving the growth, and that is, of course, the benefit of being global. So we have a nice chunk there of 22% in North America, 26% in the Nordics and the rest in Europe. And it's not so long ago that we were a purely Nordic company here. So there is clearly room for further improvement in all these areas.If we jump to the balance sheet. I think there is one item sticking out here, and that is the nonfinancial current assets, and of course, that refers to the inventories, basically. We have an increase there from the start of the year. Of course, the intangible assets have grown as well, but that's more a result or a natural result of our acquisitions. But the growth in inventories is basically a natural or planned thing as well. Cleared for currency acquisitions, the increase has been around 25%. And that is very much focused on finished goods being able to deliver now during the fall, which we were not fully able to at this time of year last year because the demand was higher than we were able to meet in terms of production. So it's a lot of finished goods there. But also, as Eric mentioned, some raw material and components, not the least in the Element area, to be able to supply our customers with these, and also, as you know, we sell a chunk of the Element product into the Climate Solutions business area. So it's planned in that sense. But then, of course, there are effects, which we will see on a couple of slides later on the cash flow.But if we just first look at the equities and liabilities side, there is not so much to mention. I think it's positive to see that the good performance in terms of profits and profitability, of course, ends up in equity, which we have been able to, of course, increase and keep a good equity assets ratio.The cash flow from the operating activities has increased by some 16% compared to the corresponding period of last year, which, of course, is a nice increase. But then, it's eaten up in a way in the changing working capital there, the SEK 1 billion you see. But again, that is from the buildup in inventory to the vast majority, and it's a planned buildup. And this will then materialize in sales and correspondingly profit during the latter part of the year. So I think we have that fairly much under control, although it sticks out on the page as such.If we jump to the next slide, we continue to invest in our operations. I think what we're foreseeing now for the first time in a couple of years in ways that we're investing slightly above our depreciations. There is a strong business cycle, and we are investing in our operations and in our factories out there, yes, to meet demand going forward.The other key numbers like net debt, equity assets ratio are all very stable. And there are a few more coming on a couple of later slides.Yes, if we look at the next one, I think I have mentioned that now enough. It's better to leave room for questions. The working capital is, of course, up there to the 22.7% but again, a result of the inventory buildup.The key financials are stable, and also, if you followed us, I think you recognize them very well. The only one that, in a way, sticks out in relation to our targets is the return on equity where we are around the 13.5% mark. We were around the 17.5% before we made the right submission and on an upward trend. So that we made in the end of 2016 has, of course, on the one hand, given us a very good equity assets ratio and power for making acquisitions, but it hits this key number for a period of time until we get that money rolling.The last row or item on the slide is the closing day share price, but as always, we don't comment upon that. We focus on the development of the business.I don't know if you would like to add anything, Eric, before we open up.

[Gerteric Lindquist, CEO, MD & Director]

Don't dare to mention anything about the share price. Of course, it was a nice situation earlier this summer when we passed SEK 100. So that was, of course, a milestone in our history. But that's as far as I'm going to go on commenting that.So I think we open up now for questions, so please shoot.

[Operator]

[Operator Instructions] And our first question comes from the line of Max Fryden from Danske Bank.

[Max Fryden, Analyst]

Max Fryden here from Danske Bank. A couple of questions, if I may. The first one is you talked about the investment in new products due to the acid gas regulation, which is clearly impacting the entire market right now. Could you maybe talk a little bit how this could affect your R&D and also OpEx going forward?

[Gerteric Lindquist, CEO, MD & Director]

Okay. Well, I think that as far as the actual spending, I don't think that that's going to affect us in any dramatic way. Of course, we've been working with other refrigerants for a long, long time. Now it's focused very much since -- the most dramatic change will take place there in 2021. We like to make certain that we have our models ready prior to that. So when we -- because this didn't happen overnight as it's been known for a couple of years, so I think it's more been the compressor manufacturers and the refrigerant manufacturers that have been lagging a little bit. If we are not going to criticize anyone, perhaps I did that, but we are, of course, very dependent on both those manufacturer categories. And we see now that there are solutions on the way, which means that we're going to adopt that. And with the amount of money we spend on R&D, I don't think that they were going to change the numbers as such. But of course, we're going to work with different refrigerants and also with the compressors that build for those refrigerants.

[Max Fryden, Analyst]

Okay. Sorry if I [indiscernible] a little bit, there's not going to be any significant change that you need to change your production structure in order to handle this propane based, et cetera?

[Gerteric Lindquist, CEO, MD & Director]

No. And I mean, their propane is one alley. There are also a number of other alleys possibly entering. So that is correct.

[Max Fryden, Analyst]

Yes, excellent. And then maybe for Hans, on the gross margin, the decline accelerated quite a lot here in Q2. I'm just trying to understand a little bit the underlying drivers behind this, and I presume it's both M&A and maybe the raw material. But maybe you can give some clarification.

[Hans Backman, Chief Financial Officer]

You said the decline, how do you express your question around the gross margin?

[Max Fryden, Analyst]

The gross margin, it looks like it -- the decline accelerated a little bit in Q2 compared to Q1.

[Hans Backman, Chief Financial Officer]

I mean -- okay. I mean, it is a combination, of course, of raw material, as I mentioned, I think, and the continuous activities that we have also on -- well, I mean, the M&A effect, of course, bringing new companies onboard, getting them into the group. So I mean, there's not anything special sticking out there, in a way.

[Max Fryden, Analyst]

Yes. Because maybe what I was thinking is that with steel prices roughly flat year-to-date, maybe up a few percentage points; copper prices down, close to 20%, and in Q1, you talked about the raising prices. I thought that the gross margin would have a slightly different profile here or, of course, this is difficult to assess on a quarterly basis, but am I missing something here? Or is there -- is my reasoning completely wrong?

[Gerteric Lindquist, CEO, MD & Director]

No. I think that the one thing that you perhaps have not really gone into, and we don't like to criticize any manufacturer, but one factor is, of course, that the refrigerants have had a pretty hefty development. And that's not something that we typically follow when it comes to -- that's not something you buy on the LME or anything. That's something that's been increased due to, I suppose, I think, shortage or the change in the market. I guess, that has been the surprise, particularly on the Climate Solutions side. So I guess, we were not totally prepared for that. But I think that's the -- individually, that is the sharpest increase.

[Max Fryden, Analyst]

Yes. But on the cooling fluid prices, it's -- I mean, how big of an -- if you could help us understand a little bit. I mean, you are selling your equipment with the cooling fluids, of course, and I presume that the aftermarket already need to replace them because, I guess, the leak in some products that's not new, that's the installers. But when you sell your products with cooling fluids, how large part of the total selling price were represented by cooling fluids, if you could please give a rough estimate?

[Gerteric Lindquist, CEO, MD & Director]

Yes. Well, I think that we would love to do that, but I think we have to be fair. But I can answer it in another way. I think that what happens is, Max, that typically, we are prepared for price increases but since the 1st of January, and again, I'd like to be modest, humble when it comes to criticizing anyone else, but we haven't had any chance, really, to react to those price increases. But of course, still, it's not the major part or the part, but it's a substantial increase, and that's what you see here. But I don't think that we're going to talk about our way of calculation. Not that we like to hide anything from you, but I think that's fair to answer that. And of course, we -- it has been a new price increase from July 1, which is a consequence now of what we're just talking about, and that's the main driver for that price increase.

[Max Fryden, Analyst]

Okay. And going forward here, because it seems like the shortage is going to continue and the price is going to continue up, and if I look at other players and the ones that are supplying these to you, what they say, how do you feel that you can handle this going forward? Do you feel more prepared now compared to you were at the beginning of the year? Or should -- if you could maybe guide us if you think you can [ analyze to ] be an improvement from here or if it's going to worsen or be more difficult for you.

[Gerteric Lindquist, CEO, MD & Director]

Well, that is to give a forecast again. I think that if we go back, return to '17, I think we were a little bit surprised about the increase of prices. And of course, our DNA setup is not to really to increase prices too aggressively. We rather like to absorb a little bit on our own productivity. And that perhaps made us a slow start compensating for the typical price increases on steel and copper and what have you. On the refrigerant side, we were not that prepared, and they come just with a very, very short notice. So that's one avenue. I feel that in the past, we've always proven that the combination of our own price increases and productivity increases, we will not suffer. From one quarter to another, we could possibly have a suffering, but I think that's as much as we can explain during this session here.

[Hans Backman, Chief Financial Officer]

And just one last comment, and then we're going to open up for more questions, of course. It's just that, there are also currency effects in these numbers, of course. Because when we say that the currency has not had much of an effect so far this year, that is, of course, related to the translation effect, translating the numbers into Swedish currency, then we have the transaction effects between the companies and the suppliers and customers, so to speak. And they can, of course -- or do have an impact. And the kroner, Swedish kroner is, of course, weakened -- continuously weakened [ during the year ].

[Max Fryden, Analyst]

Yes. I'll get into those details at a later bit. It will take up too much, I think, on the transaction.

[Operator]

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

[Douglas Lindahl, Analyst]

A few questions from my side. Coming back to the inventory buildup, what sort of markets can you say is driving this optimism? And what -- also, what indications or firm indications do you have to expect the strong growth in H2? I'm just trying to get some sort of sense of how speculative your inventory levels are, if that's changed or -- yes.

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that we've shown you in the past that our sales is typically distributed in a very broad sense like 45% in the first year and 55% in the second year. And that might not sound so great or much of a difference. But if you consider that the first half is built on, typically, 120 days and the second half is built on 100 days, and the percentage change between 45% and 55% is roughly 22%, 23% -- 22, 23 percentage units. That means that you have to produce like 20%, 22% more during 100 days versus 120 days, and that's practically impossible. You can do that if the demand is flat. But last year, it was a little bit stronger demand than we anticipated, and we could not fulfill. Our customers, of course, eventually we delivered, but we -- when we said like 2 weeks or 3 weeks, we were not able to satisfy that. And we said, okay, this year, we're going to have a combination of inventory and a combination also temporary workers to make certain that we can deliver as we have promised in the past, and as we promise every day. It's not only quality, it's not only sustainability, but it's also relying on need that when it comes to delivering performance. And that was very disturbing last year. So when you look at the buildup, it's -- you can say it's not very much of a speculation, we feel. So we are very solidly convinced that that's going to, of course, be used during the coming months here.

[Douglas Lindahl, Analyst]

So it's a seasonality and then supply issues from previous year. I know [indiscernible]...

[Hans Backman, Chief Financial Officer]

Well, there are. I mean, we don't have any category or the products where we used the same suppliers as, in many instance, as the automotive manufacturers. And are still, of course, we -- although we feel that we are important customer, the larger ones, the automotive businesses, of course, are so much larger, so we just had to line up to get our components. That's why also we had the built-up inventories of raw material and components.

[Douglas Lindahl, Analyst]

Okay, that's clear. So I guess, we should expect continued inventory levels at around these levels then compared to the -- if we look at it at total percentage of sales. And with regards to price increases, you touched upon the topics. But can you talk a little bit about magnitude of this price increase that you expect to do going forward? I'm talking about raw materials.

[Gerteric Lindquist, CEO, MD & Director]

Well, I mean, we don't really announce -- I think we try to be fair. We don't try to overcompensate ourselves. We believe that you have always to remain competitive in the market. It's very transparent when it comes to what kind of price increases have we received and what kind of productivity would our customers expect from us. So I think it's a fair combination, but we, of course, would like to return to a level that we've been at in the past. But then again, we also have to be realistic about things. When we now grow the commercial sector of the Climate Solutions side, particularly, they have, of course, a different structure. I mean, in the Climate Solution, if you just mention that, the residential side, of course, has a slightly higher contribution margin but also a higher cost structure when it comes to marketing. When you talk about the commercial side, let's say, the CCG group in America being a substantial part of that business territory now, they had a slightly lower contribution margin but, at the same time, a lower administrative and sales portion of their cost structure. So that should also be mentioned, although we don't go into details here. But as we continue to grow, we like to match, of course, our history when it comes to margins, and it came down too far 2017. But as we now grow the other side of Climate Solution business, there's going to be a little bit of a deviation, but on the bottom line, it should match up as far as the operating margin.

[Douglas Lindahl, Analyst]

So commercial in the U.S. is potentially the market, which is targeted.

[Gerteric Lindquist, CEO, MD & Director]

Well, of course, there is not only in the U.S. I think that we mention that we would like to grow in the commercial side as much as in Europe. And then now so happened, of course, that the CCG group in Oklahoma came up for sale, and of course, we've known that company for years and years, just like WaterFurnace. And once the opportunity is there, you have to grab it. But of course, in Europe, we are still relatively weak when it comes to the commercial side. And there's no secret, which we also announced that we would like to grow there. But that should be a balanced growth with the residential growing and with the commercial growing.

[Douglas Lindahl, Analyst]

Okay, great. Just a final question, following up on what you end up on the -- I think, with regards to future M&A or acquisitions. Would commercial in Europe be sort of your target market or if we talk about those future geographically and also with returns -- with regards to sort of end clients?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that we have no -- so to say, no focuses in a specific corner of the world. I think that you've seen that we've grown very, should I say, orderly over the years. Of course, we wanted to become very solid in home market, and there we are. That does not mean that we -- there couldn't be interesting acquisitions in the Nordics. But of course, the -- there's a broader scope in Europe, in North America. And the pie chart that you saw, I don't think that we like to go back to the pie chart that would be less evenly distributed as we now saw that Hans and myself did show you a little while ago. So the balance that we have now, we rather expand the pie chart than change in the different pieces of the pie.

[Operator]

Our next question comes from the line of Predrag Savinovic from Nordea.

[Predrag Savinovic, Analyst of Consumer Goods]

I was wondering if you could maybe elaborate a bit on the comments you state in the report regarding slowing single housing and how that squares versus a prior outlook in the U.S.

[Gerteric Lindquist, CEO, MD & Director]

Okay. Just the housing market in...

[Predrag Savinovic, Analyst of Consumer Goods]

Single housing, you state in the report has, I mean, some slowing growth.

[Gerteric Lindquist, CEO, MD & Director]

Okay. Are you talking about now Sweden? Or which country you're talking about?

[Predrag Savinovic, Analyst of Consumer Goods]

Yes, Sweden, specifically.

[Gerteric Lindquist, CEO, MD & Director]

Okay. Okay. Well, I think that new construction is important, but I think that it's no secret that the overall market, heat pumps, I think is fairly known now how big that market is. And the new build or the erection of new single houses in Sweden between 12,000, 13,000, 13,500 and if that is going to slow down now, that means that 80% of the slowdown is going to be -- going to hit the heat pumps. So let's say that 80% is used because district heating, we typically say, would be the remaining 20%. So that means that in very broad terms, 10,000 heat pumps would be used for new construction. If that growth slows down with some 10%, that means 1,000 heat pumps and -- or 800 rather, but the whole market slows down, and then, as I talked about 15% or around that's like 1,200 heat pumps, mathematically. But that's out of a market, say, between 45,000 and 50,000, so we should not ignore that. But in relative terms, new construction is a clear minority, it's always been in a mature market. It was many, many years ago when the new construction was the leading one. That was like 30 years ago when the heat pumps as a phenomena was established. So new construction is always leading the race, but in Sweden, which is relatively a mature market for heat pumps, the refurbishment market is far, far larger.

[Predrag Savinovic, Analyst of Consumer Goods]

All right. And could you also mention a bit on the Netherlands, which you point as a growing market, and how you tackle this and in terms of potential, does it stack up for you guys?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think we -- I don't know how we should answer the question. But of course, when the politicians come out so determinedly and so clearly saying that now, we're going to abandon a certain things from a certain day. It's just like the refrigerants that we talked about previously. Of course, that is affecting things much prior to that definite date. The refrigerants are supposed to be only 20% of what they were some at 2030, what they were at 2015. And now when the politicians are saying we're in 2030, fossil fuel is going to be gone. Of course, the market reaction is such that they don't wait until 2029. They start already now. And we are of course very present in the Dutch market, both with a subsidiary from Sweden here from NIBE, but also our German company is very, very present in Holland. So we are attacking or servicing the market from 2 sources, you can say. I don't know whether I answered your question there, but I hope there was -- yes, we are locally based...

[Hans Backman, Chief Financial Officer]

Yes, we are locally based, yes.

[Gerteric Lindquist, CEO, MD & Director]

[ Just an ] export from here, so to speak. But we are there. We are Dutch.

[Hans Backman, Chief Financial Officer]

Exactly. Holland is our oldest market, if I say. We got established there in 1963, even before we started to sell into Denmark, Finland and Norway. So if we can talk about any home market in Europe, it's Holland.

[Predrag Savinovic, Analyst of Consumer Goods]

All right, very good. And then just one more for me. You have acquired some assets in the ventilation space. And maybe if you could walk us through your thinking here in terms of what is the end game, which geography is so interesting and what kind of size are you looking to gain in terms of ventilation assets.

[Gerteric Lindquist, CEO, MD & Director]

Well, do you talk about the Italian venture or?

[Predrag Savinovic, Analyst of Consumer Goods]

Yes, yes.

[Gerteric Lindquist, CEO, MD & Director]

Yes. I know, of course -- I mean, we have walked into that venture with a very clear aim of entering this market, and we felt that there was technologically a very solid company. They have been together with another group in Italy, which did not fit so well. And we just wanted to build that platform and find our sort of position there before we start to buy into the majority. So that is definitely a platform for us where we now start to grow the commercial side of the business on Climate Solution, okay?

[Operator]

Our next question comes from the line of Daniel Lindkvist from Handelsbanken.

[Daniel Lindkvist, Research Analyst]

So just one quick question on the copper price development and the importance of copper for your sake than in the Element business and the dynamics in the price adjustment to customers and -- because I -- it's not only burdening with the raw materials for once.

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that when it comes to larger customers, you're talking about specifically on the Element side, it's such a way that there, we typically have a contract -- we have contracts with a customers that we -- they have a tipping point. So we neither gain or lose when the price go up. We have contracts with, say, around nickel, copper, stuff like that, should not influence the margin in a negative way. When it comes to smaller quantities, more of what we call like the industrial side, there, of course, we have the possibility to sometimes gain a little bit because there, we are the stronger part. But the bulk, it's pretty much framed in already. So the customers know whether the copper price goes up, okay, we should not be unfairly treated. And when it goes down, then we should not gain unfairly.

[Daniel Lindkvist, Research Analyst]

Okay. So the gross margin development or improvement is just from others effects than from the -- in Element and from the copper?

[Gerteric Lindquist, CEO, MD & Director]

Yes. Yes.

[Operator]

Our next question comes from the line of Olof Larshammar from DNB.

[Olof Krook Larshammar, Analyst]

One question from my side. Could you please elaborate a bit on the impact on [indiscernible] from the inventory build in Q2? And is there a risk that this could have a negative impact on the EBIT during the second half of this year?

[Gerteric Lindquist, CEO, MD & Director]

Well, I think that there is -- of course, that some, of course, of the cost had been absorbed. That is correct. But I don't think that you have to worry about that, if I speak in very broad terms. That's something we've done in the past that we know how to handle that. Of course, there have been some cost absorption, but we managed that on the other cost side. So you do not have to worry about that.

[Gerteric Lindquist, CEO, MD & Director]

I hope we don't cut things short, but we appreciate you calling in. We hope we've been able to answer questions in an orderly fashion. We know that some answers are not satisfying, but you also -- but we understand and we believe, that we cannot open up our calculation book. So thank you, once again, and have a nice weekend.

[Hans Backman, Chief Financial Officer]

Thank you.